1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (FEE REQUIRED)
For the fiscal year ended DECEMBER 31, 2000
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
Commission file number 0-15752
CENTURY BANCORP, INC.
(Exact name of registrant as specified in its charter)
COMMONWEALTH OF MASSACHUSETTS 04-2498617
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification number)
400 MYSTIC AVENUE, MEDFORD, MA 02155
(Address of principal executive offices) (Zip Code)
Registrant's telephone number including area code: (781) 391-4000
Securities registered pursuant to Section 12(g) of the Act:
CLASS A COMMON STOCK, $1.00 PAR VALUE
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by section 13 or 15(d) of the Securities and Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
[X] Yes [ ] No
Indicate by check mark if disclosure of delinquent filers pursuant to item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
form 10-K. [ ]
State the aggregate market value of the voting stock held by nonaffiliates of
the registrant as of February 28, 2001:
$5,316,055
Indicate the number of shares outstanding of each of the registrant's classes of
common stock as of February 28,2001:
CLASS A COMMON STOCK, $1.00 PAR VALUE 3,410,200 SHARES
CLASS B COMMON STOCK, $1.00 PAR VALUE 2,140,150 SHARES
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CENTURY BANCORP INC.
FORM 10-K
TABLE OF CONTENTS
PAGE
----
PART I
ITEM 1 BUSINESS 1-13
ITEM 2 PROPERTIES 13
ITEM 3 LEGAL PROCEEDINGS 13
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY 14
HOLDERS
PART II
ITEM 5 MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED 14-15
STOCKHOLDER MATTERS
ITEM 6 SELECTED FINANCIAL DATA 15
ITEM 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL 15
CONDITION AND RESULTS OF OPERATIONS
ITEM 7a QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET 15
RISK
ITEM 8 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 15
ITEM 9 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS 15
ON ACCOUNTING AND FINANCIAL DISCLOSURE
PART III
ITEM 10 DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT 41-43
ITEM 11 EXECUTIVE COMPENSATION AND OTHER INFORMATION 43-47
ITEM 12 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS 48
AND MANAGEMENT
ITEM 13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 49
PART IV
ITEM 14 EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND 49
REPORTS ON FORM 8-K
SIGNATURES 50
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PART I
ITEM 1. BUSINESS
THE COMPANY
Century Bancorp, Inc. (together with its bank subsidiary, unless the context
otherwise requires, the "Company"), is a Massachusetts state chartered bank
holding company headquartered in Medford, Massachusetts. The Company is a
Massachusetts corporation formed in 1972 and has one banking subsidiary (the
"Bank"): Century Bank and Trust Company formed in 1969. The Company had total
assets of $1,083.8 million on December 31, 2000. The Company presently operates
17 banking offices in 16 cities and towns in Massachusetts ranging from
Braintree to Peabody. The Banks' customers consist primarily of small and
medium-sized businesses and retail customers in these communities and
surrounding areas, as well as local governments throughout Massachusetts.
On June 11, 1998, the Company acquired Haymarket Co-operative Bank
("Haymarket"), headquartered in Boston, Massachusetts, and merged Haymarket into
the Bank. The purchase price paid by the Company to the shareholders of
Haymarket was $21.1 million in cash and the transaction was accounted for using
the purchase method of accounting. The results of operations include the effect
of the Haymarket acquisition for the 203 day period beginning June 12, 1998.
In May 1998, the Company, through its newly formed subsidiary, Century Bancorp
Capital Trust, issued 2,875,000 shares of Cumulative Trust Preferred Securities
with a liquidation value of $10 per share. These securities pay dividends at an
annualized rate of 8.30%. The Company is using the proceeds for general business
purposes.
The Company offers a wide range of services to commercial enterprises, state and
local governments and agencies, and individuals. It makes commercial loans, real
estate and construction loans, consumer loans, and accepts savings, time, and
demand deposits. In addition, the Company offers to its corporate customers
automated lock box collection services, cash management services and account
reconciliation services, and actively promotes the marketing of these services
to the municipal market.
The Company emphasizes service to small and medium-sized businesses and retail
customers in its market area. It provides business and consumer deposit services
and makes commercial loans, real estate and construction loans and consumer
loans. The Company provides full service brokerage services through Century
Financial Services, in conjunction with Commonwealth Equities.
The Company is a provider of financial services including cash management,
transaction processing, short term financing and intermediate term leasing to
municipalities in Massachusetts. The Company has deposit relationships with
approximately 30% of the 351 cities and towns in Massachusetts.
-1-
4
The following table sets forth the distribution of the Company's average
assets, liabilities and stockholders' equity, and average rates earned or paid
on a fully taxable equivalent basis for each of the years indicated.
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------------------------------------------
2000 1999 1998
------------------------------- ------------------------------- -------------------------------
Average Interest Rate Average Interest Rate Average Interest Rate
Balance Income(1) Earned(1) Balance Income(1) Earned(1) Balance Income(1) Earned(1)
(Dollars In Thousands)
Assets
Interest-earning assets:
Loans(2)...................... $434,780 $39,205 9.02% $405,794 $35,720 8.80% $358,498 $33,461 9.33%
Securities available-for-sale:
Taxable.................. 266,759 16,050 6.02% 229,015 13,441 5.87% 138,104 8,314 6.02%
Tax-exempt............... 874 57 6.52% 724 34 4.70% 808 47 5.82%
Securities held-to-maturity:
Taxable.................. 165,970 10,379 6.25% 157,696 9,261 5.87% 137,238 8.610 6.27%
Tax-exempt............... 0 0 0.00% 10 1 10.00% 21 3 14.29%
Federal funds sold............ 14,156 888 6.27% 7,786 385 4.94% 28,241 1,516 5.37%
Interest bearing deposits
in other banks.............. 6 0 6.67% 67 3 4.48% 571 44 7.71%
-------- ------- -------- ------- -------- -------
Total interest-earning
assets................ 882,545 66,579 7.54% 801,092 58,845 7.35% 663,481 51,995 7.84%
------- ----- ------- ---- ------- ----
Non interest-earning
assets...................... 72,151 65,903 61,421
Allowance for loan losses..... (5,681) (6,494) (5,452)
-------- -------- --------
Total assets.......... $949,015 $860,501 $719,450
======== ======== ========
- ----------
(1) On a fully taxable equivalent basis calculated using a federal tax rate
of 35%.
(2) Nonaccrual loans are included in average amounts outstanding.
-2-
5
YEAR ENDED DECEMBER 31,
-----------------------
2000 1999
---- ----
Average Interest Income Rate Earned Average Interest Income Rate Earned
Balance /Expense(1) /Paid(1) Balance /Expense(1) /Paid(1)
-------- --------------- ----------- -------- --------------- -----------
(Dollars In Thousands)
Liabilities and Stockholders'
Equity
Interest-bearing deposits:
NOW accounts $127,809 $2,926 2.29% $116,753 $2,541 2.18%
Savings accounts 60,373 1,167 1.93% 58,733 1,283 2.18%
Money market accounts 82,686 2,306 2.79% 82,292 2,149 2.61%
Time deposits 242,061 13,642 5.64% 228,157 11,326 4.96%
-------- ------ ------- ------
Total interest-bearing
deposits 512,929 20,041 3.91% 485,935 17,299 3.56%
Securities sold under
agreements to repurchase 68,808 2,919 4.24% 48,782 1,863 3.82%
Other borrowed funds and Long Term Debt 123,886 8,132 6.56% 114,593 7,122 6.22%
------------------------ ------------------------
Total interest-bearing
liabilities 705,623 31,092 4.41% 649,310 26,284 4.05%
------ ---- ------ ----
Non interest-bearing
liabilities
Demand deposits 168,557 138,493
Other liabilities 11,411 11,088
-------- --------
Total liabilities 885,591 798,891
Stockholders' equity 63,424 61,610
-------- --------
Total liabilities &
stockholders' equity $949,015 $860,501
======== ========
Net interest income(1) $35,487 $32,561
======= =======
Net interest spread 3.14% 3.30%
======= =======
Net yield on earnings assets 4.02% 4.07%
======= =======
YEAR ENDED DECEMBER 31,
-----------------------
1998
----
Average Interest Income Rate Earned
Balance /Expense(1) /Paid(1)
-------- --------------- -----------
(Dollars In Thousands)
Liabilities and Stockholders'
Equity
Interest-bearing deposits:
NOW accounts $110,066 $2,745 2.49%
Savings accounts 56,802 1,422 2.50%
Money market accounts 77,930 2,255 2.89%
Time deposits 213,861 11,445 5.35%
------- ------
Total interest-bearing
deposits 458,659 17,867 3.90%
Securities sold under
agreements to repurchase 36,953 1,574 4.26%
Other borrowed funds and Long Term Debt 38,293 2,574 6.72%
-------------------------
Total interest-bearing
liabilities 533,905 22,015 4.12%
------ ----
Non interest-bearing
liabilities
Demand deposits 119,802
Other liabilities 8,204
--------
Total liabilities 661,911
Stockholders' equity 57,539
--------
Total liabilities &
stockholders' equity $719,450
========
Net interest income(1) $29,980
=======
Net interest spread 3.71%
=======
Net yield on earnings assets 4.52%
=======
(1) On a fully taxable equivalent basis calculated using a federal tax rate of
35%.
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The following table summarizes the year-to-year changes in the Company's net
interest income resulting from fluctuations in interest rates and volume changes
in earning assets and interest bearing liabilities. Changes due to rate are
computed by multiplying the change in rate by the prior year's volume. Changes
due to volume are computed by multiplying the change in volume by the prior
year's rate. Changes in volume and rate that cannot be separately identified
have been allocated in proportion to the relationship of the absolute dollar
amounts of each change.
Net interest income improved in 2000. Interest income was affected positively by
higher loan and securities volume, primarily as a result of organic growth. Net
interest income increase primarily as a result of organic deposit growth and
increases in loan and securities volume. Interest expense rose primarily because
of a higher level of time deposit rates and borrowed funds rates. Interest
income on securities increased primarily because of volume.
Year Ended December 31,
----------------------------------------------------------------------------------
2000 Compared with 1999 1999 Compared with 1998
------------------------------------- -------------------------------------
Increase/(Decrease) Increase/(Decrease)
Due to Change in Due to Change in
Total
Average Average Increase
Volume Rate Income Amount Balance Rate (Decrease)
------- ------- ------------- ------- ------- ----------
(In Thousands)
Interest income:
Loans $ 2,598 $ 887 $ 3,485 $ 4,239 $(1,980) $ 2,259
Securities available-for-sale:
Taxable 2,264 345 2,609 5,341 (214) 5,127
Tax-exempt 8 15 23 (5) (8) (13)
Securities held-to-maturity:
Taxable 500 618 1,118 1,226 (575) 651
Tax-exempt (0) (1) (1) (1) (1) (2)
Federal funds sold 379 124 503 (1,020) (111) (1,131)
Interest-bearing deposits
in other banks (4) 1 (3) (28) (13) (41)
------- ------- ------- ------- ------- -------
Total interest income 5,745 1,989 7,734 9,752 (2,902) 6,850
------- ------- ------- ------- ------- -------
Interest expense:
Deposits:
NOW accounts 249 136 385 160 (364) (204)
Savings accounts 35 (151) (116) 47 (186) (139)
Money market accounts 10 147 157 122 (228) (106)
Time deposits 719 1,597 2,316 738 (857) (119)
------- ------- ------- ------- ------- -------
Total interest-bearing
deposits 1,013 1,729 2,742 1,067 (1,635) (568)
Securities sold under
agreements to repurchase 832 224 1,056 464 (175) 289
Other borrowed funds
and long term debt 597 413 1,010 4,756 (208) 4,548
------- ------- ------- ------- ------- -------
Total interest expense 2,442 2,366 4,808 6,287 (2,018) 4,269
------- ------- ------- ------- ------- -------
Change in net interest income $ 3,303 $ (377) $ 2,926 $ 3,465 $ (884) $ 2,581
======= ======= ======= ======= ======= =======
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7
The following table summarizes the remaining maturity distribution of certain
components of the Company's loan portfolio at December 31, 2000. The table
excludes loans secured by one-to-four family residential real estate and loans
for household family and other personal expenditures. Maturities are presented
as if scheduled principal amortization payments are due on the last contractual
payment date.
Remaining Maturities of Selected Loans at December 31, 2000
--------------------------------------------------------------------
One Year One to Five Over
or Less Years Five Years Total
-------- -------- -------- --------
(In Thousands)
Construction and land development $ 18,864 $ 2,976 $ 0 $ 21,840
Commercial and industrial 53,873 35,503 6,581 95,957
Industrial revenue bonds 2 117 0 119
Commercial real estate 52,004 147,588 9,641 209,233
-------- -------- -------- --------
Total $124,743 $186,184 $ 16,222 $327,149
======== ======== ======== ========
The following table indicates the rate variability of the above loans due after
one year.
December 31, 2000
------------------------------------------------
One to Five Over
Years Five Years Total
-------- -------- --------
(In Thousands)
Predetermined interest rates $133,306 $ 15,256 $148,562
Floating or adjustable interest rates 52,878 966 53,844
-------- -------- --------
Total $186,184 $ 16,222 $202,406
======== ======== ========
Individual loan officers have designated lending authorities established by the
Board of Directors, with larger loans requiring a second approval. The Bank has
an Executive Committee of its Board of Directors which meets monthly and reviews
all credits above a specified size. In addition, the Company has an Executive
Management Committee which meets bi-monthly and monitors the Company's lending
policies and practices. The members of the Executive Management Committee are:
Marshall M. Sloane, Chairman, President and CEO; Jonathan G. Sloane, Executive
Vice President; Paul V. Cusick, Jr., Vice President and Treasurer; all of the
Company, and David B. Woonton, Paul A. Evangelista and William J. Sloboda, all
Executive Vice Presidents of the Bank.
The Company's commercial and industrial (C&I) loan customers represent various
small and middle market established businesses involved in manufacturing,
distribution, retailing and services. Most clients are privately owned with
markets that range from local to national in scope. Many of the loans to this
segment are secured by liens on corporate assets and the personal guarantees of
the principals. The Bank has placed greater emphasis on building its C&I base in
the future. The regional economic strength or weakness impacts on the relative
risks in this loan category. There is little concentration to any one business
sector and loan risks are generally diversified among many borrowers.
Commercial real estate loans are extended to finance various manufacturing,
warehouse, light industrial, office, retail and residential properties in the
Banks's market area which generally includes Eastern Massachusetts and Southern
New Hampshire. Loans are normally extended in amounts up to a maximum of 80% of
appraised value and normally for terms between three to five years. Amortization
schedules are long-term and thus a balloon payment is due at maturity. Under
most circumstances, the Bank will offer to re-write or otherwise extend the loan
at prevailing interest rates. During recent years, the Bank has emphasized
non-residential type owner-occupied properties. This compliments the above C&I
emphasis placed on the operating business entities and will be continued. The
regional economic environment impacts on the risk to both non-residential and
residential mortgages. This environment has improved over the recent period.
Together the above factors have stabilized many sections of the regional market.
Residential real estate (1-4 family) includes two categories of loans.
Approximately $10 million of loans are classified as "Commercial and Industrial"
type loans secured by 1-4 family real estate. Primarily, these are small
businesses with modest capital or shorter operating histories where the
collateral mitigates some risk.
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8
The collateral position notwithstanding, this category of loans shares similar
risk characteristics as the C&I loans. The balance of loans in this category are
mostly 1-4 family residential properties located in the Bank's market area.
General underwriting criteria are largely the same as those used by Fannie Mae
but normally only one or three year adjustable interest rates are used. The Bank
utilizes mortgage insurance to provide lower down payment products and has
provided a "First Time Homebuyer" product to encourage new home ownership.
Residential real estate loan volume has declined but nonetheless remains a core
consumer product. The economic environment impacts the risks associated with
this category. In the recent period, the environment has improved, and the
market has generally been stable. Declining interest rates could negatively
impact the interest rate risk on adjustable interest rate loans as they are
repriced in the future.
Home equity loans are extended as both first and second mortgages on owner
occupied residential properties in the Bank's market area. Loans are
underwritten to a maximum loan to property value of 75%.
The Bank intends to maintain a market for construction loans, principally for
smaller local residential projects or an owner occupied commercial project.
Independent appraisals of the project and the estimated costs are obtained and
funds are advanced over the life of the project as inspections of completed work
warrant. Individual consumer residential home construction loans are also
extended on a similar basis.
Bank officers evaluate the feasibility of construction projects, based on
independent appraisals of the project, architects or engineers evaluations of
the cost of construction, and other relevant data. At December 31, 2000, the
Company was obligated to advance a total of $24.5 million to complete projects
under construction.
At December 31, 2000, approximately 47.6% of the Company's loan portfolio
consisted of commercial real estate loans. Construction loans had declined to
5.0 % of the Company's outstanding loans.
At December 31, 2000, the Company's residential mortgage loans amounted to $81.5
million. The Company's consumer loan portfolio amounted to $30.3 million at
December 31, 2000, primarily consisting of home equity loans of $21.1 million
and personal lines of credit, motor vehicle loans and other installment loans of
$9.2 million.
NONPERFORMING ASSETS AND ALLOWANCE FOR POSSIBLE LOAN LOSSES
Loans are placed on nonaccrual status when any payment of principal and/or
interest is 90 days or more past due, unless the collateral is sufficient to
cover both principal and interest and the loan is in the process of collection.
The Company monitors closely the performance of its loan portfolio. In addition
to internal loan review, the Company has contracted with an independent
organization to review the Company's commercial and commercial real estate loan
portfolios. This independent review was performed in each of the past five
years. The status of delinquent loans, as well as situations identified as
potential problems, are reviewed on a regular basis by senior management and
monthly by the Board of Directors of the Bank.
The lower level of nonperforming assets in 2000 resulted from a reduction in new
additions to nonperforming assets during the year combined with an improvement
in the resolution of nonperforming assets including payments on nonperforming
loans.
The higher level of nonperforming assets for 1999, reflects the deterioration of
one borrower's credit quality, with whom the Company has a total relationship of
$4.1 million. Management placed this credit to nonaccrual status during the
fourth quarter of 1999.
In addition to the above, the Company is monitoring closely $9.9 million of
loans for which management has concerns regarding the ability of the borrowers
to perform. The majority of the loans are secured by real estate and are
considered to have adequate collateral value to cover the loan balances at
December 31, 2000, such values can fluctuate with changes in the economy and the
real estate market.
There were no impaired loans with specific reserves at December 31, 2000 and
1999 because, in the opinion of management, none required a specific reserve.
All impaired loans have been measured using the fair value of the collateral
method.
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The Company maintains an allowance for loan losses in an amount determined by
management on the basis of the character of the loans, loan performance, the
financial condition of borrowers, the value of collateral securing loans and
other relevant factors. The following table summarizes the changes in the
Company's allowance for loan losses for the years indicated.
Year Ended December 31,
------------------------------------------------------------------------------
2000 1999 1998 1997 1996
--------- --------- --------- --------- ---------
(Dollars in Thousands)
Year end loans outstanding
(net of unearned discount) $ 439,563 $ 422,725 $ 395,903 $ 316,390 $ 288,280
========= ========= ========= ========= =========
Average loans outstanding
(net of unearned discount) $ 434,780 $ 405,794 $ 358,498 $ 304,147 $ 281,943
========= ========= ========= ========= =========
Balance of allowance for
loan losses at
beginning of year $ 7,646 $ 6,022 $ 4,446 $ 4,179 $ 4,193
--------- --------- --------- --------- ---------
Loans charged-off:
Commercial 3,522 81 316 25 2
Construction and land development 0 0 0 0 0
Commercial real estate 0 61 21 48 380
Residential real estate 0 14 0 363 801
Consumer 139 315 506 253 120
--------- --------- --------- --------- ---------
Total loans charged-off 3,661 471 843 689 1,303
--------- --------- --------- --------- ---------
Recoveries of loans previously charged-off:
Commercial 26 197 21 76 78
Real estate 195 393 367 162 163
Consumer 31 30 37 58 28
--------- --------- --------- --------- ---------
Total recoveries of loans
previously charged-off 252 620 425 296 269
--------- --------- --------- --------- ---------
Net loan charge-offs (recoveries) 3,409 (149) 418 393 1,034
--------- --------- --------- --------- ---------
Additions to allowance charged to
operating expense 1,425 1,475 800 660 1,020
Acquired allowance 0 0 1,194 -- --
--------- --------- --------- --------- ---------
Balance at end of year $ 5,662 $ 7,646 $ 6,022 $ 4,446 $ 4,179
========= ========= ========= ========= =========
Ratio of net charge-offs during
the year to average loans
outstanding 0.78% (0.04%) .12% .13% .37%
========= ========= ========= ========= =========
Ratio of allowance for
loan losses to loans
outstanding 1.29% 1.81% 1.52% 1.41% 1.45%
========= ========= ========= ========= =========
The increase for 1999, reflects increased provisions associated with the
deterioration of one borrower's credit quality with whom the Company has a total
relationship of $4.1 million. Management placed this credit to nonaccrual status
during the fourth quarter of 1999. These provisions are the result of
management's evaluation of the quality of the loan portfolio considering such
factors as loan status, collateral values, financial condition of the borrower,
the state of the economy and other relevant information. At December 31, 2000
nonperforming assets were $0.1 million or 0.02% of loans and related assets.
While the Company expects a similar level of charge-offs in future periods, the
pace of the charge-offs depends on many factors including the national and
regional economy. Cyclical lagging factors may result in charge-offs being
higher than historical levels.
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10
The allowance for loan losses is an estimate of the amount needed for an
adequate reserve to absorb losses in the existing loan portfolio. This amount
is determined by an evaluation of the loan portfolio including input from an
independent organization engaged to review selected larger loans, a review of
loan loss experience and current economic conditions. At December 31, the
allowance was comprised of the following components.
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
Percent of Percent of Percent of Percent of Percent of
loans in each loans in each loans in each loans in each loans in each
category to category to category to category to category to
total total total total total
Balance at end of
period applicable to Amount loans Amount loans Amount loans Amount loans Amount loans
- -------------------- ------ ----- ------ ----- ------ ----- ------ ----- ------ -----
(Dollars In Thousands)
Construction and land Development $ 285 5.0% $ 441 5.1% $ 361 5.5% $ 104 2.4% $ 48 1.2%
Commercial and industrial 1,200 21.8 2,846 18.3 912 16.4 716 16.0 660 14.2
Industrial revenue bonds 1 0.0 1 0.0 6 0.2 17 0.9 17 1.1
Commercial real estate 1,923 47.6 2,951 49.5 2,737 47.3 2,138 44.3 2,201 46.4
Residential real estate 726 18.5 867 19.6 1,296 22.1 846 24.1 830 26.6
Consumer 1,290 2.2 325 2.9 508 3.6 402 6.1 233 4.4
Home equity 230 4.8 209 4.5 197 4.8 214 6.0 187 6.0
Overdrafts 7 0.1 6 0.1 5 0.1 9 0.2 3 0.1
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
$5,662 100.0% $7,646 100.0% $6,022 100.0% $4,446 100.0% $4,179 100.0%
====== ===== ====== ====== ====== ===== ====== ===== ====== =====
INVESTMENT ACTIVITIES
The following table sets forth certain information regarding the Company's
investment portfolio. Dollar amounts reflect carrying values. At December 31,
2000, the market value of securities available-for-sale was $273.1 million
compared to the amortized cost of $274.9 million for such securities. At
December 31, 2000, the market value of securities held-to-maturity was $168.5
million, compared to the amortized cost of $169.2 million of such securities.
Securities available-for-sale Securities held-to-maturity
December 31, December 31,
-------------------------------- ----------------------------------
2000 1999 1998 2000 1999 1998
---- ---- ---- ---- ---- ----
(In Thousands) (In Thousands)
Balance at end of
period applicable to
- --------------------
U.S. Government and Agencies $254,838 $238,778 $202,923 $146,962 $127,719 $142,447
Obligations of states and political subdivision 1,000 250 0 0 0 11
Other 17,306 15,947 7,234 22,224 24,880 17,417
-------- -------- -------- -------- -------- --------
$273,144 $254,975 $210,157 $169,186 $152,599 $159,875
======== ======== ======== ======== ======== ========
-8-
11
The following table sets forth the maturities of the Company's investment
securities on the basis of their carrying values at December 31, 2000 and the
weighted average yields of securities, which are based on amortized cost,
calculated on a fully taxable equivalent basis.
Securities Available-for-Sale
--------------------------------------------------------------------------------
After One After Five
Within But Within But Within After
One Year Five Years Ten Years Ten Years Total
----------------- ------------------ ---------------- ----------------- ------------------
Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield
------- ----- -------- ----- ------ ----- ------- ----- -------- -----
(Dollars In Thousands)
U.S. Government and Agencies $22,391 5.90% $194,264 5.90% $7,978 6.21% $30,207 6.24% $254,840 5.95%
Obligations of states
and political subdivisions 1,000 6.88% 0 0.00% 0 0.00% 0 0.00% 1,000 6.88%
Other 0 0.00% 600 6.97% 0 0.00% 16,704 8.04% 17,304 8.00%
------- -------- ------ ------- --------
$23,391 5.94% $194,864 5.90% $7,978 6.21% $46,911 6.88% $273,144 6.08%
======= ==== ======== ==== ====== ==== ======= ==== ======== ====
Securities Held-To-Maturity
-------------------------------------------------------------------------------
After One After Five
Within But Within But Within After
One Year Five Years Ten Years Ten Years Total
---------------- ----------------- ---------------- ----------------- ------------------
Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield
------ ----- ------- ----- ------ ----- ------- ----- -------- -----
(Dollars In Thousands)
U.S. Government and Agencies $5,999 6.40% $76,981 5.94% $8,295 6.71% $55,687 6.78% $146,962 6.32%
Obligations of states
and political subdivisions 0 0.00% 0 0.00% 0 0.00% 0 0.00% 0 0.00%
Other 0 4.00% 25 5.50% 0 0.00% 22,199 6.49% 22,224 6.49%
------ ------- ------ ------- --------
$5,999 6.40% $77,006 5.94% $8,295 6.71% $77,886 6.70% $169,186 6.34%
====== ==== ======= ==== ====== ==== ======= ==== ======== ====
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12
Obligations of states and political subdivisions consist primarily of
obligations of the Commonwealth of Massachusetts and its subdivisions having
other relationships with the Company. The Company regularly bids on tax
anticipation notes and other short-term instruments of municipalities who have
other depository relationships with it. The Company also writes equipment leases
to finance acquisition of computers, fire trucks, snow plows and other equipment
used by municipalities.
DEPOSITS
The Company offers savings accounts, NOW accounts, demand deposits, certificates
of deposit and money market accounts. The Company offers cash management
accounts which provide either automatic transfer of funds above a specified
level from the customer's checking account to a money market account or
short-term borrowings. Also, an account reconciliation service is offered
whereby the Company provides a computerized report balancing the customer's
checking account.
Interest rates on deposits are set bi-monthly by the Bank's rate-setting
committee, based on factors including loan demand, maturities and a review of
competing interest rates offered. Interest rate policies are reviewed
periodically by the Executive Management Committee.
The following table shows the average amount of, and average interest rate paid
on, various categories of deposits during the years indicated.
2000 1999 1998
----------------------- ----------------------- -----------------------
(Dollars In Thousands)
Average Average Average
Interest Interest Interest
Average Rate Average Rate Average Rate
Amount Paid Amount Paid Amount Paid
-------- ---- -------- ---- -------- ----
Interest-bearing deposits:
NOW accounts $127,809 2.29% $116,753 2.18% $110,066 2.49%
Savings accounts 60,373 1.93% 58,733 2.18% 56,802 2.50%
Money market accounts 82,686 2.79% 82,292 2.61% 77,930 2.89%
Time deposits of $100,000 or more 91,378 6.00% 64,699 5.05% 60,895 5.37%
Other time deposits 150,683 5.41% 163,459 4.93% 152,966 5.34%
-------- -------- --------
Total interest-bearing deposits 512,929 3.91% 485,935 3.56% 458,659 3.90%
Non interest-bearing demand deposits 168,557 138,493 119,802
-------- -------- --------
Total average deposits $681,486 2.94% $624,428 2.77% $578,461 3.09%
======== ==== ======== ==== ======== ====
Total deposits at December 31, 2000, amounted to $794 million, including $142
million of time deposits of $100,000 or more. Traditionally, the Company
experiences a decline in deposits during the first and third quarters of each
year because of the deposit cycles of certain of its customers, notably
municipalities.
The Company's time certificates of deposit in amounts of $100,000 or more at
December 31, 2000 mature as follows.
(In Thousands)
--------
Three months or less $108,280
Three through six months 21,043
Six through twelve months 10,741
Over twelve months 1,789
--------
$141,853
========
-10-
13
BORROWED FUNDS AND LONG TERM DEBT
The Company sells securities under repurchase agreements and enters into other
borrowings to obtain funds to support asset growth. Pertinent data relating to
borrowed funds and long term debt is presented below.
2000 1999 1998
---- ---- ----
(Dollars In Thousands)
Securities sold under agreements to repurchase:
Amount outstanding at year end $ 71,450 $ 59,480 $ 57,690
Weighted average interest rate
at end of year 4.04% 3.68% 3.53%
Maximum amount outstanding at
any month end during year $ 77,426 $ 59,480 $ 57,690
Daily average amount outstanding
during year $ 68,808 $ 48,782 $ 36,953
Weighted average interest rate
during year 4.24% 3.82% 4.26%
Other borrowed funds and long term debt:
Amount outstanding at year end $126,078 $146,344 $ 63,596
Weighted average interest rate
at end of year 6.73% 6.08% 6.65%
Maximum amount outstanding at
any month end during year $161,838 $159,545 $ 79,377
Daily average amount outstanding
during year $123,886 $114,593 $ 38,293
Weighted average interest rate
during year 6.56% 6.22% 6.72%
Securities sold under agreements to repurchase are primarily over-night demand
obligations and are collateralized by U.S. Government and Agency securities.
OTHER SERVICES
In addition to fees derived from traditional banking activities such as loan
origination fees, the Company derives revenues from its automated lock box
collection system and full service securities brokerage offered through
Commonwealth Equity Services, Inc., an unaffiliated registered securities
broker-dealer and investment adviser.
Under the lock-box program, which is not tied to extensions of credit by the
Company, the Company's customer arranges for payments of its accounts receivable
to be made directly to the Company. The Company records on its computer the
amounts paid to its customers, deposits the funds to the customer's account with
the Company and provides computerized records of the amounts received to the
Company's customers. Typical customers for the lock box service are
municipalities who use it to automate tax collections, cable TV companies, and
other commercial enterprises.
Through Commonwealth Equity Services, Inc., the Bank provides full service
securities brokerage services. Registered representatives employed by the Bank
offer investment advice, execute transactions and assist customers in financial
and retirement planning. Commonwealth Equity Services, Inc., provides research
to and supervises representatives in exchange for payment by the Bank for a
fixed fee and a share in the commission revenues.
-11-
14
EMPLOYEES
As of December 31, 2000, the Company had 230 full-time and 97 part-time
employees. The Company's employees are not represented by any collective
bargaining unit. The Company believes that its employee relations are good.
FINANCIAL SERVICES MODERNIZATION
On November 12, 1999, President Clinton signed into law The Gramm-Leach-Bliley
Act ("Gramm-Leach") which significantly altered banking laws in the United
States. Gramm Leach enables combinations among banks, securities firms and
insurance companies beginning March 11, 2000. As a result of Gramm Leach, many
of the depression-era laws which restricted these affiliations and other
activities which may be engaged in by banks and bank holding companies, were
repealed. Under Gramm-Leach, bank holding companies are permitted to offer their
customers virtually any type of financial service that is financial in nature or
incidental thereto, including banking, securities underwriting, insurance (both
underwriting and agency) and merchant banking.
In order to engage in these new financial activities, a bank holding company
must qualify and register with the Federal Reserve Board as a "financial holding
company" by demonstrating that each of its bank subsidiaries is "well
capitalized," "well managed," and has at least a "satisfactory" rating under the
Community Reinvestment Act of 1977 ("CRA").
These new financial activities authorized by Gramm-Leach may also be engaged in
by a "financial subsidiary" of a national or state bank, except for insurance or
annuity underwriting, insurance company portfolio investments, real estate
investment and development and merchant banking, which must be conducted in a
financial holding company. In order for the new financial activities to be
engaged in by a financial subsidiary of a national or state bank, Gramm- Leach
requires each of the parent bank (and its sister-bank affiliates) to be well
capitalized and well managed; the aggregate consolidated assets of all of that
bank's financial subsidiaries may not exceed the lesser of 45% of its
consolidated total assets or $50 billion; the bank must have at least a
satisfactory CRA rating; and, if that bank is one of the 100 largest banks, it
must meet certain financial rating or other comparable requirements.
Gramm-Leach establishes a system of functional regulation, under which the
federal banking agencies will regulate the banking activities of financial
holding companies and banks' financial subsidiaries, the U.S. Securities and
Exchange Commission will regulate their securities activities and state
insurance regulators will regulate their insurance activities. Gramm-Leach also
provides new protections against the transfer and use by financial institutions
of consumers' nonpublic, personal information.
HOLDING COMPANY REGULATION
The Company is a bank holding company as defined by the Bank Holding Company Act
of 1956, as amended (the "Holding Company Act") and is registered as such with
the Board of Governors of the Federal Reserve System (the "FRB"), which is
responsible for administration of the Holding Company Act. Although the Company
may meet the qualifications for electing to become a financial holding company
under Gramm-Leach, the Company has elected to retain its pre-Gramm-Leach status
for the present time under the Holding Company Act. As required by the Holding
Company Act, the Company files with the FRB an annual report regarding its
financial condition and operations, management and intercompany relationships of
the Company and the Bank. It is also subject to examination by the FRB and must
obtain FRB approval before ( i ) acquiring direct or indirect ownership or
control of more than 5% of the voting stock of any bank, unless it already owns
or controls a majority of the voting stock of that bank, (ii) acquiring all or
substantially all of the assets of a bank, except through a subsidiary which is
a bank, or (iii) merging or consolidating with any other bank holding company. A
bank holding company must also give the FRB prior written notice before
purchasing or redeeming its equity securities if the gross consideration for the
purchase or redemption, when aggregated with the net consideration paid by the
company for all such purchases or redemptions during the preceding 12 months, is
equal to 10% or more of the Company's consolidated net worth.
The Holding Company Act prohibits a bank holding company, with certain
exceptions, from (i ) acquiring direct or indirect ownership or control of any
voting shares of any company which is not a bank or a bank holding company, or
(ii) engaging in any activity other than managing or controlling banks, or
furnishing services to or performing services for its subsidiaries. A bank
holding company may own, however, shares of a company engaged in activities
which the FRB has determined are so closely related to banking or managing or
controlling banks as to be a proper incident thereto.
-12-
15
The Company and its subsidiaries are examined by federal and state regulators.
The FRB has responsibility for holding company activities and performed a review
in 1999.
FEDERAL DEPOSIT INSURANCE CORPORATION IMPROVEMENT ACT OF 1991
On December 19, 1991, the FDIC Improvement Act of 1991 (the "1991 Act") was
enacted. This legislation sought to recapitalize the Bank Insurance Fund of the
FDIC ("BIF"), which had been severely depleted as a result of the larger members
of failed banks. The recapitalization continues to be funded through, among
other things, increased deposit insurance assessments payable by BIF-insured
institutions, which increases the cost of doing business by all BIF-insured
institutions, including the Bank. The 1991 Act also provides for, among other
things: enhanced federal supervision of depository institutions, including
greater authority for the appointment of a conservator or receiver for
undercapitalized institutions; the establishment of risk-based deposit insurance
premiums; a requirement that the federal banking agencies amend their risk-based
capital requirements to include components for interest-rate risk, concentration
of credit risk, and the risk of nontraditional activities; expanded authority
for cross-industry mergers and acquisitions; mandated consumer protection
disclosures with respect to deposit accounts; and imposed restrictions on the
activities of state-chartered banks, including the Bank.
Provisions of the 1991 Act relating to the activities of state-chartered banks
significantly impact the way the Company conducts its business. In this regard,
the 1991 Act provides that insured state banks, such as the Bank, may not engage
as principal in any activity that is not permissible for a national bank, unless
the FDIC has determined that the activity would pose no significant risk to the
BIF and the state bank is in compliance with applicable capital standards.
Activities of subsidiaries of insured state banks are similarly restricted to
those activities permissible for subsidiaries of national banks, unless the FDIC
has determined that the activity would pose no significant risk to the BIF and
the state bank is in compliance with applicable capital standards.
INTERSTATE BANKING
The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994, as
amended (the "Interstate Banking Act") generally permits bank holding companies
to acquire banks in any state, and preempts all state laws restricting the
ownership by a bank holding company of banks in more than one state. The
Interstate Banking Act also permits a bank to merge with an out-of-state bank
and convert any offices into branches of the resulting bank if both states have
not opted out of interstate branching; permits a bank to acquire branches from
an out-of-state bank if the law of the state where the branches are located
permits the interstate branch acquisition; and operated de novo interstate
branches whenever the host state opts-in to de novo branching. Bank holding
companies and banks seeking to engage in transactions authorized by the
Interstate Banking Act must be adequately capitalized and managed.
COMPETITION
The Company experiences substantial competition in attracting deposits and
making loans from commercial banks, thrift institutions and other enterprises
such as insurance companies and mutual funds. These competitors include several
major commercial banks whose greater resources may afford them a competitive
advantage by enabling them to maintain numerous branch offices and mount
extensive advertising campaigns.
ITEM 2. PROPERTIES
The Company owns its main banking office, headquarters, and operations center in
Medford, and 11 of the 17 other facilities in which its branch offices are
located. The remaining offices are occupied under leases expiring on various
dates from 2000 to 2026.
ITEM 3. LEGAL PROCEEDINGS
The Company and its subsidiaries are parties to various claims and lawsuits
arising in the course of their normal business activities. Although the ultimate
outcome of these suits cannot be ascertained at this time, it is the opinion of
management that none of these matters, when resolved, will have a material
adverse effect on the Company's consolidated financial position.
-13-
16
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of Security Holders during the fourth
quarter of the fiscal year ended December 31, 2000.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
(a) The Class A Common Stock of the Company is traded on the
NASDAQ National Market system. The price range of the
Company's Class A common stock since January 1, 2000 is shown
on page 18.
The shares of Class A Common Stock are not entitled to vote in
the election of Company Directors but, in limited
circumstances, are entitled to vote as a class on certain
extraordinary transactions, including any merger or
consolidation (other than one in which the Company is the
surviving corporation or one which by law may be approved by
the directors without any stockholder vote) or the sale,
lease, or exchange of all or substantially all of the property
and assets of the Company. Since the vote of a majority of the
shares of Class B Common Stock, voting as a class, is required
to approve certain extraordinary corporate transactions, the
holders of Class B Common Stock have power to prevent any
takeover of the Company not approved by them.
(b) Approximate number of equity security holders as of December
31, 2000.
Approximate Number
Title of Class of Record Holders
-------------- -----------------
Class A Common Stock 335
Class B Common Stock 48
(c) Under the Company's Articles of Organization, the holders of
the Class A Common Stock are entitled to receive dividends per
share equal to at least 200% of that paid, if any, from time
to time on each share of Class B Common Stock (cont.)
-14-
17
The following table shows the dividends paid by the Company
on the Class A and Class B Common Stock for the periods
indicated.
Dividends Per Share
--------------------------
Class A Class B
-------- --------
1998
First quarter $ .050 $ .0070
Second quarter .050 .0070
Third quarter .050 .0070
Fourth quarter .060 .0170
1999
First quarter $ .060 $ .0170
Second quarter .080 .0370
Third quarter .080 .0370
Fourth quarter .080 .0370
2000
First quarter $ .080 $ .0370
Second quarter .080 .0370
Third quarter .080 .0370
Fourth quarter .090 .0450
As a bank holding company, the Company's ability to pay
dividends is dependent in part upon the dividend payments it
receives from the Bank, which are subject to certain
restrictions on the payment of dividends. A Massachusetts
trust company may pay dividends out of net profits from time
to time, provided that either (i) the trust company's
capital stock and surplus account equal an aggregate of at
least 10% of its deposit liabilities, or (ii) the amount of
its surplus account is equal to at least the amount of its
capital account.
ITEM 6. SELECTED FINANCIAL DATA
The information required herein is shown on page 16 and 17.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION
The information required herein is shown on pages 18 through
21.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information required herein is shown on page 20 and 21.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required herein is shown on pages 22 through
40.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
None.
-15-
18
FINANCIAL HIGHLIGHTS
(dollars in thousands, except share data) 2000 1999 1998
---------- ---------- ----------
YEAR-END
Total assets $1,083,830 $ 925,533 $ 853,326
Total loans 439,563 422,725 395,903
Total deposits 793,796 643,673 643,425
Total stockholders' equity 71,506 60,296 61,051
YEARLY AVERAGES
Total assets $ 949,015 $ 860,501 $ 719,450
Total earning assets 882,545 801,092 663,481
Total securities available-for-sale 267,633 229,739 138,912
Total securities held-to-maturity 165,970 157,706 137,259
Total loans 434,780 405,794 358,498
Total deposits 681,486 624,428 578,461
Total borrowed funds 163,944 134,625 56,079
Total stockholders' equity 63,424 61,610 57,539
EARNINGS
Net income $ 10,205 $ 9,105 $ 8,105
Net interest income, taxable equivalent 35,488 32,561 29,980
Other operating income 7,234 5,603 5,230
Operating expenses 25,638 22,655 21,326
PERFORMANCE MEASURES
Earnings per share, basic $ 1.82 $ 1.57 $ 1.40
Earnings per share, diluted $ 1.82 $ 1.56 $ 1.39
Return on average stockholders' equity 16.09% 14.78% 14.09%
Book value per share at December 31 $ 12.88 $ 10.63 $ 10.49
Return on average assets 1.08% 1.06% 1.13%
COMMON SHARE DATA
Average shares outstanding, basic 5,597,136 5,791,858 5,806,445
Average shares outstanding, diluted 5,597,629 5,818,633 5,847,444
Shares outstanding at year-end 5,550,350 5,670,600 5,822,167
PER SHARE DATA
2000, QUARTER ENDED December 31, September 30, June 30, March 31,
------- ------- ------- -------
Market price range (Class A)
High $ 15.00 $14.875 $ 14.75 $ 16.50
Low 13.438 11.875 12.00 12.938
Dividends Class A 0.09 0.08 0.08 0.08
Dividends Class B 0.045 0.037 0.037 0.037
1999, QUARTER ENDED December 31, September 30, June 30, March 31,
------- ------- ------- -------
Market price range (Class A)
High $ 18.00 $19.438 $ 20.00 $19.625
Low 16.00 17.75 16.75 17.125
Dividends Class A 0.08 0.08 0.08 0.06
Dividends Class B 0.037 0.037 0.037 0.017
-16-
19
FINANCIAL HIGHLIGHTS
2000 1999 1998 1997 1996
----------- ----------- ----------- ----------- -----------
(dollars in thousands except share data)
FOR THE YEAR
Interest income $ 66,554 $ 58,819 $ 51,878 $ 41,216 $ 38,777
Interest expense 31,092 26,284 22,015 15,922 15,805
----------- ----------- ----------- ----------- -----------
Net interest income 35,462 32,535 29,863 25,294 22,972
Provision for loan losses 1,425 1,475 800 660 1,020
----------- ----------- ----------- ----------- -----------
Net interest income after
provision for loan losses 34,037 31,060 29,063 24,634 21,952
Other operating income 7,234 5,603 5,230 4,994 4,761
Operating expenses 25,638 22,655 21,326 18,600 17,874
----------- ----------- ----------- ----------- -----------
Income before income taxes 15,633 14,008 12,967 11,028 8,839
Provision for income taxes 5,428 4,903 4,862 4,205 3,405
----------- ----------- ----------- ----------- -----------
Net income $ 10,205 $ 9,105 $ 8,105 $ 6,823 $ 5,434
=========== =========== =========== =========== ===========
Average shares outstanding, basic 5,597,136 5,791,858 5,806,445 5,772,135 5,736,230
Average shares outstanding, diluted 5,597,629 5,818,633 5,847,444 5,830,910 5,818,942
Earnings per share:
Basic $ 1.82 $ 1.57 $ 1.40 $ 1.18 $ 0.95
Diluted $ 1.82 $ 1.56 $ 1.39 $ 1.17 $ 0.93
Dividend payout ratio 14.5% 15.0% 10.3% 11.1% 10.9%
AT YEAR-END
Assets $ 1,083,830 $ 925,533 $ 853,326 $ 631,125 $ 560,857
Loans 439,563 422,725 395,903 316,390 288,280
Deposits 793,796 643,673 643,425 515,449 476,135
Stockholders' equity 71,506 60,296 61,051 53,857 47,489
Book value per share $ 12.88 $ 10.63 $ 10.49 $ 9.30 $ 8.25
SELECTED FINANCIAL PERCENTAGES
Return on average assets 1.08% 1.06% 1.13% 1.20% 1.01%
Return on average stockholders' equity 16.09% 14.78% 14.09% 13.56% 12.13%
Net yield on average earning assets,
taxable equivalent 4.02% 4.07% 4.52% 4.99% 4.79%
Net charge-offs (recoveries) as a percent
of average loans 0.78% (0.04%) 0.12% 0.13% 0.37%
Average stockholders' equity to
average assets 6.68% 7.16% 7.99% 8.88% 8.29%
-17-
20
MANAGEMENT DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION
OVERVIEW
Century Bancorp, Inc. (the "Company") had net income of $10,205,000 for the year
ended December 31, 2000, compared with net income of $9,105,000 for year ended
December 31, 1999 and net income of $8,105,000 for the year ended December 31,
1998. Basic earnings per share were $1.82 in 2000 compared to $1.57 in 1999 and
$1.40 in 1998. Diluted earnings per share were $1.82 in 2000 compared to $1.56
in 1999 and $1.39 in 1998.
Total assets were $1,083,830,000 at December 31, 2000, an increase of 17.1% from
total assets of $925,533,000 on December 31, 1999, which, in turn, were 8.5%
higher than total assets of $853,326,000 on December 31, 1998.
On December 31, 2000, stockholders' equity totaled $71,506,000 compared with
$60,296,000 on December 31, 1999, and $61,051,000 on December 31, 1998. Book
value per share increased to $12.88 at December 31, 2000 from $10.63 on December
31, 1999, which had increased from $10.49 on December 31, 1998.
During the third quarter of 2000, the Company announced plans to continue its
stock repurchase plan. Under the program, the Company is authorized to
repurchase up to 300,000 shares, or less than 9%, of Century Bancorp Class A
Common Stock. The program expires on July 14, 2001.
On June 11, 1998, the Company acquired Haymarket Co-operative Bank
("Haymarket"), headquartered in Boston, Massachusetts, and merged Haymarket into
the Bank. The purchase price paid by the Company to the shareholders of
Haymarket was $21.1 million in cash and the transaction was accounted for using
the purchase method of accounting. The results of operations include the effect
of the Haymarket acquisition for the 203-day period beginning June 12, 1998.
In May 1998 the Company, through its newly formed subsidiary, Century Bancorp
Capital Trust, issued 2,875,000 shares of Cumulative Trust Preferred Securities
with a liquidation value of $10 per share. These securities pay dividends at an
annualized rate of 8.30%. The Company is using the proceeds for general business
purposes.
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
The Company's operating results depend primarily on net interest income and fees
received for providing services. Net interest income on a fully taxable
equivalent basis increased 9.0% in 2000 to $35,488,000 compared with $32,561,000
in 1999. Interest income was affected positively by the core balance sheet
growth and leveraged balance sheet transactions. Net interest income is affected
by the level of interest rates, the ability of the Company's earning assets and
deposits to adjust to changes in interest rates and the mix of the Company's
earning assets and deposits. The net yield on earning assets on a fully taxable
equivalent basis decreased to 4.02% in 2000 from 4.07% in 1999, which had
decreased from 4.52% in 1998. The decrease was mainly attributable to pricing
competition on loans.
Average earning assets were $882,545,000 in 2000, an increase of $81,453,000 or
10.2% from the average in 1999, which was 20.7% higher than the average in 1998.
Total average securities, including securities available for sale and securities
held to maturity, increased 11.9% to $433,603,000. The increase in securities
volume was mainly attributable to both deposit and borrowings growth. This
increase in securities volume resulted in higher securities income, which
increased 16.5% to $26,467,000. Total average loans increased 7.1% to
$434,780,000 after increasing $47,296,000 in 1999. Total loans increased
primarily as a result of internal loan growth. The increase in loan volume
combined with a modestly higher level of interest rates resulted in higher loan
income, which increased by 10.0% or $3,579,000 to $39,199,000. Total loan income
was $33,361,000 in 1998.
The Company's sources of funds include deposits and borrowed funds. On average,
deposits showed an increase of 9.1% in 2000 after increasing by 7.9% in 1999.
Deposits increased in 2000 primarily as a result of internal deposit growth.
Borrowed funds increased by 21.8% in 2000 following an increase of 140.1% in
1999. The majority of the Company's borrowed funds are borrowings from the
Federal Home Loan Bank (FHLB) and retail repurchase agreements. Retail
repurchase agreements contributed approximately $20,026,000 to the Bank's
increased year-to-date average. Interest expense totaled $31,092,000 in 2000 an
increase of $4,808,000 or 18.3% from 1999 when interest expense increased 19.4%
from 1998. This increase in interest expense is due primarily to increases in
deposits and deposit rates.
-18-
21
MANAGEMENT DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION
PROVISION FOR LOAN LOSSES
The provision for loan losses was $1,425,000 in 2000 compared with $1,475,000 in
1999 and $800,000 in 1998. The increased ratio, for 1999, reflects increased
provisions associated with the deterioration with one borrower's credit quality
whose total relationship amounted to $4.1 million. Management placed this credit
to nonaccrual loans during the fourth quarter of 1999 and subsequently charged
off $3,500,000 of this loan during the first quarter of 2000. These provisions
are the result of management's evaluation of the quality of the loan portfolio
considering such factors as loan status, collateral values, financial condition
of the borrower, the state of the economy and other relevant information.
The allowance for loan losses was $5,662,000 at December 31, 2000 compared with
$7,646,000 at December 31, 1999 and $6,022,000 at December 31, 1998. Expressed
as a percentage of outstanding loans at year-end, the allowance was 1.29% in
2000, 1.81% in 1999 and 1.52% in 1998. The increased ratio, for 1999, reflects
increased provisions associated with the previously mentioned deterioration with
one borrower's credit quality whose total relationship amounted to $4.1 million.
Management maintains an allowance for credit losses to absorb losses inherent in
the loan portfolio. The allowance is based on assessments of the probable
estimated losses inherent in the loan portfolio. Management's methodology for
assessing the appropriateness of the allowance consists of several key elements,
which include the formula allowance, specific allowances for identified problem
loans and the unallocated allowance.
The formula allowance is calculated by applying loss factors to outstanding
loans, in each case based on the internal risk grade of such loans. Changes in
risk grades affect the amount of the formula allowance. Loss factors are based
on the Company's historical loss experience as well as regulatory guidelines.
Specific allowances are established in cases where management has identified
significant conditions related to a credit that management believes that the
probability that a loss has been incurred in excess of the amount determined by
the application of the formula allowance.
The unallocated allowance recognizes the model and estimation risk associated
with the formula allowance and specific allowances as well as management's
evaluation of various conditions, the effects of which are not directly measured
in the determination of the formula and specific allowances. The evaluation of
the inherent loss with respect to these conditions is subject to a higher degree
of uncertainty because they are not identified with specific problem credits.
Management believes that the allowance for loan losses is adequate. Management
uses available information to provide for losses but recognizes that changes in
economic conditions may result in additional losses and additional loss
provisions. Also, the allowance is reviewed in conjunction with regulatory
examinations. These reviews may require the Company to make additional
provisions to the allowance based on judgements made by the regulators.
The Company experienced net charge-offs in 2000 with net charge-offs as a
percent of average loans outstanding at 0.78%. The comparable net (recoveries)
charge-offs figures for 1999 and 1998 were (0.04)% and 0.12% respectively.
Non-performing loans, which include all non-accruing loans and certain
restructured, accruing loans, totaled $110,000 on December 31, 2000, compared
with $4,621,000 on December 31, 1999.
OTHER OPERATING INCOME
The Company continued to experience good results in its fee-based services in
2000. These fee-based services include deposit related services, lock-box
processing, and securities brokerage services.
Total other operating income in 2000, was $7,234,000 an increase of $1,631,000
or 29.1% compared to 1999. This increase followed an increase of $373,000 or
7.1% in 1999, compared to 1998. Service charge income, which continues to be a
major area of other operating income with $2,260,000 in 2000, saw an increase of
$449,000 compared to 1999. Lock-box revenues totaled $2,506,000 up $770,000 in
2000, primarily as a result of an increase in the lock-box customer base.
Brokerage commissions increased to $1,511,000 in 2000 from $1,460,000 in 1999,
which saw an increase of $330,000 from 1998.
-19-
22
MANAGEMENT DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION
OPERATING EXPENSES
Total operating expenses were $25,638,000 in 2000 compared to $22,655,000 in
1999 and $21,326,000 in 1998.
Salaries and employee benefits expenses increased by $1,610,000 or 11.3% in 2000
after increasing 6.5% in 1999. Nearly all of the increase, for 2000 and 1999,
was in the salaries category and was caused by an increase in the wage base, an
increase in personnel, and increased accruals for incentive compensation.
Personnel costs associated with the acquisition of Haymarket also contributed to
the increase in 1999.
Occupancy expense increased by $49,000 or 3.2% in 2000, this followed an
increase of $83,000 or 5.7% in 1999. Nearly all of the increase for 1999 was
because of the acquisition of Haymarket properties and the assumption of
Haymarket leases. Equipment expense increased by $296,000 in 2000. Equipment
expense increased primarily because of increased equipment depreciation.
Other operating expenses increased by $1,028,000 in 2000, which followed a
$330,000 increase in 1999. The increase for 2000 was primarily the result of
increased marketing expense, check processing charges, software maintenance and
supplies expense. In 1999 decreases in professional services were more than
offset by full year costs associated with the purchase of Haymarket,
amortization of costs associated with the Trust Preferred Offering and
amortization of costs associated with the new core processing system.
PROVISION FOR INCOME TAXES
Income tax expense was $5,428,000 in 2000, $4,903,000 in 1999 and $4,862,000 in
1998. The effective tax rate was 34.7% in 2000, 35.0% in 1999 and 37.5% in 1998.
The Company is continuing to realize savings in this area as a result of
strategic tax savings initiatives.
MARKET RISK AND ASSET LIABILITY MANAGEMENT
Market risk is the risk of loss from adverse changes in market prices and rates.
The Company's market risk arises primarily from interest rate risk inherent in
its lending and deposit taking activities. To that end, management actively
monitors and manages its interest rate risk exposure.
The Company's profitability is affected by fluctuations in interest rates. A
sudden and substantial increase in interest rates may adversely impact the
Company's earnings to the extent that the interest rates borne by assets and
liabilities do not change at the same speed, to the same extent, or on the same
basis. The Company monitors the impact of changes in interest rates on its net
interest income using several tools. One measure of the Company's exposures to
differential changes in interest rates between assets and liabilities is an
interest rate risk management test. This test measures the impact on net
interest income of an immediate change in interest rates in 100 basis point
increments.
Change in Interest Rates (in Basis Points) Percentage Change in Net Interest Income (1)
------------------------------------------ --------------------------------------------
+200 1.5%
+100 0.7%
- 100 (0.8%)
- 200 (1.6%)
(1) The percentage change in this column represents net interest income for 12
months in various rate scenarios versus the net interest income in a stable
interest rate environment.
The Company's primary objective in managing interest rate risk is to minimize
the adverse impact of changes in interest rates on the Company's net interest
income and capital, while structuring the Company's asset-liability structure to
obtain the maximum yield-cost spread on that structure. The Company relies
primarily on its asset-liability structure to control interest rate risk.
-20-
23
MANAGEMENT DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION
LIQUIDITY
Liquidity is provided by maintaining an adequate level of liquid assets that
include cash and due from banks, federal funds sold and other temporary
investments. Liquid assets totaled $175,802,000 on December 31, 2000 compared
with $66,528,000 on December 31, 1999 and $61,019,000 on December 31, 1998. In
each of the three years deposit activity has generally been adequate to support
asset activity.
The source of funds for dividends paid by the Company is dividends received from
the Bank. The Company and the Bank are regulated enterprises and their abilities
to pay dividends are subject to regulatory review and restriction. Certain
regulatory and statutory restrictions exist regarding dividends, loans and
advances from the Bank to the Company. Generally, the Bank has the ability to
pay dividends to the Company subject to minimum regulatory capital requirements.
CAPITAL ADEQUACY
Total stockholders' equity was $71,506,000 at December 31, 2000, compared with
$60,296,000 at December 31, 1999 and $61,051,000 at December 31, 1998. The
increase in 2000 was primarily the result of earnings less dividends paid which
were offset by a decrease in net unrealized losses on securities
available-for-sale and treasury stock repurchases. The decrease in 1999 was due
to an increase in net unrealized losses on securities available-for-sale and
treasury stock repurchases which were offset by earnings less dividends paid.
Also, there was a $104,000 increase in 2000, a $71,000 increase in 1999 and a
$120,000 increase in 1998 from the execution of certain stock options.
Federal banking regulators have issued risk-based capital guidelines, which
assign risk factors to asset categories and off-balance sheet items. The current
guidelines require a tier-1 capital-to-risk assets ratio of 4.00% and a total
capital-to-risk assets ratio of 8.00%. The Company and the Bank exceeded these
requirements with a tier-1 capital-to-risk assets ratio of 16.77% and 11.82%
respectively, and total capital-to-risk assets ratio of 18.62% and 12.84%,
respectively at December 31, 2000. Additionally, federal banking regulators have
issued leverage ratio guidelines, which supplement the risk-based capital
guidelines. The minimum leverage ratio requirement applicable to the Company is
4.00% and at December 31, 2000, the Company and the Bank exceeded this
requirement with leverage ratios of 9.50% and 6.69%, respectively.
RECENT ACCOUNTING DEVELOPMENTS
In June 1998, the Financial Accounting Standards Board (FASB) issued Financial
Accounting Standard (SFAS) No. 133, "Accounting for Derivative Instruments and
Hedging Activities." 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. The statement requires an entity to record all derivatives,
at fair value, as either assets or liabilities on the balance sheet. The change
in a derivative's fair value is to be recorded either in current period earnings
or other comprehensive income depending on whether the derivative qualifies for
hedge accounting and the hedge classification. SFAS 133 is effective for all
fiscal years beginning after June 15, 1999. In June 1999 the FASB issued SFAS
137, "Accounting for Derivative Instruments and Hedging Activities - Deferral of
the Effective Date of FASB Statement No. 133." SFAS 137 delays for one year the
effective date of SFAS 133, but permits early adoption. The Bank has not adopted
this statement early. This statement is not expected to have a material impact
on the Bank.
-21-
24
CONSOLIDATED BALANCE SHEETS
December 31, 2000 1999
----------- -----------
(dollars in thousands except share data)
ASSETS
Cash and due from banks (note 2) $ 63,790 $ 34,512
Federal funds sold and interest-bearing deposits in other banks 112,012 32,016
----------- -----------
Total cash and cash equivalents 175,802 66,528
Securities available-for-sale, amortized cost $274,939 in 2000
and $263,690 in 1999 (notes 3 and 9) 273,144 254,975
Securities held-to-maturity, market value $168,462 in 2000
and $146,603 in 1999 (notes 4 and 9) 169,186 152,599
Loans, net (note 5) 439,563 422,725
Less: allowance for loan losses (note 6) 5,662 7,646
----------- -----------
Net loans 433,901 415,079
Bank premises and equipment (note 7) 8,819 9,473
Accrued interest receivable 7,612 6,624
Other assets (note 12) 15,366 20,255
----------- -----------
Total assets $ 1,083,830 $ 925,533
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Demand deposits $ 198,914 $ 143,280
Savings and NOW deposits 175,655 152,089
Money market accounts 131,159 77,729
Time deposits (note 8) 288,068 270,575
---------- -----------
Total deposits 793,796 643,673
Securities sold under agreements to repurchase (note 9) 71,450 59,480
Other borrowed funds (note 10) 97,328 117,594
Other liabilities (note 12) 21,000 15,740
Long term debt (note 10) 28,750 28,750
----------- -----------
Total liabilities 1,012,324 865,237
Commitments and contingencies (notes 7, 14 and 15)
Stockholders' equity (note 11):
Common stock, Class A,
$1.00 par value per share; authorized 10,000,000 shares;
issued 3,754,600 shares in 2000 and 3,721,850 shares in 1999 3,755 3,722
Common stock, Class B,
$1.00 par value per share; authorized 5,000,000 shares;
issued 2,191,900 shares in 2000 and 2,196,900 shares in 1999 2,192 2,197
Additional paid-in-capital 11,093 11,017
Retained earnings 60,916 52,188
Treasury stock, Class A, 348,600 shares in 2000 and 200,600 shares
in 1999, at cost (5,242) (3,122)
Treasury stock, Class B, 47,550 shares in 2000 and 1999, at cost (41) (41)
----------- -----------
72,673 65,961
Accumulated other comprehensive loss, net of taxes (note 3) (1,167) (5,665)
----------- -----------
Total stockholders' equity 71,506 60,296
----------- -----------
Total liabilities and stockholders' equity $ 1,083,830 $ 925,533
=========== ===========
See accompanying Notes to Consolidated Financial Statements.
-22-
25
CONSOLIDATED STATEMENTS OF INCOME
Year Ended December 31, 2000 1999 1998
---------- ---------- ----------
(dollars in thousands except share data)
INTEREST INCOME
Loans $ 39,199 $ 35,620 $ 33,361
Securities held-to-maturity 10,379 9,262 8,612
Securities available-for-sale 16,088 13,463 8,345
Federal funds sold and interest-bearing deposits in other banks 888 474 1,560
---------- ---------- ----------
Total interest income 66,554 58,819 51,878
INTEREST EXPENSE
Savings and NOW deposits 4,093 3,824 4,167
Money market accounts 2,306 2,149 2,255
Time deposits (note 8) 13,642 11,326 11,445
Securities sold under agreements to repurchase 2,919 1,863 1,574
Other borrowed funds and long term debt 8,132 7,122 2,574
---------- ---------- ----------
Total interest expense 31,092 26,284 22,015
---------- ---------- ----------
Net interest income 35,462 32,535 29,863
Provision for loan losses (note 6) 1,425 1,475 800
---------- ---------- ----------
Net interest income after provision for loan losses 34,037 31,060 29,063
OTHER OPERATING INCOME
Service charges on deposit accounts 2,260 1,811 1,800
Lockbox fees 2,506 1,736 1,660
Brokerage commissions 1,511 1,460 1,130
Other income 957 596 640
---------- ---------- ----------
Total other operating income 7,234 5,603 5,230
OPERATING EXPENSES
Salaries and employee benefits (note 13) 15,917 14,307 13,432
Occupancy 1,586 1,537 1,454
Equipment 1,635 1,339 1,298
Other (note 16) 6,500 5,472 5,142
---------- ---------- ----------
Total operating expenses 25,638 22,655 21,326
---------- ---------- ----------
Income before income taxes 15,633 14,008 12,967
Provision for income taxes (note 12) 5,428 4,903 4,862
---------- ---------- ----------
NET INCOME $ 10,205 $ 9,105 $ 8,105
---------- ---------- ----------
SHARE DATA (NOTE 11)
Weighted average number of shares outstanding, basic 5,597,136 5,791,858 5,806,445
Weighted average number of shares outstanding, diluted 5,597,629 5,818,633 5,847,444
Net income per share, basic $ 1.82 $ 1.57 $ 1.40
Net income per share, diluted $ 1.82 $ 1.56 $ 1.39
See accompanying Notes to Consolidated Financial Statements.
-23-
26
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Accumulated
Class A Class B Additional Treasury Treasury Other Total
Common Common Paid-In Retained Stock Stock Comprehensive Stockholders'
Stock Stock Capital Earnings Class A Class B Income(Loss) Equity
-------- -------- -------- -------- -------- -------- --------- --------
(dollars in thousands except share
data)
BALANCE, DECEMBER 31, 1997 $ 3,541 $ 2,327 $10,877 $ 37,180 $ (136) $ (41) $ 109 $ 53,857
Net income -- -- -- 8,105 -- -- -- 8,105
Other comprehensive income, net of
tax:
Increase in unrealized losses on
securities available-for-sale
net of $102 in taxes -- -- -- -- -- -- (197) (197)
--------
Comprehensive income 7,908
Conversion of Class B common
stock to Class A common
stock, 100,200 shares 100 (100) -- -- -- -- -- --
Stock options exercised,
31,750 shares 32 -- 88 -- -- -- -- 120
Cash dividends, Class A common
stock, $0.21 per share -- -- -- (749) -- -- -- (749)
Cash dividends, Class B common
stock, $0.038 per share -- -- -- (85) -- -- -- (85)
-------- -------- -------- -------- -------- -------- -------- --------
BALANCE, DECEMBER 31, 1998 3,673 2,227 10,965 44,451 (136) (41) (88) 61,051
Net income -- -- -- 9,105 -- -- -- 9,105
Other comprehensive income, net of
tax:
Increase in unrealized losses on
securities available-for-sale
net of $3,050 in taxes -- -- -- -- -- -- (5,577) (5,577)
--------
Comprehensive income 3,528
Conversion of Class B common
stock to Class A common
stock, 29,420 shares 30 (30) -- -- -- -- -- --
Stock options exercised,
19,033 shares 19 -- 52 -- -- -- -- 71
Treasury stock repurchases,
170,600 shares -- -- -- -- (2,986) -- -- (2,986)
Cash dividends, Class A common
stock, $0.30 per share -- -- -- (1,093) -- -- -- (1,093)
Cash dividends, Class B common
stock, $0.128 per share -- -- -- (276) -- -- -- (276)
-------- -------- -------- -------- -------- -------- -------- --------
BALANCE, DECEMBER 31, 1999 3,722 2,197 11,017 52,188 (3,122) (41) (5,665) 60,296
Net income -- -- -- 10,205 -- -- -- 10,205
Other comprehensive income, net of
tax:
Decrease in unrealized losses on
securities available-for-sale
net of $628 in taxes -- -- -- -- -- -- 4,498 4,498
--------
Comprehensive income 14,703
Conversion of Class B common
stock to Class A common
stock, 5,000 shares 5 (5) -- -- -- -- -- --
Stock options exercised,
27,750 shares 28 -- 76 -- -- -- -- 104
Treasury stock repurchases,
148,000 shares -- -- -- -- (2,120) -- -- (2,120)
Cash dividends, Class A common
stock, $0.33 per share -- -- -- (1,142) -- -- -- (1,142)
Cash dividends, Class B common
stock, $0.156 per share -- -- -- (335) -- -- -- (335)
-------- -------- -------- -------- -------- -------- -------- --------
BALANCE, DECEMBER 31, 2000 $ 3,755 $ 2,192 $ 11,093 $ 60,916 $ (5,242) $ (41) $ (1,167) $ 71,506
======== ======== ======== ======== ======== ======== ======== ========
See accompanying Notes to Consolidated Financial Statements.
-24-
27
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31, 2000 1999 1998
--------- --------- ---------
(in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 10,205 $ 9,105 $ 8,105
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 1,425 1,475 800
Deferred income taxes 4,455 (1,269) (434)
Net depreciation and amortization 1,939 2,225 1,389
Increase in accrued interest receivable (988) (106) (1,506)
Increase in other assets (2,902) (728) (3,101)
Loans originated for sale -- -- (2,532)
Proceeds from sales of loans 61 153 3,179
Gain on sales of loans (1) (2) (48)
Gain on sales of real estate owned -- -- (7)
Gain on sale of building (386) -- --
Increase (decrease) in other liabilities 3,261 (6,331) (31)
--------- --------- ---------
Net cash provided by operating activities 17,069 4,522 5,814
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturities of securities available-for-sale 20,396 61,312 111,641
Purchase of securities available-for-sale (31,611) (114,711) (179,295)
Proceeds from maturities of securities held-to-maturity 14,269 58,425 89,659
Purchase of securities held-to-maturity (30,934) (51,730) (140,304)
Increase (decrease) in investments purchased payable 1,999 (5,493) 11,493
Net cash paid for acquired institution -- -- (5,786)
Net increase in loans (19,906) (26,545) (5,521)
Proceeds from sales of real estate owned -- -- 137
Proceeds from sale of building 1,342 -- --
Capital expenditures (1,684) (994) (874)
--------- --------- ---------
Net cash used in investing activities (46,129) (79,736) (118,850)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in time deposit accounts 17,493 28,667 (31,483)
Net increase (decrease) in demand, savings,
money market and NOW deposits 132,630 (28,198) 33,398
Net proceeds from the issuance of common stock 104 71 120
Treasury stock repurchases (2,120) (2,986) --
Cash dividends (1,477) (1,369) (834)
Net increase in securities sold
under agreements to repurchase 11,970 1,790 24,840
Net (decrease) increase in other borrowed funds (20,266) 82,748 21,372
Issuance of long term debt -- -- 28,750
--------- --------- ---------
Net cash provided by financing activities 138,334 80,723 76,163
--------- --------- ---------
Net increase (decrease) in cash and cash equivalents 109,274 5,509 (36,873)
Cash and cash equivalents at beginning of year 66,528 61,019 97,892
--------- --------- ---------
Cash and cash equivalents at end of year $ 175,802 $ 66,528 $ 61,019
--------- --------- ---------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest $ 29,549 $ 25,566 $ 24,047
Income taxes 2,424 6,911 3,963
Noncash transactions:
Property acquired through foreclosure $ -- $ -- $ 130
Change in unrealized losses
on securities available-for-sale, net of taxes $ 4,498 $ (5,577) $ (197)
See accompanying Notes to Consolidated Financial Statements
-25-
28
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The consolidated financial statements include the accounts of Century Bancorp,
Inc. (the "Company") and its wholly-owned subsidiary, Century Bank and Trust
Company (the "Bank"). The Company provides a full range of banking services to
individual, business and municipal customers in Massachusetts. As a bank holding
company, the Company is subject to the regulation and supervision of the Federal
Reserve Board. The Bank, a state chartered financial institution, is subject to
supervision and regulation by applicable state and federal banking agencies,
including the Federal Reserve Board, the Office of the Comptroller of the
Currency (the "Comptroller"), the Federal Deposit Insurance Corporation (the
"FDIC") and the Commonwealth of Massachusetts Commissioner of Banks. The Bank is
also subject to various requirements and restrictions under federal and state
law, including requirements to maintain reserves against deposits, restrictions
on the types and amounts of loans that may be granted and the interest that may
be charged thereon, and limitations on the types of investments that may be made
and the types of services that may be offered. Various consumer laws and
regulations also affect the operations of the Bank. In addition to the impact of
regulation, commercial banks are affected significantly by the actions of the
Federal Reserve Board as it attempts to control the money supply and credit
availability in order to influence the economy. All aspects of the Company's
business are highly competitive. The Company faces aggressive competition from
other lending institutions and from numerous other providers of financial
services. The Company has one reportable operating segment under FASB 131.
BASIS OF FINANCIAL STATEMENT PRESENTATION
The financial statements have been prepared in conformity with accounting
principles generally accepted in the United States of America and to general
practices within the banking industry. In preparing the financial statements,
management is required to make estimates and assumptions that affect the
reported amounts of assets and liabilities as of the date of the balance sheet
and revenues and expenses for the period. Actual results could differ from those
estimates.
Material estimates that are susceptible to change in the near-term relate to the
allowance for losses on loans. Management believes that the allowance for losses
on loans is adequate based on independent appraisals and review of other factors
associated with the assets. While management uses available information to
recognize losses on loans, future additions to the allowance for loans may be
necessary based on changes in economic conditions. In addition, regulatory
agencies periodically review the Company's allowance for losses on loans. Such
agencies may require the Company to recognize additions to the allowance for
loans based on their judgements about information available to them at the time
of their examination.
INVESTMENT SECURITIES
Debt securities that the Company has the positive intent and ability to hold to
maturity are classified as held-to-maturity and reported at amortized cost; debt
and equity securities that are bought and held principally for the purpose of
selling are classified as trading and reported at fair value, with unrealized
gains and losses included in earnings; and debt and equity securities not
classified as either held-to-maturity or trading are classified as
available-for-sale and reported at fair value, with unrealized gains and losses
excluded from earnings and reported as a separate component of stockholders'
equity, net of estimated related income taxes. The Company has no securities
held for trading.
Premiums and discounts on investment securities are amortized or accreted into
income by use of the level-yield method. If a decline in fair value below the
amortized cost basis of an investment is judged to be other than temporary, the
cost basis of the investment is written down to fair value. The amount of the
writedown is included as a charge to earnings. Gains and losses on the sale of
investment securities are recognized at the time of sale on a specific
identification basis.
LOANS
Interest on loans is recognized based on the daily principal amount outstanding.
Accrual of interest is discontinued when loans become 90 days delinquent unless
the collateral is sufficient to cover both principal and interest and the loan
is in the process of collection. Loans, including impaired loans, on which the
accrual of interest has been discontinued are designated non-accrual loans. When
a loan is placed on non-accrual, all income which has been accrued but remains
unpaid is reversed against current period income and all amortization of
deferred loan fees is discontinued. Non-accrual loans may be returned to an
accrual status when principal and interest payments are not delinquent and the
risk characteristics of the loan have improved to the extent that there no
longer exists a concern as to the collectibility of principal and income. Income
received on non-accrual loans is either recorded in income or applied to the
principal balance of the loan depending on management's evaluation as to the
collectibility of principal.
-26-
29
Loans held for sale are carried at the lower of aggregate amortized cost or
market value. When loans are sold with servicing rights retained the Company
allocates the carrying amount of the loans between the underlying asset sold and
the servicing rights retained on the basis of the relative fair values of the
assets sold and rights retained. The value of the servicing rights retained are
amortized against mortgage banking income based on the estimated servicing
period. When actual prepayments exceed the estimated prepayments, the balance of
the mortgage servicing rights is reduced. Periodically the mortgage servicing
rights are assessed for impairment based on the fair value of such rights using
market prices.
Loan origination fees and related direct incremental loan origination costs are
offset and the resulting net amount is deferred and amortized over the life of
the related loans using the level-yield method.
The Bank accounts for impaired loans, except those loans that are accounted for
at fair value or at lower of cost or fair value, at the present value of the
expected future cash flows discounted at the loan's effective interest rate.
This method applies to all loans, 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.
Management considers the payment status, net worth and earnings potential of the
borrower, and the value and cash flow of the collateral as factors to determine
if a loan will be paid in accordance with its contractual terms. Management does
not set any minimum delay of payments as a factor in reviewing for impaired
classification. Impaired loans are charged-off when management believes that the
collectibility of the loan's principal is remote. In addition, criteria for
classification of a loan as in-substance foreclosure has been modified so that
such classification need be made only when a lender is in possession of the
collateral. The Bank measures the impairment of troubled debt restructurings
using the pre-modification rate of interest.
ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses is based on management's evaluation of the quality
of the loan portfolio and is used to provide for losses resulting from loans
which ultimately prove uncollectible. In determining the level of the allowance,
periodic evaluations are made of the loan portfolio which take into account such
factors as the character of the loans, loan status, financial posture of the
borrowers, value of collateral securing the loans and other relevant information
sufficient to reach an informed judgement. The allowance is increased by
provisions charged to income and reduced by loan charge-offs, net of recoveries.
Management maintains an allowance for credit losses to absorb losses inherent in
the loan portfolio. The allowance is based on assessments of the probable
estimated losses inherent in the loan portfolio. Management's methodology for
assessing the appropriateness of the allowance consists of several key elements,
which include the formula allowance, specific allowances for identified problem
loans and the unallocated allowance.
The formula allowance is calculated by applying loss factors to outstanding
loans, in each case based on the internal risk grade of such loans. Changes in
risk grades affect the amount of the formula allowance. Loss factors are based
on the Company's historical loss experience as well as regulatory guidelines.
Specific allowances are established in cases where management has indentified
significant conditions related to a credit that management believes that the
probability that a loss has been incurred in excess of the amount determined by
the application of the formula allowance.
The unallocated allowance recognizes the model and estimation risk associated
with the formula allowance and specific allowances as well as management's
evaluation of various conditions, the effects of which are not directly measured
in the determination of the formula and specific allowances. The evaluation of
the inherent loss with respect to these conditions is subject to a higher degree
of uncertainty because they are not identified with specific problem credits.
While management uses available information in establishing the allowance for
loan losses, future adjustments to the allowance may be necessary if economic
conditions differ substantially from the assumptions used in making the
evaluations. Loans are charged-off in whole or in part when, in management's
opinion, collectibility is not probable.
Management believes that the allowance for loan losses is adequate. In addition,
various regulatory agencies, as part of their examination process, periodically
review the Company's allowance for loan losses. Such agencies may require the
Company to recognize additions to the allowance based on their judgements about
information available to them at the time of their examination.
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.
-27-
30
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
INCOME TAXES
The Company uses the asset and liability method of accounting for income taxes.
Under the asset and liability method, deferred tax assets and liabilities are
recognized for the future tax consequences attributable to differences between
the financial statement carrying amounts of existing assets and liabilities and
their respective tax bases. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the years in
which temporary differences are expected to be recovered or settled. Under this
method, the effect on deferred tax assets and liabilities of a change in tax
rates is recognized in income in the period that includes the enactment date.
2. CASH AND DUE FROM BANKS
The Company is required to maintain a portion of its cash and due from banks as
a reserve balance under the Federal Reserve Act. Such reserve is calculated
based upon deposit levels and amounted to $12,000 at December 31, 2000 and
$41,000 at December 31, 1999.
3. SECURITIES AVAILABLE-FOR-SALE
DECEMBER 31, 2000 December 31, 1999
--------------------------------------------- ---------------------------------------------
GROSS GROSS ESTIMATED Gross Gross Estimated
AMORTIZED UNREALIZED UNREALIZED MARKET Amortized Unrealized Unrealized Market
COST GAINS LOSSES VALUE Cost Gains Losses Value
- ------------------------------------------------------------------------------------ ---------------------------------------------
(in thousands)
U.S. Government and Agencies $256,390 $ 137 $ 1,689 $254,838 $247,289 $ 10 $ 8,521 $238,778
Obligations of states
and political subdivisions 1,000 -- -- 1,000 250 -- -- 250
FHLB Stock 13,084 -- -- 13,084 13,084 -- -- 13,084
Other 4,465 19 262 4,222 3,067 14 218 2,863
--------------------------------------------- ---------------------------------------------
$274,939 $ 156 $ 1,951 $273,144 $263,690 $ 24 $ 8,739 $254,975
============================================= =============================================
Included in U.S. Government and Agency securities are securities pledged to
secure public deposits and repurchase agreements amounting to $79,464,000 at
December 31, 2000 and $141,679,000 at December 31, 1999.
The following tables show the maturity distribution of the Company's securities
available-for-sale at December 31, 2000 and 1999:
DECEMBER 31, 2000
----------------------------------------------------------------------------
OBLIGATIONS
U.S. OF STATES ESTIMATED
GOVERNMENT AND POLITICAL MARKET
AND AGENCIES SUBDIVISIONS OTHER TOTAL VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
(in thousands)
Within one year $ 22,431 $ 1,000 $ -- $ 23,431 $ 23,391
After one but within five years 195,370 -- 600 195,970 194,864
After five but within ten years 7,998 -- -- 7,998 7,978
More than ten years 30,591 -- -- 30,591 30,207
Non-maturing -- -- 16,949 16,949 16,704
----------------------------------------------------------------------------
$256,390 $ 1,000 $ 17,549 $274,939 $273,144
============================================================================
December 31, 1999
--------------------------------------------------------------------------
Obligations
U.S. of States Estimated
Government and Political Market
and Agencies Subdivisions Other Total Value
- -----------------------------------------------------------------------------------------------------------------------------------
(in thousands)
Within one year $ 5,170 $ 250 $ -- $ 5,420 $ 5,408
After one but within five years 201,757 -- 500 202,257 195,902
After five but within ten years 10,998 -- -- 10,998 10,596
More than ten years 29,363 -- -- 29,363 27,623
Non-maturing -- -- 15,652 15,652 15,446
--------------------------------------------------------------------------
$247,288 $ 250 $ 16,152 $263,690 $254,975
==========================================================================
The weighted average remaining life of investment securities available-for-sale
at December 31, 2000 and 1999 was 3.8 and 4.7 years, respectively. Included in
the weighted average remaining life calculation at December 31, 2000 were $60.1
million of U.S. Agency obligations that are callable at the option of the
issuer. These call dates were not utilized in computing the weighted average
remaining life.
4. INVESTMENT SECURITIES HELD-TO-MATURITY
DECEMBER 31, 2000 December 31, 1999
---------------------------------------------- ----------------------------------------------
GROSS GROSS ESTIMATED Gross Gross Estimated
AMORTIZED UNREALIZED UNREALIZED MARKET Amortized Unrealized Unrealized Market
COST GAINS LOSSES VALUE Cost Gains Losses Value
- ---------------------------------------------------------------------------------- ----------------------------------------------
(in thousands)
U.S. Government and Agencies $146,962 $ 485 $ 1,003 $146,444 $127,719 $ -- $ 5,036 $122,683
Other 22,224 -- 206 22,018 24,880 -- 960 23,920
---------------------------------------------- ----------------------------------------------
$169,186 $ 485 $ 1,209 $168,462 $152,599 $ -- $ 5,996 $146,603
============================================== ==============================================
Included in U.S. Government and Agency securities are securities pledged to
secure public deposits and repurchase agreements amounting to $1,999,000 at
December 31, 2000 and $1,999,000 at December 31, 1999.
-28-
31
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following tables show the maturity distribution of the Company's securities
held-to-maturity at December 31, 2000 and 1999:
DECEMBER 31, 2000
-------------------------------------------------------------------------
OBLIGATIONS
U.S. OF STATES ESTIMATED
GOVERNMENT AND POLITICAL MARKET
AND AGENCIES SUBDIVISIONS OTHER TOTAL VALUE
- --------------------------------------------------------------------------------------------------------------------------------
(in thousands)
Within one year $ 5,999 $ -- $ -- $ 5,999 $ 5,999
After one but within five years 76,981 -- 25 77,006 76,622
After five but within ten years 8,295 -- -- 8,295 8,344
More than ten years 55,687 -- 22,199 77,886 77,497
-------------------------------------------------------------------------
$146,962 $ -- $22,224 $169,186 $168,462
========================================================================
December 31, 1999
-------------------------------------------------------------------------
Obligations
U.S. of States Estimated
Government and Political Market
and Agencies Subdivisions Other Total Value
- --------------------------------------------------------------------------------------------------------------------------------
(in thousands)
Within one year $ 1,850 $ -- $ 25 $ 1,875 $ 1,874
After one but within five years 66,975 -- 25 67,000 65,172
After five but within ten years 13,999 -- -- 13,999 13,253
More than ten years 44,895 -- 24,830 69,725 66,304
-------------------------------------------------------------------------
$127,719 $ -- $24,880 $152,599 $146,603
========================================================================
The weighted average remaining life of investment securities held-to-maturity at
December 31, 2000 and 1999 was 4.9 and 7.2 years, respectively. Included in the
weighted average remaining life calculation at December 31, 2000 were $21.0
million of U.S. agency obligations that are callable at the option of the
issuer. These call dates were not utilized in computing the weighted average
remaining life.
5. LOANS
The Company's lending activities are conducted principally in Massachusetts. The
Company grants single and multi-family residential loans, commercial and
commercial real estate loans, and a variety of consumer loans. To a lesser
extent, the Company grants loans for the construction of residential homes,
multi-family properties, commercial real estate properties, and land
development. Most loans granted by the Company are secured by real estate
collateral. The ability and willingness of commercial real estate, commercial,
construction, residential and consumer loan borrowers to honor their repayment
commitments is generally dependent on the health of the real estate market in
the borrowers' geographic areas and the general economy.
The following summary shows the composition of the loan portfolio at the dates
indicated.
December 31,
-------------------------------------------------------------------------------------------------
2000 1999 1998 1997 1996
-------------------------------------------------------------------------------------------------
PERCENT Percent Percent Percent Percent
AMOUNT OF TOTAL Amount of Total Amount of Total Amount of Total Amount of Total
- ------------------------------------------------------------------------------------------------------------------------------------
(in thousands)
Construction and land development $ 21,840 5.0% $ 21,682 5.1% $ 21,691 5.5% $ 7,549 2.4% $ 3,576 1.2%
Commercial and industrial 95,957 21.8% 77,166 18.3% 64,822 16.4% 50,560 16.0% 41,006 14.2%
Industrial revenue bonds 119 0.0% 190 0.0% 1,034 0.2% 2,693 0.9% 3,030 1.1%
Commercial real estate 209,233 47.6% 209,332 49.5% 187,285 47.3% 140,270 44.3% 133,757 46.4%
Residential real estate 81,526 18.6% 82,968 19.7% 87,518 22.1% 76,385 24.1% 76,638 26.6%
Consumer 9,226 2.1% 11,678 2.8% 14,355 3.6% 19,254 6.1% 12,749 4.4%
Home equity 21,107 4.8% 19,227 4.5% 18,839 4.8% 19,031 6.0% 17,330 6.0%
Overdrafts 555 0.1% 482 0.1% 359 0.1% 648 0.2% 194 0.1%
-------------------------------------------------------------------------------------------------
$439,563 100.0% $422,725 100.0% $395,903 100.0% $316,390 100.0% $288,280 100.0%
=================================================================================================
At December 31, 2000, 1999, 1998, 1997 and 1996, loans were carried net of
discounts of $1,446,000, $1,923,000, $2,399,000, $2,875,000 and $3,360,000,
respectively.
The composition of non-accrual loans, impaired loans and troubled debt
restructuring agreements is as follows:
2000 1999 1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------------------------
(in thousands)
Loans on non-accrual $ 110 $4,621 $1,281 $1,705 $2,140
Impaired loans on non-accrual included above $ 41 $4,378 $1,131 $1,235 $1,676
Total recorded investment in impaired loans $1,535 $6,019 $2,992 $3,515 $3,055
Average recorded value of impaired loans $2,444 $3,806 $3,048 $3,157 $2,935
Loans 90 days past due and still accruing $ 19 $ 188 $ 698 $ 7 $ 192
Interest income on non-accrual loans according to
their original term $ 19 $ 463 $ 166 $ 202 $ 270
Interest income on non-accrual loans
actually recorded $ 9 $ 331 $ 27 $ 84 $ 98
Interest income recognized on impaired loans $ 160 $ 458 $ 142 $ 216 $ 149
-29-
32
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The composition of impaired loans at December 31, is as follows:
2000 1999 1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------------------------
(in thousands)
Residential real estate:
1 to 4 family $ 41 $ 341 $ 330 $ 250 $ 299
Multi-family 681 702 729 771 1,201
Construction and land development -- -- -- -- --
Commercial real estate 782 950 1,662 2,323 1,248
Commercial and industrial 31 4,026 271 171 307
------------------------------------------------------------------------
Total $1,535 $6,019 $2,992 $3,515 $3,055
Specific valuation allowance -- -- -- -- --
------------------------------------------------------------------------
Total impaired loans $1,535 $6,019 $2,992 $3,515 $3,055
========================================================================
There were no impaired loans with specific reserves from December 31, 1996
through December 31, 2000 and in the opinion of management, none of the above
listed impaired loans required a specific reserve. All of the impaired loans
listed above have been measured using the fair value of the collateral method.
The Company was servicing mortgage loans sold to others without recourse at
December 31, 2000, 1999, 1998, 1997 and 1996 of approximately $10,678,000,
$13,111,000, $16,123,000, $18,053,000 and $20,359,000, respectively.
Additionally, the Company was servicing mortgage loans sold to others with
limited recourse. The outstanding balance of these loans with limited recourse
at December 31, 2000, 1999, 1998, 1997 and 1996 was approximately $479,000,
$490,000, $501,000, $753,000 and $1,092,000, respectively.
Directors and officers of the Company and their associates are customers of, and
have other transactions with, the Company in the normal course of business. All
loans and commitments included in such transactions were made on substantially
the same terms, including interest rates and collateral, as those prevailing at
the time for comparable transactions with other persons and do not involve more
than normal risk of collection or present other unfavorable features.
The following table shows the aggregate amount of loans to directors and
officers of the Company and their associates during 2000.
Balance at REPAYMENTS BALANCE AT
December 31, 1999 ADDITIONS AND DELETIONS DECEMBER 31, 2000
- ---------------------------------------------------------------------------------------------------------------------
(in thousands)
$ 2,037 $ 168 $ 667 $ 1,538
==========================================================================
6. ALLOWANCE FOR LOAN LOSSES
2000 1999 1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------------------------
(in thousands)
Balance at beginning of year $ 7,646 $ 6,022 $ 4,446 $ 4,179 $ 4,193
Acquired allowance -- -- 1,194 -- --
Provision charged to operating expense 1,425 1,475 800 660 1,020
Loans charged-off (3,661) (470) (843) (689) (1,303)
Loan recoveries 252 619 425 296 269
------------------------------------------------------------------------------------
Balance at end of year $ 5,662 $ 7,646 $ 6,022 $ 4,446 $ 4,179
====================================================================================
7. BANK PREMISES AND EQUIPMENT
December 31, 2000 1999
- --------------------------------------------------------------------------------
(in thousands)
Land $ 1,839 $ 1,839
Bank premises 6,533 7,540
Furniture and equipment 12,566 11,144
Leasehold improvements 1,888 1,888
------------------------------
22,826 22,411
Accumulated depreciation and amortization (14,007) (12,938)
------------------------------
$ 8,819 $ 9,473
==============================
The Company and its subsidiaries are obligated under a number of noncancelable
operating leases for premises and equipment expiring in various years through
the year 2026. Total lease expense approximated $199,000, $148,000 and $111,000
for the years ended December 31, 2000, 1999 and 1998, respectively.
-30-
33
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Future minimum rental commitments for noncancelable operating leases with
initial or remaining terms of one year or more at December 31, 2000 were as
follows:
Year Amount
- --------------------------------------------------------------------------------
(in thousands)
2001 $ 457
2002 457
2003 457
2004 457
2005 410
Thereafter 2,149
--------------------------------
$ 4,387
================================
8. DEPOSITS
Time deposits as of December 31, are as follows:
2000 1999
- --------------------------------------------------------------------------------
(in thousands)
Three months or less $ 153,958 $127,752
Three months through twelve months 106,222 111,283
Over twelve months 27,888 31,540
-----------------------------
$ 288,068 $270,575
=============================
Time deposits in denominations of $100,000 or more totaled $141,853,000 and
$121,769,000 at December 31, 2000 and 1999, respectively. Interest expense
associated with deposits in denominations of $100,000 or more was $5,797,000,
$3,497,000 and $3,547,000 for the years ended 2000, 1999 and 1998, respectively.
9. SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
2000 1999 1998
- --------------------------------------------------------------------------------
(dollars in thousands)
Average rate at December 31, 4.04% 3.68% 3.53%
Average balance outstanding during the year $68,808 $48,782 $36,953
Average rate during the year 4.24% 3.82% 4.26%
Maximum amount outstanding at any month-end $77,426 $59,480 $57,690
Amount outstanding at December 31, $71,450 $59,480 $57,690
Amounts outstanding at December 31, 2000, 1999 and 1998 carried maturity dates
of the next business day. U.S. Government and Agency securities with a total
book value of $72,974,000, $62,121,000 and $57,654,000 were pledged as
collateral and held by custodians to secure the agreements at December 31, 2000,
1999 and 1998, respectively. The approximate market value of the collateral at
those dates was $72,552,000, $59,486,000 and $57,626,000, respectively.
10. OTHER BORROWED FUNDS AND LONG TERM DEBT
December 31, 2000 1999
- --------------------------------------------------------------------------------
(in thousands)
Treasury tax and loan note $ 1,800 $ 2,023
Federal Home Loan Bank-Advance 94,331 114,375
Other 1,197 1,196
-----------------------------
$ 97,328 $ 117,594
=============================
The Bank serves as a Treasury Tax and Loan depository under a note option with
the Federal Reserve Bank of Boston. This open-ended interest bearing borrowing
carries an interest rate equal to the daily Federal funds rate less 0.25%. The
Bank borrowed $1,500,000 from the Federal Home Loan Bank in July 1996. The
borrowing bears interest at a fixed rate of 7.20%, has a remaining principal
balance of $1,331,000 and matures on July 24, 2006. In addition, the bank had a
credit line advance of $20,000,000 with the Federal Home Loan Bank on December
29, 2000. The interest rate on this line was 6.56%. Also the bank borrowed eight
long-term loans with the Federal Home Loan Bank. These loans total $73,000,000,
bear a weighted average interest rate of 5.87% and mature between April 8, 2002
and April 12, 2010.
In May 1998 the Company, through its newly formed subsidiary, Century Bancorp
Capital Trust, issued 2,875,000 shares of Cumulative Trust Preferred Securities
with a liquidation value of $10 per share. These securities pay dividends at an
annualized rate of 8.30% and mature on June 30, 2029. The Company will have the
right, at any time not earlier than June 30, 2003, to dissolve the Trust and
cause the Junior Subordinated Debentures, after satisfaction of liabilities to
creditors of the Trust, to be distributed to the holders of the Preferred
Securities. Such right is subject, however, to the Company having received prior
approval of the Federal Reserve if then required under applicable capital
guidelines or policies of the Federal Reserve. The Company is using the proceeds
primarily for general business purposes.
-31-
34
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11. STOCKHOLDERS' EQUITY
DIVIDENDS
Holders of the Class A common stock may not vote in the election of directors,
but may vote as a class to approve certain extraordinary corporate transactions.
Class A common stockholders are entitled to receive dividends per share equal to
at least 200% per share of that paid, if any, on each share of Class B common
stock. Class A common stock is publicly traded. Class B common stock is not
publicly traded, however, it can be converted on a share for share basis to
Class A common stock at any time. Dividend payments by the Company are dependent
in part on the dividends it receives from its bank subsidiary, which are subject
to certain regulatory restrictions.
EARNINGS PER SHARE (EPS)
Diluted EPS includes the dilutive effect of common stock equivalents; basic EPS
excludes all common stock equivalents. The only common stock equivalents for the
Company are the stock options discussed below. The dilutive effect of these
stock options for 2000, 1999 and 1998 was an increase of 493, 26,775 and 40,999
shares, respectively.
STOCK OPTION PLAN
The common stockholders of the Company approved a stock option plan (the "Option
Plan") that provides for granting of options for not more than 150,000 shares of
Class A common stock. Under the Option Plan, all officers and key employees of
the Company are eligible to receive non-qualified and incentive stock options to
purchase shares of Class A common stock. The Option Plan is administered by the
Compensation Committee whose members are ineligible to participate in the Option
Plan. Based on management's recommendations, the Committee submits its
recommendations to the Board of Directors as to persons to whom options are to
be granted, the number of shares granted to each, the option price (which may
not be less than 85% of the fair market value for non-qualified stock options,
or the fair market value for incentive stock options, of the shares on the date
of grant) and the time period over which the options are exercisable (no more
than ten years from the date of grant). There were no options exercisable at
December 31, 2000.
Information with regard to the stock option plan is as follows:
Number of Weighted Average
Option Shares Option Price Per Share
- --------------------------------------------------------------------------------
Outstanding at December 31, 1997 78,533 $ 3.75
Granted - -
Exercised (31,750) 3.75
Cancelled - -
- --------------------------------------------------------------------------------
Outstanding at December 31, 1998 46,783 3.75
Granted - -
Exercised (19,033) 3.75
Cancelled - -
- --------------------------------------------------------------------------------
Outstanding at December 31, 1999 27,750 3.75
Granted - -
Exercised (27,750) 3.75
Cancelled - -
- --------------------------------------------------------------------------------
OUTSTANDING AT DECEMBER 31, 2000 - $ -
================================================================================
The Company measures compensation cost for stock-based compensation plans using
the intrinsic value based method prescribed by Accounting Principles Board
Opinion No. 25. The Company granted no stock options during 2000, 1999 or 1998
and, therefore, no disclosures of proforma net income and earnings per share as
if the fair value method had been applied are required. The new disclosures will
be provided when additional stock options are granted.
-32-
35
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CAPITAL AND OTHER REGULATORY REQUIREMENTS
The Bank is subject to various regulatory requirements administered by federal
banking agencies. Failure to meet minimum capital requirements can initiate
certain mandatory and possibly additional discretionary actions by regulators
that, if undertaken, could have a direct material affect on the Company's
financial statements. Under capital adequacy guidelines and regulatory framework
for prompt corrective action, the Bank must meet specific capital guidelines
that involve quantitative measures of the Bank's assets, liabilities, and
certain off-balance-sheet items as calculated under regulatory accounting
practices. The Bank's capital amounts and classification are also qualitative
judgements by the regulators about components, risk weightings, and other
factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios (set forth in the table
below) of total and Tier 1 capital (as defined in the regulation) to risk
weighted assets (as defined), and Tier 1 capital (as defined) to average assets
(as defined). Management believes, as of December 31, 2000, that the Bank meets
all capital adequacy requirements to which it is subject.
As of December 31, 2000, the most recent notification from the Commonwealth of
Massachusetts categorized the Bank as well capitalized under the regulatory
framework for prompt corrective action. To be categorized as well capitalized,
the Bank must maintain minimum total risk-based, Tier risk-based, and Tier 1
leverage ratios as set forth in the table. There are no conditions or events
since that notification that management believes would cause a change in the
Bank's categorization.
The Bank's actual capital amounts and ratios are presented in the following
table.
To Be Well Capitalized
Under Prompt Corrective
Actual For Capital Adequacy Purposes Action Provisions
- ------------------------------------------------------------------------------------------------------------------------------------
Amount Ratio Amount Ratio Amount Ratio
- ------------------------------------------------------------------------------------------------------------------------------------
(dollars in thousands)
As of December 31, 2000:
Total capital (to risk-weighted assets) $71,240 12.84% $ 44,384 8.00% $ 55,480 10.00%
Tier 1 capital (to risk-weighted assets) 65,578 11.82% 22,192 4.00% 33,288 6.00%
Tier 1 capital (to 4th qtr. average assets) 65,578 6.69% 39,195 4.00% 48,994 5.00%
As of December 31, 1999:
Total capital (to risk-weighted assets) $63,962 12.61% $ 40,581 8.00% $ 50,726 10.00%
Tier 1 capital (to risk-weighted assets) 57,605 11.36% 20,291 4.00% 30,436 6.00%
Tier 1 capital (to 4th qtr. average assets) 57,605 6.44% 35,785 4.00% 44,731 5.00%
12. INCOME TAXES
The current and deferred components of income tax expense for the years ended
December 31 are as follows:
2000 1999 1998
- --------------------------------------------------------------------------------
(in thousands)
Current expense:
Federal $ 967 $ 5,883 $ 4,884
State 6 289 349
--------------------------------------------
Total current expense 973 6,172 5,233
--------------------------------------------
Deferred expense:
Federal 4,534 (1,269) (1,001)
State -- -- 630
Valuation allowance (79) -- --
--------------------------------------------
Total deferred expense 4,455 (1,269) (371)
--------------------------------------------
Provision for income taxes $ 5,428 $ 4,903 $ 4,862
============================================
Income tax accounts included in other assets and other liabilities at December
31 are as follows:
2000 1999
- --------------------------------------------------------------------------------
(in thousands)
Currently receivable (payable) $ 1,078 $ (373)
Deferred income tax (liability) asset, net (769) 6,108
----------------------------
$ 309 $ 5,735
============================
-33-
36
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Income tax expense for the years presented is different from the amounts
computed by applying the statutory Federal income tax rate of 35% for 2000 and
1999 and 34% for 1998 to income before Federal income taxes. The following
tabulation reconciles Federal income tax expense based on statutory rates to the
actual income tax expense for the years ended December 31:
2000 1999 1998
- --------------------------------------------------------------------------------
(in thousands)
Federal income tax expense
at statutory rates $ 5,471 $ 4,903 $ 4,409
State income taxes, net of Federal
income tax benefit 4 188 646
Effect of tax-exempt interest (17) (17) (77)
Other (30) (171) (116)
------------------------------------
$ 5,428 $ 4,903 $ 4,862
====================================
Effective Tax Rate 34.7% 35.0% 37.5%
The following table sets forth the Company's gross deferred income tax assets
and gross deferred income tax liabilities at December 31:
2000 1999
- --------------------------------------------------------------------------------
(in thousands)
Deferred income tax assets:
Allowance for loan losses $ 2,806 $ 2,602
Deferred compensation 1,892 1,678
Unrealized loss on securities available-for-sale 628 3,050
Acquisition premium 340 240
Capital loss carryforward -- 79
Investments writedown 51 64
Other 72 62
-----------------------
Gross deferred income tax asset 5,789 7,775
Valuation allowance -- (79)
-----------------------
5,789 7,696
Deferred income tax liabilities:
Deferred income (4,949) --
Accrued dividends (73) --
Purchase accounting (26) (270)
Depreciation (246) (188)
Limited partnerships (1,205) (1,106)
Other (59) (24)
=======================
Deferred income tax (liability) asset, net $ (769) $ 6,108
=======================
13. EMPLOYEE BENEFITS
The Company has a qualified Defined Benefit Pension Plan (the "Plan"), which is
offered to all employees reaching minimum age and service requirements. A change
in the discount rate used, a stable work force and increased compensation
expense in 2000 resulted in an increase in pension cost.
The Company has a Supplemental Insurance/Retirement Plan(the "Supplemental
Plan"), which is limited to certain officers and employees of the Company. The
Supplemental Plan is voluntary and participants are required to contribute to
its cost. Under the Supplemental Plan, each participant will receive a
retirement benefit based on compensation and length of service. Individual life
insurance policies, which are owned by the Company, are purchased covering the
lives of each participant.
-34-
37
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Defined Benefit Pension Plan Supplemental Insurance/Retirement Plan
2000 1999 2000 1999
- ------------------------------------------------------------------------------------------------------------------------------------
(in thousands)
Change in benefit obligation:
Benefit obligation at beginning of year $ 7,628 $ 7,952 $ 6,272 $ 5,557
Service cost 427 495 32 63
Interest cost 553 497 455 347
Plan amendment -- -- -- 440
Actuarial loss (gain) 917 (1,158) 1,321 (124)
Benefits paid (285) (158) (13) (11)
--------------------------------------------------------------------------
Benefit obligation at end of year $ 9,240 $ 7,628 $ 8,067 $ 6,272
--------------------------------------------------------------------------
Change in plan assets:
Fair value of plan assets at beginning of year $ 5,625 $ 4,875
Actual return on plan assets 506 308
Employer contributions 600 600
Benefits paid (285) (158)
--------------------------------------------------------------------------
Fair value of plan assets at end of year $ 6,446 $ 5,625
--------------------------------------------------------------------------
Funded status $(2,794) $(2,003) $(8,067) $(6,272)
Unrecognized transition obligation (1) (2) (103) (206)
Unrecognized prior service cost (424) (523) 407 446
Unrecognized net actuarial loss (1,646) (794) (2,963) (1,714)
--------------------------------------------------------------------------
Accrued benefit cost $ (723) $ (684) $(5,408) $(4,798)
==========================================================================
Weighted-average assumptions as of December 31:
Discount rate 6.75% 7.25% 6.75% 7.25%
Expected return on plan assets 8.00% 8.00% N/A N/A
Rate of compensation increase 5.00% 5.00% 5.00% 5.00%
Components of net periodic benefit cost:
Service cost $ 427 $ 495 $ 32 $ 63
Interest cost 553 497 455 347
Expected return on plan assets (443) (396) -- --
Amortization of unrecognized
transition obligation 1 1 103 103
Recognized prior service cost 99 99 (39) (68)
Recognized net losses 2 76 72 91
--------------------------------------------------------------------------
Net periodic cost $ 639 $ 772 $ 623 $ 536
==========================================================================
The Company offers a 401(k) defined contribution plan for all employees reaching
minimum age and service requirements. The plan is voluntary and employee
contributions are matched by the Company at a rate of 25% for the first 4% of
compensation contributed by each employee. The Company's match totaled $70,000
for 2000 and $61,000 for 1999. Administrative costs associated with the plan are
absorbed by the Company.
The Company does not offer any post retirement programs other than pensions.
14. COMMITMENTS AND CONTINGENCIES
A number of legal claims against the Bank arising in the normal course of
business were outstanding at December 31, 2000. Management, after reviewing
these claims with legal counsel, is of the opinion that their resolution will
not have a material adverse affect on the Company's consolidated financial
position.
15. FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
The Company is party to financial instruments with off-balance sheet risk in the
normal course of business to meet the financing needs of its customers. These
financial instruments primarily include commitments to originate and sell loans,
standby letters of credit, unused lines of credit and unadvanced portions of
construction loans. The instruments involve, to varying degrees, elements of
credit and interest rate risk in excess of the amount recognized in the
consolidated balance sheet. The contract or notional amounts of those
instruments reflect the extent of involvement the Company has in these
particular classes of financial instruments.
The Company's exposure to credit loss in the event of non-performance by the
other party to the financial instrument for loan commitments and standby letters
of credit is represented by the contractual amount of those instruments. The
Company uses the same credit policies in making commitments and conditional
obligations as it does for on-balance sheet instruments.
-35-
38
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Financial instruments with off-balance sheet risk at December 31 are as follows:
Contract or Notional Amount 2000 1999
- --------------------------------------------------------------------------------
(in thousands)
Financial instruments whose contract amount
represents credit risk:
Commitments to originate 1 - 4 family mortgages $ 1,344 $ 3,056
Standby letters of credit 991 1,169
Unused lines of credit 88,679 86,015
Unadvanced portions of construction loans 24,476 10,838
Commitments to originate loans, unadvanced portions of construction loans and
unused lines of credit are generally agreements to lend to a customer provided
there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. Since many of the commitments are expected to expire
without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. The Company evaluates each customer's credit
worthiness on a case-by-case basis. The amount of collateral obtained, if deemed
necessary by the Company upon extension of credit, is based on management's
credit evaluation of the borrower.
Standby letters of credit are conditional commitments issued by the Company to
guarantee the performance by a customer to a third party. The credit risk
involved in issuing letters of credit is essentially the same as that involved
in extending loan facilities to customers.
In addition to general commitments, the Company has originated 1 - 4 family
mortgages for sale in the secondary markets. These loans were sold with and
without recourse and no loan was originated without its sale having been
pre-arranged. The Company was servicing mortgage loans sold to others with a
maximum recourse provision of 10% of the outstanding balance of approximately
$479,000 at December 31, 2000 and $490,000 at December 31, 1999.
16. OTHER OPERATING EXPENSES
Year Ended December 31, 2000 1999 1998
- --------------------------------------------------------------------------------
(in thousands)
Marketing $1,286 $ 947 $1,079
Supplies 595 479 488
Telephone 268 240 267
Postage and delivery 492 470 459
Legal and audit 546 462 381
Consulting 278 180 654
Software maintenance and amortization 539 421 237
Processing services 764 436 278
Insurance 164 179 172
FDIC assessment 141 82 70
Core deposit intangible amortization 200 200 200
Goodwill amortization 267 327 171
Capital expense amortization 224 257 133
Other 736 792 553
---------------------------------
$6,500 $5,472 $5,142
=================================
17. FAIR VALUES OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used by the Company in estimating
fair values of its financial instruments.
Excluded from this disclosure are certain financial instruments for which it is
not practical to estimate their value and all nonfinancial instruments.
Accordingly, the aggregate fair value amounts presented do not represent the
underlying value of the Company.
CASH AND CASH EQUIVALENTS: The carrying amounts reported in the balance sheet
for cash and cash equivalents approximate the fair values of these assets
because of the short-term nature of these financial instruments.
SECURITIES HELD-TO-MATURITY AND SECURITIES AVAILABLE-FOR-SALE: The fair value of
these securities, excluding certain state and municipal securities whose fair
value is estimated at book value because they are not readily marketable, is
estimated based on bid prices published in financial newspapers or bid
quotations received from securities dealers.
LOANS: For variable-rate loans that reprice frequently and with no significant
change in credit risk, fair values are based on carrying amounts. The fair value
of other loans is estimated using discounted cash flow analysis, based on
interest rates currently being offered for loans with similar terms to borrowers
of similar credit quality. Incremental credit risk for non-performing loans has
been considered.
ACCRUED INTEREST RECEIVABLE AND PAYABLE: The carrying amounts for accrued
interest receivable and payable approximate fair values because of the
short-term nature of these financial instruments.
-36-
39
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DEPOSITS: The fair value of demand deposits, savings, NOW and money market
accounts is based on the estimated discounted value of cash flows. The discount
rate used is estimated based on similar rates currently offered for deposits of
similar remaining estimated maturities. The fair value of certificates of
deposit is based on the discounted value of contractual cash flows. The discount
rate used is estimated based on the rates currently offered for deposits of
similar remaining maturities.
REPURCHASE AGREEMENTS AND OTHER BORROWED FUNDS: The fair value of repurchase
agreements and other borrowed funds is based on the discounted value of
contractual cash flows. The discount rate used is estimated based on the rates
currently offered for other borrowed funds of similar remaining maturities.
OFF-BALANCE SHEET INSTRUMENTS: The fair values of the Company's unused lines of
credit, commitments to originate and sell loans and standby letters of credit
are estimated using the fees currently charged to enter into similar agreements,
taking into account the remaining terms of the agreements and the
counterparties' credit standing. The fair value of the Company's commitments to
sell mortgage loans approximates the estimated cost to terminate or otherwise
settle the obligations with the counterparties. Therefore, at December 31, 2000
and 1999, there was no fair value adjustment.
The carrying amounts and fair values of the Company's financial instruments at
December 31 are as follows:
2000 1999
- ------------------------------------------------------------------------------------------------------------------------------------
CARRYING Carrying
AMOUNTS FAIR VALUE Amounts Fair Value
- ------------------------------------------------------------------------------------------------------------------------------------
(in thousands)
Financial assets:
Cash and cash equivalents $175,802 $175,802 $ 66,528 $ 66,528
Securities available-for-sale 273,144 273,144 254,975 254,975
Investment securities held-to-maturity 169,186 168,462 152,599 146,603
Net loans 433,901 422,040 415,079 419,095
Accrued interest receivable 7,612 7,612 6,624 6,624
Financial liabilities:
Deposits 793,796 754,559 643,673 643,799
Repurchase agreements
and other borrowed funds 168,778 167,786 177,074 175,057
Accrued interest payable 3,854 3,854 2,332 2,332
LIMITATIONS
Fair value estimates are made at a specific point in time, based on relevant
market information and information about the type of financial instrument. These
estimates do not reflect any premium or discount that could result from offering
for sale at one time the Bank's entire holdings of a particular financial
instrument. Because no active market exists for some of the Bank's financial
instruments, fair value estimates are based on judgements regarding future
expected loss experience, cash flows, current economic conditions, risk
characteristics and other factors. These estimates are subjective in nature and
involve uncertainties and matters of significant judgement and therefore cannot
be determined with precision. Changes in assumptions and changes in the loan,
debt and interest rate markets could significantly affect the estimates.
Further, the income tax ramifications related to the realization of the
unrealized gains and losses can have a significant effect on the fair value
estimates and have not been considered.
18. QUARTERLY RESULT OF OPERATIONS (UNAUDITED)
2000 Quarters FOURTH THIRD SECOND FIRST
- ------------------------------------------------------------------------------------------------------------------------------------
(in thousands, except per share data)
Interest income $ 17,207 $ 16,943 $ 16,592 $ 15,812
Interest expense 8,040 7,958 7,768 7,326
--------------------------------------------------------------------------
Net interest income 9,167 8,985 8,824 8,486
Provision for loan losses 375 375 375 300
--------------------------------------------------------------------------
Net interest income after provision
for loan losses 8,792 8,610 8,449 8,186
Other operating income 1,943 1,772 2,060 1,459
Operating expenses 6,799 6,549 6,303 5,987
--------------------------------------------------------------------------
Income before income taxes 3,936 3,833 4,206 3,658
Provision for income taxes 1,304 1,307 1,510 1,307
--------------------------------------------------------------------------
Net income $ 2,632 $ 2,526 $ 2,696 $ 2,351
==========================================================================
Share Data:
Average shares outstanding, basic 5,553,720 5,560,350 5,603,086 5,672,269
Average shares outstanding, diluted 5,553,720 5,560,350 5,603,086 5,674,306
Earnings per share, basic $ 0.47 $ 0.45 $ 0.48 $ 0.41
Earnings per share, diluted $ 0.47 $ 0.45 $ 0.48 $ 0.41
==========================================================================
-37-
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1999 Quarters Fourth Third Second First
- -----------------------------------------------------------------------------------------------------
(in thousands, except per share data)
Interest income $ 15,404 $ 14,682 $ 14,583 $ 14,150
Interest expense 7,063 6,528 6,481 6,212
----------------------------------------------------------
Net interest income 8,341 8,154 8,102 7,938
Provision for loan losses 800 225 225 225
----------------------------------------------------------
Net interest income after provision
for loan losses 7,541 7,929 7,877 7,713
Other operating income 1,366 1,407 1,532 1,298
Operating expenses 5,693 5,613 5,749 5,600
----------------------------------------------------------
Income before income taxes 3,214 3,723 3,660 3,411
Provision for income taxes 978 1,275 1,375 1,275
----------------------------------------------------------
Net income $ 2,236 $ 2,448 $ 2,285 $ 2,136
==========================================================
Share Data:
Average shares outstanding, basic 5,724,416 5,804,096 5,814,533 5,825,528
Average shares outstanding, diluted 5,746,282 5,827,577 5,842,324 5,858,711
Earnings per share, basic $ 0.39 $ 0.42 $ 0.39 $ 0.37
Earnings per share, diluted $ 0.39 $ 0.42 $ 0.39 $ 0.36
==========================================================
19. PARENT COMPANY FINANCIAL STATEMENTS
The balance sheets of Century Bancorp, Inc. ("Parent Company") as of December
31, 2000 and 1999 and the statements of income and cash flows for each of the
years in the three-year period ended December 31, 2000 are presented below. The
statements of changes in stockholders' equity are identical to the consolidated
statements of changes in stockholders' equity and are therefore not presented
here.
BALANCE SHEETS
December 31, 2000 1999
- --------------------------------------------------------------------------------
(in thousands)
Assets:
Cash $ 32,172 $32,404
Investment in subsidiary, at equity 67,955 55,910
Other assets 1,329 1,425
-------------------------
Total assets $101,456 $89,739
=========================
Liabilities and Stockholders' Equity:
Liabilities $ 1,200 $ 693
Long term debt 28,750 28,750
Stockholders' equity 71,506 60,296
-------------------------
Total liabilities and stockholders' equity $101,456 $89,739
=========================
STATEMENTS OF INCOME
Year Ended December 31, 2000 1999 1998
- ---------------------------------------------------------------------------------------
(in thousands)
Income:
Dividends from subsidiary $ 3,193 $1,678 $1,435
Interest income from deposits in bank 1,835 1,714 1,159
Other income 79 86 12
--------------------------------------
Total income 5,107 3,478 2,606
Interest expense 2,460 2,460 1,485
Operating expenses 283 390 212
--------------------------------------
Income before income taxes and equity in
undistributed income of subsidiary 2,364 628 909
Provision for income taxes (293) (373) (167)
--------------------------------------
Income before equity in undistributed
income of subsidiary 2,657 1,001 1,076
Equity in undistributed income of subsidiary 7,548 8,104 7,029
--------------------------------------
Net income $10,205 $9,105 $8,105
======================================
-38-
41
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
STATEMENTS OF CASH FLOWS
Year Ended December 31, 2000 1999 1998
- ----------------------------------------------------------------------------------------------------
(in thousands)
Cash flows from operating activities:
Net income $10,205 $ 9,105 $ 8,105
Adjustments to reconcile net income to
net cash provided by operating activities:
Undistributed income of subsidiary (7,548) (8,104) (7,029)
Depreciation and amortization 230 234 138
(Increase) decrease in other assets (133) 14 (1,728)
Increase in liabilities 507 277 38
----------------------------------------
Net cash provided by (used in)
operating activities 3,261 1,526 (476)
----------------------------------------
Cash flows from financing activities:
Stock options exercised 104 71 120
Cash dividends paid (1,477) (1,369) (834)
Treasury stock repurchases (2,120) (2,986) --
Issuance of long term debt -- -- 28,750
----------------------------------------
Net cash (used in) provided by
financing activities (3,493) (4,284) 28,036
----------------------------------------
Net increase (decrease) in cash 232 (2,758) 27,560
Cash at beginning of year 32,404 35,162 7,602
----------------------------------------
Cash at end of year $32,172 $32,404 $35,162
========================================
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Income taxes $ -- $ -- $ 25
-39
42
INDEPENDENT AUDITORS' REPORT
KPMG LLP
Certified Public Accountants
99 High Street
Boston, Massachusetts 02110
THE BOARD OF DIRECTORS
CENTURY BANCORP, INC.:
We have audited the accompanying consolidated balance sheets of Century Bancorp,
Inc. and subsidiary (the Company) as of December 31, 2000 and 1999, and the
related consolidated statements of income, changes in stockholders' equity and
cash flows for each of the years in the three-year period ended December 31,
2000. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the consolidated
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Century Bancorp,
Inc. and subsidiary as of December 31, 2000 and 1999, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 2000 in conformity with accounting principles generally
accepted in the United States of America.
/s/ KPMG LLP
January 8, 2001
-40-
43
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The directors of the Company and their ages as of December 31, 2000 are as
follows:
NAME AGE POSITION
George R. Baldwin 57 Director, Century Bancorp, Inc., and Century Bank and Trust Co.,
Roger S. Berkowitz 48 Director, Century Bancorp, Inc., and Century Bank and Trust Co.
Karl E. Case, Ph. D. 54 Director, Century Bancorp, Inc., and Century Bank and Trust Co.
Henry L. Foster, D.V.M. 75 Director, Century Bancorp, Inc., and Century Bank and Trust Co.
Marshall I. Goldman, Ph. D. 70 Director, Century Bancorp, Inc., and Century Bank and Trust Co.
Russell B. Higley, Esquire 61 Director, Century Bancorp, Inc., and Century Bank and Trust Co.
Jonathan B. Kay 41 Director, Century Bancorp, Inc., and Century Bank and Trust Co.
Donald H. Lang 60 Director, Century Bancorp, Inc., and Century Bank and Trust Co.
Fraser Lemley 60 Director, Century Bancorp, Inc., and Century Bank and Trust Co.
Joseph P. Mercurio 52 Director, Century Bancorp, Inc., and Century Bank and Trust Co.
Joseph J. Senna, Esquire 61 Director, Century Bancorp, Inc., and Century Bank and Trust Co.
Barry R. Sloane 45 Director, Century Bancorp, Inc., and Century Bank and Trust Co.
Jonathan G. Sloane 42 Director and Executive Vice President, Century Bancorp, Inc.; President
and COO, Century Bank and Trust Company
Marshall M. Sloane 74 Chairman, President and CEO, Century Bancorp, Inc., Chairman and
CEO, Century Bank and Trust Company
Stephanie Sonnabend 47 Director, Century Bancorp, Inc., and Century Bank and Trust Co.
George F. Swansburg 58 Director, Century Bancorp, Inc., and Century Bank and Trust Co.
Jon Westling 58 Director, Century Bancorp, Inc., and Century Bank and Trust Co.
-41-
44
Mr. Baldwin became a director of the Company in 1996. He has been a Director of
Century Bank and Trust Company since 1995. Mr. Baldwin is President and CEO of
Baldwin & Co.
Mr. Berkowitz became a director of the Company in 1996. He was elected a
director of Century Bank/Suffolk in 1989 and has been a director of Century Bank
and Trust Company since the banks merged in 1992. Mr. Berkowitz is President and
CEO of Legal SeaFoods, Inc.
Dr. Case became a director of the Company in 1996. Dr. Case has been a director
of Century Bank and Trust Company since 1995. He is a Professor of Economics at
Wellesley College and a Visiting Scholar at the Federal Reserve Bank of Boston.
Dr. Foster has been a director of the Company since its organization in 1972. He
was a founding director of Century Bank and Trust Company in 1969. He is founder
and Chairman Emeritus of Charles River Laboratories, Inc.
Dr. Goldman has been a director of the Company since its organization in 1972.
He was also a founding director of Century Bank and Trust Company in 1969. He is
a Professor of Economics at Wellesley College and Associate Director of the
Davis Center for Russian Studies at Harvard University.
Mr. Higley became a director of the Company in 1996. He has been a director of
Century Bank and Trust Company since 1986. Mr. Higley is an attorney.
Mr. Kay became a director of the Company in 1997. He was also elected a director
of Century Bank and Trust Company in 1997. Mr. Kay is President of The Kay
Companies.
Mr. Lang became a director of the Company and Century Bank and Trust Company in
September of 1999. In 1987 he was elected Executive Vice President of Century
Bank and Trust Company. He is now retired.
Mr. Lemley became a director of the Company in 1996. He has been a director of
Century Bank and Trust Company since 1988. Mr. Lemley is Chairman of the Board
and CEO of Sentry Ford, Inc., Sentry Lincoln-Mercury, Inc., and Sentry South
Lincoln-Mercury, Inc.
Mr. Mercurio became a director of the Company in 1991. He has been a director of
Century Bank and Trust Company since 1995. He is an Executive Vice President of
Boston University.
Mr. Senna became a director of the Company in 1986. He has been a director of
Century Bank and Trust Company since 1979. Mr. Senna is an attorney.
Mr. Barry R. Sloane became a director of the Company in 1997. He was also
elected a director of Century Bank and Trust Company in 1997. Mr. Sloane is Vice
President of The Citibank Private Bank.
Mr. Jonathan G. Sloane became a director of the Company in 1986. He was elected
President and director of Century Bank/Suffolk in 1983. In 1992 he was elected
Executive Vice President of Century Bank and Trust Company and in 1995 promoted
to Senior Executive Vice President. Mr. Sloane is currently Executive Vice
President of Century Bancorp Inc. and President and COO of Century Bank and
Trust Company.
Mr. Marshall M. Sloane is the founder of the Company and has been Chairman,
President and CEO since its organization in 1972. He founded Century Bank and
Trust Company in 1969 and is currently its Chairman and CEO.
Ms. Sonnabend became a director of the Company in 1997. She has been a director
of Century Bank and Trust Company since 1997. Ms. Sonnabend is President of
Sonesta International Hotels Corporation.
Mr. Swansburg became a director of the Company in 1986 and was elected Executive
Vice President in 1995. He was President of Century North Shore Bank and Trust
Company. In 1992 he was elected President and COO and became a director of
Century Bank and Trust Company. He is now retired.
Mr. Westling became a director of the Company in 1996. He has been a director of
Century Bank and Trust Company since 1995. Mr. Westling is President of Boston
University.
All of the Company's directors are elected annually and hold office until their
successors are duly elected and qualified. There are no family relationships
between any of the directors or executive officers, except that Barry R. Sloane
and Jonathan G. Sloane are the sons of Marshall M. Sloane and Jonathan B. Kay is
the son-in-law of Marshall M. Sloane.
-42-
45
The Audit Committee meets with KPMG LLP, the independent certified public
accountants, in connection with the annual audit of the Company's financial
statements. The Audit Committee reviews the findings and recommendations of the
FRB, FDIC, and Massachusetts Bank Commissioner's staff in connection with their
examinations and the internal audit reports and procedures for the Company and
its subsidiary. The Audit Committee met four times during 2000.
AUDIT COMMITTEE REPORT
The Audit Committee of the Company's Board of Directors is responsible for
providing independent, objective oversight of the Company's accounting functions
and internal controls. The Audit Committee is composed of five directors, each
of whom is independent as defined by the National Association of Securities
Dealers' listing standards as may be modified or supplemented. The Audit
Committee operates under a written charter first adopted and approved by the
Board of Directors in 2000. A copy of this Charter is attached as Appendix A.
Management is responsible for the Company's internal controls and financial
reporting process. The independent accountants are responsible for performing an
independent audit of the Company's consolidated financial statement in
accordance with generally accepted auditing standards and to issue a report
thereon. The Audit Committee's responsibility is to monitor and oversee these
processes.
The Audit Committee has reviewed and discussed the audited financial statements
with management. The Audit Committee has discussed with KPMG LLP, the
independent accounting firm for the Company, the matters required to be
discussed by Codification of Statements on Auditing Standards No. 61
(Communication with Audit Committees), as may be modified or supplemented. The
Audit Committee has received the written disclosures and the letter from the
independent accountants as required by Independence Standards Board Standard No.
1 (Independence Discussions with Audit Committees), as may be modified or
supplemented. Additionally, the Audit Committee has discussed with KPMG LLP the
firm's independence. Fees paid to KPMG LLP for audit fees and other fees were
$90,000 and $24,950, respectively.
Based on the review and discussions referred to in the paragraph above, the
Audit Committee recommended to the Board of Directors that the audited financial
statements be included in the Company's Annual Report on Form 10-K for the last
fiscal year for filing with the Securities and Exchange Commission.
Joseph J. Senna, Chair, George R. Baldwin, Henry L. Foster,
Russell B. Higley, Jon Westling
Directors not employed by the Company receive $250 per Board meeting attended
and $450 per committee meeting attended.
ITEM 11. EXECUTIVE COMPENSATION AND OTHER INFORMATION
Executive officers are elected annually by the Board prior to the Annual Meeting
of Shareholders to serve for a one year term and until their successors are
elected and qualified. The following table sets forth the name of each executive
officer of the Company and the principal positions and offices he holds with the
Company. Unless otherwise noted, each of these officers has served as an
executive officer of the Company or its principal subsidiary for at least five
years.
Marshall M. Sloane Chairman, President and CEO; Chairman and CEO, Century Bank
and Trust Company. Mr. Sloane is 74 years of age.
Jonathan G. Sloane Director and Executive Vice President; Director, President and COO, Century
Bank and Trust Company. Mr. Sloane is 42 years of age.
Paul V. Cusick, Jr. Vice President and Treasurer; Executive Vice President, Chief Financial
Officer and Treasurer, Century Bank and Trust Company.
Mr. Cusick is 56 years of age.
Paul A. Evangelista Executive Vice President, Century Bank and Trust Company with
responsibility for retail, cash management and fee income. Mr. Evangelista
is 37 years of age.
Kenneth M. Johnson President, Century Financial Services, Inc. Mr. Johnson is 40 years of age.
William J. Sloboda Executive Vice President, Century Bank and Trust Company with
responsibility for operations. Mr. Sloboda is 58 years of age.
David B. Woonton Executive Vice President, Century Bank and Trust Company with
responsibility for lending. Mr. Woonton is 45 years of age.
-43-
46
COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
The Compensation Committee is a committee of the Board of Directors composed of
Joseph P. Mercurio as Chairman, Fraser Lemley and Roger S. Berkowitz. It reviews
the salaries of the Company's officers and administers the Company's
Supplemental Executive Insurance/Retirement Income Plan and Incentive
Compensation Plan.
Decisions on compensation of the Company's executives are generally made by the
Compensation Committee of the Board of Directors. Each member of the
Compensation Committee is a non-employee director. The goal of the Committee is
to provide competitive levels of compensation in order to attract and retain
qualified executive personnel. The Compensation Committee believes that the
actions of each executive officer have the potential to affect the short and
long term profitability of the Company. Accordingly, the Compensation Committee
places considerable importance on the design and administration of the executive
compensation program.
The Company has an executive compensation program that is driven by the overall
performance of the Company, the increase in shareholder value, the performance
of the business unit directly affected by the executive and by the performance
of the individual executive. The three primary components of the executive
compensation program are base salary, cash incentive plan and stock based
incentive plans.
BASE SALARY
Base salary levels are set so that the Company has the management talent to meet
the challenges in the financial services industry. Several factors are included
in setting base salaries including the responsibilities of the executive
officer, the scope of the executive's position, individual performance and
salary levels at peer banks. Historically, the Company's executive compensation
practices have been designed to provide total compensation in the middle range
of compensation levels at similar banking institutions. Salary increases for the
senior management group have averaged 5% to 9% during the last several years.
CASH INCENTIVE PLANS
The Company has a cash incentive compensation plan which provides for the award
of bonuses up to a percentage of base salary to officers of the Company or its
subsidiaries. Recipients of incentive compensation are selected by the
Compensation Committee, upon the recommendation of management, as eligible to
participate in the plan. Awards are based upon the attainments of established
objectives including profitability, expense control, sales volume and overall
job performance. No bonuses are paid unless actual earnings are of budgeted net
income. Upon recommendation of the Compensation Committee, the Board of
Directors determines the amounts, if any, to be awarded. Earned bonuses for
2000, 1999 and 1998 are shown in the Summary Compensation Table.
EXECUTIVE BENEFITS
The Company's executive compensation package includes a special benefits
component in addition to base salary and cash and stock incentive plans. These
special benefits are viewed as less important than the above. Where such
benefits are provided, they are intended to support other business purposes
including facilitating business development efforts.
CHIEF EXECUTIVE OFFICER COMPENSATION
Mr. Marshall Sloane is eligible to participate in the same executive
compensation plans available to other executive officers described above. The
2000 cash compensation for Mr. Sloane was $827,000 of which $585,000 was base
salary.
CONCLUSION
The Compensation Committee believes that the executive compensation package will
motivate the management team to produce the results the Company has historically
achieved.
-44-
47
COMPARISON OF FIVE-YEAR
Cumulative Total Return*
[LINE GRAPH]
Value of $100 Invested on December 31, 1995 at:
[PLOTPOINTS]
12/31/96 12/31/97 12/31/98 12/31/99 12/31/00
--------- --------- --------- --------- --------
Century 131.34 181.25 186.99 169.35 156.82
Nasdaq Banks 132.04 221.06 219.64 211.14 241.08
Nasdaq U.S. 123.04 150.69 212.51 394.92 237.62
* Assumes that the value of the investment in the Company's Common Stock and
each index was $100 on December 31, 1995 and that all dividends were
reinvested.
-45-
48
SUMMARY OF CASH AND CERTAIN OTHER COMPENSATION
The following table shows, for fiscal years ending December 31, 1998, 1999 and
2000, the cash compensation paid by the Company and its subsidiaries, as well as
certain other compensation paid, accrued or granted for those years to the five
most highly compensated executive officers of the Company.
==================================================================================================================================
SUMMARY COMPENSATION TABLE
==================================================================================================================================
Long-Term Compensation
-------------------------------------
Annual Compensation Awards Payouts
==================================================================================================================
Restricted Securities
Name Stock Underlying LTIP All Other
and Salary Bonus(1) Other Awards Options/ Payouts Compensation
Principal Position Year ($) ($) ($) ($) SARs (#) ($) ($)
- ----------------------------------------------------------------------------------------------------------------------------------
Marshall M. Sloane 2000 585,000 268,000 0 0 0 0 0
Chairman, President and 1999 520,000 242,200 0 0 0 0 0
CEO, Century Bancorp, Inc. 1998 464,500 199,400 0 0 0 0 0
Chairman and CEO, Century
Bank and Trust Company
- ----------------------------------------------------------------------------------------------------------------------------------
Jonathan G. Sloane 2000 295,000 108,800 0 0 0 0 0
Executive Vice President 1999 250,000 96,900 0 0 0 0 0
Century Bancorp, Inc. 1998 200,000 79,760 0 0 0 0 0
President and COO, Century
Bank and Trust Company
- ----------------------------------------------------------------------------------------------------------------------------------
Paul V. Cusick, Jr. 2000 195,000 69,500 0 0 0 0 0
Executive Vice President 1999 160,000 60,600 0 0 0 0 0
Century Bank and Trust 1998 129,500 49,850 0 0 0 0 0
Company
- ----------------------------------------------------------------------------------------------------------------------------------
Kenneth M. Johnson 2000 251,128 0 0 0 0 0 0
President 1999 240,454 0 0 0 0 0 0
Century Financial Services, 1998 202,947 0 0 0 0 0 0
Inc.
- ----------------------------------------------------------------------------------------------------------------------------------
David B. Woonton 2000 187,200 69,500 0 0 0 0 0
Executive Vice President 1999 123,914 40,400 0 0 0 0 0
Century Bank and Trust 1998 0 0 0 0 0 0 0
Company
==================================================================================================================================
(1) Bonus amounts are based on performance for the years shown.
-46-
49
SUPPLEMENTAL EXECUTIVE INSURANCE/RETIREMENT INCOME PLAN
Executive officers of the Company or its subsidiaries who have at least one year
of service may participate in the Supplemental Executive Insurance/Retirement
Income Plan (the "Supplemental Plan").
The Company maintains split dollar life insurance policies for participants, in
addition to the group term life insurance, which provides life insurance equal
to twice the individual's salary with a maximum of $200,000, which they receive
under a policy the Company maintains for its employees generally. The split
dollar insurance provides death benefits if the participant dies while in the
employ of the Company, equal to $2,925,000, $1,475,000, $975,000, $936,000 for
Messrs. Marshall M. Sloane, Jonathan G. Sloane, Cusick and Woonton.
Premiums paid by the Company in 2000 amounted to $87,800, $63,500, $27,200,
$65,000, for policies on the lives of Messrs. Marshall M. Sloane, Jonathan G.
Sloane, Cusick, and Woonton. The policies are on an "insurance bonus" basis,
which means that the Company pays the full amount of all premiums on the
policies but an amount equal to the one-year term cost of the insurance is
treated for tax purposes as a bonus to the insured. The Company is the owner of
these policies and each participating employee has received an assignment of a
portion of each policy's proceeds. Upon the death of a participant, the Company
will receive benefits equal to the difference between the death benefits payable
to the named beneficiary under the Supplemental Plan and the face amount of the
policy (less any policy loans then in force).
A participant in the Supplemental Plan is also entitled to retirement benefits.
Participants, upon retirement at age 65, after a specified number of years of
service, are entitled to receive for life, with ten years certain, 75% of their
highest 36 months compensation for certain executives, or 66% of such
compensation if the participants are senior officers (as determined by the
Compensation Committee), less the primary social security benefits and the
benefit received from the defined benefit retirement plan. If a participant
retires or terminates employment prior to age 65 such person is entitled to a
reduced benefit. Five years of service are required for any benefits to become
vested. Thereafter benefits vest incrementally.
The following table illustrates representative annual retirement benefits at
various compensation levels for executive management employees under the
Supplemental Plan who retire at age 65 and with 15 years of service, without
reflecting the required offset of benefits from social security and the defined
benefit retirement plan.
Five Year Executive Officer Senior Officer
Average Compensation Annual Benefit Annual Benefit
-------------------- ----------------- --------------
$ 100,000 $ 75,000 $ 66,666
150,000 112,500 100,000
200,000 150,000 133,300
250,000 187,500 166,700
300,000 225,000 200,000
400,000 300,000 266,700
600,000 450,000 400,000
800,000 600,000 533,300
As of January 1, 2001, Messrs. Marshall M. Sloane, Jonathan G. Sloane, Cusick,
and Woonton were 100%, 100%, 77.5%, and 0%, vested, respectively, under the
Supplemental Plan.
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ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information as to the number and
percentage of shares of Class A and Class B Common Stock beneficially owned as
of December 31, 2000 (i) by each person known by the Company to own beneficially
more than 5% of the Company's outstanding shares of Class A or Class B Common
Stock (ii) by each of the Company's directors and certain officers; and (iii) by
all directors and officers of the Company as a group.
NUMBER OF BENEFICIAL
OWNER & ADDRESS OR NUMBER CLASS A % A CLASS B % B
OF PERSONS IN GROUP OWNED OWNED OWNED OWNED
- ------------------- ----- ----- ----- -----
Charles J. Moore (i) 328,100 8.74%
The Banc Funds
208 South LaSalle Street
Chicago, IL 60604
Marshall M. Sloane (I)(ii) 16,357(1) 0.44% 1,682,690(2) 79.25%
400 Mystic Ave.
Medford, MA 02155
George R. Baldwin (ii) 7,514 0.20%
Roger S. Berkowitz (ii) 1,862 0.05%
Karl E. Case (ii) 1,150 0.03%
Paul V. Cusick, Jr. (ii) 15,200 0.40%
Paul A. Evangelista(ii) 500 0.01%
Henry L. Foster, D.V.M. (ii) 19,206 0.51% 1,000 0.05%
Marshall I. Goldman (ii) 1,096(3) 0.03% 30,000(4) 1.41%
Russell B. Higley, Esquire (ii) 4,407 0.12%
Jonathan B. Kay (ii) 4,745(7) 0.13% 60,000(6) 2.83%
Donald H. Lang (ii) 12,100 0.32%
Fraser Lemley (ii) 7,467(9) 0.20%
Joseph P. Mercurio (ii) 2,909 0.08%
Joseph J. Senna (ii) 45,740(5) 1.22%
Barry R. Sloane (ii) 1,366(10) 0.04%
Jonathan G. Sloane (ii) 17,330(8) 0.46% 60,000 2.83%
William J. Sloboda (ii) 12,009 0.32% 500 0.02%
Stephanie Sonnabend (ii) 969 0.03%
George F. Swansburg (ii) 30,040 0.80%
Jon Westling (ii) 1,221 0.03%
David B. Woonton 0 0.00%
All directors and officers as a group
(20 in number) (iii) 203,188 5.42% 1,834,190 86.39%
(1) Includes 2,500 shares owned by Mrs. Sloane and also includes 13,466
shares held in trust for Mr. Sloane's grandchildren.
(2) Includes 1,500 shares owned by Mrs. Sloane, and does not include 120,000
shares owned by Mr. Sloane's children. Mr. Sloane disclaims beneficial
ownership of such 120,000 shares.
(3) Does not include 9,000 shares held of record by Mr. Goldman's children;
Mr. Goldman disclaims beneficial ownership of such shares.
(4) Does not include 9,000 shares held of record by Mr. Goldman's children;
Mr. Goldman disclaims beneficial ownership of such shares.
(5) Includes 34,800 shares owned by Mrs. Senna.
(6) Entire 60,000 shares are owned by Mrs. Kay, Marshall Sloane's daughter.
(7) Includes 30 shares owned by Mrs. Kay.
(8) Includes 70.56 shares owned by Mrs. Debra Sloane and includes 333 shares
owned by Mr. Jonathan Sloane's children.
(9) Includes 500 shares owned by Mrs. Lemley and 610 shares held by son,
Noah Lemley.
(10) Includes 30 shares owned by son and 51 shares owned by partner Candace
Lapidus.
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COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
Section 16(a) of the Exchange Act requires the Company's Executive Officers and
Directors, and any persons who own more than 10% of a registered class of the
Company's equity securities, to file reports of ownership and changes in
ownership of securities with the SEC and NASDAQ. Executive Officers, Directors,
and greater than 10% stockholders (of which, to the Company's knowledge, there
currently are none) are required by SEC regulation to furnish the Company's with
copies of all Section 16(a) forms they file. Based solely on a review of the
copies of such reports received by it or written representations from certain
reporting persons that no other reports were required, the corporation believes
that, during 2000, all Section 16(a) filing requirements applicable to its
Executive Officers and Directors were complied with, except that reports on
initial holdings and subsequent purchases by one director were filed late.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) (1) Financial Statements.
The following financial statements of the company and its
subsidiaries are presented in Item 8:
Independent Auditors' Report
Consolidated Balance Sheets - December 31, 2000 and 1999
Consolidated Statements of Income -- Years Ended December 31,
2000, 1999 and 1998
Consolidated Statements of Changes in Stockholders' Equity
-Years ended December 31, 2000, 1999 and 1998
Consolidated Statements of Cash Flows-Years Ended December 31,
2000, 1999 and 1998
Notes to Consolidated Financial Statements
(2) Financial Statement Schedules
All schedules are omitted because either the required
information is shown in the financial statements or notes
incorporated by reference, or they are not applicable, or the
data is not significant.
(3) Exhibits
Those exhibits required by Item 601 of Regulation S-K and by
paragraph (c) below previously filed.
(b) Reports on Form 8K.
There were no items reported on Form 8K during the last quarter of
the period covered by this Form.
(c) Exhibits required by Item 601 of Regulation S-K.
Required exhibits previously filed
(d) Financial Statement required by Regulation S-X.
Schedules to Consolidated Financial Statements required by
Regulation S-X are not required under the related instructions or
are inapplicable, and therefore have been omitted.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized, on this 13th day of March
2001.
Century Bancorp, Inc.
/s/ Marshall M. Sloane
-----------------------------------------------
By: Marshall M. Sloane, Chairman, President and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities indicated and on the date indicated.
- ----------------------------------------------------
George R. Baldwin, Director
- ----------------------------------------------------
Roger S. Berkowitz, Director
/s/ Karl E. Case
- ----------------------------------------------------
Karl E. Case, Ph.D., Director
/s/ Henry L. Foster
- ----------------------------------------------------
Henry L. Foster, D.V.M., Director
/s/ Marshall I. Goldman
- ----------------------------------------------------
Marshall I. Goldman, Ph.D., Director
/s/ Russell B. Higley
- ----------------------------------------------------
Russell B. Higley, Esquire, Director
/s/ Jonathan B. Kay
- ----------------------------------------------------
Jonathan B. Kay, Director
/s/ Donald H. Lang
- ----------------------------------------------------
Donald H. Lang, Director
/s/ Fraser Lemley
- ----------------------------------------------------
Fraser Lemley, Director
/s/ Joseph P. Mercurio
- ----------------------------------------------------
Joseph P. Mercurio, Director
/s/ Joseph J. Senna
- ----------------------------------------------------
Joseph J. Senna, Esquire, Director
/s/ Barry R. Sloane
- ----------------------------------------------------
Barry R. Sloane, Director
/s/ Stephanie Sonnabend
- ----------------------------------------------------
Stephanie Sonnabend, Director
/s/ George F. Swansburg
- ----------------------------------------------------
George F. Swansburg, Director
/s/ Jon Westling
- ----------------------------------------------------
Jon Westling, Director
/s/ Marshall M. Sloane
- ----------------------------------------------------
Marshall M. Sloane, Chairman, President and
Chief Executive Officer
/s/ Jonathan G. Sloane
- ----------------------------------------------------
Jonathan G. Sloane, Director and
Executive Vice President
/s/ Paul V. Cusick, Jr.
- ----------------------------------------------------
Paul V. Cusick, Jr., Vice President and Treasurer,
Principal Financial Officer
/s/ Kenneth A. Samuelian
- ----------------------------------------------------
Kenneth A. Samuelian, Vice President and Controller,
Century Bank and Trust Company,
Principal Accounting Officer
53
APPENDIX A
CENTURY BANCORP, INC., AUDIT COMMITTEE CHARTER
I. PURPOSE
The Audit Committee's ("Committee") primary mission is to
oversee the financial reporting process and internal controls of
Century Bancorp. and subsidiaries. The Committee is to assist
the Century Bancorp. Board of Directors ("Board") in fulfilling
its oversight responsibilities by reviewing: the financial
information provided to shareholders and others; the systems of
internal controls regarding finance, accounting, legal
compliance, and ethics that management and the Board have
established; as well as the audit and financial reporting
processes. Consistent with this function, the Committee should
promote continuous improvement of, and foster adherence to, the
Company's policies, procedures, and practices.
II. COMPOSITION AND MEETINGS
On an annual basis, the Board shall elect the members of the
Committee and the Committee's Chair, who shall also be a member
of the Board. A quorum shall consist of a majority of the
members of the Committee. The Committee shall be comprised of
three or more directors, each of whom shall be financially
literate and have a working familiarity with basic finance and
accounting practices. At least one Committee member shall have
accounting or related financial expertise.
Each Committee member shall be an "independent" director. In
accordance with the NASD Rule 4000 series and the considerations
noted in Section 112 of FDICIA, an "independent director" will
be defined as a person other than an officer or employee of the
company or its subsidiaries or any other individual having a
relationship which, in the opinion of the Board, would interfere
with the exercise of independent judgement in carrying out the
responsibilities of a director. The following persons shall not
be considered independent:
- a director who is employed by the corporation or any of
its affiliates for the current year or any of the past
three years;
- a director who accepts any compensation from the
corporation or any of its affiliates in excess of
$60,000 during the previous fiscal year, other than
compensation for board service, benefits under a
tax-qualified retirement plan, or non-discretionary
compensation;
- a director who is a member of the immediate family of an
individual who is, or has been in the past three years,
employed by the corporation of any of its affiliates as
an executive officer;
- a director who is a partner in, or a controlling
shareholder or an executive officer of, any for-profit
business organization to which the corporation made, or
from which the corporation received, payments (other
than those arising solely from investments in the
corporation's securities) that exceed 5% of the
corporation or business organization's consolidated
gross revenues for that year, or $200,000, whichever is
more, in any of the past three years;
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- a director who is employed as an executive of another
entity where any of the company's executives serve on
that entity's compensation committee.
- a director who owns or controls, or has owned or
controlled within the preceding year, assets
representing 10% or more of any outstanding class of
voting securities of Century Bancorp.
The Committee shall meet at least four times annually. The Audit
Director or other designee shall have responsibility for
recording minutes of the proceedings. To foster open
communication, the Committee should meet with management, the
Audit Director, and the Independent Public Accountant ("IPA") in
separate executive sessions. The Committee shall report its
activities to the Board on a regular basis.
III. RESPONSIBILITIES OF THE AUDIT COMMITTEE
A. OVERSIGHT
1. Provide an open avenue of communication among the IPA, financial
and senior management, the Internal Audit Department, the
Compliance Officer, and the Board.
2. Review the activities of Internal Audit and the IPA. Review
reports of audits, regulatory examinations, and asset quality.
In consultation with the Audit Director and the IPA, the
Committee shall review: the scope of the Internal Audit Plan,
the annual audit of the financial statements, the result of the
previous year's audit activities, and the level of coordination
between the internal and external audit activities. The
Committee should ensure that the activities of the IPA and the
Audit Director are independent, and there is no management
interference in the audit reporting process.
3. Ensure that management undertakes timely and appropriate
corrective actions to recommendations made by regulatory
examiners, the IPA, and Internal Audit. Report to the Board
management's failure to implement a resolution to internal
control exceptions.
4. In consultation with management, the IPA, and Internal Audit,
consider the integrity of financial reporting processes and
controls. Discuss significant financial risk exposures and the
steps management has taken to monitor, control, and report such
exposures.
5. Perform any other activities consistent with this Charter, the
Company's by-laws, and governing law, as the Committee or the
Board deems appropriate. If deemed necessary, the Committee may
retain special counsel or hire other consultants.
B. REQUIRED REVIEWS AND DISCLOSURES
1. Review, assess the adequacy of, and approve the Audit Committee
Charter annually. Submit the Charter to the Board for approval
on an annual basis. Have the Charter published every 3 years in
accordance with SEC regulations.
2. Require that the CFO and IPA review interim quarterly financial
statements before the company files its Form 10-Q.
3. Review with management, internal audit, and the IPA the annual
financial statements and related footnotes, and financial
information included in the company's annual report to
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55
shareholders and on Form 10-K. Discuss certain matters required
to be communicated to the Committee in accordance with SAS61.
Discuss significant issues regarding accounting principles,
practices, and judgements. Review with management the
Management's Discussion & Analysis ("MD&A") section of the
Annual Report to the SEC on Form 10-K, and ask the extent to
which the IPA reviewed the MD&A section.
4. As required by the SEC, prepare a report to shareholders for
inclusion in the Company's annual proxy statement (10-K).
5. Annually, review with management, the IPA, and the Audit
Director, the content and conclusion of each report issued under
Section 112 of FDICIA, management reporting on internal controls
and compliance with certain laws and regulations. The Committee
shall be the final arbiter of any disputes between management
and the auditors.
C. INDEPENDENT PUBLIC ACCOUNTANT ("IPA")
1. The IPA is ultimately accountable to the Audit Committee and the
Board of Directors. The Committee has the authority and
responsibility to select, evaluate, and replace the principal
IPA.
2. On an annual basis, ensure that the IPA submits a written
statement, consistent with Independence Standards Board Standard
1, regarding relationships and services that may affect
objectivity and independence. Discuss any relevant matters with
the IPA and recommend that the Board take action, as needed, to
address the IPA's independence.
3. Review the IPA's audit plan. Discuss scope, staffing, locations,
reliance upon management and internal audit, and general audit
approach.
4. Consider the IPA's judgements about the quality and
appropriateness of the Company's accounting principles as
applied to its financial reporting. The Committee shall review
the Company's annual financial statements and accompanying
footnotes, and the IPA's reports of audits and management
letters, with particular attention to the:
- conformance of the audits to Auditing Standards;
- financial statements conformance to Generally Accepted
Accounting Principles;
- full disclosure of all material issues affecting the
Company's operations and financial condition as well as
their fair presentation;
- scope and effectiveness of the audit.
5. Request an explanation from the IPA and the CFO of changes in
accounting standards or rules promulgated by the FASB, SEC, or
other regulatory bodies.
6. Evaluate the effectiveness of the external audit efforts through
meetings with the Audit Director, the IPA, and management.
D. INTERNAL AUDIT
1. Internal Audit is ultimately accountable to the Audit Committee
and the Board of Directors. The Committee should review the
appointment and replacement of the Audit Director. The Committee
has the authority and responsibility to evaluate and, if
necessary, replace the Audit Director.
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56
2. Review the budget, plan, changes in plan, activities,
organizational structure, and qualifications of the Internal
Audit Department. The Committee shall be informed when personnel
other than Internal Audit Department staff are used in the
completion of the Internal Audit Plan and understand the
rationale for using them.
3. Review significant reports prepared by the Internal Audit
Department together with management's response and follow-up to
significant issues noted in these reports.
4. Evaluate the effectiveness of the Internal Audit function
through meetings with the Audit Director, the IPA, and
management.
4