T his is ou r Ce nt u ry .
My Lif e.
My T ime.
My Centur y.
400 MYSTIC AVENUE, MEDFORD, MA 02155 866.8.CENTURY century-bank.com
MEMBER FDIC
0665-AR-05 MKT2005
2 0 0 4
A N N U A L
R E P O R T
SHAREHOLDER INF ORMATION
CORPORA TE HEA DQUARTERS
ANNUAL MEETING
Century Bank
400 Mystic Avenue
Medford, MA 02155-6316
TEL 866.8.CENTURY
century-bank.com
TRANSFER AGE NT AND REGISTRAR
EquiServe Trust Company, N.A.
The annual meeting of stockholders will be held on Tuesday, April 12, 2005, at 10:00 a.m. The
meeting will take place at Century Bank, 400 Mystic Avenue, Medford, MA.
STOCK LISTING
Century Bancorp, Inc. became a public company in 1987. Centuryʼs Class A Common Stock is
listed in the NASDAQ national market and is traded under the symbol CNBKA. The stock is listed
as CntyBc in The Boston Globe and Boston Herald, and CentyBcp in The Wall Street Journal.
P.O. Box 43010
10- K REPORT
Providence, RI 02940-3010
A copy of the Companyʼs annual report to the Securities and Exchange Commission on Form 10-K
TEL 781.575.3400 (Investor Relations)
may be obtained without charge upon written request to: Century Bancorp, Inc., Investor Relations,
EquiServe.com
400 Mystic Avenue, Medford, MA 02155.
CENTURY B ANK L OC AT IONS
OFFIC ES
Allston
Beverly
Boston
Boston
Boston
Boston
Boston
Boston
Braintree
Brookline
Burlington
300 Western Avenue, Allston, MA 02134
428 Rantoul Street, Beverly, MA 01915
710 Albany Street, Boston, MA 02118
280 Atlantic Avenue, Boston, MA 02110
512 Commonwealth Avenue, Boston, MA 02215
771 Commonwealth Avenue, Boston, MA 02215
275 Hanover Street, Boston, MA 02113
24 Federal Street, Boston, MA 02110
703 Granite Street, Braintree, MA 02184
617-562-1700
978-921-2300
617-578-9250
617-557-0516
617-424-1644
617-424-5211
617-557-2950
617-423-1490
781-356-3400
1184-1186 Boylston Street/Rt 9 East, Brookline, MA 02467
617-713-4910
134 Cambridge Street/Rt 3A, Burlington, MA 01803
781-238-8700
Cambridge
2309 Massachusetts Avenue, Cambridge, MA 02140
617-349-5300
S peci al t hank s t o Jame s M. Fl ynn , Jr., Sen ior
V i ce P resident & Chair man, Bu ilding Committ ee ,
f or hi s dedi cat ion an d dilige nce in mak ing
t he new Cent ur y Ban k He adq u ar t e rs a re ality.
Everett
Lynn
Malden
Medford
1763 Revere Beach Parkway/Rt 16, Everett, MA 02149
617-381-6300
2 State Street, Lynn, MA 01901
781-586-8700
140 Ferry Street at Eastern Avenue, Malden, MA 02148
781-388-2100
400 Mystic Avenue, Medford, MA 02155
Medford Square
55 High Street, Medford, MA 02155
781-393-4160
781-391-9830
Newton
Peabody
Quincy
Salem
31 Boylston Street/Route 9 West, Newton, MA 02467
617-582-0920
12 Peabody Square, Peabody, MA 01960
651 Hancock Street, Quincy, MA 02170
37 Central Street, Salem, MA 01970
978-977-4900
617-376-8100
978-740-6900
Somerville
102 Fellsway West at Mystic Avenue, Somerville, MA 02145
617-629-0929
FREE S TANDING C ASH DISPENSERS
Boston
Boston
Boston
Boston
Boston
Boston
Boston
Boston
Agganis Arena, Boston University, 925 Commonwealth Avenue, Boston, MA 02215
Barnes & Noble, 660 Beacon Street, Boston, MA 02215
Campus Convenience/Sleeper Hall, Boston University, 275 Babcock Street, Boston, MA 02215
Dental School, Boston University, 100 East Newton Street, Boston, MA 02118
The Hotel Commonwealth, 500 Commonwealth Avenue, Boston, MA 02215
Medical School, Boston University, 715 Albany Street, Boston, MA 02118
Parking Garage, Boston University, 710 Albany Street, Boston, MA 02118
Warren Towers, 770 Commonwealth Avenue, Boston, MA 02215
Cambridge
One Kendall Square, Building #100, Cambridge, MA 02139
Medford
Magoun Square, 110 Medford Street, Medford, MA 02155
Dear Fellow Shareholders:
2004 was an important year of achievement for Century Bank.
Our 35-year tradition of client intimacy and community involvement
remains the core of our existence and the central building block
of our success. This is why we are a market leader. It indicates our
commitment to being one for many years to come.
Our asset growth this year was excellent. However, our earnings
were less so and are attributed to the clear and compelling reasons of
a historically low interest rate environment and investments we made
in our future. We added significant resources in 2004 to our three
principal business units, Personal, Business, and Institutional Banking
and feel that these investments and changing market conditions have
created an attitude of optimism and atmosphere of positive energy
PICTURED (from left): Jonathan G. Sloane,
President & Co-COO; Linda Sloane Kay, Vice
President; Marshall M. Sloane, Chairman of
the Board & CEO; Barry R. Sloane, Executive
Vice President & Co-COO.
and excitement for 2005.
While 2004 was a year of modest performance, it was a period of significant investment that we feel prepares
us for both market change and market opportunity. Century Bankʼs major events of 2004 are comprised of the
following:
• Record asset size of $1.83 billion reached, representing an 8.6% increase of assets from the previous
year-end. The Bankʼs five-year compounded annual growth rate (CAGR) is 14.7%.
• $8.88 million earned net income, representing a 24% decline from 2003 to $1.60 per share, resulting
from the interest rate environment and our investments in both client relationships and infrastructure.
• Net increase of $68 million in our loan portfolio or 13% to $580 million, including $26 million in a
record 402 approved small business loans and 543 new home equity loans totaling over $65 million.
Our credit quality remains, as one auditor has put it, “impeccable.”
• 22nd branch office opened on Albany Street, Boston.
• Operations upgraded to full-check image capability to maintain our competitive advantage in lockbox
processing and in response to the Check 21 clearing environment representing an investment of $2.2 million.
• Expanded our Business Development Team to include six new, experienced line officers.
•
Implemented state-of-the-art technology advancements to enhance our PC office working environment.
• BlackRock Financial Management, the second largest domestic fixed-income manager in the U.S.
was retained to manage our “Available-For-Sale” portfolio insuring best practices are utilized in the
management of our securities portfolio, thus maximizing its yield.
• Raised an additional $6.4 million of capital by refinancing our outstanding Trust Preferred securities
while lowering the interest rate paid from 8.3% to 6.65%.
•
Imposed another layer of financial control reporting, in addition to our existing five supervisory levels
of oversight, as a result of the advent of the Sarbanes-Oxley Act. We estimate hundreds of thousands
of dollars of new audit expense and thousands of hours of management time elapsed in compliance
efforts with this implementation.
• Finally, we completed, and now occupy our new 50,000 square foot Medford Headquarters and new
Main Office Branch.
In 2004, the New England banking environment continued its 20-year evolution to where the four largest
banks represented 45% of the Massachusetts banking marketplace. Additionally, they are all owned and
controlled by out-of-state institutions. With Century Bank being the second largest locally-controlled
commercial bank in Massachusetts, competing is both our challenge and our opportunity.
Our instincts and experience tell us that the major global banks will continue to create a significant market
opportunity by their missteps, i.e.: branch disruptions, arbitrary officer transfers, thoughtless layoffs, unjustified
fee increases, and ethics scandals. The megabanks will drive a meaningful market segment back to the
competent independent bank where an officerʼs personal connection is the bridge to the clients and communities.
Consequently, our ability to recruit and retain quality bankers from our competitors continues to be a significant
initiative for us. Our recruiting success in 2004 is a direct result of that initiative. If you examine every major
metropolitan area that has experienced such a similar consolidation of assets within that market, in virtually
every instance at least one closely controlled, independent, full-service bank has emerged as a superior
performer and permanent market presence. As long as we can continue to execute a diversified and superior
product offering, we believe Century Bank will be that surviving and thriving success story in Greater Boston.
There are few independent banks that can be as proud of the professionalism of their Associatesʼ product
delivery as Century Bank.
As 2004 came to a close, so too did the distinguished terms of departing Directors Jonathan B. Kay and
Joseph P. Mercurio. Their counsel and diligence was greatly appreciated and their contributions in shaping
our Bank will be evident for many years. They will be greatly missed.
Century Bank now competes in the “land of the giants.” We cannot change that. Frankly, we welcome the new
banking reality and landscape. In it, we will do more than compete, we will excel. We will do more than survive,
we will thrive. 2004 was a very busy year of hard work and forward motion towards that goal. We have
thoughtfully constructed an institution that well serves its clients, communities, Associates and shareholders.
We look forward to 2005 with a sense of optimism and excitement and hope you share our passion.
Sincerely,
Marshall M. Sloane
Chairman, President and CEO,
Century Bancorp, Inc.;
Chairman & CEO,
Century Bank and Trust Company
Jonathan G. Sloane
Executive Vice President,
Century Bancorp, Inc.;
President & Co-COO,
Century Bank and Trust Company
Barry R. Sloane
Executive Vice President,
Century Bancorp, Inc.;
Executive Vice President & Co-COO,
Century Bank and Trust Company
PEOPLE. BUSINESSES. CITIES. TOWNS.
EVERYONE HAS GOALS.
2004 was a year of investment and vision for Century Bank. It was
also a year of success and growth, as our Bank continued to perform
and grow in the core areas of Business Banking, Personal Banking
and Institutional Services.
Across all lines of business, we continue to increase
our level of strategic partnership with all our clients and
immersion in their business and personal banking needs.
PICTURED (from left): Paul V. Cusick, Jr., Executive Vice President, CFO &
Treasurer; Paul A. Evangelista, Executive Vice President; David B. Woonton,
Executive Vice President.
1972
Century Bancorp, Inc.
formed.
1975
First of 29 years of
uninterrupted dividends paid.
1981
Automated lockbox
service introduced.
1969
Founded by Marshall M. Sloane
in Somerville, MA.
• Record first day of deposits ($1.1M).
• Total first year-end assets ($17M).
• Year-end net income ($32,177).
1973
North Shore Bank & Trust
Company acquired.
1979
Bank passes $100 million
in assets.
BUSI N ESS B ANKING
Century Bankʼs Business Banking Group had a
In 2004, we launched a successful Small Business
strong year of performance by continuing to meet
Loan campaign leveraging our Retail Branch
the needs of our existing clients and cultivating
Network and Branch Managers. This sales team
many new relationships by providing working
focused on their local markets and provided local
capital, lines/letters of credit, term loans, construction
businesses with easy access to needed credit.
loans and residential and investor mortgage products.
Our focus will continue to be small and mid-sized,
We listened to our customers and simplified the
closely controlled businesses that flourish within
process so that through our partnership, we could
our market area.
all enjoy the growth and rewards of their enterprise.
This is what banking at Century Bank is all about:
In a challenging year for all banks within our
finding solutions that work.
region, we increased our volume of outstanding
loans to over $580 million, reflecting a 13%
increase. Our traditional corporate emphasis
of over-delivering against our business clientsʼ
expectations continues to prove that client intimacy
will always yield the best results. This mantra is
who we are. Our clientsʼ business is our business
and we can consistently exceed their needs by
knowing the intricacies of their livelihood.
1983
Acquired property in
Medford, MA for future
site of operations center.
1986
Acquired Social Service and
St. Michaelʼs Credit Union.
1988
Bank passes $500M
in assets.
1982
Acquired Bank of
Massachusetts.
1985
Acquired Massachusetts
Teachers Association
Credit Union.
1987
Initial public offering resulted
in $10.5M in new capital under
NASDAQ symbol CNBKA.
PER SON AL B ANKING
In 2004, Century Bankʼs personal accounts grew
The focus for all Branch Associates in 2004 was
to over 46,000. With a branch network of 22
on sales and outreach. Branch Managers met with
locations, and an ATM network of 33 sites, our
hundreds of local business owners in their respective
Bank had a solid year of growth, expansion
communities. These meetings resulted into new
and performance as we met and exceeded the
relationships for the Bank and ultimately played a
personal needs of our customers.
major role in the organic loan and deposit growth
We opened our 22nd branch location in the heart
for the Bank.
of the Boston University Medical Center Campus.
Our retail banking Associates continue to provide
This area has experienced significant growth and
unparalleled service to their consumer and business
change and is now one of the premier areas for
clients to ensure each is served exceptionally.
Biomedical and Infectious Disease Research.
This is our quality and service commitment and why
This branch location and sales staff will provide
we will continue to succeed.
products and services to the professionals, local
businesses and residents in the area.
1998
• $29.75M raised through a preferred security
2001
• Headcount exceeds 400.
offering under NASDQ symbol CNBKP.
• Worcester processing center opened.
• Haymarket Cooperative Bank purchased.
• Opened branches in Newton and Brookline.
1993
Wollaston Credit Union
acquired.
2000
Topped $1 billion in assets.
INS TI TUTI ON AL SER VICES
In 2004, the Century Bank Institutional Banking
We made significant investments throughout the
business continued to thrive and was a major
year and installed an image-based processing
source of revenue, success and pride for the Bank.
technology that fully automated our lockbox and
We grew the business of our current base of
check transit areas. This technology affords us
clients and added important new client relationships
state-of-the-art capabilities to customize payment
in corporate, government, not-for-profit and the
collection and remittance programs for any
utilities sector.
corporate, not-for-profit or government banking
customer or prospect.
Century Bank is the second largest lockbox processor
in New England with over $560 million of related
Our capabilities are not limited to simply payment
client deposits, 25 million transactions and 200
collections. During 2004, we also introduced a
client processing engagements. Our clients range
sophisticated Positive Pay and Account Reconciliation
from major utilities and corporations in Connecticut,
Program to better assist our largest clients to reconcile
New York and Massachusetts to world renowned
their cash flows and prevent exposures to fraud or
not-for-profits. We also partner with over 40% of the
incorrect payments.
local Massachusetts municipalities, ranging from the
largest to the smallest, and assist them to efficiently
From wire transfers to money markets and Cash
collect real estate and excise taxes, as well as other
Management Services, we realize the potential of our
necessary payments.
opportunity throughout New England and New York.
2003
• Acquired Capital Crossingʼs Chestnut Hill branch
and its retail deposits in downtown Boston.
• Grew to 21 branch locations.
• Broke ground on new five-story Headquarters in Medford.
2002
Opened Federal Street branch in
Bostonʼs financial district, bringing
branch total to 19.
2004
• Completed and occupied Headquarters building.
• Opened branch at Boston University Medical Center.
• Assets exceed $1.83 billion.
• Chosen BEST BANK in Somerville.
Jon Westling1,2*,3
President Emeritus, Boston University
Anthony C. LaRosa, CPA
Senior Vice President, Accounting
C E N T U RY B ANCOR P, I NC.
D IR E C T O R S
George R. Baldwin1,4,6
President & CEO, Baldwin & Company
Roger S. Berkowitz2,5
President & CEO, Legal Sea Foods, Inc.
Karl E. Case, Ph.D.3,5*
Katharine Coman and A. Barton Hepburn
Professor of Economics
Wellesley College
Visiting Scholar,
Federal Reserve Bank
Henry L. Foster, D.V.M.
Founder & Chairman Emeritus,
Charles River Laboratories, Inc.
Marshall I. Goldman, Ph.D.3*,5**
Professor Emeritus, Wellesley College;
Associate Director, Davis Center for
Russian Studies, Harvard University
Russell B. Higley, Esquire6*
Higley & Higley, Attorneys at Law
Jonathan B. Kay4
President, The Kay Companies, Inc.
Linda Sloane Kay
Vice President, Business Development
Century Bank and Trust Company
Fraser Lemley2,4,5
Chairman & CEO, Sentry Ford, Inc.;
Sentry Lincoln-Mercury, Inc.;
Sentry South Lincoln-Mercury, Inc.
HO N OR ARY DIRECT ORS
Michael M. Ossoff
Philibert L. Pellegrini, Esquire
OF F I CERS
Marshall M. Sloane
Chairman, President and CEO
Jonathan G. Sloane
Executive Vice President
Barry R. Sloane
Executive Vice President
Paul V. Cusick, Jr.
Vice President and Treasurer
Rosalie A. Cunio
Clerk
Paula A. Grimaldi
Assistant Clerk
C ENTURY B ANK AND TRUS T
CO MPANY OFFICERS
M A N A G E M E N T C O M M I T T E E
Marshall M. Sloane
Chairman of the Board & CEO
Jonathan G. Sloane
President & Co-COO
Joseph P. Mercurio2*,4**
Executive Vice President, Boston University
Barry R. Sloane
Executive Vice President & Co-COO
Joseph J. Senna, Esquire1*,4
Barry R. Sloane4,5,6
Executive Vice President,
Century Bancorp, Inc.;
Executive Vice President & Co-COO,
Century Bank and Trust Company
Jonathan G. Sloane 4,5,6
Executive Vice President,
Century Bancorp, Inc.;
President & Co-COO,
Century Bank and Trust Company
Marshall M. Sloane4,5
Chairman, President and CEO,
Century Bancorp, Inc.; Chairman & CEO,
Century Bank and Trust Company
Stephanie Sonnabend1,5
President & CEO, Sonesta International
Hotels Corporation
George F. Swansburg4*,5
Retired Executive Vice President,
Century Bancorp, Inc.;
Retired Vice Chairman, Century Bank
and Trust Company
Paul V. Cusick, Jr.5,6
Executive Vice President,
CFO & Treasurer
Paul A. Evangelista
Executive Vice President
David B. Woonton
Executive Vice President
S E N I O R V I C E P R E S I D E N T S
Gerald S. Algere
Senior Vice President, Division Head,
Not-for-Profit
Janice A. Brandano
Senior Vice President, Items Processing
Brian J. Feeney
Senior Vice President, Institutional
Services
James M. Flynn, Jr.
Senior Vice President, Commercial Loans
Philip M. Gannon, Jr.
Senior Vice President, Information
Systems
John C. Lavallee
Senior Vice President, Division Head,
Institutional Services
John McKenna
Senior Vice President, Division Head,
Small Business
Jason J. Melius
Senior Vice President, Information
Systems
F I R S T V I C E P R E S I D E N T S
Diana L. Carito, CIA, CRP
First Vice President & Audit Director
Louise F. Young
First Vice President, Credit
V I C E P R E S I D E N T S
Robert A. Bennett
Vice President & Retail Sales Manager
Bradford J. Buckley
Vice President, Commercial Loans
Joseph B. Chapman
Vice President, Purchasing
Jennifer L. Conrad
Vice President, Institutional Services
Charles J. Cope, Jr.
Vice President, Commercial Loans
Rosalie A. Cunio
Vice President & Corporate Secretary
Sylvia Daikos
Vice President & Somerville Branch
Manager
Anthony J. DiGuilio
Vice President, Commercial Loans
Stuart J. Erbstein
Vice President, Commercial Loans
William J. Gambon, Jr.
Vice President, Electronic
Operations & Delivery
Timothy L. Glynn
Vice President, Consumer Loans
T. Daniel Kausel
Vice President, Commercial Loans
Linda Sloane Kay
Vice President, Business Development
Nancy Lindstrom
Vice President, Retail
Operations & Support
Karen Martin
Vice President, Accounting
1 Audit Committee, 2 Compensation Committee, 3 Nominating Committee, 4 Executive Committee, 5 Asset Liability Committee, 6 Non-deposit Investment
and Insurance Products Committee, * Committee Chairperson, ** Vice Chairperson
Shipley C. Mason
Vice President, Commercial Loans
Janet McElwee
Vice President, Compliance & CRA
Joanne C. McNamara, CISA
Vice President, Audit
Thomas F. Peltier
Vice President, Not-For-Profit Division
Miguel A. Rosado
Vice President, Commercial Loans
Deborah R. Rush
Vice President, Institutional Services
Kenneth A. Samuelian
Vice President & Controller
Andrew J. Santos, Jr.
Vice President, Commercial Loans
Bernice A. Shuman
Vice President, Systems
Jim Smith
Vice President & Albany St. Branch
Manager
Maria L. Spadoni-Merena
Vice President, Institutional Services
Michael W. Sweeney
Vice President, Commercial Loans
Janice D. Taylor
Vice President & Malden Branch Manager
David J. Waryas
Vice President, Training
Yasmin D. Whipple
Vice President, Human Resources
A S S I S T A N T V I C E P R E S I D E N T S
Laura A. DiFava
Assistant Vice President & Everett
Branch Manager
Ann Marie Ellis-Stetson
Assistant Vice President,
Institutional Services
Judith A. Fallon
Assistant Vice President, Lockbox
John R. Ferguson
Assistant Vice President, Accounting
Jeanna K. Frawley
Assistant Vice President, Loan
Administration
Howard N. Gold
Assistant Vice President, Systems
Howard C. Green
Assistant Vice President & Newton
Branch Manager
Roland E. Harvey
Assistant Vice President & Cambridge
Branch Manager
Ann J. Hollup
Assistant Vice President, Lockbox
Kristine M. Holopainen
Assistant Vice President & Federal Street
Branch Manager
James J. Jordan
Assistant Vice President & Salem
Branch Manager
Ann E. Mannion
Assistant Vice President & Lynn
Branch Manager
Nancy M. Marsh
Assistant Vice President,
Commercial Loans
Michael D. Ballard
Assistant Vice President, Consumer Loans
Carl M. Mattos
Assistant Vice President, Loan Operations
Gerald Bovardi
Assistant Vice President, Commercial Loans
Jennifer R. Carpenito
Assistant Vice President & Allston/
Brighton Branch Manager
Debra J. Cloutier
Assistant Vice President,
Commercial Loans
Gracine Copithorne
Assistant Vice President,
Corporate Security/BSA
Barbara Cunningham
Assistant Vice President,
Deposit Accounting
Cynthia A. Davidson
Assistant Vice President & Braintree
Branch Manager
Carol A. Melisi
Assistant Vice President & Burlington
Branch Manager
Karen Roses
Assistant Vice President, Credit
Administration
William F. Shutt, Jr.
Assistant Vice President & Quincy
Branch Manager
Suzanne Sumski
Assistant Vice President & Beverly
Branch Manager
Marcia T. Trenholm, CISA
Assistant Vice President, Audit
O F F I C E R S
Irene A. Lima Butler
Atlantic Avenue Branch Manager
Pasqualina Buttiri
North End Branch Manager
Toni M. Chardo
Customer Service Center
Michael J. Dwyer
Mystic Branch Manager
Sandra C. Gomes
Marketing
Lisa Gosling
Kenmore Square Branch Manager
Paula A. Grimaldi
Assistant Corporate Secretary
Karen Grindrod
Institutional Services
Janice D. Hallinan
Peabody Branch Manager
Amelia N. Iocco
Mystic Cash Room Manager
Malcolm I. Maloon
Information Systems
Maureen E. Matranga
Marketing
Christina Welch-Matthews
Retail Operations and Support
Cornelius C. Prioleau
Audit
Bruce A. Priestley
Medford Square Branch Manager
Ashley G. Taylor
Brookline Branch Manager
Elizabeth Theriault
Retail Operations and Support
Jose I. Umana
BU Sherman Union,
Branch Manager
John Forest Wallace
Information Systems
CENTURY FINANCIAL SERVICES
Kenneth M. Johnson, CFP6, President
Paul V. Cusick, Treasurer
Kenneth A. Samuelian, Clerk
Amy E. Cinelli, Operations Officer
Policy making officer subject to FRB Regulation
Part 215 - Loans to Executive Officers, Directors
and Principal Shareholders of Member Banks.
Non-policy making officers.
FINANCIAL STATEMENTS
1
2
9
Financial Highlights
Management’s Discussion and Analysis of Results of Operations and Financial Condition
Consolidated Balance Sheets
10
Consolidated Statements of Income
11
Consolidated Statements of Changes of Stockholders’ Equity
12
Consolidated Statements of Cash Flows
13
Notes to Consolidated Financial Statements
31
33
Report of Independent Registered Public Accounting Firm
Management’s Report on Internal Control over Financial Reporting
Financial Highlights
1
2004
2003
2002
2001
2000
(dollars in thousands, except share data)
FOR THE YEAR
Interest income
Interest expense
Net interest income
Provision for loan losses
Net interest income after
provision for loan losses
Other operating income
Operating expenses
Income before income taxes
Provision for income taxes
$
65,033
23,646
41,387
300
41,087
10,431
37,663
13,855
4,974
$
69,298
23,942
45,356
450
44,906
10,009
34,272
20,643
8,963
$
71,124
24,718
46,406
1,200
45,206
10,266
34,089
21,383
7,879
$
67,459
27,701
39,758
1,500
38,258
8,863
30,025
17,096
6,237
$
66,554
31,092
35,462
1,425
34,037
7,234
25,638
15,633
5,428
Net income
$
8,881
$
11,680
$
13,504
$
10,859
$
10,205
Average shares outstanding, basic
Average shares outstanding, diluted
Shares outstanding at year-end
Earnings per share:
Basic
Diluted
Dividend payout ratio
AT YEAR-END
Assets
Loans
Deposits
Stockholders’ equity
Book value per share
SELECTED FINANCIAL
PERCENTAGES
Return on average assets
Return on average stockholders’ equity
Net interest margin, taxable equivalent
Net (recoveries) charge-offs as a
percent of average loans
Average stockholders’ equity to
average assets
Efficiency Ratio
Per Share Data
2004, Quarter Ended
Market price range (Class A)
High
Low
Dividends Class A
Dividends Class B
2003, Quarter Ended
Market price range (Class A)
High
Low
Dividends Class A
Dividends Class B
5,526,202
5,553,197
5,534,088
5,519,800
5,548,615
5,524,438
5,516,590
5,534,059
5,517,425
5,535,309
5,541,745
5,515,350
5,597,136
5,597,629
5,550,350
$
$
1.61
1.60
24.2)%
$
$
2.12
2.11
17.2)%
$
$
2.45
2.44
13.9)%
$
$
1.96
1.96
15.2)%
$
$
1.82
1.82
14.5)%
$ 1,833,701
580,003
1,394,010
104,773
18.93
$
$ 1,688,911
512,314
1,338,853
103,728
18.78
$
$ 1,557,201
514,249
1,146,284
100,256
18.17
$
$ 1,271,022
462,772
888,408
84,599
15.34
$
$ 1,083,830
439,563
793,796
71,506
12.88
$
.55)%
8.61)%
2.75)%
0.01)%
6.38)%
72.7)%
.74)%
11.57)%
3.08)%
0.04)%
6.40)%
61.6)%
1.02)%
14.64)%
3.77)%
(0.04)%
6.98)%
60.1)%
1.03)%
13.70)%
4.06)%
0.01)%
7.49)%
61.7)%
1.08)%
16.09)%
4.02)%
0.78)%
6.68)%
60.6)%
December 31,
September 30,
June 30,
March 31,
$ 32.79
28.15
0.12
0.060
$ 33.62
30.38
0.12
0.060
$ 33.74
29.75
0.12
0.060
$ 37.51
32.80
0.12
0.060
December 31,
September 30,
June 30,
March 31,
$ 38.11
32.40
0.12
0.06
$ 37.30
28.55
0.11
0.055
$ 31.51
25.75
0.11
0.055
$ 28.47
26.40
0.11
0.055
2
Management’s Discussion and Analysis of Results of Operations and Financial Condition
Overview
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 $1.8
billion on December 31, 2004. The Company presently operates 22
banking offices in 16 cities and towns in Massachusetts ranging from
Braintree to Peabody. The Bank’s customers consist primarily of small
and medium-sized businesses and retail customers in these communities
and surrounding areas, as well as local governments and institutions
throughout Massachusetts.
The Company’s results of operations are largely dependent on net
interest income, which is the difference between the interest earned
on loans and securities and interest paid on deposits and borrowings.
The results of operations are also affected by the level of income/fees
from loans, deposits, as well as operating expenses, the provision
for loan losses, the impact of federal and state income taxes and the
relative levels of interest rates and economic activity.
The Company offers a wide range of services to commercial enterprises,
state and local governments and agencies, non-profit organizations and
individuals. It emphasizes service to small and medium-sized businesses
and retail customers in its market area. The Company makes commercial
loans, real estate and construction loans, consumer loans, and accepts
savings, time and demand deposits. In addition, the Company offers to
its corporate and institutional customers automated lockbox collection
services, cash management services and account reconciliation services,
and actively promotes the marketing of these services to the municipal
market. Also, the Company provides full service securities brokerage
services through its subsidiary, Century Financial Services, Inc. in
conjunction with Commonwealth Equity Services, Inc., a full service
securities brokerage business.
The Company is also a provider of financial services including cash
management, transaction processing and short term financing to
municipalities in Massachusetts and Rhode Island. The Company has
deposit relationships with approximately 30% of the 351 cities and
towns in Massachusetts.
Century Bancorp, Inc. (the “Company”) had net income of $8,881,000
for the year ended December 31, 2004, compared with net income of
$11,680,000 for year ended December 31, 2003 and net income of
$13,504,000 for the year ended December 31, 2002. Basic earnings
per share were $1.61 in 2004, compared to $2.12 in 2003 and $2.45
in 2002. Diluted earnings per share were $1.60 in 2004, compared to
$2.11 in 2003 and $2.44 in 2002. The Company’s earnings in 2004
were negatively affected by the historically low interest rate environment.
Assets have continued to reprice at lower interest rates while interest
rates paid on deposits have not had a corresponding decrease.
The Company believes that the net interest margin will continue to be
challenged. During 2003, the Company’s earnings were also negatively
affected by a net tax charge of $1,183,000 associated with the Real
Estate Investment Trust (“REIT”) settlement. This charge was the result of
an agreement with the Massachusetts Department of Revenue (“DOR”)
settling a dispute related to taxes that the DOR claimed were owed from
the Company’s REIT.
Total assets were $1,833,701,000 at December 31, 2004, an increase
of 8.6% from total assets of $1,688,911,000 on December 31, 2003,
which, in turn, were 8.5% higher than total assets of $1,557,201,000
on December 31, 2002.
On December 31, 2004, stockholders' equity totaled $104,773,000,
compared with $103,728,000 on December 31, 2003 and $100,256,000
on December 31, 2002. Book value per share increased to $18.93 at
December 31, 2004 from $18.78 on December 31, 2003, which had
increased from $18.17 on December 31, 2002.
During February 2003, the Company began construction of an addition
to its corporate headquarters building. The property is located adjacent
to its current headquarters in Medford, Massachusetts and will provide
additional corporate office space and an expanded branch banking
floor. The building is scheduled to be occupied during the first quarter of
2005 and the current cost estimate including land costs is $14.5 million.
As of December 31, 2004, $13.6 million has been expended. The capital
expenditure will provide a five-story addition containing approximately
50 thousand square feet of office and branch banking space. Occupancy
costs are expected to increase by approximately $1 million per year
when the building is occupied.
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.
During the third quarter of 2004, 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 15, 2005.
In July 2004, the Company opened a new branch location on Albany
Street in Boston, Massachusetts. In 2003, the Company opened two
branches in Boston, Massachusetts.
During the fourth quarter of 2004, the Company announced that it entered
into an Investment Management Agreement with BlackRock Financial
Management, Inc. for the Company’s Available-For-Sale securities portfolio.
The Company believes that BlackRock will help it achieve improvements in
the Company’s yield and total return on its investment portfolio.
Also during the fourth quarter, the Company consummated the sale of
a trust preferred securities offering, in which it issued $36,083,000 of
subordinated debt securities due 2034 to its newly formed unconsolidated
subsidiary Century Bancorp Capital Trust II. Century Bancorp Capital Trust II
issued 35,000 shares of Cumulative Trust Preferred Securities with a
liquidation value of $1,000 per share. These securities pay dividends at
an annualized rate of 6.65% for the first ten years and then convert to
the three-month LIBOR rate plus 1.87% for the remaining twenty years.
The total amount of this issuance was $36,083,000. The Company is
using the proceeds primarily for general business purposes. Also, the
Company, through its subsidiary, Century Bancorp Capital Trust,
announced the redemption of their 8.30% Trust Preferred Securities,
with a redemption date of January 10, 2005. The total amount of
this redemption is $29,639,000.
Management’s Discussion and Analysis of Results of Operations and Financial Condition
3
Critical Accounting Policies
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,” 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
hinder its ability to make future scheduled interest and principal payments
on a timely basis or whether there was downgrade in ratings by rating
agencies.
Accounting policies involving significant judgments and assumptions
by management, which have, or could have, 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 and impaired
investment securities. 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 and lease losses
necessarily 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 estimation risk
associated with the formula allowance and specific allowances, as well
as management’s evaluation of various conditions, including business
and economic conditions, delinquency trends, charge-off experience and
other 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.
4
Management’s Discussion and Analysis of Results of Operations and Financial Condition
Results of Operations and Financial Condition
The following table sets forth the distribution of the Company’s average assets, liabilities and stockholders’ equity, and average rates earned or paid on
a fully taxable equivalent basis for each of the years indicated.
Year Ended December 31,
2004
2003
2002
Interest
Rate
Average
Income/
Earned/
Balance
Expense (1)
Paid (1)
Average
Balance
Interest
Rate
Income/
Earned/
Expense (1)
Paid (1)
Average
Balance
Interest
Rate
Income/
Earned/
Expense (1)
Paid (1)
(dollars in thousands)
ASSETS
Interest-earning assets:
Loans (2)
Securities available-for-sale:
Taxable
Tax-exempt
Securities held-to-maturity:
Taxable
Federal funds sold
Interest bearing deposits
in other banks
$
546,147
$ 33,384
6.11)%
$
500,723
$ 33,134
6.62)%
$
488,465
$ 35,954
7.36)%
570,935
18,528
61
1
3.25
1.64)
782,782
28,736
92
3
3.67
3.26
570,067
960
27,285
39
4.79)
4.06)
319,860
12,296
3.84
162,988
7,152
4.39)
126,675
7,150
5.64))
69,461
824
1.19)
24,730
274
1.11)
45,253
710
1.57)
251
— 0.13
30
—
0.58)
20
—
2.50)
Total interest-earning assets
1,506,715
65,033
4.32)%
1,471,345
69,299
4.71)%
1,231,440
71,138
5.78)%
Non Interest-earning assets
Allowance for loan losses
120,306
(8,813)
Total Assets
$ 1,618,208
114,919
(8,901)
$ 1,577,363
97,981
(7,828)
$ 1,321,593
LIABILITIES AND
STOCKHOLDERS’ EQUITY
Interest-bearing deposits:
NOW accounts
Savings accounts
Money market accounts
Time deposits
$
250,224
$ 1,966
0.79)%
$
260,383
$ 2,267
0.87)%
$
202,060
$ 2,588
1.28)%
79,037
412,220
242,791
302
5,010
6,833
0.38)
1.22)
2.81)
79,333
392,066
239,189
319
5,111
7,246
0.40)
1.30)
3.03)
72,780
268,504
189,395
732,739
595
4,730
6,841
0.82)
1.76)
3.61)
14,754
2.01)
Total interest-bearing deposits
984,272
14,111
1.43)
970,971
14,943
1.54)
Securities sold under
agreements to repurchase
40,937
331
0.81)
51,402
457
0.89)
61,718
696
1.13)
Other borrowed funds
and subordinated debentures
194,932
9,204
4.72)
170,344
8,542
5.01)
Total interest-bearing liabilities
1,220,141
23,646
1.94)%
1,192,717
23,942
2.01)%
186,531
980,988
9,268
4.97)
24,718
2.52)%
Non Interest-bearing liabilities
Demand deposits
Other liabilities
Total liabilities
Stockholders’ equity
Total liabilities &
279,361
15,511
1,515,013
103,195
267,284
16,429
1,476,430
100,933
232,372
15,986
1,229,346
92,247
stockholders’ equity
$ 1,618,208
$ 1,577,363
$ 1,321,593
Net interest income (1)
Net interest spread
Net interest margin
$ 41,387
$ 45,357
$ 46,420
2.38)%
2.75)%
2.70)%
3.08)%
3.26)%
3.77)%
(1) On a fully taxable equivalent basis calculated using a federal tax rate of 35%.
(2) Nonaccrual loans are included in average amounts outstanding.
Management’s Discussion and Analysis of Results of Operations and Financial Condition
5
The following table summarizes the year-to-year changes in the Company's net interest income resulting from fluctuations in interest rates and volume
changes in earning assets and interest-bearing liabilities. Changes due to rate are computed by multiplying the change in rate by the prior year's
volume. Changes due to volume are computed by multiplying the change in volume by the prior year's rate. Changes in volume and rate that cannot
be separately identified have been allocated in proportion to the relationship of the absolute dollar amounts of each change.
Year Ended December 31,
2004 Compared with 2003
2003 Compared with 2002
(dollars in thousands)
Interest Income:
Loans
Securities available-for-sale:
Taxable
Tax-exempt
Securities held-to-maturity:
Taxable
Federal funds sold
Interest-bearing deposits in other banks
Total interest income
Interest expense:
Deposits:
NOW accounts
Savings accounts
Money market accounts
Time deposits
Total interest-bearing deposits
Securities sold under agreements to repurchase
Other borrowed funds and subordinated debentures
Total interest expense
Change in net interest income
Increase/(Decrease)
Due to Change in
Increase/(Decrease)
Due to Change in
Volume
Rate
Total
Volume
Rate
Total
$ 2,881
$ (2,631) $
250
$
884
$ (3,704)
$ (2,820)
(7,145)
(1)
(3,063)
(1)
(10,208)
(2)
(984)
21
(1)
5,144
550
—
8,721
(30)
1,793
(265)
—
(7,270)
(6)
(1,791)
(171)
—
1,451
(36)
2
(436)
—
(6,659)
(4,266)
11,103
(12,942)
(1,839)
(215)
(16)
(356)
(521)
(1,108)
(39)
(490)
(1,637)
(301)
(17)
(101)
(413)
(832)
(126)
662
(296)
634
49
1,815
1,619
4,117
(105)
(811)
3,201
(955)
(325)
(1,434)
(1,214)
(3,928)
(134)
84
(3,978)
(321)
(276)
381
405
189
(239)
(727)
(777)
6,128
529
1
2,393
(86)
(1)
255
108
276
(87)
1,152
1,341
$ 1,052
$ (5,022) $ (3,970)
$ 7,902
$ (8,964)
$ (1,062)
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 decreased 8.8% in 2004 to $41,387,000,
compared with $45,357,000 in 2003. The decrease in net interest
income for 2004 was mainly due to an 11% or a thirty-three basis point
decrease in the net interest margin. The level of interest rates, the ability
of the Company’s earning assets and liabilities to adjust to changes in
interest rates and the mix of the Company’s earning assets and liabilities
affect net interest income. The net interest margin on a fully taxable
equivalent basis decreased to 2.75% in 2004 from 3.08% in 2003,
which had decreased from 3.77% in 2002. The decrease in the net
interest margin, for both years, 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.
Average earning assets were $1,506,715,000 in 2004, an increase
of $35,370,000 or 2.4% from the average in 2003, which was 19.5%
higher than the average in 2002. Total average securities, including
securities available-for-sale and securities held-to-maturity, decreased
5.8% to $890,856,000. The decrease in securities volume was mainly
attributable to a shift in asset concentration to loans and short-term
funds. This decrease in securities volume and lower yields resulted in
lower securities income, which decreased 14.1% to $30,825,000.
Total average loans increased 9.1% to $546,147,000 after increasing
$12,258,000 in 2003. The increase in loans was mainly attributable to
an increase in commercial and industrial, home equity credit lines and
residential real estate loans, partially offset by a decrease in commercial
real estate. Those types of loans increased in part because of a loan
campaign that began during the first quarter of 2004. The increase in
loan volume was partially offset by a lower level of interest rates
resulting in higher loan income, which increased by 0.8% or $250,000
to $33,384,000. Total loan income was $35,954,000 in 2002.
The Company’s sources of funds include deposits and borrowed funds.
On average, deposits showed an increase of 2.0% or $25,378,000 in
2004 after increasing by 28.3% or $273,143,000 in 2003. Deposits
increased in 2004 primarily as a result of the internal deposit growth
and were mainly concentrated in money market accounts, which
increased by $20,154,000. Borrowed funds and subordinated debentures
increased by 6.4% in 2004 following a decrease of 10.7% in 2003.
The majority of the Company’s borrowed funds are borrowings from the
Federal Home Loan Bank (FHLB) and retail repurchase agreements.
Borrowings from the FHLB increased by approximately $20,733,000
and retail repurchase agreements decreased by $10,465,000.
Interest expense totaled $23,646,000 in 2004, a decrease of $296,000
or 1.2% from 2003 when interest expense decreased 3.1% from 2002.
This decrease in interest expense is due to decreases in deposit rates,
partially offset by an increase in the average balance of deposits.
6
Management’s Discussion and Analysis of Results of Operations and Financial Condition
Provision for Loan Loss
The provision for loan losses was $300,000 in 2004, compared with
$450,000 in 2003 and $1,200,000 in 2002. These provisions are the
result of management's evaluation of the amounts and 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 $9,001,000 at December 31, 2004,
compared with $8,769,000 at December 31, 2003. Expressed as a
percentage of outstanding loans at year-end, the allowance was 1.55%
in 2004, 1.71% in 2003 and 1.65% in 2002.
Non-performing loans, which include all non-accruing loans and certain
restructured, accruing loans, totaled $628,000 on December 31, 2004,
compared with $1,175,000 on December 31, 2003.
Other Operating Income
During 2004, the Company continued to experience positive results in
its fee-based services including fees derived from traditional banking
activities such as deposit related services, its automated lockbox
collection system and full service securities brokerage offered through
Commonwealth Equity Services, Inc., an unaffiliated registered securities
broker-dealer and investment adviser.
Under the lockbox 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 the amounts paid to its customers, deposits the funds to the
customer's account and provides automated records of the transactions
to customers. Typical customers for the lockbox service are municipalities
who use it to automate tax collections, cable TV companies and other
commercial enterprises.
Through Commonwealth Equity Services, Inc., an unaffiliated company,
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.
Total other operating income in 2004 was $10,431,000, an increase
of $422,000 or 4.2% compared to 2003. This increase followed a
decrease of $257,000 or 2.5% in 2003, compared to 2002. Service
charge income, which continues to be a major area of other operating
income with $5,271,000 in 2004, saw an increase of $489,000
compared to 2003. Service charges on deposit accounts increased
mainly because of an increase in overdraft charges. Lockbox revenues
totaled $2,950,000, down $236,000 in 2004. This decrease was
mainly attributable to a decrease in volume that was due to increased
competition. Through Commonwealth Equity Services, Inc., brokerage
commissions increased to $670,000 in 2004, from $579,000 in 2003,
primarily as a result of increased transaction volume. Also included in
other operating income for 2002 is a pretax realized gain of $359,000
associated with the sale of bank premises.
Operating Expenses
Total operating expenses were $37,663,000 in 2004, compared to
$34,272,000 in 2003 and $34,089,000 in 2002.
Salaries and employee benefits expenses increased by $1,503,000 or
6.9% in 2004, after increasing by 0.2% in 2003. The increase for 2004
was mainly attributable to an increase in staff levels and merit increases
in salaries. The decrease in 2003 was mainly attributable to a decrease
in incentive compensation accruals; this was partially offset by increased
retirement and healthcare costs.
Occupancy expense increased by $349,000 or 13.2% in 2004, this
followed an increase of $347,000 or 15.1% in 2003. The increase in
2004 was mainly attributable to full-year costs associated with the
opening of two new branches in 2003 and the partial year cost associated
with the opening of one new branch in 2004. The increase in 2003 was
mainly attributable to full-year costs associated with the opening of a
new branch in 2002 and partial year costs associated with opening two
new branches in 2003. Equipment expense increased by $677,000 or
39.8% in 2004; this followed a decrease of $431,000 or 20.2% in
2003. The increase in 2004 was mainly attributable to increased
depreciation and service contract expense associated with the additions
of check and lockbox image systems. The decrease in 2003 was mainly
the result of a decrease in equipment depreciation expense, as well as
a reduction in service contract expense. Service contract expense
decreased as a result of decreases in lockbox activity.
Other operating expenses increased by $862,000 in 2004, which
followed a $213,000 increase in 2003. The increase for 2004 was
primarily the result of increased legal, audit, personnel recruitment and
marketing expense. The costs increased mainly because of compliance
related services. Marketing increased because of an increase in advertising.
The increase for 2003 was primarily the result of increased core deposit
intangible amortization, telephone and software maintenance expense.
Provision for Income Taxes
Income tax expense was $4,974,000 in 2004, $8,963,000 in 2003
and $7,879,000 in 2002. The effective tax rate was 35.9% in 2004,
43.4% (37.7%, excluding REIT settlement) in 2003 and 36.8% in 2002.
The decrease in the effective tax rate for 2004 was mainly attributable to
less earnings at the Bank. The portion of earnings subject to a higher tax
rate decreased in 2004. Included in tax expense for 2003 is a net tax
charge of $1,183,000 associated with the REIT settlement. This charge
was the result of an agreement with the Massachusetts DOR settling a
dispute related to taxes that the DOR claimed were owed from the
Company’s REIT.
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, and 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.
Management’s Discussion and Analysis of Results of Operations and Financial Condition
7
Capital Adequacy
Total stockholders' equity was $104,773,000 at December 31, 2004,
compared with $103,728,000 at December 31, 2003 and $100,256,000
at December 31, 2002. The increase in 2004 was primarily the result of
earnings less dividends paid and a decrease in accumulated other
comprehensive income. The increase in 2003 was primarily the result
of earnings less dividends paid and an increase in accumulated other
comprehensive income.
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 at
least 4.00% and a total capital-to-risk assets ratio of at least 8.00%.
The Company and the Bank exceeded these requirements with a Tier 1
capital-to-risk assets ratio of 15.69% and 12.43%, respectively, and total
capital-to-risk assets ratio of 20.14% and 13.47%, respectively at
December 31, 2004. 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, 2004, the Company
and the Bank exceeded this requirement with leverage ratios of 8.27%
and 6.54%, respectively.
Change in Interest Rates
(in Basis Points)
Percentage Change in
Net Interest Income (1)
+300
+200
+100
–100
(9.5)%
(6.3)%
(3.1)%
(0.8)%
(1) The percentage change in this column represents net interest income for 12 months in
various rate scenarios versus the net interest income in a stable interest rate environment.
The Company's primary objective in managing interest rate risk is
to minimize the adverse impact of changes in interest rates on the
Company's net interest income and capital, while structuring the
Company's asset-liability structure to obtain the maximum yield-cost
spread on that structure. The Company relies primarily on its
asset-liability structure to control interest rate risk.
Liquidity and Capital Resources
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 $238,235,000 on December
31, 2004, compared with $225,321,000 on December 31, 2003 and
$122,205,000 on December 31, 2002. In each of these 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.
Contractual Obligations, Commitments, and Contingencies
The Company has entered into contractual obligations and commitments. The following tables summarize the Company's contractual cash obligations
and other commitments at December 31, 2004.
Contractual Obligations and Commitments by Maturity
(dollars in thousands)
Contractual Obligations
FHLB advances
Subordinated debentures
Retirement benefit obligations
Lease obligations
Other
Treasury, tax and loan
Customer repurchase agreements
Total contractual cash obligations
Other Commitments
Lines of credit
Standby letters of credit
Other commitments
Total commitments
Payments Due – By Period
Total
Less than
One Year
One To
Three Years
Three To
Five Years
After
Five Years
$ 213,120
65,722
9,568
6,192
$ 105,000
29,639
601
1,088
$ 1,120
—
1,381
1,952
$ 51,500
—
1,786
1,601
$ 55,500
36,083
5,800
1,551
1,660
38,650
1,660
38,650
—
—
—
—
—
—
$ 334,912
$ 176,638
$ 4,453
$ 54,887
$ 98,934
Amount of Commitment Expiring – By Period
Total
Less than
One Year
One To
Three Years
Three To
Five Years
After
Five Years
$ 128,915
11,195
36,265
$
30,481
4,691
5,480
$ 13,676
128
22,936
$
515
5,287
1,250
$ 84,243
1,089
6,599
$ 176,375
$
40,652
$ 36,740
$ 7,052
$ 91,931
8
Management’s Discussion and Analysis of Results of Operations and Financial Condition
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 notational 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,
standby letters of credit and unadvanced portions of construction loans is
represented by the contractual amount of those instruments. The Company
uses the same credit policies in making commitments and conditional
obligations as it does for on-balance sheet instruments. Financial
instruments with off-balance sheet risk at December 31 are as follows:
Contract or Notational Amount
2004
2003
(dollars in thousands)
Financial instruments whose contract
amount represents credit risk:
Commitments to originate
1-4 family mortgages
$
Standby letters of credit
Unused lines of credit
Unadvanced portions of
construction loans
2,511
11,195
128,915
33,754
$ 600
4,914
126,825
15,414
Commitments to originate loans, unadvanced portions of construction
loans and unused letters 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.
Forward-looking Statements
Certain statements contained herein are not based on historical facts and
are “forward-looking statements” within the meaning of Section 21A of
the Securities Exchange Act of 1934. Forward-looking statements, which
are based on various assumptions (some of which are beyond the
Company’s control), may be identified by reference to a future period
or periods, or by the use of forward-looking terminology, such as “may,”
“will,” “believe,” “expect,” “estimate,” “anticipate,” “continue” or
similar terms or variations on those terms, or the negative of these terms.
Actual results could differ materially from those set forth in forward-
looking statements due to a variety of factors, including, but not limited to,
those related to the economic environment, particularly in the market areas
in which the Company operates, competitive products and pricing, fiscal
and monetary polices of the U.S. Government, changes in government
regulations affecting financial institutions, including regulatory fees and
capital requirements, changes in prevailing interest rates, acquisitions
and the integration of acquired businesses, credit risk management,
asset/liability management, the financial and securities markets and
the availability of and costs associated with sources of liquidity.
The Company does not undertake, and specifically disclaims any obligation,
to publicly release the result of any revisions which may be made to any
forward-looking statements to reflect the occurrence of anticipated or
unanticipated events or circumstances after the date of such statements.
Recent Accounting Developments
In November 2003 and March 2004, the Financial Accounting
Standards Board’s (FASB) Emerging Issues Task Force (EITF) issued
a consensus on EITF Issue 03-1which contains guidance on other-than-
temporary impairments of investment securities. The EITF provides
guidance on when impairment is deemed to exist, provides guidance
on determining if impairment is other-than-temporary, and directs how
to calculate impairment loss. Issue 03-1 also details expanded annual
disclosure rules. In September 2004, the FASB’s EITF issued EITF 03-1-1
Effective Date of Paragraphs 10-20 of EITF Issue 03-1 “The Meaning of
Other-Than-Temporary Impairment and Its Application to Certain
Investments,” which delays the effective date of those paragraphs to be
concurrent with the final issuance of EITF 03-1-a “Implementation
Guidance for the Application of Paragraph 16 of EITF 03-1 The
Meaning of Other-Than-Temporary Impairment and Its Application to
Certain Investments.” EITF 03-1-a is currently being reviewed by the
FASB in regards to final guidance and effective date with a comment
period that ended October 29, 2004. EITF 03-1, as issued, was origi-
nally effective for periods beginning after June 15, 2004. The adoption
of the original EITF 03-1 (excluding paragraphs 10-20) did not have a
material impact on the Company’s financial position or results of opera-
tions. The Company also does not anticipate that the adoption of EITF
03-1-1 or EITF 03-1-a will have a material impact on the Company’s
financial position or results of operations.
In December 2004, the FASB issued a revised Statement No. 123,
(revised 2004) (SFAS No. 123R), “Share-Based Payment.”
This Statement replaces SFAS No. 123, Accounting for Stock-Based
Compensation, and supersedes APB Opinion No. 25, Accounting for
Stock Issued to Employees, and its related implementation guidance.
This Statement establishes standards for the accounting for transactions
in which an entity exchanges its equity instruments for goods or services.
This Statement requires a public entity to measure the cost of employee
services received in exchange for an award of equity instruments based
on the grant-date fair value of the award (with limited exceptions).
That cost will be recognized over the period during which an employee
is required to provide service in exchange for the award—the requisite
service period (usually the vesting period). This Statement is effective
as of the beginning of the first interim or annual reporting period that
begins after June 15, 2005. The Company estimates that 2005
additional compensation expense (net of tax) will be approximately
$100,000 for the six months of 2005. For the years 2006 and beyond,
a full year of compensation expense will be recognized.
December 31,
(dollars in thousands, except share data)
ASSETS
Cash and due from banks (note 2)
Federal funds sold and interest-bearing deposits in other banks
Total cash and cash equivalents
Securities available-for-sale, amortized cost $614,729 in 2004
and $701,444 in 2003 (notes 3 and 9)
Securities held-to-maturity, market value $343,399 in 2004
and $198,790 in 2003 (notes 4 and 9)
Loans, net (note 5)
Less: allowance for loan losses (note 6)
Net loans
Bank premises and equipment (note 7)
Accrued interest receivable
Other assets (note 12)
Total assets
LIABILITIES AND STOCKHOLDERS’ EQUITY
Demand deposits
Savings and NOW deposits
Money market accounts
Time deposits (note 8)
Total deposits
Securities sold under agreements to repurchase (note 9)
Other borrowed funds (note 10)
Subordinated debentures (note 10)
Investments purchased payable
Other liabilities
Total liabilities
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 3,818,048 shares in 2004 and 3,792,938 shares in 2003
Common stock, Class B, $1.00 par value per share; authorized 5,000,000 shares;
issued 2,147,190 shares in 2004 and 2,162,650 shares in 2003
Additional paid-in-capital
Retained earnings
Treasury stock, Class A, 383,600 shares in 2004 and 2003, at cost
Treasury stock, Class B, 47,550 shares in 2004 and 2003, at cost
Accumulated other comprehensive (loss) income, net of taxes (note 3)
Total stockholders’ equity
Total liabilities and stockholders’ equity
See accompanying Notes to Consolidated Financial Statements.
Consolidated Balance Sheets
9
2004
2003
$
36,209
202,026
$
64,299
161,022
238,235
225,321
609,806
345,369
580,003
9,001
571,002
26,265
6,800
36,224
703,335
197,872
512,314
8,769
503,545
21,589
8,450
28,799
$ 1,833,701
$ 1,688,911
$
280,871
$
270,115
268,317
485,006
359,816
291,950
417,171
359,617
1,394,010
1,338,853
38,650
214,906
65,722
—
15,640
40,050
136,329
29,639
29,330
10,982
1,728,928
1,585,183
3,818
2,147
11,395
98,161
(5,941)
(41)
109,539
(4,766)
104,773
3,793
2,163
11,227
91,427
(5,941)
(41)
102,628
1,100
103,728
$ 1,833,701
$ 1,688,911
10
Consolidated Statements of Income
Year Ended December 31,
(dollars in thousands, except share data)
INTEREST INCOME
Loans
Securities available-for-sale
Securities held-to-maturity
Federal funds sold and interest-bearing deposits in other banks
Total interest income
INTEREST EXPENSE
Savings and NOW deposits
Money market accounts
Time deposits (note 8)
Securities sold under agreements to repurchase
Other borrowed funds and long term debt
Total interest expense
Net interest income
Provision for loan losses (note 6)
Net interest income after provision for loan losses
OTHER OPERATING INCOME
Service charges on deposit accounts
Lockbox fees
Brokerage commissions
Net (losses) gains on sales of securities
Other income
Total other operating income
OPERATING EXPENSES
Salaries and employee benefits (note 13)
Occupancy
Equipment
Other (note 16)
Total operating expenses
Income before income taxes
Provision for income taxes (note 12)
Retroactive REIT settlement (note 12)
Net income
SHARE DATA (NOTE 11)
Weighted average number of shares outstanding, basic
Weighted average number of shares outstanding, diluted
Net income per share, basic
Net income per share, diluted
See accompanying Notes to Consolidated Financial Statements.
2004
2003
2002
$
33,384
$
18,529
12,296
824
65,033
2,268
5,010
6,833
331
9,204
23,646
41,387
300
41,087
5,271
2,950
670
(91)
1,631
10,431
23,266
2,997
2,380
9,020
37,663
13,855
4,974
—
33,134
28,738
7,152
274
69,298
2,586
5,111
7,246
457
8,542
23,942
45,356
450
44,906
4,782
3,186
579
1
1,461
10,009
21,763
2,648
1,703
8,158
34,272
20,643
7,780
1,183
$
35,953
27,311
7,150
710
71,124
3,183
4,730
6,841
696
9,268
24,718
46,406
1,200
45,206
4,418
3,463
1,038
—
1,347
10,266
21,709
2,301
2,134
7,945
34,089
21,383
7,879
—
$
8,881
$
11,680
$
13,504
5,526,202
5,553,197
$
1.61
1.60
5,519,800
5,548,615
$
2.12
2.11
5,516,590
5,534,059
$
2.45
2.44
Consolidated Statements of Changes in Stockholders’ Equity
11
Class A
Common
Stock
Class B
Common
Stock
Additional
Paid-In
Capital
Retained
Earnings
Treasury
Stock
Class A
Treasury
Stock
Class B
Accumulated
Other
Total
Comprehensive
Stockholders’
Income (Loss)
Equity
(dollars in thousands, except share data)
BALANCE, DECEMBER 31, 2001
$ 3,761
$ 2,186
$ 11,094
$ 70,122
$ (5,941)
$ (41)
$ 3,418
$ 84,599
Net income
Other comprehensive income, net of tax:
Unrealized holding gains arising
during period, net of $2,150 in taxes
Comprehensive income
Conversion of Class B Common Stock
to Class A Common Stock, 17,820 shares
Stock options exercised, 2,075 shares
Cash dividends paid, Class A Common
Stock, $0.42 per share
Cash dividends paid, Class B Common
Stock, $0.21 per share
—
—
18
2
—
—
—
—
(18)
—
—
—
—
—
—
29
—
—
13,504
—
—
—
(1,426)
(445)
—
—
—
—
—
—
—
—
—
—
—
—
—
13,504
3,993
3,993
17,497
—
31
(1,426)
(445)
—
—
—
—
BALANCE, DECEMBER 31, 2002
3,781
2,168
11,123
81,755
(5,941)
(41)
7,411
100,256
Net income
Other comprehensive income, net of tax:
Unrealized holding losses arising
during period, net of $3,200 in taxes
Comprehensive income
Conversion of Class B Common Stock
to Class A Common Stock, 5,010 shares
Stock options exercised, 7,013 shares
Cash dividends paid, Class A Common
Stock, $0.45 per share
Cash dividends paid, Class B Common
Stock, $0.225 per share
—
—
5
7
—
—
—
—
(5)
—
—
—
—
—
—
104
—
—
11,680
—
—
—
(1,532)
(476)
—
—
—
—
—
—
—
—
—
—
—
—
—
11,680
(6,311)
(6,311)
5,369
—
111
(1,532)
(476)
—
—
—
—
BALANCE, DECEMBER 31, 2003
3,793
2,163
11,227
91,427
(5,941)
(41)
1,100
103,728
Net income
Other comprehensive income (loss), net of tax:
Unrealized holding losses arising
during period, net of $2,741 in taxes
Less: reclassification adjustment for gains
included in net income, net of $36 in taxes
Minimum pension liability adjustment
Comprehensive income
Conversion of Class B Common Stock to
Class A Common Stock, 15,460 shares
Stock options exercised, 9,650 shares
Cash dividends paid, Class A Common
Stock, $0.48 per share
Cash dividends paid, Class B Common
Stock, $0.24 per share
—
—
—
—
16
9
—
—
—
—
—
—
(16)
—
—
—
—
—
—
—
—
168
—
—
8,881
—
—
—
—
—
(1,642)
(505)
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
8,881
(4,164)
(4,164)
55
55
(1,757)
(1,757)
3,015
—
177
(1,642)
(505)
—
—
—
—
BALANCE, DECEMBER 31, 2004
$ 3,818
$ 2,147
$ 11,395
$ 98,161
$ (5,941)
$ (41)
$ (4,766)
$ 104,773
See accompanying Notes to Consolidated Financial Statements
12
Consolidated Statements of Cash Flows
Year Ended December 31,
(dollars in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income
Adjustments to reconcile net income to net cash provided by operating activities:
2004
2003
2002
$
8,881
$
11,680
$
13,504
Provision for loan losses
Deferred income taxes
Net depreciation and amortization
Decrease (increase) in accrued interest receivable
Increase in other assets
Loans originated for sale
Proceeds from sales of loans
Gain on sales of loans
Loss (gain) on sales of securities available-for-sale
Gain on sale of building
Increase (decrease) in other liabilities
Net cash provided by operating activities
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from calls/maturities of securities available-for-sale
Proceeds from sales of securities available-for-sale
Purchase of securities available-for-sale
Proceeds from calls/maturities of securities held-to-maturity
Purchase of securities held-to-maturity
(Decrease) increase in investments purchased payable
Net (increase) decrease in loans
Proceeds from sale of building
Capital expenditures
Net cash used in investing activities
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in time deposit accounts
Net increase in demand, savings, money market and NOW deposits
Net proceeds from the exercise of stock options
Cash dividends
Net decrease in securities sold under agreements to repurchase
Net increase (decrease) in other borrowed funds
Increase in subordinated debentures
Net cash provided by financing activities
Net increase (decrease) in cash and cash equivalents
Cash and cash equivalents at beginning of year
300
470
1,848
1,650
(4,368)
—
—
—
91
—
1,699
10,571
389,172
88,198
(390,398)
56,930
(204,309)
(29,330)
(67,639)
—
(6,728)
(164,104)
199
54,958
177
(2,147)
(1,400)
78,577
36,083
166,447
12,914
225,321
450
(1,416)
1,754
920
(6,639)
(267)
270
(3)
(1)
—
(6,614)
134
665,635
—
(616,783)
125,254
(195,991)
(13,739)
2,102
—
(10,217)
(43,739)
137,292
55,277
112
(2,008)
(11,750)
(33,091)
889
146,721
103,116
122,205
1,200
(5,690)
1,822
(1,809)
(4,318)
—
73
(1)
—
(359)
6,702
11,124
324,502
—
(618,946)
63,494
(48,113)
4,093
(50,883)
1,020
(2,854)
(327,687)
3,049
254,827
31
(1,871)
(21,040)
25,939
—
260,935
(55,628)
177,833
Cash and cash equivalents at end of year
$ 238,235
$ 225,321
$ 122,205
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest
Income taxes
Net unrealized holding (losses) gains arising during period, net of taxes
See accompanying Notes to Consolidated Financial Statements
$
$
23,165
4,600
(4,109)
$
$
24,102
15,632
(6,311)
$
$
24,668
8,367
3,993
Notes to Consolidated Financial Statements
13
1. Summary of Significant Accounting Policies
BASIS OF FINANCIAL STATEMENT PRESENTATION
INVESTMENT SECURITIES
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 consolidated financial state-
ments also include the accounts of the Bank’s wholly-owned subsidiaries,
Century Subsidiary Investments, Inc. (CSII), Century Subsidiary
Investments, Inc. II (CSII II), Century Subsidiary Investments, Inc. III (CSII
III) and Century Financial Services Inc. (CFSI). CSII, CSII II, CSII III are
engaged in buying, selling and holding investment securities. CFSI has
the power to engage in financial agency, securities brokerage and
investment and financial advisory services and related securities credit.
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.
The Company also owns 100% of Century Bancorp Capital Trust (CBCT)
and CBCT II. The entities are unconsolidated subsidiaries of the Company.
All significant intercompany accounts and transactions have been
eliminated in consolidation. The Company provides a full range of
banking services to individual, business and municipal customers in
Massachusetts. As a bank holding company, the Company is subject to
the regulation and supervision of the Federal Reserve Board. The Bank,
a state chartered financial institution, is subject to supervision and
regulation by applicable state and federal banking agencies, including
the Federal Reserve Board, the Federal Deposit Insurance Corporation
(the “FDIC”) and the Commonwealth of Massachusetts Commissioner of
Banks. The Bank is also subject to various requirements and restrictions
under federal and state law, including requirements to maintain reserves
against deposits, restrictions on the types and amounts of loans that may
be granted and the interest that may be charged thereon, and limitations
on the types of investments that may be made and the types of services
that may be offered. Various consumer laws and regulations also affect
the operations of the Bank. In addition to the impact of regulation,
commercial banks are affected significantly by the actions of the Federal
Reserve Board as it attempts to control the money supply and credit
availability in order to influence the economy. All aspects of the
Company’s business are highly competitive. The Company faces aggressive
competition from other lending institutions and from numerous other
providers of financial services. The Company has one reportable
operating segment.
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.
Certain reclassifications were made to prior year amounts to conform
with the current year presentation.
Premiums and discounts on investment securities are amortized or accreted
into income by use of the level-yield method, which approximates the
effective 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 write down
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.
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.
14
Notes to Consolidated Financial Statements
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
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.
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.
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.
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 “cost” of the option is estimated on the date of
grant using an option valuation model and recognized as compensation
expense over the vesting period of the option. Any change from the
intrinsic value method to the fair value method of accounting for stock
options is required to be applied prospectively for options granted after
the date of change in method which must be as of the beginning of a
fiscal year. The Company generally awards stock options annually.
Had compensation cost for the Company’s stock option plans been
determined based on the fair value at the grant date, the Company’s net
income and earnings per share would have been reduced to the pro
forma amounts indicated below:
December 31,
2004
2003
2002
(dollars in thousands, except share data)
Net income:
As reported
Less:
Pro forma stock based
compensation cost
(net of tax):
Pro forma and diluted
Basic earning per share
As reported
Pro forma
Diluted earnings per share
As reported
Pro forma
$
8,881
$ 11,680
$ 13,504
$
$
$
$
$
$
151
$
140
$
98
8,730
$ 11,540
$ 13,406
1.61
1.58
1.60
1.57
$
$
$
$
2.12
2.09
2.11
2.08
$
$
$
$
2.45
2.43
2.44
2.42
In determining the pro forma amounts, the fair value of each option
grant was estimated as of the date of grant using Black-Scholes
option-pricing model with the following weighted average assumptions:
December 31,
Dividend yields
Expected life
Expected volatility
Risk-free interest rate
INCOME TAXES
2004
2003
2002
1.59)%
1.69)%
1.91)%
9 years
8 years
8 years
28)%
3.95)%
26)%
3.78)%
19)%
5.37)%
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 $725,000 at
December 31, 2004 and $650,000 at December 31, 2003.
Notes to Consolidated Financial Statements
15
3. Securities Available-for-Sale
December 31, 2004
December 31, 2003
Gross
Gross
Estimated
Gross
Gross
Estimated
Amortized
Unrealized
Unrealized Market
Amortized
Unrealized
Unrealized
Cost
Gains
Losses
Value
Cost
Gains
Losses
Market
Value
(dollars in thousands)
U.S. Government and Agencies
$ 384,504
$
Mortgage-backed securities
Obligations of states and
political subdivisions
FHLB stock
Other
187,170
499
13,895
28,661
182
165
—
—
174
$ 3,824
$ 380,862
$ 674,766
$ 3,981
$ 2,253
$ 676,494
1,577
185,758
—
—
43
499
13,895
28,792
8,977
—
13,084
4,617
209
—
—
278
145
—
—
179
9,041
—
13,084
4,716
$ 614,729
$
521
$ 5,444
$ 609,806
$ 701,444
$ 4,468
$ 2,577
$ 703,335
December 31, 2002
Gross
Gross
Estimated
Amortized
Unrealized
Unrealized
Cost
Gains
Losses
Market
Value
(dollars in thousands)
U.S. Government and Agencies
$
701,964
$ 10,631
$
— $
712,595
Mortgage-backed securities
Obligations of states and
political subdivisions
FHLB stock
Other
29,911
907
390
13,084
4,780
—
—
52
—
—
—
188
30,818
390
13,084
4,644
$
750,129
$ 11,590
$
188
$
761,531
During the year ended December 31, 2004 a total of $42,123,000
available-for-sale securities were sold for a gross gain of $692,000.
A total of $46,075,000 available-for-sale securities were sold for a
gross loss of $783,000.
Included in U.S. Government and Agency securities are securities pledged
to secure public deposits and repurchase agreements amounting to
$42,486,000 at December 31, 2004. Also included are securities
pledged for borrowing at the Federal Home Loan Bank amounting
to $295,396,000 at December 31, 2004.
The following table shows the temporary impaired securities of the
Company’s securities available-for-sale portfolio at December 31, 2004.
This table shows the unrealized market loss of securities that have been
in a continuous unrealized loss position for 12 months or less and a
continuous loss position for 12 months and longer. There are 93 and 9
securities that are temporarily impaired for less than 12 months and for
12 months or longer, respectively out of a total of 176 holdings at
December 31, 2004. The Company believes that the investments are
temporarily impaired.
Temporarily Impaired Investments*
December 31, 2004
(dollars in thousands)
U.S. Government and Agencies
Mortgage-backed securities
Other
Less than 12 months
12 months or longer
Total
Unrealized
Unrealized
Unrealized
Fair Value
Losses
Fair Value
Losses
Fair Value
Losses
$ 238,849
$ 3,064
$ 29,232
$ 760
$ 268,081
$ 3,824
161,567
25,990
1,436
12
4,258
1,519
141
31
165,825
27,509
1,577
43
Total temporarily impaired securities
$ 426,406
$ 4,512
$ 35,009
$ 932
$ 461,415
$ 5,444
* The decline in market value is attributable to changes in interest rates and not credit quality and because the Company has the ability and intent to hold these investments until recovery of fair value,
which may be maturity, the Company does not consider these investments to be other-than-temporarily impaired at December 31, 2004.
The following table shows the maturity distribution of the Company’s securities available-for-sale at December 31, 2004 and the weighted average
yields of securities, which are based on the amortized cost, calculated on a fully taxable equivalent basis.
U.S. Government
Mortgage
Backed
Obligations of States
and Political
Subdivisions
and Agencies
Yield
Securities
Yield
and Other
Yield
Total
Yield
Estimated
Market
Value
(dollars in thousands)
DECEMBER 31, 2004
Within one year
$ 69,637
2.39)%
$
—
0.00)% $ 25,579
2.27)% $ 95,216
2.35)% $ 95,154
After one but within five years
After five but within ten years
Non-maturing
299,869
14,998
—
2.85)
4.18)
0.00
187,170
—
—
4.09)
0.00)
0.00)
700
—
16,776
4.04)
0.00)
2.95
487,739
14,998
16,776
3.33)
4.18)
2.95)
482,688
15,057
16,907
$ 384,504
2.82)%
$ 187,170
4.09)% $ 43,055
2.56)% $ 614,729
3.19)% $ 609,806
16
Notes to Consolidated Financial Statements
The weighted average remaining life of investment securities available-for-
sale at December 31, 2004, 2003 and 2002 was 2.7, 3.5 and 2.9
years, respectively. Included in the weighted average remaining life
calculation at December 31, 2004 and 2003, there were 134.1 million
and 545.8 million, respectively of U.S. agency obligations that are
callable at the discretion of the issuer. These call dates were not utilized
in computing the weighted average remaining life.
4. Investment Securities Held-to-Maturity
December 31, 2004
December 31, 2003
Gross
Gross
Estimated
Gross
Gross
Estimated
Amortized
Unrealized
Unrealized Market
Amortized
Unrealized
Unrealized
Cost
Gains
Losses
Value
Cost
Gains
Losses
Market
Value
(dollars in thousands)
U.S. Government and Agencies
$ 186,324
$
Mortgage-backed securities
Other
159,045
—
175
589
—
$ 1,609
$ 184,890
$
6,400
$
278
$ —
$
6,678
1,125
158,509
—
—
191,447
25
1,548
—
908
—
192,087
25
$ 345,369
$
764
$ 2,734
$ 343,399
$ 197,872
$ 1,826
$ 908
$ 198,790
December 31, 2002
Gross
Gross
Estimated
Amortized
Unrealized
Unrealized
Cost
Gains
Losses
Market
Value
(dollars in thousands)
U.S. Government and Agencies
$
Mortgage-backed securities
Other
76,430
50,754
25
$
1,442
1,363
—
$
127,209
$
2,805
$
$
— $
—
—
77,872
52,117
25
— $
130,014
Included in U.S. Government and Agency securities are securities pledged
to secure public deposits amounting to $6,000,000 at December 31,
2004. Also included are securities pledged for borrowing at the Federal
Home Loan Bank amounting to $165,445,000 at December 31, 2004.
The following table shows the temporary impaired securities of the
Company’s securities held-to-maturity portfolio at December 31, 2004.
This table shows the unrealized market loss of securities that have been
in a continuous unrealized loss position for 12 months or less and a
continuous loss position for 12 months and longer. There are 50 and 5
securities temporarily impaired for less than 12 months and for 12 months
or longer, respectively out of a total of 98 holdings at December 31, 2004.
The Company believes that the investments are temporarily impaired.
Temporarily Impaired Investments*
December 31, 2004
(dollars in thousands)
U.S. Government and Agencies
Mortgage-backed securities
Less than 12 months
12 months or longer
Total
Unrealized
Unrealized
Unrealized
Fair Value
Losses
Fair Value
Losses
Fair Value
Losses
$ 133,367
$ 1,609
$
—
$
— $ 133,367
$ 1,609
74,165
673
15,678
452
89,843
1,125
Total temporarily impaired securities
$ 207,532
$ 2,282
$ 15,678
$
452
$ 223,210
$ 2,734
* The decline in market value is attributable to changes in interest rates and not credit quality and because the Company has the ability and intent to hold these investments until recovery of fair value,
which may be maturity, the Company does not consider these investments to be other-than-temporarily impaired at December 31, 2004.
Notes to Consolidated Financial Statements
17
The following table shows the maturity distribution of the Company’s securities held-to-maturity at December 31, 2004 and the weighted average yields
of securities, which are based on the amortized cost, calculated on a fully taxable equivalent basis.
(dollars in thousands)
DECEMBER 31, 2004
Within one year
After one but within five years
U.S. Government
and Agencies
Yield
Mortgage
Backed
Securities
Yield
Total
Yield
Estimated
Market
Value
$
6,400
179,924
5.02)%
3.39)
$
—
159,045
0.00)%
4.18)
$
6,400
338,969
5.13)%
$
6,439
3.76)
336,960
$ 186,324
3.45)%
$ 159,045
4.18)%
$ 345,369
3.79)%
$ 343,399
The weighted average remaining life of investment securities held-to-
maturity at December 31, 2004, 2003 and 2002 was 3.3, 3.5 and
3.2 years, respectively. Included in the weighted average remaining
life calculation at December 31, 2004 and 2003, were $139.9 and
$0 million, respectively of U.S. agency obligations that are callable at the
discretion of the issuer. These call dates were not utilized in computing
the weighted average remaining life.
5. Loans
The Company's lending activities are conducted principally in
Massachusetts. The Company 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,
2004
2003
2002
2001
2000
Amount
Percent
of Total
Amount
Percent
of Total
Amount
Percent
of Total
Amount
Percent
of Total
Amount
Percent
of Total
Construction and
land development
$ 51,918
9.0)%
$ 34,121
6.7)%
$ 33,155
6.4)%
$ 39,256
8.5)%
$ 21,840
5.0)%
Commercial and industrial
Industrial revenue bonds
Commercial real estate
Residential real estate
Consumer
Home equity
Overdrafts
71,962
12.4)
—
258,524
118,223
8,607
69,957
812
0.0)
44.6)
20.4)
1.5)
12.0)
0.1)
39,742
—
293,781
86,780
8,025
49,382
483
7.8)
0.0)
57.3)
16.9)
1.6)
9.6)
0.1)
46,044
—
291,598
92,291
8,169
41,527
1,465
9.0)
0.0)
56.7)
17.9)
1.6)
8.1)
0.3)
59,162
48
241,419
88,450
7,701
26,016
720
12.8)
0.0)
52.2)
19.1)
1.7)
5.6)
0.1)
95,957
119
209,233
81,526
9,226
21,107
555
21.8)
0.0)
47.7)
18.5)
2.1)
4.8)
0.1)
$ 580,003
100.0)%
$ 512,314
100.0)%
$ 514,249
100.0)%
$ 462,772
100.0)%
$ 439,563
100.0)%
At December 31, 2004, 2003, 2002, 2001 and 2000 loans were
carried net of discounts of $20,000, $138,000, $492,000, $969,000
and $1,446,000, respectively. Included in these amounts at December
31, 2004, 2003, 2002, 2001 and 2000, residential real estate loans
were carried net of discounts of $16,000, $133,000, $487,000,
$959,000 and $1,431,000, respectively, associated with the acquisition
of loans from another financial institution.
18
Notes to Consolidated Financial Statements
The following table summarizes the remaining maturity distribution of
certain components of the Company’s loan portfolio on December 31,
2004. 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, 2004
One Year
One to Five
Over
or Less
Years
Five Years
Total
(dollars in thousands)
Construction and land development
$ 20,606
$ 20,609
$ 10,703
$ 51,918
Commercial and industrial
Commercial real estate
39,901
22,066
23,593
8,468
71,962
106,654
129,804
258,524
Total
$ 82,573
$ 150,856
$ 148,975
$ 382,404
The following table indicates the rate variability of the above loans due after one year.
December 31, 2004
(dollars in thousands)
One to Five
Over
Years
Five Years
Total
Predetermined interest rates
$ 92,610
$ 22,569
$ 115,179
Floating or adjustable interest rates
58,246
126,406
184,652
Total
$ 150,856
$ 148,975
$ 299,831
The Company’s commercial and industrial (C&I) loan customers
represent various small and middle-market established businesses and
institutions involved in manufacturing, distribution, retailing and services.
Most clients are privately owned with markets that range from local to
national in scope. Many of the loans to this segment are secured by
liens on corporate assets and the personal guarantees of the principals.
The Bank has placed greater emphasis on building its C&I base in the
future. The regional economic strength or weakness impacts the relative
risks in this loan category. There is little concentration to any one business
sector and loan risks are generally diversified among many borrowers.
Commercial real estate loans are extended to finance various
manufacturing, warehouse, light industrial, office, retail, residential
properties and properties of non-profit organizations in the Bank’s
market area, which generally includes Eastern Massachusetts, Rhode
Island and Southern New Hampshire. Loans are normally extended in
amounts up to a maximum of 80% of appraised value and normally
for terms between three to five years. Amortization schedules are
long-term and thus a balloon payment is due at maturity. Under most
circumstances, the Bank will offer to re-write or otherwise extend the
loan at prevailing interest rates. During recent years, the Bank
has emphasized non-residential type owner-occupied properties.
This compliments our C&I emphasis placed on the operating business
entities and will be continued. The regional economic environment
affects the risk of both non-residential and residential mortgages.
Residential real estate (1-4 family) includes two categories of loans.
Approximately $6,542,000 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. This category of loans shares
similar risk characteristics with the C&I loans, notwithstanding the
collateral position.
The other category of residential real estate loans are mostly 1-4 family
residential properties located in the Bank’s market area. General
underwriting criteria are largely the same as those used by Fannie Mae
but normally only one or three year adjustable interest rates are used.
The Bank utilizes mortgage insurance to provide lower down payment
products and has provided a “First Time Homebuyer” product to
encourage new home ownership. Residential real estate loan volume
has increased and remains a core consumer product. The economic
environment impacts the risks associated with this category. This year, the
economy has deteriorated, and the market has generally been volatile.
Home equity loans are extended as both first and second mortgages on
owner occupied residential properties in the Bank’s market area. Loans
are underwritten to a maximum loan to property value of 80%.
The Bank intends to maintain a market for construction loans, principally
for smaller local residential projects or an owner-occupied commercial
project. Individual consumer residential home construction loans are also
extended on a similar basis.
Bank officers evaluate the feasibility of construction projects, based on
independent appraisals of the project, architects or engineers evaluations
of the cost of construction and other relevant data. As of December 31,
2004, the Company was obligated to advance a total of $33,754,000
to complete projects under construction.
The composition of non-accrual loans, impaired loans & troubled debt restructuring agreements is as follows:
2004
2003
2002
2001
2000
Notes to Consolidated Financial Statements
19
(dollars in thousands)
Loans on non-accrual
Impaired loans on non-accrual included above
Total recorded investment in impaired loans
Average recorded value of impaired loans
Loans 90 days past due and still accruing
Interest income on non-accrual loans according to their original terms
Interest income on non-accrual loans actually recorded
Interest income recognized on impaired loans
The composition of impaired loans at December 31, is as follows:
Residential real estate:
1-4 family
Multi-family
Commercial real estate
Commercial and industrial
Total
Specific valuation allowance
Total impaired loans
$
$
$
$
$
$
$
$
$
628
452
964
$
$ 1,156
160
66
—
105
$ 1,175
$ 1,137
$ 1,678
$ 2,043
$
$
$
$
—
100
70
116
$
$
511
487
$ 1,116
$ 1,273
$
$
$
$
—
50
—
60
2004
2003
2002
—
512
—
452
964
—
964
$
60
541
—
1,077
$ 1,678
—
$ 1,678
$
—
629
487
—
$ 1,116
—
$ 1,116
$
$
423
292
$ 1,118
$ 2,149
$
$
$
$
$
9
43
32
116
2001
29
656
433
—
$
$
110
41
$ 1,535
$ 2,919
$
$
$
$
$
19
19
9
160
2000
41
681
782
31
$ 1,118
—
$ 1,118
$ 1,535
—
$ 1,535
There were no impaired loans with specific reserves from December 31,
2000 through December 31, 2004, and in the opinion of management,
none of the above listed impaired loans required a specific reserve.
All of the impaired loans listed above have been measured using the fair
value of the collateral method.
The Company was servicing mortgage loans sold to others without
recourse of approximately $1,538,000, $2,397,000, $4,444,000,
$6,888,000 and $10,199,000 at December 31, 2004, 2003, 2002,
2001 and 2000, respectively. Additionally, the Company was servicing
mortgage loans sold to others with limited recourse. The outstanding
balance of these loans with limited recourse was approximately
$86,000, $183,000, $194,000, $338,000 and $479,000 at
December 31, 2004, 2003, 2002, 2001 and 2000, 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 2004.
Balance at
Repayments
Balance at
December 31, 2003
Additions
and Deletions
December 31, 2004
(dollars in thousands)
$ 1,527
$ 433
$ 478
$ 1,482
Loans are placed on non-accrual 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 Company.
The relatively low level of nonperforming assets of $628,000 in 2004
and $1,175,000 in 2003 resulted from fewer additions to nonperforming
assets during the year combined with an improvement in the resolution
of nonperforming assets including payments on nonperforming loans.
In addition to the above, as of December 31, 2004, the Company
continues to monitor closely $7,883,000 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, 2004, although such values can fluctuate with changes in the
economy and the real estate market.
Included in residential real estate loans are loans pledged for borrowing
at the Federal Home Loan Bank amounting to $107,957,000.
20
Notes to Consolidated Financial Statements
6. Allowance for Loan Losses
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,
(dollars in thousands)
Year-end loans outstanding
(net of unearned discount)
Average loans outstanding
(net of unearned discount)
Balance of allowance for loan
losses at beginning of year
Loans charged-off:
Commercial
Commercial real estate
Residential real estate
Consumer
Total loans charged-off:
Recovery of loans previously charged-off:
Commercial
Real estate
Consumer
Total recoveries of loans previously charged-off:
Net loan charge-offs (recoveries)
Additions to allowance charged to operating expense
Balance at end of year
Ratio of net charge-offs during
the year to average loans outstanding
Ratio of allowance for loan losses
to loans outstanding
2004
2003
2002
2001
2000
$ 580,003
$ 512,314
$ 514,249
$ 462,772
$ 439,563
$ 546,147
$ 500,723
$ 488,465
$ 443,395
$ 434,780
$
8,769
$
8,506
$
7,112
$
5,662
$
7,646
1
—
194
113
308
117
103
20
240
68
300
240
—
—
125
365
127
29
22
178
187
450
—
58
—
87
145
276
—
63
339
27
343
12
55
437
154
184
49
387
(194)
1,200
50
1,500
3,522
—
—
139
3,661
26
195
31
252
3,409
1,425
$
9,001
$
8,769
$
8,506
$
7,112
$
5,662
0.01)%
0.04)%
(0.04)%
0.01)%
0.78)%
1.55)%
1.71)%
1.65)%
1.54)%
1.29)%
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 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.
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. The unallocated reserve was allocated proportionately
among the listed loan categories. At December 31 of each year listed
below, the allowance was allocated as follows:
2004
2003
2002
2001
2000
Percent
of loans
in each
category
to total
loans
Amount
Percent
of loans
in each
category
to total
loans
Amount
(dollars in thousands)
Construction and land development
$
988
9.0%
$
701
Commercial and industrial
Commercial real estate
Residential real estate
Consumer and other
Home equity
1,480 12.4%
4,518 44.6%
1,045 20.4%
177
1.6%
793 12.0%
1,048
5,364
904
165
587
6.7%
7.8%
57.3%
16.9%
1.7%
9.6%
Percent
of loans
in each
category
to total
loans
6.4%
9.0%
56.7%
17.9%
1.9%
8.1%
Amount
$
497
1,106
4,941
1,160
210
592
Percent
of loans
in each
category
to total
loans
8.5%
12.8%
52.2%
19.1%
1.8%
5.6%
Amount
$
605
1,257
3,786
955
173
336
Percent
of loans
in each
category
to total
loans
5.0%
21.8%
47.6%
18.5%
2.3%
4.8%
Amount
$
285
1,200
1,923
726
1,298
230
$ 9,001 100.0%
$ 8,769
100.0%
$ 8,506
100.0%
$ 7,112
100.0%
$ 5,662
100.0%
Notes to Consolidated Financial Statements
21
7. Bank Premises and Equipment
December 31,
(dollars in thousands)
Land
Bank premises
Construction in progress (note 14)
Furniture and equipment
Leasehold improvements
Accumulated depreciation and amortization
2004
2003
2002
Estimated Useful Life
$ 3,650
6,198
11,766
19,740
5,083
46,437
(20,172)
$ 3,650
6,198
7,506
17,969
4,446
39,769
(18,180)
$ 3,607
6,198
—
16,377
3,483
29,665
(16,737)
$ 26,265
$ 21,589
$ 12,928
—
30-39 years
3-10 years
30-39 years or lease term
The Company and its subsidiaries are obligated under a number of
noncancelable operating leases for premises and equipment expiring
in various years through 2026. Total lease expense approximated
$1,084,000, $886,000 and $711,000 for the years ended December
31, 2004, 2003 and 2002, respectively.
Future minimum rental commitments for noncancelable operating leases
with initial or remaining terms of one year or more at December 31,
2004 were as follows:
(dollars in thousands)
Year
Amount
2005
2006
2007
2008
2009
Thereafter
$ 1,088
982
970
900
701
1,551
$ 6,192
8. Deposits
The Company offers savings accounts, NOW accounts, demand
deposits, time deposits and money market accounts. The Company
offers cash management accounts which provide either automatic
transfer of funds above a specified level from the customer’s checking
account to a money market account or short-term borrowings. Also, an
account reconciliation service is offered, whereby the Company provides
a computerized report balancing the customer’s checking account.
Interest rates on deposits are set bi-monthly by the Bank’s rate-setting
committee, based on factors including loan demand, maturities and a
review of competing interest rates offered. Interest rate policies are
reviewed periodically by the Executive Management Committee.
Time Deposits as of December 31, are as follows:
(dollars in thousands)
Three months or less
Three months through twelve months
Over twelve months
2004
2003
2002
$ 206,518
72,382
80,916
$ 359,816
$ 207,180
85,651
66,786
$ 359,617
$
82,741
66,096
73,488
$ 222,325
22
Notes to Consolidated Financial Statements
Time Deposits of $100,000 or more as of December 31, are as follows:
(dollars in thousands)
Three months or less
Three months through twelve months
Over twelve months
2004
2003
2002
$ 169,423
23,442
20,428
$ 213,293
$ 165,198
10,855
3,759
$ 179,812
$ 43,261
7,933
1,079
$ 52,273
9. Securities Sold Under Agreements to Repurchase
(dollars in thousands)
Amount outstanding at December 31,
Weighted average rate at December 31,
Maximum amount outstanding at any month end
Daily average balance outstanding during the year
Weighted average rate during the year
2004
2003
2002
$ 38,650
$ 40,050
$ 51,800
0.97)%
0.77)%
1.00)%
$ 49,700
$ 40,937
$ 58,830
$ 51,402
$ 69,190
$ 61,718
0.81)%
0.89)%
1.13)%
Amounts outstanding at December 31, 2004, 2003 and 2002 carried
maturity dates of the next business day. U.S. Government and Agency
securities with a total book value of $39,460,000, $40,560,000
and $51,176,000 were pledged as collateral and held by custodians
to secure the agreements at December 31, 2004, 2003 and 2002,
respectively. The approximate market value of the collateral at those
dates was $38,989,000, $40,638,000 and $51,994,000, respectively.
10. Other Borrowed Funds and Subordinated Debentures
(dollars in thousands)
Amount outstanding at December 31,
Weighted average rate at December 31,
Maximum amount outstanding at any month end
Daily average balance outstanding during the year
Weighted average rate during the year
FEDERAL HOME LOAN BANK BORROWINGS
2004
2003
2002
$ 280,628
$ 165,968
$ 198,170
4.62)%
4.86)%
4.97)%
$ 280,628
$ 194,932
$ 233,600
$ 170,344
$ 199,163
$ 186,531
4.72)%
5.01)%
4.97)%
Federal Home Loan Bank (“FHLB”) borrowings are collateralized by a blanket pledge agreement on the Bank’s FHLB stock, certain qualified investment
securities, deposits at the Federal Home Loan Bank and residential mortgages held in the Bank’s portfolio. The Bank’s borrowing capacity at the Federal
Home Loan Bank was approximately $230,100,000 at December 31, 2004. In addition, the Bank has a $14,500,000 line of credit with the FHLB.
A schedule of the maturity distribution of FHLB advances with the weighted average interest rates is as follows:
December 31,
2004
2003
2002
(dollars in thousands)
Within 1 year
Over 1 year to 2 years
Over 2 years to 3 years
Over 3 years to 5 years
Over 5 years
Total
Weighted
Average
Amount
Rate
Amount
$ 105,000
1,120
—
51,500
55,500
2.22)%
7.20
0.00
5.25
5.32
$ 35,000
—
1,178
19,500
78,500
$ 213,120
3.79)%
$ 134,178
Weighted
Average
Rate
1.55)%
0.00
7.20
5.38
5.40
4.41)%
Weighted
Average
Rate
2.65)%
0.00
0.00
7.20
5.45
4.28)%
Amount
$ 70,000
—
—
1,233
95,000
$ 166,233
Notes to Consolidated Financial Statements
23
SUBORDINATED DEBENTURES
OTHER BORROWED FUNDS
In December 2004, the Company consummated the sale of a trust preferred
securities offering, in which it issued $36,083,000 of subordinated debt
securities due 2034 to its newly formed unconsolidated subsidiary Century
Bancorp Capital Trust II.
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%. This amount totaled $1,638,000 at December 31, 2004.
The Bank also has an outstanding loan in the amount of $148,000
borrowed against the cash value of a whole life insurance policy for
a key executive of the Bank.
Century Bancorp Capital Trust II then issued 35,000 shares of
Cumulative Trust Preferred Securities with a liquidation value of $1,000
per share. These securities pay dividends at an annualized rate of
6.65% for the first ten years and then convert to the three-month LIBOR
rate plus 1.87% for the remaining twenty years. The total amount of
this issuance was $36,083,000. The Company is using the proceeds
primarily for general business purposes. Also, the Company, through its
subsidiary, Century Bancorp Capital Trust, announced the redemption of
their 8.30% Trust Preferred Securities, with a redemption date of January
10, 2005. The total amount of this redemption is $29,639,000.
11. Stockholders’ Equity
DIVIDENDS
STOCK OPTION PLAN
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. Holders of Class B may vote in the election of
directors. 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 at the option of the holder. Dividend payments by the Company are
dependent in part on the dividends it receives from the Bank, 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 2004, 2003 and 2002 was
an increase of 26,995, 28,815 and 17,469 shares, respectively.
During 2000 and 2004, common stockholders of the Company
approved stock option plans (the “Option Plans”) that provides for
granting of options for not more than 150,000 shares of Class A
common stock per plan. Under the Option Plans, 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 Plans are administered by the Compensation Committee of
the Board of Directors, whose members are ineligible to participate in
the Option Plans. 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 (not more than
ten years from the date of grant). There were 67,486 options exercisable
at December 31, 2004.
Stock option activity under the plan is as follows:
Shares under option:
Outstanding at beginning of year
Granted
Cancelled
Exercised
Outstanding at end of year
Exercisable at end of year
Available to be granted at end of year
Weighted average fair value of
options granted during the year
December 31, 2004
December 31, 2003
December 31, 2002
Weighted
Average
Exercise Price
$ 22.84
32.64
26.68
18.31
Amount
95,062
47,050
(675)
(9,650)
131,787
$ 26.65
67,486
$ 22.22
149,475
$ 10.69
Weighted
Average
Exercise Price
$ 19.52
27.58
15.49
15.93
$ 22.84
$ 18.65
Amount
67,000
35,750
(675)
(7,013)
95,062
42,399
45,850
Weighted
Average
Exercise Price
$ 15.56
23.29
15.063
15.063
$ 19.52
$ 15.63
Amount
36,500
34,075
(1,500)
(2,075)
67,000
15,900
79,425
$
6.84
$
5.99
24
Notes to Consolidated Financial Statements
At December 31, 2004, the 131,787 options outstanding have exercise
prices between $15.063 and $35.010, with a weighted average
exercise price at $26.65 and a weighted average remaining contractual
life of 7 years.
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 judgments 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, 2004, that the Bank meets all capital adequacy
requirements to which it is subject.
As of December 31, 2004, the most recent notification from the FDIC
categorized the Bank as well capitalized under the regulatory framework
for prompt corrective action. To be categorized as well capitalized,
the Bank must maintain minimum total risk-based, Tier risk-based, and
Tier 1 leverage ratios as set forth in the table. There is 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.
As of December 31, 2004
Total capital (to risk-weighted assets)
Tier 1 capital (to risk-weighted assets)
Tier 1 capital (to 4th Qtr. average assets)
As of December 31, 2003
Total capital (to risk-weighted assets)
Tier 1 capital (to risk-weighted assets)
Tier 1 capital (to 4th Qtr. average assets)
Actual
For Capital Adequacy
Purposes
To Be Well Capitalized
Under Prompt Corrective
Action Provisions
Amount
Ratio
Amount
Ratio
Amount
Ratio
$ 116,698
107,697
107,697
13.47%
12.43
6.54
$ 69,312
34,656
65,835
8.00%
4.00%
4.00%
$ 86,640
51,984
82,294
10.00%
6.00%
5.00%
$
113,236
104,467
104,467
15.26%
14.08%
6.70%
$
59,362
29,681
62,353
8.00%
4.00%
4.00%
$
74,203
44,522
77,942
10.00%
6.00%
5.00%
12. Income Taxes
The current and deferred components of income tax expense for the years ended December 31 are as follows:
2004
2003
2002
(dollars in thousands)
Current expense:
Federal
State
Total current expense
Deferred expense (benefit):
Federal
State
Total deferred expense (benefit)
$ 4,277
227
4,504
427
43
470
$ 5,783
4,596
10,379
102
(1,518)
(1,416)
$ 12,936
633
13,569
(5,617)
(73)
(5,690)
Provision for income taxes
$ 4,974
$ 8,963
$ 7,879
Notes to Consolidated Financial Statements
25
Income tax accounts included in other assets and other liabilities at December 31 are as follows:
(dollars in thousands)
Currently receivable (payable)
Deferred income tax asset, net
2004
2003
$
474
8,518
$ 8,992
$
377
5,019
$ 5,396
Income tax expense for the years presented is different from the amounts computed by applying the statutory Federal income tax rate of 35% for 2004,
2003 and 2002 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:
(dollars in thousands)
Federal income tax expense at statutory rates
State income taxes, net of federal income tax benefit
Effect of tax-exempt interest
Other
2004
2003
2002
$ 4,849
176
—
(51)
$ 4,974
$ 7,225
2,001
(1)
(262)
$ 8,963
$ 7,484
364
(10)
41
$ 7,879
Effective tax rate
35.9)%
43.4)%
36.8)%
The following table sets forth the Company’s gross deferred income tax
assets and gross deferred income tax liabilities at December 31:
2004
2003
(dollars in thousands)
Deferred income tax assets:
Allowance for loan losses
Deferred compensation
Unrealized loss on securities
available-for-sale
Unrecognized SERP liability
Acquisition premium
Investments writedown
Deferred gain
Other
Gross deferred
income tax asset
Deferred income tax liabilities:
Unrealized gain on securities
available-for-sale
Accrued dividends
Depreciation
Limited partnerships
Other
Gross deferred income
tax liability
Deferred income tax
asset net
$ 3,765
3,855
$ 3,668
3,431
1,914
1,264
721
33
176
8
—
—
648
61
197
48
11,736
8,053
—
(41)
(1,277)
(1,836)
(64)
(3,218)
8,518
(791)
—
(562)
(1,611)
(70)
(3,034)
5,019
During 2003, the Company incurred a net tax charge of $1,183,000
associated with the Real Estate Investment Trust (“REIT”) settlement.
This charge was the result of an agreement with the Massachusetts
Department of Revenue (“DOR”) settling a dispute related to taxes
that the DOR claimed were owed from the Company’s REIT.
The Company believes that the net deferred tax asset will be realized
in the years in which the temporary differences are expected to be
recovered or settled.
13. Employee Benefits
The Company has a qualified Defined Benefit Pension Plan (the "Plan"),
which is offered to all employees reaching minimum age and service
requirements. An increase in the size of the work force and increased
compensation expense in 2004 resulted in an increase in pension cost.
The measurement date for the Plan is September 30 for each year.
The benefits expected to be paid in each year from 2005-2009 are
$316,000, $329,000, $379,000, $493,000 and $530,000.
The aggregate benefits expected to be paid in the five years from
2010-2014 are $3,200,000. The Company plans to contribute
$1,232,000 to the Plan in 2005.
The weighted-average asset allocation of pension benefit assets at
September 30, were:
Asset Category
Debt securities
Equity securities
Other
2004
66)%
15)%
19)%
2003
80)%
16)%
4)%
The Company has a Supplemental Insurance/Retirement Plan
(the Supplemental Plan), which is limited to certain officers and
employees of the Company. The Supplemental Plan is voluntary
and participants are required to contribute to its cost. Under the
Supplemental Plan, each participant will receive a retirement benefit
based on compensation and length of service. Individual life insurance
policies, which are owned by the Company, are purchased covering
the lives of each participant. Increased compensation expense resulted
in increased cost for the Supplemental Plan.
The measurement date for the Supplemental Plan is September 30
for each year. The benefits expected to be paid in each year from
2005-2009 are $285,000, $337,000, $336,000, $340,000 and
$423,000. The aggregate benefits expected to be paid in the five
years from 2010-2014 are $2,600,000.
26
Notes to Consolidated Financial Statements
(dollars in thousands)
Change in benefit obligation:
Benefit obligation at beginning of year
Service cost
Interest cost
Plan Amendment
Actuarial (gain)/loss
Benefits paid
Defined Benefit Pension Plan
Retirement Plan
Supplemental Insurance /
2004
2003
2004
2003
$ 13,353
714
868
—
(628)
(231)
$ 12,634
692
821
(1,719)
1,131
(206)
$ 13,368
12
869
—
(2,331)
(61)
$ 12,467
100
811
968
(962)
(16)
Benefit obligation at end of year
$ 14,076
$ 13,353
$ 11,857
$ 13,368
Change in plan assets:
Fair value of plan assets at beginning of year
Actual return on plan assets
Employer contributions
Benefits paid
Fair value of plan assets at end of year
Funded status
Unrecognized prior service cost
Unrecognized net actuarial loss
Accrued benefit cost
$ 9,285
224
1,525
(231)
$ 7,783
438
1,270
(206)
$ 10,803
$ 9,285
$ (3,273)
1,441
(4,216)
$ (4,068)
1,446
(4,696)
$ (11,857)
(1,155)
(1,437)
$ (13,368)
(1,219)
(3,941)
$
(498)
$
(818)
$ (9,265)
$ (8,208)
Accumulated benefit obligation
$ 13,037
$ 11,876
$ 11,151
$ 10,101
Weighted average assumptions as of December 31:
Discount rate
Expected return on plan assets
Rate of compensation increase
Components of net periodic benefit cost:
Service cost
Interest cost
Expected return on plan assets
Recognized prior service cost
Recognized net losses
Net periodic cost
6.50)%
8.00)%
4.00)%
$
$
714
868
(597)
(4)
224
6.50)%
8.00)%
4.00)%
692
821
(614)
110
153
6.50)%
N/A
4.00)%
$
$
12
869
—
64
174
6.50)%
N/A
4.00)%
100
811
—
(1)
261
$ 1,205
$ 1,162
$
1,119
$
1,171
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 33.3% for the first 6% of compensation contributed by
each employee. The Company's match totaled $210,900 for 2004,
$218,100 for 2003 and $202,500 for 2002. Administrative costs
associated with the plan are absorbed by the Company.
The Company does not offer any post retirement programs other
than pensions.
14. Commitments and Contingencies
A number of legal claims against the Company arising in the
normal course of business were outstanding at December 31, 2004.
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 or results of operation.
During February 2003, the Company began construction of an addition
to its corporate headquarters building. The property is located adjacent
to its current headquarters in Medford, Massachusetts and will provide
additional corporate office space and an expanded branch banking
floor. The building is scheduled to be completed during the first quarter of
2005 and the current cost estimate, including land costs, is $14.5 million.
As of December 31, 2004, $13.6 million has been expended, this includes
land costs of $1.8 million. The capital expenditure will provide a five-story
addition containing approximately 50 thousand square feet of office and
branch banking space.
Notes to Consolidated Financial Statements
27
15. Financial Instruments With Off-Balance Sheet Risk
16. Other Operating Expenses
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 notational 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,
standby letters of credit and unadvanced portions of construction loans is
represented by the contractual amount of those instruments. The Company
uses the same credit policies in making commitments and conditional
obligations as it does for on-balance sheet instruments. Financial
instruments with off-balance sheet risk at December 31 are as follows:
Contract or Notational Amount
2004
2003
(dollars in thousands)
Financial instruments whose contract
amount represents credit risk:
Commitments to originate
1-4 family mortgages
$
Standby letters of credit
Unused lines of credit
Unadvanced portions
of construction loans
2,511
11,195
128,915
33,754
$
600
4,914
126,825
15,414
Commitments to originate loans, unadvanced portions of construction
loans and unused letters 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.
Year ended December 31,
2004
2003
2002
(dollars in thousands)
Marketing
Processing services
Supplies
Telephone
Postage and delivery
Legal and audit
Consulting
Software maintenance/amortization
Insurance
Director’s fees
FDIC assessment
Core deposit tangible amortization
Capital expense amortization
Other
$ 1,403
1,379
728
583
826
812
316
653
316
258
198
388
—
1,160
$ 1,265
1,292
775
511
735
478
316
743
248
270
208
320
137
860
$ 1,440
1,215
664
434
690
683
399
723
205
192
163
167
311
659
$ 9,020
$ 8,158
$ 7,945
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.
28
Notes to Consolidated Financial Statements
ACCRUED INTEREST RECEIVABLE AND PAYABLE: The carrying amounts for accrued
interest receivable and payable approximate fair values because of the
short-term nature of these financial instruments.
DEPOSITS: The fair value of deposits with no stated maturity is equal to
the carrying amount. The fair value of time deposits is based on the
discounted value of contractual cash flows, applying interest rates
currently being offered on the deposit products of similar maturities.
The fair value estimates for deposits do not include the benefit that results
from the low-cost funding provided by the deposit liabilities compared to
the cost of alternative forms of funding (“deposit base intangibles”).
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.
SUBORDINATED DEBENTURES: The fair value of subordinated debentures is
based on the discounted value of contractual cash flows. The discount
rate used is estimated based on the rates currently for other subordinated
debentures of similar remaining maturities.
OFF-BALANCE SHEET INSTRUMENTS: The fair values of the Company’s unused
lines of credit and unadvanced portions of construction loans, 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 carrying amounts and fair values of the Company’s financial instruments at December 31 are as follows:
2004
Carrying
Amounts
Fair
Value
2003
Carrying
Amounts
Fair
Value
$
238,235 $
609,806
345,369
571,002
6,800
238,235
609,806
343,399
565,539
6,800
$
225,321
703,335
197,872
503,545
8,450
$
225,321
703,335
198,790
506,232
8,450
1,394,010
1,397,901
1,338,853
1,346,713
253,556
65,722
2,305
255,036
65,801
2,305
176,379
29,639
1,016
176,557
30,469
1,016
—
136
—
100
(dollars in thousands)
Financial assets:
Cash and cash equivalents
Securities available-for-sale
Securities held-to-maturity
Net loans
Accrued interest receivable
Financial liabilities:
Deposits
Repurchase agreement
and other borrowed funds
Subordinated debentures
Accrued interest payable
Standby letters of credit
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.
Notes to Consolidated Financial Statements
29
18. Quarterly Results of Operations (unaudited)
2004 Quarters
Fourth
Third
Second
First
(dollars in thousands, except per share data)
Interest income
Interest expense
Net interest income
Provision for loan losses
Net interest income after provision for loan losses
Other operating income
Operating expenses
Income before income taxes
Provision for income taxes
Net income
Share data:
Average shares outstanding, basic
Average shares outstanding, diluted
Earnings per share, basic
Earnings per share, diluted
2003 Quarters
(dollars in thousands, except per share data)
Interest income
Interest expense
Net interest income
Provision for loan losses
Net interest income after provision for loan losses
Other operating income
Operating expenses
Income before income taxes
Provision for income taxes
Net income
Share data:
Average shares outstanding, basic
Average shares outstanding, diluted
Earnings per share, basic
Earnings per share, diluted
$
$
$
$
16,892
6,578
10,314
150
10,164
2,432
9,452
3,144
1,117
2,027
5,528,008
5,547,913
0.37
0.37
Fourth
16,560
5,613
10,947
—
10,947
2,518
8,313
5,152
1,953
3,199
5,523,403
5,560,317
0.58
0.58
$
$
$
$
$
$
$
$
16,077
5,561
10,516
150
10,366
2,501
9,587
3,280
1,147
2,133
5,526,438
5,552,202
0.39
0.38
$
$
$
$
16,102
5,502
10,600
—
10,600
2,745
9,560
3,785
1,382
2,403
5,525,665
5,553,500
0.44
0.43
$
15,962
6,005
9,957
—
9,957
2,753
9,064
3,646
1,328
2,318
5,524,659
5,557,984
0.42
0.42
$
$
$
Third
Second
First
$
$
$
$
16,889
5,807
11,082
—
11,082
2,455
8,401
5,136
1,939
3,197
5,520,025
5,553,470
0.58
0.58
$
$
$
$
18,110
6,462
11,648
225
11,423
2,616
9,106
4,933
(147)
5,080
5,518,093
5,517,856
0.92
0.92
$
$
$
$
17,739
6,060
11,679
225
11,454
2,420
8,452
5,422
5,218
204
5,517,616
5,537,151
0.04
0.04
30
Notes to Consolidated Financial Statements
19. Parent Company Financial Statements
The balance sheets of Century Bancorp, Inc. (“Parent Company”) as of December 31, 2004 and 2003 and the statements of income and cash flows for
each of the years in the three-year period ended December 31, 2004 are presented below. The statements of changes in stockholders’ equity are iden-
tical to the consolidated statements of changes in stockholders’ equity and are therefore not presented here.
BALANCE SHEETS
December 31,
(dollars in thousands)
ASSETS:
Cash
Investment in subsidiary, at equity
Other assets
Total assets
LIABILITIES AND STOCKHOLDERS’ EQUITY:
Liabilities
Subordinated debentures
Stockholders’ equity
Total liabilities and stockholders’ equity
STATEMENTS OF INCOME
December 31,
(dollars in thousands)
Income:
Dividends from subsidiary
Interest income from deposits in bank
Other income
Total income
Interest expense
Operating expenses
Income before income taxes and equity in undistributed income of subsidiary
Provision for income taxes
Income before equity in undistributed income of subsidiary
Equity in undistributed income of subsidiary
2004
2003
$
58,704
110,189
2,465
$ 171,358
$
863
65,722
104,773
$ 171,358
$ 21,062
111,356
1,368
$ 133,786
$
419
29,639
103,728
$ 133,786
2004
2003
2002
$
5,786
313
80
6,179
2,653
216
3,310
(873)
4,183
4,698
$
2,825
377
74
3,276
2,460
250
566
(790)
1,356
10,324
$
4,774
575
74
5,423
2,460
451
2,512
(786)
3,298
10,206
Net income
$
8,881
$ 11,680
$ 13,504
STATEMENTS OF CASH FLOWS
Year Ended December 31,
(dollars in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income
Adjustments to reconcile net income to net cash provided by operating activities:
Undistributed income of subsidiary
Depreciation and amortization
Increase in other assets
Increase (decrease) in liabilities
Net cash provided by operating activities
CASH FLOWS FROM FINANCING ACTIVITIES:
Subordinated debt issuance
Capital payment to bank subsidiary
Stock options exercised
Cash dividends paid
Treasury stock repurchases
Net cash provided by (used in) financing activities
Net increase (decrease) in cash
Cash at beginning of year
Cash at end of year
2004
2003
2002
$
8,881
$ 11,680
$ 13,504
(4,698)
—
(1,098)
444
3,529
36,083
—
177
(2,147)
—
34,113
37,642
21,062
(10,324)
138
(61)
(356)
1,077
—
(13,000)
111
(2,008)
—
(14,897)
(13,820)
34,882
(10,206)
314
(11)
107
3,708
—
—
31
(1,871)
—
(1,840)
1,868
33,014
$ 58,704
$ 21,062
$ 34,882
Report of Independent Registered Public Accounting Firm
31
KPMG LLP
Certified Public Accountants
99 High Street
Boston, Massachusetts 02110
The Board of Directors and Stockholders
Century Bancorp, Inc.:
We have audited the accompanying consolidated balance sheets of Century Bancorp, Inc. and subsidiary as of December 31, 2004 and 2003, 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, 2004. 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 the standards of the Public Company Accounting Oversight Board (United States). Those standards
require that we plan and perform the audit to obtain reasonable assurance about whether the 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, 2004 and 2003, and the results of their operations and their cash flows for each of the years in the three-year
period ended December 31, 2004, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of the
Company’s internal control over financial reporting as of December 31, 2004, based on criteria established in Internal Control—Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated March 8, 2005 expressed an
unqualified opinion on management’s assessment of, and the effective operation of, internal control over financial reporting.
Boston, Massachusetts
March 8, 2005
32
Report of Independent Registered Public Accounting Firm
KPMG LLP
Certified Public Accountants
99 High Street
Boston, Massachusetts 02110
The Board of Directors and Stockholders
Century Bancorp, Inc.:
We have audited management's assessment, included in the accompanying Management’s Report on Internal Control Over Financial Reporting,
that Century Bancorp, Inc. and subsidiary maintained effective internal control over financial reporting as of December 31, 2004, based
on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO). The Company's management is responsible for maintaining effective internal control over financial reporting and for its
assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management's assessment
and an opinion on the effectiveness of the Company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards
require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting
was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating
management's assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other
procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting
principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide
reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally
accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations
of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any
evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or
that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, management's assessment that Century Bancorp, Inc. and subsidiary maintained effective internal control over financial
reporting as of December 31, 2004, is fairly stated, in all material respects, based on criteria established in Internal Control—Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Also, in our opinion, the Company
maintained, in all material respects, effective internal control over financial reporting as of December 31, 2004, based on criteria established in
Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated
balance sheets of Century Bancorp, Inc. and subsidiary as of December 31, 2004 and 2003, 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, 2004, and our
report dated March 8, 2005 expressed an unqualified opinion on those consolidated financial statements.
Boston, Massachusetts
March 8, 2005
Management’s Report on Internal Control Over Financial Reporting
33
Century Bancorp, Inc.
400 Mystic Avenue
Medford, Massachusetts 02155
We, together with the other members of Century Bancorp, Inc. and subsidiary (the “Company”), are responsible for establishing and maintaining ade-
quate internal control over financial reporting. The Company’s internal control system was designed to provide reasonable assurance to the Company’s
management and board of directors regarding the preparation and fair presentation of published financial statements.
All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide
only reasonable assurance with respect to financial statement preparation and presentation.
The Company’s management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2004. In making
this assessment, it used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control—
Integrated Framework. Based on our assessment we believe that, as of December 31, 2004, the Company’s internal control over financial reporting is
effective based on those criteria.
The Company’s independent registered public accounting firm has issued an audit report on our assessment of the Company’s internal control over
financial reporting. Their report appears on page 32.
Marshall M. Sloane
Paul V. Cusick, Jr.
Chairman, President and CEO
Vice President and Treasurer
March 8, 2005
34
Notes
SHAREHOLDER INF ORMATION
CORPORA TE HEA DQUARTERS
ANNUAL MEETING
Century Bank
400 Mystic Avenue
Medford, MA 02155-6316
TEL 866.8.CENTURY
century-bank.com
TRANSFER AGE NT AND REGISTRAR
EquiServe Trust Company, N.A.
The annual meeting of stockholders will be held on Tuesday, April 12, 2005, at 10:00 a.m. The
meeting will take place at Century Bank, 400 Mystic Avenue, Medford, MA.
STOCK LISTING
Century Bancorp, Inc. became a public company in 1987. Centuryʼs Class A Common Stock is
listed in the NASDAQ national market and is traded under the symbol CNBKA. The stock is listed
as CntyBc in The Boston Globe and Boston Herald, and CentyBcp in The Wall Street Journal.
P.O. Box 43010
10- K REPORT
Providence, RI 02940-3010
A copy of the Companyʼs annual report to the Securities and Exchange Commission on Form 10-K
TEL 781.575.3400 (Investor Relations)
may be obtained without charge upon written request to: Century Bancorp, Inc., Investor Relations,
EquiServe.com
400 Mystic Avenue, Medford, MA 02155.
CENTURY B ANK L OC AT IONS
OFFIC ES
Allston
Beverly
Boston
Boston
Boston
Boston
Boston
Boston
Braintree
Brookline
Burlington
300 Western Avenue, Allston, MA 02134
428 Rantoul Street, Beverly, MA 01915
710 Albany Street, Boston, MA 02118
280 Atlantic Avenue, Boston, MA 02110
512 Commonwealth Avenue, Boston, MA 02215
771 Commonwealth Avenue, Boston, MA 02215
275 Hanover Street, Boston, MA 02113
24 Federal Street, Boston, MA 02110
703 Granite Street, Braintree, MA 02184
617-562-1700
978-921-2300
617-578-9250
617-557-0516
617-424-1644
617-424-5211
617-557-2950
617-423-1490
781-356-3400
1184-1186 Boylston Street/Rt 9 East, Brookline, MA 02467
617-713-4910
134 Cambridge Street/Rt 3A, Burlington, MA 01803
781-238-8700
Cambridge
2309 Massachusetts Avenue, Cambridge, MA 02140
617-349-5300
S peci al t hank s t o Jame s M. Fl ynn , Jr., Sen ior
V i ce P resident & Chair man, Bu ilding Committ ee ,
f or hi s dedi cat ion an d dilige nce in mak ing
t he new Cent ur y Ban k He adq u ar t e rs a re ality.
Everett
Lynn
Malden
Medford
1763 Revere Beach Parkway/Rt 16, Everett, MA 02149
617-381-6300
2 State Street, Lynn, MA 01901
781-586-8700
140 Ferry Street at Eastern Avenue, Malden, MA 02148
781-388-2100
400 Mystic Avenue, Medford, MA 02155
Medford Square
55 High Street, Medford, MA 02155
781-393-4160
781-391-9830
Newton
Peabody
Quincy
Salem
31 Boylston Street/Route 9 West, Newton, MA 02467
617-582-0920
12 Peabody Square, Peabody, MA 01960
651 Hancock Street, Quincy, MA 02170
37 Central Street, Salem, MA 01970
978-977-4900
617-376-8100
978-740-6900
Somerville
102 Fellsway West at Mystic Avenue, Somerville, MA 02145
617-629-0929
FREE S TANDING C ASH DISPENSERS
Boston
Boston
Boston
Boston
Boston
Boston
Boston
Boston
Agganis Arena, Boston University, 925 Commonwealth Avenue, Boston, MA 02215
Barnes & Noble, 660 Beacon Street, Boston, MA 02215
Campus Convenience/Sleeper Hall, Boston University, 275 Babcock Street, Boston, MA 02215
Dental School, Boston University, 100 East Newton Street, Boston, MA 02118
The Hotel Commonwealth, 500 Commonwealth Avenue, Boston, MA 02215
Medical School, Boston University, 715 Albany Street, Boston, MA 02118
Parking Garage, Boston University, 710 Albany Street, Boston, MA 02118
Warren Towers, 770 Commonwealth Avenue, Boston, MA 02215
Cambridge
One Kendall Square, Building #100, Cambridge, MA 02139
Medford
Magoun Square, 110 Medford Street, Medford, MA 02155
T his is ou r Ce nt u ry .
My Lif e.
My T ime.
My Centur y.
400 MYSTIC AVENUE, MEDFORD, MA 02155 866.8.CENTURY century-bank.com
MEMBER FDIC
0665-AR-05 MKT2005
2 0 0 4
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