-----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, CcGHLAMExPWVrwsRxkSIHBqUsje1+XIlOKjfvlbIHbZPKRtweX8yXypXF6/g7jUA hOkdSvSe/iE3T+r9rL3a3g== 0000950135-98-005900.txt : 19981116 0000950135-98-005900.hdr.sgml : 19981116 ACCESSION NUMBER: 0000950135-98-005900 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980930 FILED AS OF DATE: 19981113 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: SEC FILE NUMBER: 000-15752 FILM NUMBER: 98749067 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 CENTURY BANCORP, INC. 1 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, 1998 ------------------------------------------------- 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 incorporation or organization) (I.R.S. Employer Identification No.)
400 MYSTIC AVENUE, MEDFORD, MA 02155 - -------------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) (781)391-4000 - -------------------------------------------------------------------------------- (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by section 13 or 15(d) of the Securities and Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. X Yes No --- --- Indicate the number of shares outstanding of each of the registrant's classes of common stock as of September 30, 1998: CLASS A COMMON STOCK, $1.00 PAR VALUE 3,608,897 SHARES CLASS B COMMON STOCK, $1.00 PAR VALUE 2,208,770 SHARES 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 13, 1998 CENTURY BANCORP, INC. ---------------------------------- ---------------------------------------- (Registrant) /s/ Paul V. Cusick, Jr. /s/ Kenneth A. Samuelian - ----------------------------- ------------------------------ PAUL V. CUSICK, JR. KENNETH A. SAMUELIAN VICE PRESIDENT AND TREASURER VICE PRESIDENT AND CONTROLLER, (PRINCIPAL FINANCIAL OFFICER) CENTURY BANK & TRUST COMPANY (CHIEF ACCOUNTING OFFICER) 1 of 16 2 Century Bancorp, Inc. Page Index Number ----- ------ PART I. FINANCIAL INFORMATION Item 1. FINANCIAL STATEMENTS Consolidated Balance Sheets: September 30, 1998 and December 31, 1997. 3 Consolidated Statements of Income: Three (3) Months Ended September 30, 1998 and 1997; and Nine (9)Months Ended 4 September 30, 1998 and 1997. Consolidated Statements of Changes in Stockholders Equity: Nine (9) Months Ended September 30, 1998 and 1997. 5 Consolidated Statements of Cash Flows: Nine (9) Months Ended September 30, 1998 and 1997. 6 Notes to Consolidated Financial Statements 7 - 12 Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 12 - 15 Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK 15 PART II. OTHER INFORMATION Item 1 through Item 6 16 2 of 16 3 PART I - Item 1 - ------ Century Bancorp, Inc. - Consolidated Balance Sheets (unaudited) - -------------------------------------------------------------------------------- (000's)
Sep 30, Dec 31, Assets 1998 1997 - ------ --------- --------- Cash and due from banks $ 52,165 $ 46,868 Federal funds sold and interest-bearing deposits in other banks 17 51,024 --------- --------- Total cash and cash equivalents 52,182 97,892 --------- --------- Securities available-for-sale, amortized cost $161,356 and $89,004, respectively 162,761 89,190 Securities held-to-maturity, market value $167,388 and $109,454, respectively 165,814 109,239 Loans, net of unearned discount: Commercial & industrial 57,891 50,560 Construction & land development 20,619 7,549 Commercial real estate 185,448 140,270 Industrial revenue bonds 1,869 2,693 Residential real estate 89,019 76,385 Consumer 16,063 19,254 Home equity 20,132 19,031 Overdrafts 1,056 648 --------- --------- Total loans, net of unearned discount 392,097 316,390 Less allowance for loan losses (5,956) (4,446) --------- --------- Net loans 386,141 311,944 Bank premises and equipment, net 10,200 8,718 Accrued interest receivable 6,500 4,334 Other assets 14,203 9,808 --------- --------- Total assets $ 797,801 $ 631,125 ========= ========= Liabilities - ----------- Deposits: Demand deposits $ 125,188 $ 123,301 Savings and NOW deposits 157,016 149,808 Money market accounts 87,752 71,061 Time deposits 241,525 171,279 --------- --------- Total deposits 611,481 515,449 Securities sold under agreements to repurchase 39,550 32,850 Federal Home Loan Bank (FHLB) borrowings and other borrowed funds 50,627 13,474 Other liabilities 7,420 15,495 Long term debt 28,750 0 --------- --------- Total liabilities 737,828 577,268 Stockholders' equity - -------------------- Class A common stock, $1.00 par value per share; 3,639 3,541 authorized 10,000,000 shares; issued 3,638,897 Class B common stock, $1.00 par value per share; 2,256 2,327 authorized 5,000,000 shares; issued 2,256,320 Additional paid-in capital 10,952 10,877 Retained earnings 42,476 37,180 Treasury stock, Class A, 30,000 shares (136) (136) Treasury stock, Class B, 47,550 shares (41) (41) --------- --------- Realized stockholders' equity 59,146 53,748 Accumulated other comprehensive income 827 109 --------- --------- Total stockholders' equity 59,973 53,857 --------- --------- Total liabilities and stockholders' equity $ 797,801 $ 631,125 ========= =========
See accompanying Notes to Consolidated Financial Statements 3 of 16 4 Century Bancorp, Inc. - Consolidated Statements of Income (unaudited) - --------------------------------------------------------------------------------
(000's except share data) Three months ended September 30, Nine months ended September 30, 1998 1997 1998 1997 ---------------- -------------- -------------- ---------------- Interest income Loans $ 9,193 $ 7,280 $ 24,310 $ 21,057 Securities held-to-maturity 2,352 1,751 6,058 5,366 Securities available-for-sale 2,653 1,274 5,773 3,817 Federal funds sold and interest-bearing deposits in other banks 205 90 1,286 383 ---------- ---------- ---------- ---------- Total interest income 14,403 10,395 37,427 30,623 Interest expense Savings and NOW deposits 1,043 998 3,236 3,005 Money market accounts 641 466 1,644 1,435 Time deposits 3,490 2,088 8,302 6,312 Securities sold under agreements to repurchase 449 275 1,134 688 FHLB borrowings and other borrowed funds 972 164 1,398 388 ---------- ---------- ---------- ---------- Total interest expense 6,595 3,991 15,714 11,828 ---------- ---------- ---------- ---------- Net interest income 7,808 6,404 21,713 18,795 Provision for loan losses 225 135 575 525 ---------- ---------- ---------- ---------- Net interest income after provision for loan losses 7,583 6,269 21,138 18,270 Other operating income Service charges on deposit accounts 456 460 1,337 1,309 Lockbox fees 398 365 1,252 1,088 Brokerage commissions 258 278 859 839 Gain on sales of loans 8 37 47 88 Other income 131 108 370 323 ---------- ---------- ---------- ---------- Total other operating income 1,251 1,248 3,865 3,647 ---------- ---------- ---------- ---------- Operating expenses Salaries and employee benefits 3,422 3,055 9,953 9,090 Occupancy 423 323 1,071 957 Equipment 317 285 955 840 Other 1,310 1,030 3,680 3,100 ---------- ---------- ---------- ---------- Total operating expenses 5,472 4,693 15,659 13,987 ---------- ---------- ---------- ---------- Income before income taxes 3,362 2,824 9,344 7,930 Provision for income taxes 1,273 1,093 3,468 3,160 ---------- ---------- ---------- ---------- Net income $ 2,089 $ 1,731 $ 5,876 $ 4,770 ========== ========== ========== ========== - ------------------------------------------------------------------------------------------------------------------------------------ Share data: Weighted average number of shares outstanding, basic 5,817,667 5,777,767 5,806,509 5,769,503 Weighted average number of shares outstanding, diluted 5,858,784 5,846,473 5,848,388 5,836,008 Net income per share, basic $ 0.36 $ 0.30 $ 1.01 $ 0.83 Net income per share, diluted $ 0.36 $ 0.30 $ 1.00 $ 0.82 Cash dividends declared: Class A common stock $ 0.0600 $ 0.0500 $ 0.1600 $ 0.1500 Class B common stock $ 0.0170 $ 0.0070 $ 0.0310 $ 0.0210
See accompanying Notes to Consolidated Financial Statements. 4 of 16 5 Century Bancorp, Inc. - Consolidated Statement 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' Nine months ended September 30, Stock Stock Capital Earnings Class A Class B Income (Loss) Equity ----------------------------------------------------------------------------------------- (000's) 1997 - ---- Balance at December 31, 1996 $3,488 $ 2,348 $10,786 $ 31,117 ($136) ($41) ($ 73) $ 47,489 Net income - - - 4,770 - - - 4,770 Other comprehensive income, net of tax: Increase in unrealized gain on securities available-for-sale - - - - - - 166 166 -------- Comprehensive income 4,936 Conversion of Class B common stock to Class A common stock, 9,200 shares 10 (10) - - - - - - Stock options exercised, 19,300 shares 19 - 54 - - - - 73 Cash dividends, Class A common stock, $.050 per share, per quarter - - - (521) - - - (521) Cash dividends, Class B common stock, $.0070 per share, per quarter - - - (48) - - - (48) ------------------------------------------------------------------------------------- Balance at September 30, 1997 $3,517 $ 2,338 $10,840 $ 35,318 ($136) ($41) $ 93 $ 51,929 ===================================================================================== 1998 - ---- Balance at December 31, 1997 $3,541 $ 2,327 $10,877 $ 37,180 ($136) ($41) $ 109 $ 53,857 Net income - - - 5,876 - - - 5,876 Other comprehensive income, net of tax: Increase in unrealized gain on securities available-for-sale - - - - - - 718 718 -------- Comprehensive income 6,594 Conversion of Class B common stock to Class A common stock, 70,200 shares 71 (71) - - - - - - Stock options exercised, 27,250 shares 27 - 75 - - - - 102 Cash dividends, Class A common stock, $.050 per share, per quarter - - - (533) - - - (533) Cash dividends, Class B common stock, $.0070 per share, per quarter - - - (47) - - - (47) ------------------------------------------------------------------------------------- Balance at September 30, 1998 $3,639 $ 2,256 $10,952 $ 42,476 ($136) ($41) $ 827 $ 59,973 =====================================================================================
See accompanying Notes to Consolidated Financial Statements. 5 of 16 6
Century Bancorp, Inc. - Consolidated Statements of Cash Flows (unaudited) 1998 1997 - --------------------------------------------------------------------------------------------------------- For the nine months ended September 30, (000's) CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 5,876 $ 4,770 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses 575 525 Deferred income taxes (228) (312) Net depreciation and amortization 588 442 Increase in accrued interest receivable (1,488) (515) (Increase) decrease in other assets (1,679) 167 Loans originated for sale (2,532) (6,899) Proceeds from sales of loans 3,118 7,037 Gain on sales of loans (47) (88) (Gain) loss on sales of real estate owned (7) 4 (Decrease) increase in other liabilities (2,183) 778 --------- -------- Net cash provided by operating activities 1,993 5,909 --------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from maturities of securities available-for-sale 71,214 18,776 Purchase of securities available-for-sale (89,579) (18,993) Proceeds from maturities of securities held-to-maturity 59,787 15,502 Purchase of securities held-to-maturity (116,309) (16,923) Decrease in investments purchased payable (6,499) 0 Net cash paid for acquired institution (5,786) 0 Net increase in loans (1,567) (22,893) Proceeds from sales of real estate owned 137 319 Capital expenditures (1,087) (1,062) --------- -------- Net cash used in investing activities (89,689) (25,274) --------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Net decrease in time deposits (32,197) (10,899) Net increase (decrease) in demand, savings, money market and NOW deposits 2,058 (4,200) Net proceeds from the issuance of common stock 102 73 Cash Dividends (580) (570) Net increase in securities sold under agreements to repurchase 6,700 12,190 Net increase in FHLB borrowings and other borrowed funds 37,153 4,717 Issuance of long term debt 28,750 0 --------- -------- Net cash provided by financing activities 41,986 1,311 --------- -------- Net decrease in cash and cash equivalents (45,710) (18,054) Cash and cash equivalents at beginning of year 97,892 67,681 --------- -------- Cash and cash equivalents at end of period $ 52,182 $ 49,627 ========= ======== SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid during the period for: Interest $ 17,665 $ 11,146 Income taxes 3,891 3,569 Noncash transactions: Property acquired through foreclosure $ 130 $ 296 Change in unrealized gains on securities available-for-sale, net of taxes $ 718 $ 181
See accompanying Notes to Consolidated Financial Statements. 6 of 16 7 Century Bancorp Inc. Notes to Consolidated Financial Statements BASIS OF PRESENTATION 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 Century Bancorp, Inc. (the "Company") and its wholly owned subsidiary, Century Bank and Trust Company (the "Bank"). The results of operations for the interim period ended September 30, 1998, are not necessarily indicative of results for the entire year. It is suggested that these statements be read in conjunction with the consolidated financial statements and the notes thereto included in the Company's Annual Report. The financial statements have been prepared in conformity with generally accepted accounting principles 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. RECENT ACCOUNTING DEVELOPMENTS In June 1997, FASB issued SFAS No. 130, "Reporting Comprehensive Income." SFAS No. 130 establishes standards for reporting and displaying comprehensive income, which is defined as all changes to equity except investments by and distributions to shareholders. Net income is a component of comprehensive income, with all other components referred to in the aggregate as other comprehensive income. The Bank has adopted SFAS No. 130 effective for January 1, 1998. In February 1998, the FASB issued SFAS No. 132, "Employers' Disclosures about Pensions and Other Postretirement Benefits--an amendment of FASB Statements No. 87, 88, and 106." This Statement revises employers' disclosures about pension and other postretirement benefit plans. It does not change the measurement or recognition of those plans. It standardizes the disclosure requirements for pensions and other postretirement benefits to the extent practicable, requires additional information on changes in the benefit obligations and fair values of plan assets that will facilitate financial analysis, and eliminates certain disclosures that are no longer as useful as they were when FASB 7 of 16 8 Statements No. 87, "Employers' Accounting for Pensions," No. 88, "Employers' Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits," and No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions," were issued. The Statement suggests combined formats for presentation of pension and other postretirement benefit disclosures. The provisions of the statement will be adopted in the December 31, 1998 financial statements. In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities" which amends FASB Statements No. 52, 80, 105, and 107, as well as, nullifies or modifies the consensuses reached in a number of issues addressed by the Emerging Issues Task Force. This statement establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, (collectively referred to as derivatives) and for hedging activities. It requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. If certain conditions are met, a derivative may be specifically designated as (a) a hedge of the exposure to changes in the fair value of a recognized asset or liability or an unrecognized firm commitment, (b) a hedge of the exposure to variable cash flows of a forecasted transaction, or (c ) a hedge of the foreign currency exposure of a net investment in a foreign operation, an unrecognized firm commitment, an available-for-sale security, or a foreign-currency-denominated forecasted transaction. Under this Statement, an entity that elects to apply hedge accounting is required to establish at the inception of the hedge the method it will use for assessing the effectiveness of the hedging derivative and the measurement approach for determining the ineffective aspect of the hedge. Those methods must be consistent with the entity's approach to managing risk. The Statement is effective for the year 2000 financial statements. This statement is not expected to have a material impact on the financial statements. 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 Office of the Comptroller of the Currency (the "Comptroller") and the Federal Deposit Insurance Corporation (the "FDIC"). 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 8 of 16 9 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. 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. Loans held for sale are carried at the lower of aggregate cost or market value. Gain or loss on sales of loans is recognized at the time of sale when the sales proceeds exceed or are less than the Bank's investment in the loans. Additionally, gains and losses are recognized when the average interest rate on the loans sold, adjusted for normal servicing fee, differs from the agreed yield to the buyer. The resulting excess service fee 9 of 16 10 receivables, if any, are amortized using the interest method over the estimated life of the loans, adjusted for estimated prepayments. Discounts and premiums on loans purchased from failed financial institutions that represent market yield adjustments are accreted or amortized to interest income over the estimated lives of the loans using the level-yield method. 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, uncollateralized 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 and debt securities. 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 absorb 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. 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. 10 of 16 11 OTHER REAL ESTATE OWNED Other real estate owned ("OREO") includes real estate acquired by foreclosure and real estate substantively repossessed. Real estate acquired by foreclosure is comprised of properties acquired through foreclosure proceedings or acceptance of a deed in lieu of foreclosure. Real estate substantively repossessed includes only those loans for which the Company has taken possession of the collateral, but has not completed legal foreclosure proceedings. Both in-substance foreclosures and real estate formally acquired in settlement of loans are recorded at the lower of the carrying value of the loan or the fair value of the property constructively or actually received. Loan losses from the acquisition of such properties are charged against the allowance for loan losses. After foreclosure, if the fair value of an asset minus its estimated cost to sell is less than the carrying value of the asset, such amount is recognized as a valuation allowance. If the fair value of an asset less its estimated cost to sell subsequently increases so that the resulting amount is more than the asset's current carrying value, the valuation allowance is reversed by the amount of the increase. Increases or decreases in the valuation allowance are charged or credited to income. Gains upon disposition of OREO are reflected in the statement of income as realized. Realized losses are charged to the valuation allowance. 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. ==================================================== 11 of 16 12 ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. OVERVIEW For the quarter ended and year-to-date ended September 30, 1998. Earnings for the third quarter ended September 30, 1998 were $2.1 million, an increase of 20.7% when compared with the third quarter 1997 earnings of $1.7 million. Diluted earnings per share for the third quarter 1998 were $0.36 versus $0.30 for the third quarter of 1997. For the nine months ending September 30, 1998, earnings were $5.9 million an increase of 23.2% when compared with the same period last year earnings of $4.8 million. Diluted earnings per share were $1.00 for the first nine months of 1998 compared with $.82 for the first nine months of 1997. YEAR 2000 The Company has completed its assessment of Year 2000 issues and developed a plan, budget, and testing strategy for mission-critical systems. The Bank relies on its recently converted new core processing system for critical data warehousing and transaction processing. Other, less critical, systems are supported by purchased applications software. The Bank is continually evaluating mission-critical vendor plans and monitoring project milestones. The Bank plans to begin testing its key transaction processing system in the fourth quarter of 1998 and to substantially complete testing on its core processing system and on most other applications no later than December 31, 1998. The vendor has disclosed that its core processing system is Year 2000 compliant. Currently, there are five vendors for which testing will not commence until the first quarter of 1999. There can be no guarantee that the systems of other companies, or third party vendors on which the Company's systems rely, will be remedied on a timely basis. Therefore, the Company could possibly be negatively impacted to the extent other entities not affiliated with the Company are unsuccessful in properly addressing their respective Year 2000 compliance responsibilities. Specific factors that might cause such material differences include, but are not limited to, the availability and cost of personnel trained in this area, the ability to locate and correct all relevant computer codes, and similar uncertainties. The Company will continue to utilize both internal and external resources to update, or replace, develop and test all software information systems for Year 2000 modification. The Bank's cost of Year 2000 remediation, which includes its cost of converting to new mainframe software, is expected to approach $1.5 - $2.0 million of which approximately $1.0 million has been incurred. The Company expects that the majority of the costs yet to be incurred will be to replace or update existing hardware and software, which will be capitalized and amortized in accordance with the Company's existing accounting policy. In most instances, upgrades to computer hardware and software are being made to improve the capacity and performance of the systems as well as to achieve Year 2000 compliance. Maintenance and modification costs will be expensed as incurred. The costs of the project and the date on which the Bank plans to complete 12 of 16 13 Management's Discussion and Analysis of Financial Condition and Results of Operation (con't.) Year 2000 testing are based on management's best estimates, which were derived utilizing numerous assumptions of future events including the continued availability of certain resources, third party modification plans and other factors. The Bank has also assessed the impact of the Year 2000 issue on its major borrowing customers. Borrowers that could experience a significant disruption in their business due to a Year 2000 failure have been identified. Management is in the process of obtaining specific information as to the readiness of these borrowers for Year 2000. Management will complete this assessment process by December 31, 1998. After the Bank completes its testing of mission-critical systems, a contingency plan will be completed for non-compliant systems. The Bank's contingency plan is expected to be in place by the second quarter of 1999. FINANCIAL CONDITION LOANS On September 30, 1998 total loans outstanding, net of unearned discount, were $392.1 million, an increase of 23.9% from the total on December 31, 1997. At September 30, 1998 commercial real estate loans accounted for 47.3% and residential real estate loans and real estate loans held-for- sale accounted for 27.8% of total loans. Construction loans increased to $20.6 million at September 30, 1998 from $19.6 million at the end of the previous quarter. Total loans increased primarily as a result of the acquisition of Haymarket in June 1998. ALLOWANCE FOR LOAN LOSSES The allowance for loan losses was 1.52% of total loans on September 30, 1998 compared with 1.41% on December 31, 1997. Net charge-offs for the nine month period ended September 30, 1998, were $259 thousand, compared with net charge-offs of $270 thousand for the same period in 1997. The allowance for loan losses is based on management's overview of the quality of the loan portfolio, previous loan loss experience and current economic conditions. As of September 30, 1998, loans on non-accrual status totaled $1.6 million or .40% of loans; loans past due 90 days or more totaled $682 thousand; restructured performing loans totaled $1.0 million. SECURITIES HELD-TO-MATURITY The securities held-to-maturity portfolio totaled $165.8 million on September 30, 1998, an increase of 51.8% from the total on December 31, 1997. The portfolio is concentrated in United States Treasury and Agency securities and had a legal weighted average maturity of 11.0 years. Total securities held-to-maturity increased primarily as a result of leveraged balance sheet transactions. 13 of 16 14 Management's Discussion and Analysis of Financial Condition and Results of Operation (con't.) SECURITIES AVAILABLE-FOR-SALE The securities available-for-sale portfolio totaled $162.8 million at September 30, 1998, an increase of 82.5 % from December 31, 1997. The portfolio is concentrated in United States Treasury and Agency securities and had a weighted average maturity of 3.25 years. Total securities available-for-sale increased primarily as a result of the acquisition of Haymarket. DEPOSITS AND BORROWED FUNDS On September 30, 1998 deposits totaled $611.5 million, representing a 18.6% increase in total deposits from December 31, 1997. Borrowed funds totaled $90.2 million compared to $46.3 million at December 31, 1997. The majority of the increase was an increase in borrowings from the Federal Home Loan Bank, as well as an increase in securities sold under agreements to repurchase. Total deposits increased primarily as a result of the acquisition of Haymarket. RESULTS OF OPERATIONS NET INTEREST INCOME For the three month period ended September 30, 1998 net interest income totaled $7.8 million, an increase of 21.9% from the comparable period in 1997. For the nine month period ended September 30, 1998 net interest income totaled $21.7 million, an increase of 15.5% from the comparable period in 1997. Interest income was primarily affected positively by the acquisition of Haymarket. The net yield on average earning assets on a fully taxable equivalent basis decreased to 4.60% in the first nine months of 1998 from 4.91% during the same period in 1997. PROVISION FOR LOAN LOSSES For the three month period ended September 30, 1998 the loan loss provision totaled $225 thousand compared to $135 thousand for the same period in 1997. Loan loss provision for the nine months ended September 30, 1998 was $575 thousand compared with $525 thousand for the same period in 1997. Loan loss provision increased due to growth in loan portfolio.The Company's loan loss allowance as a percentage of total loans outstanding has increased from 1.43% at September 30, 1997 to 1.52% at September 30, 1998, respectively. NON-INTEREST INCOME AND EXPENSE Other operating income for the quarter ended September 30, 1998 was $1.3 million unchanged, compared to the third quarter of 1997. For the nine month period ended September 30, 1998 other operating income totaled $3.9 million compared to $3.6 million for the same period in 14 of 16 15 Management's Discussion and Analysis of Financial Condition and Results of Operation (con't.) 1997. Lockbox fees increased 6.0% due to an increase in lockbox volume relating to new customers for September 30, 1998. During the third quarter 1998, operating expenses increased by $779 thousand to $5.5 million or 16.6% from the same quarter last year. The third quarter increase reflects expenses associated with the Haymarket acquisition.. For the nine month period ended September 30, 1998 operating expenses totaled $15.7 million compared to $14.0 million for the same period in 1997. For both the third quarter and year-to-date approximately half of the increase was in salaries and employee benefits with the remaining half in all other expenses. The Company has incurred expenses relating to increased professional fees for certain strategic initiatives. INCOME TAXES For the third quarter of 1998, the Company's income taxes totaled $1.3 million on pretax income of $3.4 million for an effective tax rate of 37.9%. For last year's corresponding quarter, the Company's income taxes totaled $1.1 million on pretax income of $2.8 million for an effective rate of 38.7%. For the nine month period ended September 30, 1998 income taxes totaled $3.5 million on pretax income of $9.3 million for an effective tax rate of 37.1%. For last year's corresponding period, the Company's income taxes totaled $3.2 million on pretax income of $7.9 million for an effective tax rate of 39.8%. The Company is continuing to realize savings in this area as the result of strategic tax savings initiatives. ==================================================== ITEM 3 QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK The response is incorporated herein by reference from the discussion under the subcaption "Interest Rate Sensitivity" of the caption "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" on pages 7 through 10 of the Annual Report which is incorporated herein by reference. ==================================================== 15 of 16 16 PART II - OTHER INFORMATION Item 1 Legal proceedings - The Company is not engaged in any legal proceedings of a material nature at the present time. From time to time, the Company is party to routing 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 - Not applicable 16 of 16 EX-27 2 FINANCIAL DATA SCHEDULE
9 0000812348 CENTURY BANCORP INC. 1,000 U.S. DOLARS 9-MOS DEC-31-1998 JAN-01-1998 SEP-30-1998 1 52,182 17 0 0 162,761 165,814 167,388 392,097 5,956 797,801 611,481 90,177 7,420 28,750 0 0 5,895 54,078 797,801 24,310 11,831 1,286 37,427 13,182 15,714 21,713 575 0 15,659 9,344 5,876 0 0 5,876 1.01 1.00 4.62 1,568 682 1,015 2,900 4,446 600 341 5,956 5,956 0 0
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