UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2003
---------------------------------
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________________________________
Commission file number 0-15752
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CENTURY BANCORP, INC.
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(Exact name of registrant as specified in its charter)
COMMONWEALTH OF MASSACHUSETTS 04-2498617
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
400 MYSTIC AVENUE, MEDFORD, MA 02155
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(Address of principal executive offices) (Zip Code)
(781) 391-4000
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(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by section 13 or 15 (d) of the Securities and Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
X Yes No
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Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2).
X Yes No
- --- ---
Indicate the number of shares outstanding of each of the registrant's classes of
common stock as of June 30, 2003:
CLASS A COMMON STOCK, $1.00 PAR VALUE 3,404,100 SHARES
CLASS B COMMON STOCK, $1.00 PAR VALUE 2,115,100 SHARES
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Century Bancorp, Inc.
Page
Index Number
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Part I Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets:
June 30, 2003 and December 31, 2002 3
Consolidated Statements of Income:
Three (3) and Six (6) months ended June 30, 2003 and 2002. 4
Consolidated Statements of Changes in Stockholders'
Equity: Six (6) months ended June 30, 2003 and 2002. 5
Consolidated Statements of Cash Flows:
Six (6) months ended June 30, 2003 and 2002. 6
Notes to Consolidated Financial Statements 7-10
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 10-16
Item 3. Quantitative and Qualitative Disclosure About
Market Risk 16
Item 4. Controls and Procedures 16-17
Part II. Other Information
Item 1 through Item 6 17
Signatures 18
Exhibits
2 of 24
PART I - Item 1
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Century Bancorp, Inc. - Consolidated Balance Sheets (unaudited)
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(000's)
June 30, Dec. 31,
Assets 2003 2002
- ------ ----------- -----------
Cash and due from banks $ 67,624 $ 63,188
Federal funds sold and interest-bearing deposits in other banks 3,014 59,017
----------- -----------
Total cash and cash equivalents 70,638 122,205
----------- -----------
Securities available-for-sale, amortized cost $808,545 and
$750,129, respectively 818,919 761,531
Securities held-to-maturity, market value $186,775 and
$130,014, respectively 183,644 127,209
Loans, net:
Commercial & industrial 43,673 46,044
Construction & land development 39,950 33,155
Commercial real estate 270,726 291,598
Residential real estate 90,987 92,291
Consumer & other 7,951 9,634
Home equity 43,949 41,527
----------- -----------
Total loans, net 497,236 514,249
Less: allowance for loan losses 9,036 8,506
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Net loans 488,200 505,743
Bank premises and equipment 15,726 12,928
Accrued interest receivable 9,464 9,370
Goodwill 2,717 2,717
Core Deposit Intangible 3,391 0
Other assets 17,054 15,498
----------- -----------
Total assets $ 1,609,753 $ 1,557,201
=========== ===========
Liabilities
- -----------
Deposits:
Demand deposits $ 269,426 $ 248,340
Savings and NOW deposits 278,721 275,834
Money market accounts 443,371 357,921
Time deposits 298,526 264,189
----------- -----------
Total deposits 1,290,044 1,146,284
Securities sold under agreements to repurchase 49,620 51,800
Federal Home Loan Bank (FHLB) borrowings and other borrowed funds 112,431 169,420
Other liabilities 25,698 60,691
Long term debt 28,750 28,750
----------- -----------
Total liabilities 1,506,543 1,456,945
Commitments and contingencies
Stockholders' equity
- --------------------
Class A common stock, $1.00 par value per share; authorized
10,000,000 shares; issued 3,787,700 shares and 3,780,915 shares,
respectively 3,787 3,781
Class B common stock, $1.00 par value per share;
authorized 5,000,000 shares; issued 2,162,650 shares and
2,167,660 shares, respectively 2,163 2,168
Additional paid-in capital 11,149 11,123
Retained earnings 86,058 81,755
Treasury stock, Class A, 383,600 shares, each period, at cost (5,941) (5,941)
Treasury stock, Class B, 47,550 shares, each period, at cost (41) (41)
----------- -----------
97,175 92,845
Accumulated other comprehensive income, net of taxes 6,035 7,411
----------- -----------
Total stockholders' equity 103,210 100,256
----------- -----------
Total liabilities and stockholders' equity $ 1,609,753 $ 1,557,201
=========== ===========
See accompanying Notes to unaudited Consolidated Financial Statements.
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Century Bancorp, Inc. - Consolidated Statements of Income (unaudited)
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(000's except share data) Three months ended June 30, Six months ended June 30,
2003 2002 2003 2002
----------- ---------- ---------- ----------
Interest income
Loans $ 8,387 $ 8,929 $ 16,920 $ 17,516
Securities held-to-maturity 1,804 1,825 3,323 3,784
Securities available-for-sale 7,776 6,894 15,394 12,989
Federal funds sold and interest-bearing deposits in
other banks 143 138 212 279
----------- ---------- ---------- ----------
Total interest income 18,110 17,786 35,849 34,568
Interest expense
Savings and NOW deposits 449 651 943 1,236
Money market accounts 1,558 1,170 2,711 2,195
Time deposits 2,296 1,778 4,203 3,687
Securities sold under agreements to repurchase 124 184 264 373
FHLB borrowings, other borrowed funds and long term debt 2,035 2,304 4,401 4,402
----------- ---------- ---------- ----------
Total interest expense 6,462 6,087 12,522 11,893
----------- ---------- ---------- ----------
Net interest income 11,648 11,699 23,327 22,675
Provision for loan losses 225 300 450 600
----------- ---------- ---------- ----------
Net interest income after provision
for loan losses 11,423 11,399 22,877 22,075
Other operating income
Service charges on deposit accounts 1,201 1,113 2,346 2,190
Lockbox fees 917 972 1,718 1,859
Brokerage commissions 127 320 262 587
Other income 259 574 486 791
----------- ---------- ---------- ----------
Total other operating income 2,504 2,979 4,812 5,427
----------- ---------- ---------- ----------
Operating expenses
Salaries and employee benefits 5,677 5,396 11,040 10,619
Occupancy 651 528 1,301 1,099
Equipment 493 538 781 1,077
Other 2,173 2,182 4,211 4,217
----------- ---------- ---------- ----------
Total operating expenses 8,994 8,644 17,333 17,012
----------- ---------- ---------- ----------
Income before income taxes 4,933 5,734 10,356 10,490
Income tax expense
Provision for income taxes 1,899 2,098 3,888 3,850
Retroactive REIT settlement (2,046) 0 1,183 0
----------- ---------- ---------- ----------
Total income tax (benefit) expense (147) 2,098 5,071 3,850
Net income $ 5,080 $ 3,636 $ 5,285 $ 6,640
=========== ========== ========== ==========
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Share data:
Weighted average number of shares outstanding, basic 5,518,093 5,515,982 5,538,547 5,515,767
Weighted average number of shares outstanding, diluted 5,517,856 5,536,224 5,537,962 5,530,548
Net income per share, basic $ 0.92 $ 0.66 $ 0.96 $ 1.20
Net income per share, diluted $ 0.92 $ 0.66 $ 0.95 $ 1.20
Cash dividends declared:
Class A common stock $ 0.1100 $ 0.1000 $ 0.2200 $ 0.2000
Class B common stock $ 0.0550 $ 0.0500 $ 0.1100 $ 0.1000
See accompanying Notes to unaudited Consolidated Financial Statements.
4 of 24
Century Bancorp, Inc. - Consolidated Statements of Changes in Stockholders' Equity (unaudited)
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Accumulated
Class A Class B Additional Treasury Treasury Other Total
Common Common Paid-In Retained Stock Stock Comprehensiv Stockholders'
Stock Stock Capital Earnings Class A Class B Income (Loss) Equity
------- ------- ---------- -------- -------- -------- ------------- -------------
(000's)
2002
- ----
Balance at December 31, 2001 $3,761 $ 2,186 $11,093 $ 70,123 ($5,941) ($41) $ 3,418 $ 84,599
Net income -- -- -- 6,640 -- -- -- 6,640
Other comprehensive income, net of tax:
Change in unrealized (loss) gain on
securities available-for-sale -- -- -- -- -- -- 2,504 2,504
---------
Comprehensive income 9,144
Conversion of Class B common stock to
Class A common stock, 17,400 shares 17 (17) -- -- -- -- -- --
Stock Options Exercised, 2,050 shares 2 -- 29 -- -- -- -- 31
Cash dividends, Class A common stock,
$.20 per share -- -- -- (679) -- -- -- (679)
Cash dividends, Class B common stock,
$.10 per share -- -- -- (212) -- -- -- (212)
------ ------- ------- -------- ------- ---- ------- ---------
Balance at June 30, 2002 $3,780 $ 2,169 $11,122 $ 75,872 ($5,941) ($41) $ 5,922 $ 92,883
========================================================================================
2003
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Balance at December 31, 2002 $3,781 $ 2,168 $11,123 $ 81,755 ($5,941) ($41) $ 7,411 $ 100,256
Net income -- -- -- 5,285 -- -- -- 5,285
Other comprehensive income, net of tax:
Change in unrealized loss on
securities available-for-sale -- -- -- -- -- -- (1,376) (1,376)
---------
Comprehensive income 3,909
Conversion of Class B common stock to
Class A common stock, 5,010 shares 5 (5) -- -- -- -- -- --
Stock Options Exercised, 1,625 shares 1 -- 26 -- -- -- -- 27
Cash dividends, Class A common stock,
$.22 per share -- -- -- (749) -- -- -- (749)
Cash dividends, Class B common stock,
$.11 per share -- -- -- (233) -- -- -- (233)
------ ------- ------- -------- ------- ---- ------- ---------
Balance at June 30, 2003 $3,787 $ 2,163 $11,149 $ 86,058 ($5,941) ($41) $ 6,035 $ 103,210
========================================================================================
See accompanying Notes to unaudited Consolidated Financial Statements.
5 of 24
Century Bancorp, Inc. - Consolidated Statements of Cash Flows (unaudited) 2003 2002
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For the three months ended
June 30,
(000's)
-------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 5,285 $ 6,640
Adjustments to reconcile net income to net cash
(used in) provided by operating activities:
Provision for loan losses 450 600
Deferred income taxes (386) (803)
Net depreciation and amortization 722 947
Increase in accrued interest receivable (94) (1,895)
(Increase) decrease in other assets (5,304) (1,660)
Loans originated for sale (180) --
Proceeds from sales of loans 177 73
Gain on sales of loans 3 (1)
Gain on sale of building -- (359)
Increase (decrease) in other liabilities (6,927) 619
--------- ---------
Net cash (used in) provided by operating activities (6,254) 4,161
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturities of securities available-for-sale 388,765 114,314
Purchase of securities available-for-sale (447,058) (222,088)
Proceeds from maturities of securities held-to-maturity 71,503 32,170
Purchase of securities held-to-maturity (127,952) (17,969)
Increase (decrease) in payable for investments purchased (28,066) (33,976)
Net decrease (increase) in loans 17,329 (34,641)
Proceeds from sale of building -- 1,020
Capital expenditures (3,470) (1,126)
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Net cash used in investing activities (128,949) (162,296)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in time deposits 34,337 (13,815)
Net increase in demand, savings, money market and NOW deposits 109,423 78,639
Net proceeds from the exercise of stock options 27 31
Cash dividends (982) (891)
Net decrease in securities sold under agreements to repurchase (2,180) (15,950)
Net (decrease) increase in FHLB borrowings and other borrowed funds (56,989) 26,932
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Net cash provided by financing activities 83,636 74,946
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Net decrease in cash and cash equivalents (51,567) (83,189)
Cash and cash equivalents at beginning of year 122,205 177,833
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Cash and cash equivalents at end of period $ 70,638 $ 94,644
========= =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 12,666 $ 11,963
Income taxes 12,167 4,412
Change in unrealized gains on securities available-for-sale, net of taxes $ (1,376) $ 2,504
See accompanying Notes to unaudited Consolidated Financial Statements.
6 of 24
Century Bancorp, Inc.
Notes to Consolidated Financial Statements
BASIS OF FINANCIAL STATEMENT PRESENTATION
The consolidated financial statements include the accounts of Century
Bancorp, Inc. (the "Company") and its wholly-owned subsidiary, Century
Bank and Trust Company (the "Bank"). The Company provides a full range
of banking services to individual, business and municipal customers in
Massachusetts. As a bank holding company, the Company is subject to
the regulation and supervision of the Board of Governors of the
Federal Reserve System (the "Federal Reserve Board"). The Bank, a
state chartered financial institution, is subject to supervision and
regulation by applicable state and federal banking agencies, including
the Federal Reserve Board, the Federal Deposit Insurance Corporation
(the "FDIC") and the Commonwealth of Massachusetts Commissioner of
Banks. The Bank is also subject to various requirements and
restrictions under federal and state law, including requirements to
maintain reserves against deposits, restrictions on types and amounts
of loans that may be made and the interest that may be charged
thereon, and limitations on types of investments that may be made and
the types of services that may be offered. Various consumer laws and
regulations also affect the operations of the Bank. In addition to the
impact of regulation, commercial banks are affected significantly by
the actions of the Federal Reserve Board as it attempts to control the
money supply and credit availability in order to influence the
economy. All aspects of the Company's business are highly competitive.
The Company faces aggressive competition from other lending
institutions and from numerous other providers of financial services.
The Company has one reportable operating segment under Statement of
Financial Accounting Standards No. 131.
In the opinion of management, the accompanying unaudited interim
consolidated financial statements reflect all adjustments, consisting
of normal recurring adjustments, which are necessary to present a fair
statement of the results for the interim period presented of the
Company and its wholly-owned subsidiary, the Bank. The results of
operations for the interim period ended June 30, 2003, are not
necessarily indicative of results for the entire year. All significant
intercompany accounts and transactions have been eliminated in
consolidation. These statements should be read in conjunction with the
consolidated financial statements and the notes thereto included in
the Company's Annual Report on Form 10-k for the year ended December
31, 2002.
The financial statements have been prepared in conformity with
accounting principles generally accepted in the United States of
America and to general practices within the banking industry. In
preparing the financial statements, management is required to make
estimates and assumptions that affect the reported amounts of assets
and liabilities as of the date of the balance sheet and revenues and
expenses for the period. Actual results could differ from those
estimates.
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
Page 7 of 24
loans based on their judgments about information available to them at
the time of their examination.
SUMMARY OF CRITICAL ACCOUNTING POLICIES
Accounting policies involving significant judgments and assumptions by
management, which had, or could have in the future, a material impact
on the carrying value of certain assets and impact income, are
considered critical accounting policies. The Company considers the
following to be its critical accounting policies: allowance for loan
losses, impaired investment securities and deferred income taxes.
There have been no significant changes in the methods or assumptions
used in the accounting policies that require material estimates and
assumptions.
ALLOWANCE FOR LOAN LOSSES
Arriving at an appropriate level of allowance for loan losses involves
a high degree of judgment. Management maintains an allowance for
credit losses to absorb losses inherent in the loan portfolio. The
allowance is based on assessments of the probable estimated losses
inherent in the loan portfolio. Management's methodology for assessing
the appropriateness of the allowance consists of several key elements,
which include the formula allowance, specific allowances for
identified problem loans and the unallocated allowance
The formula allowance is calculated by applying loss factors to
outstanding loans, in each case based on the internal risk grade of
such loans. Changes in risk grades affect the amount of the formula
allowance. Risk grades are determined by reviewing current collateral
value, financial information, cash flow, payment history and other
relevant facts surrounding the particular credit. Provisions for
losses on the remaining commercial and commercial real estate loans
are based on pools of similar loans using a combination of historical
loss experience and qualitative adjustments. For the residential real
estate and consumer loan portfolios, the reserves are calculated by
applying historical charge-off and recovery experience and qualitative
adjustments to the current outstanding balance in each loan category.
Loss factors are based on the Company's historical loss experience as
well as regulatory guidelines.
Specific allowances are established in cases where management has
identified significant conditions related to a credit that management
believes that the probability that a loss has been incurred in excess
of the amount determined by the application of the formula allowance
The unallocated allowance recognizes the model and estimated risk
associated with the formula allowance and specific allowances as well
as management's evaluation of various conditions, including the
business and economic conditions, delinquency trends, charge-off
experience and other asset quality factors, the effects of which are
not directly measured in the determination of the formula and specific
allowances. The evaluation of the inherent loss with respect to these
conditions is subject to a higher degree of uncertainty because they
are not identified with specific problem credits
Management believes that the allowance for loan losses is adequate. In
addition, various regulatory agencies, as part of the examination
process, periodically review the Company's allowance for loan losses.
Such agencies may require the Company to recognize additions to the
allowance based on their judgments about information available to them
at the time of their examination.
Page 8 of 24
DEFERRED INCOME TAXES
The Company uses the asset and liability method of accounting for
income taxes. Under the asset and liability method, deferred tax
assets and liabilities are recognized for future tax consequences
attributable to differences between the financial statement carrying
amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted
tax rates expected to apply to taxable income in the years in which
temporary differences are expected to be recovered or settled. Under
this method, the effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that
includes the enactment date.
IMPAIRED INVESTMENT SECURITIES
If a material decline in fair value below the amortized cost basis of
an investment security is judged to be "other than temporary,"
generally six months or longer, the cost basis of the investment is
written down to fair value. The amount of the write-down is included
as a charge to earnings. An "other than temporary" impairment exists
for debt securities if it is probable that the Company will be unable
to collect all amounts due according to contractual terms of the
security. Some factors considered for "other than temporary"
impairment related to a debt security include an analysis of yield
which results in a decrease in expected cash flows, whether an
unrealized loss is issuer specific, whether the issuer has defaulted
on scheduled interest and principal payments, whether the issuer's
current financial condition hinders its ability to make future
scheduled interest and principal payments on a timely basis or whether
there was downgrade in ratings by rating agencies.
STOCK OPTION ACCOUNTING
The Company currently accounts for employee stock options using the
intrinsic value method. Under the intrinsic value method, no
compensation cost is recognized related to options if the exercise
price of the option is greater than or equal to the fair market value
of the underlying stock on the date of grant. Under an alternative
method, the fair value method, the "fair value" of the option at the
grant date is estimated using an option valuation model and recognized
as compensation expense over the vesting period of the option. The
Company generally awards stock options annually with a grant date in
January.
Had compensation cost for the Company's stock option plans been
determined based on the fair value at the grant date, the Company's
net income and earnings per share would have been reduced to the pro
forma amounts indicated below:
Six Months Ended
June 30, 2003 June 30, 2002
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(Dollars in Thousands)
Net income
As reported $ 5,285 $ 6,640
Less:
Pro forma 5,204 6,559
Pro forma stock based
Compensation (net of tax) 81 81
Page 9 of 24
Basic earning per share
As reported 0.96 1.20
Pro forma 0.94 1.19
Diluted earnings per share
As reported 0.95 1.20
Pro forma 0.94 1.19
In determining the pro forma amounts, the fair value of each option
grant was estimated as of the date of grant using the Black-Scholes
option-pricing model with the following weighted average assumptions:
Dividend yields 1.45% 2.25%
Expected life 7 years 8 years
Expected volatility 24% 25%
Risk-free interest rate 2.99% 4.01%
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
FORWARD LOOKING STATEMENTS
Except for the historical information contained herein, this Quarterly
Report on Form 10-Q may contain forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933 and Section 21E
of the Securities Exchange Act of 1934. Investors are cautioned that
forward-looking statements are inherently uncertain. Actual
performance and results of operations may differ materially from those
projected or suggested in the forward-looking statements due to
certain risks and uncertainties, including, without limitation, (i)
the fact that the Company's success is dependent to a significant
extent upon general economic conditions in New England, (ii) the fact
that the Company's earnings depend to a great extent upon the level of
net interest income (the difference between interest income earned on
loans and investments and the interest expense paid on deposits and
other borrowings) generated by the Bank and thus the Bank's results of
operations may be adversely affected by increases or decreases in
interest rates, (iii) the fact that the banking business is highly
competitive and the profitability of the Company depends upon the
Bank's ability to attract loans and deposits within its market area,
where the Bank competes with a variety of traditional banking and
other institutions such as credit unions and finance companies, and
(iv) the fact that a significant portion of the Company's loan
portfolio comprised of commercial loans, exposing the Company to the
risks inherent in loans based upon analyses of credit risk, the value
of underlying collateral, including real estate, and other more
intangible factors, which are considered in making commercial loans.
Accordingly, the Company's profitability may be negatively impacted by
errors in risk analyses, by loan defaults, and the ability of certain
borrowers to repay such loans may be adversely affected by any
downturn in general economic conditions. These factors, as well as
general economic and market conditions, may materially and adversely
affect the market price of shares of the Company's common stock.
Because of these and other factors, past financial performance should
not be considered an indicator of future performance. The
forward-looking statements contained herein represent the Company's
judgment as of the date of this Form 10-Q, and the Company cautions
readers not to place undue reliance on such statements.
Page 10 of 24
Management's Discussion and Analysis of Financial Condition and
Results of Operation (con't.)
OVERVIEW For the quarter ended June 30, 2003.
Earnings for the second quarter ended June 30, 2003 were $5.1 million,
an increase of 39.7% when compared with the second quarter 2002
earnings of $3.6 million. Diluted earnings per share for the second
quarter 2003 were $0.92 versus $0.66 for the second quarter of 2002.
Included in income for the quarter is an after-tax benefit of
$2,040,000 of previously accrued tax expense. This benefit was the
result of an agreement with the Massachusetts Department of Revenue
("DOR") settling a dispute related to taxes that the DOR claimed were
owed from the Company's Real Estate Investment Trust subsidiary
("REIT"). Under the terms of the agreement, the Company paid
$3,138,000, representing 50% of the amount assessed for the years 1999
through 2002 plus interest. The payment is deductible for federal tax
purposes.
Earnings for the six months ended June 30, 2003 were $5.3 million, a
decrease of 20.4% when compared with the same period last year
earnings of $6.6 million. Diluted earnings per share for the first six
months were $0.95 versus $1.20 for the first six months of 2002. The
decrease was mainly attributable to a year-to-date net tax charge of
$1.2 million associated with the REIT settlement described above.
On March 21, 2003, the Company completed the acquisition of Capital
Crossing Bank's branch office at 1220 Boylston Street, Chestnut Hill,
Massachusetts, and substantially all of the retail deposits at Capital
Crossing's main office at 101 Summer Street, Boston, Massachusetts.
Century closed the Chestnut Hill branch and transferred all customers
of the branch to its nearby branch office at 1184 Boylston Street,
Brookline, Massachusetts. In addition, Century transferred all of the
retail deposits from Capital Crossing's Summer Street branch to its
branch at 24 Federal Street, Boston, Massachusetts. The acquisition
included $192.7 million in deposits. The acquisition also included a
premium paid to Capital Crossing of approximately $3.9 million. This
premium was subsequently reduced by a gain of $395 thousand from the
sale of the acquired Chestnut Hill branch and a rebate of $282
thousand for closed accounts at the Boston office.
FINANCIAL CONDITION
Loans On June 30, 2003, total loans outstanding, net of unearned discount,
were $497.2 million, a decrease of 3.3% from the total on December 31,
2002. At June 30, 2003, commercial real estate loans accounted for
54.4% and residential real estate loans, including home equity credit
lines, accounted for 27.1% of total loans. Construction loans
increased to $40.0 million at June 30, 2003 from $33.2 million on
December 31, 2002.
The decrease in loans was mainly attributable to a decrease in
commercial real estate loans and residential real estate loans,
excluding home equity credit lines. Commercial real estate loans
decreased mainly because of payoffs in the portfolio.
Allowance for Loan Losses
The allowance for loan losses was 1.82% of total loans on June 30,
2003 compared with 1.65% on December 31, 2002. Net recoveries for the
six-month period ended June 30, 2003 were $80 thousand compared with
net charge-offs of
Page 11 of 24
Management's Discussion and Analysis of Financial Condition and
Results of Operation (con't.)
$8 thousand for the same period in 2002. Additional provisions have
been made due to the mix of the loan portfolio. At the current time,
management believes that the allowance for loan losses is adequate.
Nonperforming Loans
June 30, 2003 December 31, 2002
------------- -----------------
(Dollars in Thousands)
Nonaccruing loans $994 $511
Loans past due 90 days
or more $ 0 $ 0
Nonaccruing loans as a
Percentage of total loans .19% .10%
Investments
Management continually evaluates its investment alternatives in order
to properly manage the overall balance sheet mix. The timing of
purchases, sales and reinvestments, if any, will be based on various
factors including expectation of movements in market interest rates,
deposit flows and loan demand. Notwithstanding these events, it is the
intent of management to grow the earning asset base through loan
originations, loan purchases or investment acquisitions while funding
this growth through a mix of retail deposits, FHLB advances, and
retail repurchase agreements.
June 30, 2003 December 31, 2002
------------- -----------------
(Dollars in Thousands)
Securities Available-for-Sale
-----------------------------
U.S. Government and
Agencies $787,747 $712,596
Other Bonds and Equity Securities 17,653 18,117
Mortgage-backed Securities 13,519 30,818
-------- --------
Total Securities Available-for-Sale $818,919 $761,531
======== ========
Securities Held-to-Maturity
---------------------------
U.S. Government and
Agencies $ 27,400 $ 73,373
Other Bonds and Equity Securities 25 25
Mortgage-backed Securities 156,219 53,811
-------- --------
Total Securities Held-to-Maturity $183,644 $127,209
======== ========
Securities Available-for-Sale
The securities available-for-sale portfolio totaled $818.9 million at
June 30, 2003, an increase of 7.5% from December 31, 2003. The
portfolio increased mainly
Page 12 of 24
Management's Discussion and Analysis of Financial Condition and
Results of Operation (con't.)
because of increases in deposits associated with the acquisition of
Capital Crossing. The portfolio is concentrated in United States
Government and Agency securities and has an estimated weighted average
maturity of 3.4 years.
Securities Held-to-Maturity
The securities held-to-maturity portfolio totaled $183.6 million on
June 30, 2003, an increase of 44.4% from the total on December 31,
2003. The portfolio increased mainly because of increases in deposits
associated with the acquisition of Capital Crossing. The portfolio is
concentrated in United States Government Agency Collateralized
Mortgage Obligations and has an estimated weighted average maturity of
3.5 years.
Deposits and Borrowed Funds
On June 30, 2003, deposits totaled $1.29 billion, representing a 12.5%
increase in total deposits from December 31, 2002. Total deposits
increased primarily as a result of increases in money market accounts
and time deposits acquired from Capital Crossing. Borrowed funds
totaled $162.1 million compared to $221.2 million at December 31,
2002. Borrowed funds decreased because of the increased liquidity as a
result of the Capital Crossing transaction.
RESULTS OF OPERATIONS
Net Interest Income
For the three-month period ended June 30, 2003, net interest income
totaled $11.6 million, a decrease of 0.4% from the comparable period
in 2002. For the six-month period ended June 30, 2003 net interest
income totaled $23.3 million versus $22.7 million for the same period
in 2002. The 2.9% increase in net interest income for the year-to-date
was mainly due to a 27.1% increase in the average balances of earning
assets, combined with a similar increase in deposits and borrowed
funds. The increase in volume was mainly the result of an acquisition
of $192.7 million of deposits from Capital Crossing Bank during the
first quarter of 2003. This increase in volume was mostly offset by a
seventy-four basis point decrease in the net interest margin.
The net yield on average earning assets on a fully taxable equivalent
basis decreased to 3.19% in the first six months of 2003 from 3.93%
during the same period in 2002. The decrease in the net interest
margin was mainly attributable to assets continuing to reprice at
historically low levels without a corresponding decrease in rates paid
on deposits. The Company believes that the net interest margin will
continue to be challenged.
Page 13 of 24
Management's Discussion and Analysis of Financial Condition and
Results of Operation (con't.)
The following table sets forth the distribution of the Company's
average assets, liabilities and stockholders' equity, and average
rates earned or paid on a fully taxable equivalent basis for each of
the six-month periods indicated.
June 30, 2003 June 30, 2002
-------------------------------------------------------------------------------
Average Interest Rate Average Interest Rate
Balance Income/ Earned/ Balance Income/ Earned/
Expense(1) Paid Expense(1) Paid
- ------------------------------------------------------------------------------------------------------------------------
(dollars in thousands)
Assets
- ------
Interest-earning assets:
Loans (2) $ 500,661 16,920 6.82% $ 470,337 17,516 7.51%
Securities available-for-sale 787,559 15,394 3.91% 519,620 12,989 5.00%
Securities held-to-maturity 140,104 3,323 4.74% 132,041 3,784 5.73%
Temporary funds 36,313 212 1.17% 33,611 279 1.66%
----------- ------ ---- ---------- ------ ----
Total interest earning Assets $ 1,464,637 $ 35,849 4.90% $1,155,609 $34,568 5.98%
Non interest-earning assets 114,417 95,786
Allowance for loan losses (8,754) (7,438)
----------- ----------
Total assets $ 1,570,300 $1,243,957
=========== ==========
Liabilities and Stockholders' Equity
- ------------------------------------
Interest bearing deposits:
NOW account $ 223,529 $ 779 0.70% $ 166,554 $ 932 1.13%
Savings accounts 78,373 164 0.42% 70,471 304 0.87%
Money market accounts 382,062 2,711 1.43% 243,651 2,195 1.82%
Time deposits 285,735 4,204 2.97% 198,689 3,687 3.74%
----------- ------ ---- ---------- ------ ----
Total interest-bearing Deposits 969,699 7,858 1.63% 679,365 7,118 4.25%
Securities sold under
Agreements to Repurchase 53,576 264 .99% 65,959 373 1.14%
Other borrowed funds and
Long term debt 172,274 4,400 5.15% 173,754 4,402 5.11%
----------- ------ ---- ---------- ------ ----
Total interest-bearing Liabilities 1,195,549 12,522 2.11% 919,078 11,893 2.61%
Non interest-bearing Liabilities
Demand deposits 253,756 220,272
Other liabilities 20,410 17,030
----------- ----------
Total liabilities 1,469,715 1,156,380
Stockholders' equity 100,585 87,577
----------- ----------
Total liabilities &
Stockholders Equity $ 1,570,300 $1,243,957
=========== ==========
Net interest income $ 23,327 $ 22,675
------------------------------------------------------------------------------
Net interest spread 2.78% 3.37%
------------------------------------------------------------------------------
Net yield on earnings Assets 3.19% 3.93%
------------------------------------------------------------------------------
(1) On a fully taxable equivalent basis calculated using a tax rate of 41.825%.
(2) Nonaccrual loans are included in average amounts outstanding.
Page 14 of 24
Management's Discussion and Analysis of Financial Condition and Results of
Operation (con't.)
2003 Compared with 2002
---------------------------------
Increase/(Decrease)
Due to Change in
---------------------------------
Income
Increase
Volume Rate (Decrease)
------------------------------------------------------------------------------
(dollars in thousands)
Interest Income:
Loans $ 1,086 $(1,682) $ (596)
Securities available-for-sale 5,671 (3,266) 2,405
Securities held-to-maturity 221 (682) (461)
Temporary funds 21 (88) (67)
------- ------- -------
Total interest income 6,999 (5,718) 1,281
======= ======= =======
Interest expense:
Deposits:
NOW accounts 262 (415) (153)
Savings accounts 31 (171) (140)
Money market accounts 1,054 (538) 516
Time deposits 1,388 (871) 517
------- ------- -------
Total interest-bearing deposits 2,735 (1,995) 740
Securities sold under agreements to
repurchase (65) (44) (109)
Other borrowed funds and long term
debt (38) 36 (2)
------- ------- -------
Total interest expense 2,632 (2,003) 629
------- ------- -------
Change in net interest income 4,367 (3,715) 652
======= ======= =======
Provision for Loan Losses
For the three-month period ended June 30, 2003, the loan loss
provision totaled $225 thousand compared to $300 thousand for the same
period last year. For the six-month period ended June 30, 2003, the
loan loss provision totaled $450 thousand compared to $600 thousand
for the same period last year. Loan loss provision decreased because
of management's determination of the relative adequacy in the loan
loss reserve. The Company's loan loss allowance as a percentage of
total loans outstanding has increased from 1.65% at December 31, 2002
to 1.82% at June 30, 2003. The loan loss reserve percentage is deemed
adequate.
Non-Interest Income and Expense
Other operating income for the quarter ended June 30, 2003 was $2.5
million compared to $3.0 million for the second quarter of 2002. The
decrease was mainly attributable to a pre-tax gain of $359,000
associated with the sale of bank premises during the second quarter of
2002. Also, brokerage commissions decreased by $193 thousand, this was
due to decreased volume. For the six-month period ending June 30, 2003
other operating income totaled $4.8 million compared to $5.4 million
for the same period last year. The decrease was mainly attributable to
the pre-tax gain of $359,000 associated with the sale of bank premises
during the second quarter of 2002. Also, brokerage commissions
decreased by $325 thousand this was due to decreased volume.
Page 15 of 24
Management's Discussion and Analysis of Financial Condition and
Results of Operation (con't.)
Lock box income decreased by $141 thousand, for the six-month period
ended June 30, 2003. This decrease was mainly attributable to a
decrease in volume that was due to increased competition. This was
partially offset by an increase of $156 thousand in service charges on
deposit accounts. Service charges on deposit accounts increased mainly
because of an increase in deposits.
During the quarter ended June 30, 2003, operating expenses increased
by $350 thousand to $9.0 million or 4.0% from the same period last
year. Most of the increase in operating expenses was attributable to
an increase of $281 thousand in salaries and employee benefits.
Increased retirement and healthcare costs contributed to this
increase. For the six-month period ending June 30, 2003 operating
expenses increased by $321 thousand to $17.3 million or 1.9% from the
same period last year. Most of the increase in operating expense was
attributable to an increase of $421 thousand in salaries and employee
benefits. Increased retirement and healthcare costs contributed to
this increase. Although salaries expense increased, this was offset by
decreases in incentive compensation accruals as the Company determined
that the Company's performance did not justify prior accruals.
Equipment expense decreased mainly because of a decrease in
depreciation expense and was partially offset by an increase in
occupancy expense.
Income Taxes
For the second quarter of 2003, the Company's income tax benefit
totaled $147 thousand on pretax income of $4.9 million for an
effective tax rate of (3.1%). For last year's corresponding quarter,
the Company's income taxes totaled $2.1 million on pretax income of
$5.7 million for an effective tax rate of 36.6%. Included in taxes for
the current quarter was an after-tax benefit of $2.0 million of
previously accrued tax expense. This benefit was the result of an
agreement with the Massachusetts Department of Revenue ("DOR")
settling a dispute related to taxes that the DOR claimed were owed
from the Company's Real Estate Investment Trust subsidiary ("REIT").
Under the terms of the agreement, the Company paid $3,138,000,
representing 50% of the amount assessed for the years 1999 through
2002 plus interest. The payment is deductible for federal tax
purposes. For the six-month period ending June 30, 2003 the Company's
income taxes totaled $5.1 million on pretax income of $10.4 million
for an effective tax rate of 49%. The effective tax rate increased
because of the previously announced net tax charge of $1,183,000
associated with the REIT settlement.
ITEM 3 QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Market risk is the risk of loss from adverse changes in market prices
and rates. The Company's market risk arises primarily from interest
rate risk inherent in its lending and deposit taking activities. To
that end, management actively monitors and manages its interest rate
risk exposure. The Company's profitability is affected by fluctuations
in interest rates. A sudden and substantial increase or decrease in
interest rates may adversely impact the Company's earnings to the
extent that the interest rates tied to specific assets and liabilities
do not change at the same speed, to the same extent, or on the same
basis. The Company monitors the impact of changes in interest rates
on its net interest income using several tools. The Company's primary
objective in managing interest rate risk is to minimize the adverse
impact of changes in interest rates on the Company's net interest
income and capital, while structuring the Company's asset-liability
structure to obtain the maximum yield-cost spread on that structure.
The Company relies on its asset-liability structure to control
interest rate risk.
ITEM 4 CONTROLS AND PROCEDURES
The principal executive officer and principal financial officer have
evaluated the disclosure controls and procedures as of a date within
90 days before the filing date of this quarterly report. Based on this
evaluation, the Company has concluded that the disclosure controls and
procedures effectively ensure that information required to be
disclosed in the Company's filings and submissions with the Securities
and Exchange Commission under the Exchange Act, is accumulated and
reported to
Page 16 of 24
Management (including the principal executive officer and the
principal financial officer) and is recorded, processed, summarized
and reported within the time periods specified by the Securities and
Exchange Commission. In addition, the Company has reviewed its
internal controls and there have been no significant changes in its
internal controls or in other factors that could significantly affect
those controls subsequent to the date of its last evaluation.
PART II - OTHER INFORMATION
Item 1
Legal proceedings - At the present time, the Company is not engaged in
any legal proceedings which, if adversely determined to the Company,
would have a material adverse impact on the Company's financial
condition or results of operations. From time to time, the Company is
party to routine legal proceedings within the normal course of
business. Such routine legal proceedings, in the aggregate, are
believed by management to be immaterial to the Company's financial
condition and results of operation.
Item 2 Change in securities - Not applicable
Item 3 Defaults upon senior securities - Not applicable
Item 4 Submission of matters to a vote - Not applicable
Item 5 Other information - Not Applicable
Item 6 Exhibits and reports on form 8-K
(a) Exhibits
31.1 Certification of Chief Executive Officer of the Company Pursuant
to Securities Exchange Act Rules 13a-14 and 15d-14.
31.2 Certification of Chief Financial Officer of the Company Pursuant
to Securities Exchange Act Rules 13a-14 and 15d-14.
32.1 Certification of Chief Executive Officer Pursuant to 18 U.S.C.
Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
32.2 Certification of Chief Financial Officer Pursuant to 18 U.S.C.
Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
(b) Reports on Form 8-K
On April 8, 2003, the Company filed a Form 8-K in connection with its
issuance of a press release on April 8, 2003 announcing the Company's
results for the quarter ended March 31, 2003.
On June 24, 2003, the Company filed a form 8-K in connection with the
issuance of a press release on June 23, 2003 announcing a settlement
with the Massachusetts Department of Revenue related to a REIT-related
liability.
Page 17 of 24
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DATE: AUGUST 11, 2003 CENTURY BANCORP, INC
/s/ Marshall M. Sloane /s/ Paul V. Cusick, Jr.
- ------------------------------------ -----------------------------------
MARSHALL M. SLOANE PAUL V. CUSICK, JR.
CHAIRMAN AND CHIEF EXECUTIVE OFFICER VICE PRESIDENT AND TREASURER
(PRINCIPAL EXECUTIVE OFFICER) (PRINCIPAL FINANCIAL OFFICER)
Page 18 of 24