-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Updvnnw+LgNcgxrcnTBZljJ2bPReqmGECsLIZB5HPPEoYQ/gzcmI4TmGaY4gCJuP EWXqe9vC+nL9D2nDKM2GkA== 0000950135-99-001445.txt : 19990325 0000950135-99-001445.hdr.sgml : 19990325 ACCESSION NUMBER: 0000950135-99-001445 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990323 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CENTURY BANCORP INC CENTRAL INDEX KEY: 0000812348 STANDARD INDUSTRIAL CLASSIFICATION: STATE COMMERCIAL BANKS [6022] IRS NUMBER: 042498617 STATE OF INCORPORATION: MA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-15752 FILM NUMBER: 99570611 BUSINESS ADDRESS: STREET 1: 400 MYSTIC AVENUE CITY: MEDFORD STATE: MA ZIP: 01887 BUSINESS PHONE: 6173934606 MAIL ADDRESS: STREET 1: 400 MYSTIC AVE CITY: MEDFORD STATE: MA ZIP: 01887 10-K 1 CENTURY BANCORP, INC. 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED) For the fiscal year ended DECEMBER 31, 1998 ------------------------------------------------- [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED) Commission file number 0-15752 --------------------------------------------------------- CENTURY BANCORP, INC. - -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) COMMONWEALTH OF MASSACHUSETTS 04-2498617 ----------------------------- ---------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification number) 400 MYSTIC AVENUE, MEDFORD, MA 02155 - -------------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number including area code: (781)391-4000 ------------------------------ Securities registered pursuant to Section 12(g) of the Act: CLASS A COMMON STOCK, $1.00 PAR VALUE - -------------------------------------------------------------------------------- (Title of class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by section 13 or 15(d) of the Securities and Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. X Yes No - - Indicate by check mark if disclosure of delinquent filers pursuant to item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this form 10-K. [ ] State the aggregate market value of the voting stock held by nonaffiliates of the registrant as of February 28, 1999: $5,778,720 Indicate the number of shares outstanding of each of the registrant's classes of common stock as of February 28,1999: CLASS A COMMON STOCK, $1.00 PAR VALUE 3,648,397 SHARES CLASS B COMMON STOCK, $1.00 PAR VALUE 2,178,770 SHARES 2 CENTURY BANCORP INC. FORM 10-K TABLE OF CONTENTS PAGE ---- PART I ------ ITEM 1 BUSINESS 1-16 ITEM 2 PROPERTIES 17 ITEM 3 LEGAL PROCEEDINGS 17 ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 17 PART II ------- ITEM 5 MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED 17-18 STOCKHOLDER MATTERS ITEM 6 SELECTED FINANCIAL DATA 18 ITEM 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL 18 CONDITION AND RESULTS OF OPERATIONS ITEM 7a QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET 18 RISK ITEM 8 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 18 ITEM 9 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS 18 ON ACCOUNTING AND FINANCIAL DISCLOSURE PART III -------- ITEM 10 DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT 45-47 ITEM 11 EXECUTIVE COMPENSATION AND OTHER INFORMATION 47-51 ITEM 12 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS 52 AND MANAGEMENT ITEM 13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 53 PART IV ------- ITEM 14 EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND 53 REPORTS ON FORM 8-K SIGNATURES 54 ---------- ii 3 PART I ITEM 1. BUSINESS THE COMPANY Century Bancorp, Inc. (together with its bank subsidiary, unless the context otherwise requires, the "Company"), is a Massachusetts state chartered bank holding company headquartered in Medford, Massachusetts. The Company is a Massachusetts corporation formed in 1972 and has one banking subsidiary (the "Bank"): Century Bank and Trust Company formed in 1969. The Company had total assets of $853.3 million on December 31, 1998. The Company presently operates 16 banking offices in 15 cities and towns in Massachusetts ranging from Braintree to Peabody. The Banks' customers consist primarily of small and medium-sized businesses and retail customers in these communities and surrounding areas, as well as local governments throughout Massachusetts. On June 11, 1998, the Company completed its acquisition of Haymarket Co-operative Bank ("Haymarket"), headquartered in Boston, Massachusetts, and merged Haymarket into the Bank. The purchase price paid by the Company to the shareholders of Haymarket was $21.1 million in cash and the transaction was accounted for using the purchase method of accounting. The results of operations include the effect of the Haymarket acquisition for the 203 day period beginning June 12, 1998. The Company offers a wide range of services to commercial enterprises, state and local governments and agencies, and individuals. It makes commercial loans, real estate and construction loans, and consumer loans, and accepts savings, time, and demand deposits. In addition, the Company offers to its corporate customers automated lock box collection services, cash management services and account reconciliation services, and actively promotes the marketing of these services to the municipal market. The Company emphasizes service to small and medium-sized businesses and retail customers in its market area. It provides business and consumer deposit services and makes commercial loans, real estate and construction loans and consumer loans. The Company provides full service brokerage through Century Financial Services in conjunction with Commonwealth Equities. The Company is a provider of financial services including cash management, transaction processing, short term financing and intermediate term leasing to municipalities in Massachusetts. The Company has deposit relationships with approximately 30% of the 351 cities and towns in Massachusetts. -1- 4 The following table sets forth the distribution of the Company's average assets, liabilities and stockholders' equity, and average rates earned or paid on a fully taxable equivalent basis for each of the years indicated.
YEAR ENDED DECEMBER 31, ---------------------- 1998 1997 1996 ---- ---- ---- Average Interest Rate Average Interest Rate Average Interest Rate Balance Income(1) Earned(1) Balance Income(1) Earned(1) Balance Income(1) Earned(1) ------- --------- --------- ------- --------- --------- ------- --------- --------- (Dollars In Thousands) ASSETS Interest-earning assets: Loans(2) $358,498 $33,461 9.33% $304,147 $28,479 9.36% $281,943 $26,429 9.37% Securities available-for-sale: Taxable 138,104 8,314 6.02% 82,069 5,054 6.16% 90,652 5,627 6.21% Tax-exempt 808 47 5.82% 1,327 80 6.03% 872 52 5.96% Securities held-to-maturity: Taxable 137,238 8,610 6.27% 109,458 7,047 6.44% 94,335 6,007 6.37% Tax-exempt 21 3 14.29% 33 3 9.09% 170 13 7.65% Federal funds sold 28,241 1,516 5.37% 12,864 706 5.49% 15,090 807 5.35% Interest bearing deposits in other banks 571 44 7.71% 36 1 2.78% 47 2 4.26% ----------------- ------------------ ------------------ Total interest-earning assets 663,481 51,995 7.84% 509,934 41,370 8.11% 483,109 38,937 8.06% ------- ------- ---- ------- ---- Non interest-earning assets 61,421 61,305 61,450 Allowance for loan losses (5,452) (4,412) (4,163) -------- -------- -------- Total assets $719,450 $566,827 $540,396 ======== ======== ========
- -------------------------------------------------------------------------------- (1) On a fully taxable equivalent basis calculated using a federal tax rate of 34%. (2) Nonaccrual loans are included in average amounts outstanding. -2- 5
YEAR ENDED DECEMBER 31, ---------------------- 1998 1997 1996 ---- ---- ---- Interest Rate Interest Rate Interest Average Income/ Earned/ Average Income/ Earned/ Average Income/ Rate Balance Expense(1) Paid(1) Balance Expense(1) Paid(1) Balance Expense(1) Earned(1) ------- ---------- --------- ------- --------- --------- ------- --------- --------- (Dollars In Thousands) LIABILITIES AND STOCKHOLDERS' EQUITY Interest-bearing deposits: NOW accounts $110,066 $ 2,745 2.49% $ 91,938 $ 2,561 2.79% $ 84,620 $ 2,367 2.80% Savings accounts 56,802 1,422 2.50% 55,911 1,433 2.56% 55,905 1,439 2.57% Money market accounts 77,930 2,255 2.89% 66,936 1,888 2.82% 70,735 2,084 2.95% Time deposits 213,861 11,445 5.35% 155,607 8,474 5.45% 158,037 9,020 5.71% -------- ------- -------- ------- -------- ------- Total interest-bearing deposits 458,659 17,867 3.90% 370,392 14,356 3.88% 369,297 14,910 4.04% Securities sold under agreements to repurchase 36,953 1,574 4.26% 24,994 1,075 4.30% 16,654 713 4.28% Other borrowed funds and Long Term Debt 38,293 2,574 6.72% 7,908 491 6.21% 3,135 182 5.81% ----------------- ------------------ ------------------ Total interest-bearing liabilities 533,905 22,015 4.12% 403,294 15,922 3.95% 389,086 15,805 4.06% ------- ---- ------- ---- ------- ---- Non interest-bearing liabilities Demand deposits 119,802 105,417 99,179 Other liabilities 8,204 7,787 7,340 -------- -------- -------- Total liabilities 661,911 516,498 495,605 -------- -------- -------- Stockholders' equity 57,539 50,329 44,791 Total liabilities & stockholders' equity $719,450 $566,827 $540,396 ======== ======== ======== Net interest income(1) $29,980 $25,448 $23,132 ======= ======= ======= Net interest spread 3.72% 4.16% 4.00% ==== ==== ==== Net yield on earnings assets 4.52% 4.99% 4.79% ==== ==== ====
- -------------------------------------------------------------------------------- (1) On a fully taxable equivalent basis calculated using a federal tax rate of 34%. -3- 6 The following table summarizes the year-to-year changes in the Company's net interest income resulting from fluctuations in interest rates and volume changes in earning assets and interest bearing liabilities. Changes due to rate are computed by multiplying the change in rate by the prior year's volume. Changes due to volume are computed by multiplying the change in volume by the prior year's rate. Changes in volume and rate that cannot be separately identified have been allocated in proportion to the relationship of the absolute dollar amounts of each change. Net interest income improved in 1998. Interest income was affected positively by higher loan volume, primarily as a result of the Haymarket acquisition. Much of the Company's earning assets were repriced to improve their respective returns. Interest expense rose primarily because of a higher level of borrowed funds. Interest income on securities increased primarily because of volume.
Year Ended December 31, ----------------------- 1998 Compared with 1997 1997 Compared with 1996 ------------------------------------- ------------------------------------ Increase/(Decrease) Increase/(Decrease) Due to Change in Due to Change in --------------------- -------------------- Total Total Average Average Increase Average Average Increase Balance Rate (Decrease) Balance Rate (Decrease) ------- ---- ---------- ------- ---- ---------- (In Thousands) Interest income: Loans $ 5,073 $ (91) $ 4,982 $ 2,079 $ (29) $ 2,050 Securities available-for-sale: Taxable 3,376 (116) 3,260 (523) (50) (573) Tax-exempt (30) (3) (33) 27 1 28 Securities held-to-maturity: Taxable 1,747 (183) 1,564 973 66 1,039 Tax-exempt (1) 1 (0) (12) 2 (10) Federal funds sold 826 (16) 810 (122) 21 (101) Interest-bearing deposits in other banks 40 2 42 (1) 1 0 -------- -------- -------- -------- -------- -------- Total interest income 11,031 (406) 10,625 2,422 11 2,433 -------- -------- -------- -------- -------- -------- Interest expense: Deposits: NOW accounts 470 (286) 184 204 (10) 194 Savings accounts 23 (34) (11) 0 (6) (6) Money market accounts 19 348 367 (109) (87) (196) Time deposits 2,980 (9) 2,971 (137) (409) (546) -------- -------- -------- -------- -------- -------- Total interest-bearing deposits 3,492 19 3,511 (42) (512) (554) Securities sold under agreements to repurchase 509 (10) 499 359 3 362 Other borrowed funds and long term debt 2,040 43 2,083 262 13 309 -------- -------- -------- -------- -------- -------- Total interest expense 6,041 52 6,093 612 (495) 117 -------- -------- -------- -------- -------- -------- Change in net interest income $ 4,990 $ (458) $ 4,532 $ 1,811 $ 505 $ 2,316 ======== ======== ======== ======== ======== ========
-4- 7 ASSET/LIABILITY MANAGEMENT The Company's asset/liability management objective is to attempt to insulate the balance sheet, and therefore the income statement, from excessive risk due to changes in market interest rates. It is the responsibility of the Company's ALCO committee to establish long- term strategies with respect to interest rate exposure, and to monitor that exposure in relation to present and prospective market interest rates, economic conditions, and balance sheet composition on an on-going basis. Monitoring techniques include gap management and simulation analysis. The Company attempts to manage its exposure to interest rate risk by closely monitoring the maturities and interest rate sensitivities of its assets and liabilities. The following table measures the extent to which interest-sensitive assets exceed interest-sensitive liabilities (or vice versa) within certain time periods. This "Gap" analysis is one measure of the Company's sensitivity to interest rate fluctuations. A Gap is considered positive when the amount of interest-sensitive assets maturing or repricing within a period exceeds the amount of interest-sensitive liabilities maturing or repricing within that period; a Gap is considered negative when the converse occurs. During a decreasing interest rate environment, a negative Gap would tend to result in an increase in net interest income while a positive Gap would tend to adversely affect net interest income. In a rising interest rate environment, an institution with a positive Gap would generally expect an increase in net interest income, whereas an institution with a negative Gap would generally be expected to experience the opposite result. The Company's targeted Gap range is +/- 20% within 3 months or less and +/- 20% within 4 to 12 months with a cumulative 1 year Gap at +/- 20%. The table presents categorical balances based on contractual maturities and repricing opportunities. The resulting amounts have been modified to reflect a management adjustment that pertains to NOW savings and money market accounts. While these core deposit accounts are subject to immediate withdrawal, the management adjustment is based on the fact that interest changes on such accounts have been infrequent and have not coincided with changes in market interest rates. In addition, a management adjustment has been made in the first maturity interval for the uncollected portion of cash and due from banks.
Repricing / Maturity Interval Within -------------------------------------------------------------------------------------- December 31, 1998 3 months 4 months One year Over Non- or less to 12 months to 5 years 5 years Maturing(1) Total -------------------------------------------------------------------------------------- INTEREST-EARNING ASSETS: (Dollars in Thousands) Loans $ 232,904 $ 92,982 $ 56,812 $ 11,923 $ 1,282 $ 395,903 Securities available-for-sale: Taxable 20,821 6,513 138,585 44,238 0 210,157 Tax exempt 0 0 0 0 0 0 Securities held-to-maturity: Taxable 1,026 1,005 83,846 73,987 0 159,864 Tax exempt 0 11 0 0 0 11 Federal funds sold 26,500 0 0 0 0 26,500 Interest-bearing deposits in other banks: 1 0 0 0 0 1 -------------------------------------------------------------------------------------- Total interest-earning assets 281,252 100,511 279,243 130,148 1,282 792,436 -------------------------------------------------------------------------------------- INTEREST-BEARING LIABILITIES: Deposits: NOW accounts 98,127 0 0 0 0 98,127 Savings accounts 55,080 0 0 0 0 55,080 Money market deposits 84,848 0 0 0 0 84,848 Time deposits 78,845 121,731 41,553 0 0 242,129 -------------------------------------------------------------------------------------- Total interest-bearing deposits 316,900 121,731 41,553 0 0 480,184 Securities sold under agreements to repurchase 57,690 0 0 0 0 57,690 Other borrowed funds & Long Term Debt 6,382 1,048 0 56,166 0 63,596 -------------------------------------------------------------------------------------- Total interest-bearing liabilities 380,972 122,779 41,553 56,166 0 601,470 -------------------------------------------------------------------------------------- Interest-earning assets minus interest-bearing liabilities(Gap) ($99,720) ($22,268) $ 237,690 $ 73,982 $ 1,282 $ 190,966 Management adjustment 200,653 (17,448) (155,437) 0 0 27,768 -------------------------------------------------------------------------------------- Management-adjusted Gap $ 100,933 ($39,716) $ 82,253 $ 73,982 $ 1,282 $ 218,734 Management-adjusted Cumulative Gap 61,217 143,470 217,452 218,734 -- Management-adjusted Gap/Total Assets 11.75% -4.62% 9.57% 8.61% 0.15% 25.45% Management-adjusted Cumulative Gap/ Total Assets 7.12% 16.70% 25.30% 25.45% -- December 31, 1997 Management-adjusted Gap/Total Assets 0.92% 1.82% 17.22% 5.28% 0.27% 25.50% Management-adjusted Cumulative Gap/ Total Assets 2.74% 19.96% 25.24% 25.50% --
(1) Represents loans placed on nonaccrual status. -5- 8 LENDING ACTIVITIES The following summary shows the composition of the loan portfolio at the dates indicated.
December 31, ------------------------------------------------------------------------------------------ 1998 1997 1996 1995 1994 ----------------- --------------- ---------------- --------------- --------------- Percent Percent Percent Percent Percent Amount of Total Amount of Total Amount of Total Amount of Total Amount of Total ------ -------- ------ -------- ------ -------- ------ -------- ------ -------- (Dollars In Thousands) Construction and land development....... $ 21,691 5.5% $ 7,549 2.4% $ 3,576 1.2% $ 1,444 0.5% $ 1,924 0.7% Commercial and industrial............. 64,822 16.4 50,560 16.0 41,006 14.2 37,811 13.2 33,283 12.2 Industrial revenue bonds.................. 1,034 0.2 2,693 0.9 3,030 1.1 3,362 1.2 3,873 1.4 Commercial real estate.. 187,285 47.3 140,270 44.3 133,757 46.4 130,173 45.6 122,538 44.9 Residential real estate................. 87,518 22.1 76,385 24.1 76,638 26.6 82,132 28.8 82,028 30.1 Consumer................ 14,355 3.6 19,254 6.1 12,749 4.4 9,243 3.2 12,017 4.4 Home equity............. 18,839 4.8 19,031 6.0 17,330 6.0 21,130 7.4 16,826 6.2 Overdrafts.............. 359 0.1 648 0.2 194 0.1 143 0.1 232 0.1 -------- ----- ------- ----- -------- ----- -------- ----- -------- ----- Loans (net of unearned discount).............. $395,903 100.0% $316,390 100.0% $288,280 100.0% $285,438 100.0% $272,721 100.0% ======== ===== ======== ===== ======== ===== ======== ===== ======== =====
-6- 9 The following table summarizes the remaining maturity distribution of certain components of the Company's loan portfolio at December 31, 1998. 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, 1998 ----------------------------------------------------------- One Year One to Five Over or Less Years Five Years Total ------- ----- ---------- ----- (In Thousands) Construction and land development $ 20,009 $ 1,682 $ 0 $ 21,691 Commercial and industrial 62,766 2,415 0 65,181 Industrial revenue bonds 339 0 695 1,034 Commercial real estate 167,744 18,398 1,143 187,285 -------- -------- -------- -------- Total $250,858 $ 22,495 $ 1,838 $275,191 ======== ======== ======== ========
The following table indicates the rate variability of the above loans due after one year.
December 31, 1998 ----------------- One to Five Over Years Five Years Total ----- ---------- ----- (In Thousands) Predetermined interest rates $19,895 $ 1,838 $21,733 Floating or adjustable interest rates 2,600 0 2,600 ------- ------- ------- Total $22,495 $ 1,838 $24,333 ======= ======= =======
Individual loan officers have designated lending authorities established by the Board of Directors, with larger loans requiring a second approval. The Bank has an Executive Committee of the Board of Directors which meets monthly and ratifies or approves all credits above a specified size. In addition, the Company has an Executive Management Committee which meets monthly and monitors the Company's lending policies and practices. The members of the Executive Management Committee are: Marshall M. Sloane, Chairman, President and CEO; Jonathan G. Sloane, Executive Vice President; Paul V. Cusick, Jr., Vice President and Treasurer; all of the Company, and Donald H. Lang and William J. Sloboda, both Executive Vice Presidents of the Bank. The Company's commercial and industrial (C&I) loan customers represent various small and middle market established businesses involved in manufacturing, distribution, retailing and services. Most clients are privately owned with markets that range from local to national in scope. Many of the loans to this segment are secured by liens on corporate assets and the personal guarantees of the principals. The Bank has placed greater emphasis on building its C&I base in the future. The regional economic strength or weakness impacts on the relative risks in this loan category. There is little concentration to any one business sector and loan risks are generally diversified among many borrowers. Commercial real estate loans are extended to finance various manufacturing, warehouse, light industrial, office, retail and residential properties in the Banks's market area to generally include Eastern Massachusetts and Southern New Hampshire. Loans are normally extended in amounts up to a maximum of 80% of appraised value and normally for terms between three to five years. Amortization schedules are long term and thus a balloon payment is due at maturity. Under most circumstances, the Bank will offer to re-write or otherwise extend the loan at prevailing interest rates. During recent years, the Bank has emphasized non-residential type owner-occupied properties. This complements the above C&I emphasis placed on the operating business entities and will be continued. The regional economic environment impacts on the risk to both non-residential and residential mortgages. This environment has improved over the recent period. Together the above factors have stabilized many sections of the regional market. -7- 10 Residential real estate (1-4 family) includes two categories of loans. Approximately $20 million of loans are classified as "Commercial and Industrial" type loans secured by 1-4 family real estate. Primarily, these are small businesses with modest capital or shorter operating histories wherein the collateral mitigates some risk. The collateral position notwithstanding, this category of loans shares similar risk characteristics as the C&I loans. The balance of loans in this category are mostly 1-4 family residential properties located in the Bank's market area. General underwriting criteria are largely the same as Fannie Mae but normally only one or three year adjustable interest rates are used. The Bank utilizes mortgage insurance to provide lower down payment products and has provided a "First Time Homebuyer" product to encourage new home ownership. Residential real estate loan volume has declined but nonetheless remains a core consumer product. The economic environment impacts the risks associated with this category. In the recent period, the environment has improved, and the market has generally been stable. Declining interest rates could negatively impact the interest rate risk on adjustable interest rate loans as they are repriced in the future. Home equity loans are extended as both first and second mortgages on owner occupied residential properties in the Bank's market area. Loans are underwritten to a maximum loan to property value of 75%. The Bank intends to maintain a market for construction loans, principally for smaller local residential projects or an owner occupied commercial project. Independent appraisals of the project and the estimated costs are obtained and funds are advanced over the life of the project as inspections of completed work warrant. Individual consumer residential home construction loans are also extended on a similar basis. Bank officers evaluate the feasibility of construction projects, based on independent appraisals of the project, architects or engineers evaluations of the cost of construction, and other relevant data. At December 31, 1998, the Company was obligated to advance a total of $321 thousand to complete projects under construction. At December 31, 1998 approximately 47.3% of the Company's loan portfolio consisted of commercial real estate loans. Construction loans had increased to 5.5 % of the Company's outstanding loans. At December 31, 1998, the Company's residential mortgage loans amounted to $87.5 million. The Company's consumer loan portfolio amounted to $33.2 million at December 31, 1998, primarily consisting of home equity loans of $18.8 million and personal lines of credit, motor vehicle loans and other installment loans of $14.4 million. -8- 11 NONPERFORMING ASSETS AND ALLOWANCE FOR POSSIBLE LOAN LOSSES Loans are placed on nonaccrual status when any payment of principal and/or interest is 90 days or more past due, unless the collateral is sufficient to cover both principal and interest and the loan is in the process of collection. The Company monitors closely the performance of its loan portfolio. In addition to internal loan review, the Company has contracted with an independent organization to review the Company's commercial and commercial real estate loan portfolios. This independent review was performed in each of the past five years. The status of delinquent loans, as well as situations identified as potential problems, are reviewed on a regular basis by senior management and monthly by the Board of Directors of the Bank. The following table summarizes the Company's nonperforming assets at the dates indicated.
December 31, ------------ 1998 1997 1996 1995 1994 ---- ---- ---- ---- ---- (Dollars in Thousands) Loans on nonaccrual $1,281 $1,705 $2,140 $3,751 $2,954 Loans not included above which are nonperforming troubled debt restructurings -0- -0- -0- 1,457 3,113 Other real estate owned , net -0- -0- 182 845 3,192 ------ ------ ------ ------ ------ Total nonperforming assets $1,281 $1,705 $2,322 $6,053 $9,259 ====== ====== ====== ====== ====== Percentage of nonperforming assets to total loans and other related assets 0.32% 0.54% 0.81% 2.12% 3.39% ====== ====== ====== ====== ======
The lower level of nonperforming assets in 1998 resulted from a reduction in new additions to nonperforming assets during the year combined with an improvement in the resolution of nonperforming assets including payments on nonperforming loans and sales of other real estate owned (OREO). The Company identifies loans renegotiated prior to January 1, 1995 at then below market rates as troubled debt restructurings. Interest income associated with the $2,872,000 of troubled debt restructurings and performing impaired loans at December 31, 1998 amounted to $196,000 for the year then ended. Interest income for the same period would have amounted to $260,000 under the original terms and agreements of the notes. As a result of placing loans on non-accrual status, the Company has foregone $139,000 of interest income during 1998 compared to $118,000 during 1997. In addition to the above, the Company is monitoring closely $8.7 million of loans for which management has concerns regarding the ability of the borrowers to perform. The majority of the loans are secured by real estate properties experiencing higher than expected vacancies and lower than expected rental revenue. While the properties are considered to have adequate value to cover the loan balances at December 31, 1998, such values can fluctuate with changes in the economy and the real estate market. There were no impaired loans with specific reserves at December 31, 1998 and 1997 because, in the opinion of management, none required a specific reserve. All impaired loans have been measured using the fair value of the collateral method. The following table summarizes the Company's loans past due 90 days or more and still accruing and impaired loans at the dates indicated.
December 31, ------------ 1998 1997 1996 1995 1994 ---- ---- ---- ---- ---- (Dollars in Thousands) Loans past due 90 days or more and still accruing $ 698 $ 7 $ 192 $ 87 $ 114 Impaired loans $2,992 $3,515 $3,055 $3,356 n/a
-9- 12 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, ----------------------- 1998 1997 1996 1995 1994 ---- ---- ---- ---- ---- (Dollars in Thousands) Year end loans outstanding (net of unearned discount) $395,903 $316,390 $288,280 $285,438 $272,721 ======== ======== ======== ======== ======== Average loans outstanding (net of unearned discount) $358,498 $304,147 $281,943 $279,555 $267,123 ======== ======== ======== ======== ======== Balance of allowance for loan losses at beginning of year $ 4,446 $ 4,179 $ 4,193 $ 4,239 $ 5,129 -------- -------- -------- -------- -------- Loans charged-off: Commercial 316 25 2 2 781 Construction and land development 0 0 0 0 292 Commercial real estate 21 48 380 1,144 433 Residential real estate 0 363 801 551 1,016 Consumer 506 253 120 131 242 -------- -------- -------- -------- -------- Total loans charged-off 843 689 1,303 1,828 2,764 -------- -------- -------- -------- -------- Recoveries of loans previously charged-off: Commercial 21 76 78 39 23 Real estate 367 162 163 134 204 Consumer 37 58 28 49 27 -------- -------- -------- -------- -------- Total recoveries of loans previously charged-off 425 296 269 222 254 -------- -------- -------- -------- -------- Net loans charged-off 418 393 1,034 1,606 2,510 -------- -------- -------- -------- -------- Additions to allowance charged to operating expense 800 660 1,020 1,560 1,620 Acquired allowance 1,194 -- -- -- -- -------- -------- -------- -------- -------- Balance at end of year $ 6,022 $ 4,446 $ 4,179 $ 4,193 $ 4,239 ======== ======== ======== ======== ======== Ratio of net charge-offs during the year to average loans outstanding 0.12% 0.13% .37% .57% 1.32% ======== ======== ======== ======== ======== Ratio of allowance for loan losses to loans outstanding 1.52% 1.41% 1.45% 1.47% 1.89% ======== ======== ======== ======== ========
The provision for 1998, while below the prior four year average, remains above historical levels and reflects significant improvements in the loan portfolio. At December 31, 1998 nonperforming assets were $1.3 million or .32% of loans and related assets. Such figures are significantly lower than those at the end of the last four years. While the Company expects a similar level of charge-offs in future periods, the pace of the charge-offs depends on many factors including the national and regional economy. Cyclical lagging factors may result in charge-offs being higher than historical levels. -10- 13 The allowance for loan losses is an estimate of the amount needed for an adequate reserve to absorb losses in the existing loan portfolio. This amount is determined by an evaluation of the loan portfolio including input from an independent organization engaged to review selected larger loans, a review of loan loss experience and current economic conditions. At December 31, the allowance was comprised of the following components.
1998 1997 1996 1995 1994 ----------------- ---------------- ---------------- ---------------- ---------------- Percent of Percent of Percent of Percent of Percent of loans in loans in loans in loans in loans in each category each category each category each category each category Balance at end of to total to total to total to total to total period applicable to Amount loans Amount loans Amount loans Amount loans Amount loans - -------------------- ------ -------- ------ -------- ------ -------- ------ -------- ------ -------- (Dollars In Thousands) Construction and land development............. $ 361 5.5% $ 104 2.4% $ 48 1.2% $ 21 0.5% $ 49 0.7% Commercial and industrial.............. 912 16.4 716 16.0 660 14.2 595 13.2 530 12.2 Industrial revenue bonds................... 6 0.2 17 0.9 17 1.1 23 1.2 26 1.4 Commercial real estate... 2,737 47.3 2,138 44.3 2,201 46.4 2,095 45.6 2,158 44.9 Residential real estate.. 1,296 22.1 846 24.1 830 26.6 1,031 28.8 1,025 30.1 Consumer................. 508 3.6 402 6.1 233 4.4 228 3.2 293 4.4 Home equity.............. 197 4.8 214 6.0 187 6.0 198 7.4 155 6.2 Overdrafts............... 5 0.1 9 0.2 3 0.1 2 0.1 3 0.1 ------ ----- ------ ----- ------ ----- ------ ----- ------ ----- $6,022 100.0% $4,446 100.0% $4,179 100.0% $4,193 100.0% $4,239 100.0% ====== ===== ====== ===== ====== ===== ====== ===== ====== =====
INVESTMENT ACTIVITIES The following table sets forth certain information regarding the Company's investment portfolio. Dollar amounts reflect carrying values. At December 31, 1998, the market value of securities available-for-sale was $210.2 million compared to the amortized cost of $210.3 million for such securities. At December 31, 1998, the market value of securities held-to-maturity was $160.1 million, compared to the amortized cost of $159.9 million of such securities.
Securities available-for-sale Securities held-to-maturity December 31, December 31, --------------------------------- --------------------------------- 1998 1997 1996 1998 1997 1996 --------- -------- -------- --------- --------- --------- (In Thousands) (In Thousands) Balance at end of period applicable to - -------------------- U.S. Government and Agencies...... $202,925 $84,763 $77,155 $159,789 $107,117 $105,582 Obligations of states and political subdivision............ 0 750 1,241 11 22 34 Other............................. 7,232 3,677 2,619 75 2,100 2,099 -------- ------- ------- -------- -------- -------- $210,157 $89,190 $81,015 $159,875 $109,239 $107,715 ======== ======= ======= ======== ======== ========
-11- 14 The following table sets forth the maturities of the Company's investment securities on the basis of their carrying values at December 31, 1998 and the weighted average yields of securities, which are based on amortized cost, calculated on a fully taxable equivalent basis.
Securities Available-for-Sale ------------------------------------------------------------------------------------------ After One After Five Within But Within But Within After One Year Five Years Ten Years Ten Years Total ----------------- ---------------- ---------------- --------------- --------------- Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield ------ -------- ------ -------- ------ -------- ------ -------- ------ -------- (Dollars In Thousands) U.S. Government and Agencies................. $20,527 6.02% $138,480 5.82% $42,918 5.84% $1,000 6.01% $202,925 5.85% Obligations of states and political subdivisions... 0 0.00% 0 0.00% 0 0.00% 0 0.00% 0 0.00% Other..................... 0 0.00% 105 6.30% 268 7.80% 6,859 6.40% 7,232 6.45% ------- -------- ------- ------ -------- $20,527 6.02% $138,585 5.82% $43,186 5.86% $7,861 6.35% $210,157 5.87% ======= ==== ======== ==== ======= ==== ====== ==== ======== ====
Securities Held-to-Maturity ------------------------------------------------------------------------------------------ After One After Five Within But Within But Within After One Year Five Years Ten Years Ten Years Total ----------------- ---------------- ---------------- --------------- --------------- Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield ------ -------- ------ ------ ------ ------ ------- ------ -------- ------ (Dollars In Thousands) U.S. Government and Agencies................. $2,006 5.92% $83,822 6.05% $19,996 5.98% $36,623 7.12% $142,447 6.31% Obligations of states and political subdivisions... 11 8.65% 0 0.00% 0 0.00% 0 0.00% 11 8.65% Other..................... 25 7.25% 25 4.00% 25 5.50% 17,342 6.35% 17,417 6.53% ------ ------- ------- ------- ------- $2,042 5.95% $83,847 6.05% $20,021 5.98% $53,965 6.93% $159,875 6.34% ====== ==== ======= ==== ======= ==== ======= ==== ======== ====
-12- 15 Obligations of states and political subdivisions consist primarily of obligations of the Commonwealth of Massachusetts and its subdivisions having other relationships with the Company. The Company regularly bids on tax anticipation notes and other short-term instruments of municipalities who have other depository relationships with it. The Company also writes equipment leases to finance acquisition of computers, fire trucks, snow plows and other equipment used by municipalities. DEPOSITS The Company offers savings accounts, NOW accounts, demand deposits, certificates of deposit and money market accounts. The Company offers cash management accounts which provide either automatic transfer of funds above a specified level from the customer's checking account to a money market account or short-term borrowings. Also, an account reconciliation service is offered whereby the Company provides a computerized report balancing the customer's checking account. Interest rates on deposits are set bi-monthly by the Bank's rate setting committee, based on factors including loan demand, maturities and a review of competing interest rates offered. Interest rate policies are reviewed periodically by the Executive Management Committee. The following table shows the average amount of and average interest rate paid on various categories of deposits during the years indicated.
1998 1997 1996 ---------------------- ---------------------- ---------------------- (Dollars In Thousands) Average Average Average Interest Interest Interest Average Rate Average Rate Average Rate Amount Paid Amount Paid Amount Paid -------- ---- -------- ---- -------- ---- Interest-bearing deposits: NOW accounts $110,066 2.49% $ 91,938 2.79% $ 84,620 2.80% Savings accounts 56,802 2.50% 55,911 2.56% 55,905 2.57% Money market accounts 77,930 2.89% 66,936 2.82% 70,735 2.95% Time deposits of $100,000 or more 60,895 5.37% 35,939 5.14% 34,542 5.19% Other time deposits 152,966 5.34% 119,668 5.54% 123,495 5.85% -------- ---- -------- ---- -------- ---- Total interest-bearing deposits 458,659 3.90% 370,392 3.88% 369,297 4.04% Non interest-bearing demand deposits 119,802 105,417 99,179 -------- -------- -------- Total average deposits $578,461 3.09% $475,809 3.02% $468,476 3.18% ======== ==== ======== ==== ======== ====
Total deposits at December 31, 1998 amounted to $643 million, including $72 million of time deposits of $100,000 or more. Traditionally, the Company experiences a decline in deposits during the first and third quarters of each year because of the deposit cycles of certain of its customers, notably municipalities. The Company's time certificates of deposit in amounts of $100,000 or more at December 31, 1998 mature as follows.
(In Thousands) Three months or less $43,637 Three through six months 13,264 Six through twelve months 8,419 Over twelve months 6,512 ----- $71,832 =======
-13- 16 BORROWED FUNDS AND LONG TERM DEBT The Company sells securities under repurchase agreements and enters into other borrowings to obtain funds to support asset growth. Pertinent data relating to borrowed funds and long term debt is presented below.
1998 1997 1996 ---- ---- ---- (Dollars In Thousands) Securities sold under agreements to repurchase: Amount outstanding at year end $57,690 $32,850 $17,790 Weighted average interest rate at end of year 3.53% 4.49% 4.34% Maximum amount outstanding at any month end during year $57,690 $39,060 $17,790 Daily average amount outstanding during year $36,953 $24,994 $16,654 Weighted average interest rate during year 4.26% 4.30% 4.28% Other borrowed funds and long term debt: Amount outstanding at year end $63,596 $13,474 $12,353 Weighted average interest rate at end of year 6.65% 6.96% 7.16% Maximum amount outstanding at any month end during year $79,377 $36,609 $17,577 Daily average amount outstanding during year $38,293 $ 7,908 $ 3,135 Weighted average interest rate during year 6.72% 6.21% 5.81%
Securities sold under agreements to repurchase are primarily over-night demand obligations and are collateralized by U.S. Government and Agency securities. OTHER SERVICES In addition to fees derived from traditional banking activities such as loan origination fees, the Company derives revenues from its automated lock box collection system and full service securities brokerage offered through Commonwealth Equity Services, Inc., an unaffiliated registered securities broker-dealer and investment adviser. Under the lock-box program, which is not tied to extensions of credit by the Company, the Company's customer arranges for payments of its accounts receivable to be made directly to the Company. The Company records on its computer the amounts paid to its customers, deposits the funds to the customer's account with the Company and provides computerized records of the amounts received to the Company's customers. Typical customers for the lock box service are municipalities who use it to automate tax collections, cable TV companies, and other commercial enterprises. -14- 17 Through Commonwealth Equity Services, Inc., the Bank provides full service securities brokerage services. Registered representatives employed by the Bank offer investment advice, execute transactions and assist customers in financial and retirement planning. Commonwealth Equity Services, Inc., provides research to and supervises the representatives in exchange for payment by the Bank for a fixed fee and a share in the commission revenues. EMPLOYEES As of December 31, 1998, the Company had 214 full-time and 72 part-time employees. The Company's employees are not represented by any collective bargaining unit. The Company believes that its employee relations are good. HOLDING COMPANY REGULATION The Company is a bank holding company as defined by the Bank Holding Company Act of 1956, as amended (the "Holding Company Act") and is registered as such with the Federal Reserve Board (the "FRB"), which is responsible for administration of the Holding Company Act. As required by the Holding Company Act, the Company files with the FRB an annual report regarding its financial condition and operations, management and intercompany relationships of the Company and the Bank. It is also subject to examination by the FRB and must obtain FRB approval before (I) acquiring direct or indirect ownership or control of more than 5% of the voting stock of any bank, unless it already owns or controls a majority of the voting stock of that bank, (ii) acquiring all or substantially all of the assets of a bank, except through a subsidiary which is a bank, or (iii) merging or consolidating with any other bank holding company. A bank holding company must also give the FRB prior written notice before purchasing or redeeming its equity securities if the gross consideration for the purchase or redemption, when aggregated with the net consideration paid by the company for all such purchases or redemptions during the preceding 12 months, is equal to 10% or more of the Company's consolidated net worth. The Holding Company Act prohibits a bank holding company, with certain exceptions, from (I) acquiring direct or indirect ownership or control of any voting shares of any company which is not a bank or a bank holding company, or (ii) engaging in any activity other than managing or controlling banks, or furnishing services to or performing services for its subsidiaries. A bank holding company may own, however, shares of a company engaged in activities which the FRB has determined are so closely related to banking or managing or controlling banks as to be a proper incident thereto. Such activities include leasing real or personal property under certain conditions; operating as a mortgage finance or factoring company; servicing loans and other extensions of credit; acting as a fiduciary; acting as investment or financial advisor under certain conditions; acting as insurance agent or broker principally in connection with extensions of credit by the bank holding company or any subsidiary; acting as underwriter for credit life insurance and credit accident and health insurance which is directly related to extensions of credit by the bank holding company or any subsidiary; arranging commercial real estate equity financing under certain circumstances; providing securities brokerage and related services as agent for the account of customers; providing bookkeeping or data processing services for the bank holding company, its affiliates and other institutions, with certain limitations; making certain equity and debt investments in community rehabilitation and development corporations; and providing certain kinds of management consulting advice to unaffiliated banks. A bank holding company and its subsidiaries are prohibited from acquiring any voting shares of, interest in, or all or substantially all of the assets of, any bank located outside the state in which the operations of the bank holding company's banking subsidiaries are principally conducted, unless the acquisition is specifically authorized by the statutes of the state in which the bank to be acquired is located. The Company and its subsidiaries are examined by federal and state regulators. The FRB has responsibility for holding company activities and performed a review in 1998. -15- 18 The regulatory standard for capital adequacy assigns risk factors to asset categories and certain off-balance sheet commitments. The fully-phased in 1992 standard requires a tier-1 capital to risk assets ratio of 4.00% and a total capital to risk assets ratio of 8.00%. At December 31, 1998, the Company's ratios were 16.66% and 19.72%, respectively. The Bank also exceeded these risk-weighted capital measures at December 31, 1998. In addition to these risk based capital requirements, federal banking regulators have leverage guidelines. The minimum leverage requirement is 4% as measured by the ratio of core capital, net of intangible assets, to total assets. At December 31, 1998 the Company's ratio was 9.55%. The Bank also exceeded the leverage requirement at December 31, 1998. FEDERAL DEPOSIT INSURANCE CORPORATION IMPROVEMENT ACT OF 1991 On December 19, 1991, the FDIC Improvement Act of 1991 (the "1991 Act") was enacted. This legislation sought to recapitalize the Bank Insurance Fund of the FDIC ("BIF"), which had been severely depleted as a result of the larger members of failed banks. The recapitalization continues to be funded through, among other things, increased deposit insurance assessments payable by BIF-insured institutions, which increases the cost of doing business by all BIF-insured institutions, including the Bank. The 1991 Act also provides for, among other things: enhanced federal supervision of depository institutions, including greater authority for the appointment of a conservator or receiver for undercapitalized institutions; the establishment of risk-based deposit insurance premiums; a requirement that the federal banking agencies amend their risk-based capital requirements to include components for interest-rate risk, concentration of credit risk, and the risk of nontraditional activities; expanded authority for cross-industry mergers and acquisitions; mandated consumer protection disclosures with respect to deposit accounts; and imposed restrictions on the activities of state-chartered banks, including the Bank. Provisions of the 1991 Act relating to the activities of state-chartered banks significantly impact the way the Company conducts its business. In this regard, the 1991 Act provides that insured state banks, such as the Bank, may not engage as principal in any activity that is not permissible for a national bank, unless the FDIC has determined that the activity would pose no significant risk to the BIF and the state bank is in compliance with applicable capital standards. Activities of subsidiaries of insured state banks are similarly restricted to those activities permissible for subsidiaries of national banks, unless the FDIC has determined that the activity would pose no significant risk to the BIF and the state bank is in compliance with applicable capital standards. INTERSTATE BANKING As of September 29, 1995, the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (the "RNA") permitted adequately capitalized and managed bank holding companies to acquire control of banks in any state. Additionally, beginning on June 1, 1997, the RNA provides for banks to branch across state lines, although individual states are authorized to permit interstate branches earlier or to elect to opt out entirely. COMPETITION The Company experiences substantial competition in attracting deposits and making loans from commercial banks, thrift institutions and other enterprises such as insurance companies and mutual funds. These competitors include several major commercial banks whose greater resources may afford them a competitive advantage by enabling them to maintain numerous branch offices and mount extensive advertising campaigns. -16- 19 ITEM 2. PROPERTIES The Company owns its main banking office, headquarters, and operations center in Medford, and 11 of the 15 other facilities in which its branch offices are located. The remaining offices are occupied under leases expiring on various dates from 1998 to 2026. ITEM 3. LEGAL PROCEEDINGS The Company and its subsidiaries are parties to various claims and lawsuits arising in the course of their normal business activities. Although the ultimate outcome of these suits cannot be ascertained at this time, it is the opinion of management that none of these matters, when resolved, will have a material adverse effect on the Company's consolidated financial position. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of Security Holders during the fourth quarter of the fiscal year ended December 31, 1998. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS (a) The Class A Common Stock of the Company is traded on the NASDAQ system. The price range of the Company's Class A common stock since January 1, 1997 is shown on page 19. The shares of Class A Common Stock are not entitled to vote in the election of Company Directors but, in limited circumstances, are entitled to vote as a class on certain extraordinary transactions, including any merger or consolidation (other than one in which the Company is the surviving corporation or one which by law may be approved by the directors without any stockholder vote) or the sale, lease, or exchange of all or substantially all of the property and assets of the Company. Since the vote of a majority of the shares of Class B Common Stock, voting as a class, is required to approve certain extraordinary corporate transactions, the Board of Directors of the Company has power to prevent any takeover of the Company not approved by them in their capacity as Class B stockholders. (b) Approximate number of equity security holders as of December 31, 1998. Approximate Number Title of Class of Record Holders Class A Common Stock 330 Class B Common Stock 69 (C) Under the Company's Articles of Organization, the holders of the Class A Common Stock are entitled to receive dividends per share equal to at least 200% of that paid, if any, from time to time on each share of Class B Common Stock. (cont.) -17- 20 The following table shows the dividends paid by the Company on the Class A and Class B Common Stock for the periods indicated.
Dividends Per Share Class A Class B ------- ------- 1996 First quarter $ .040 $.0056 Second quarter .040 .0056 Third quarter .040 .0056 Fourth quarter .040 .0056 1997 First quarter $ .050 $.0070 Second quarter .050 .0070 Third quarter .050 .0070 Fourth quarter .050 .0070 1998 First quarter $ .050 $.0070 Second quarter .050 .0070 Third quarter .050 .0070 Fourth quarter .060 .0170
As a bank holding company, the Company's ability to pay dividends is dependent in part upon the dividend payments it receives from the Bank, which are subject to certain restrictions on the payment of dividends. A Massachusetts trust company may pay dividends out of net profits from time to time, provided that either (I) the trust company's capital stock and surplus account equal an aggregate of at least 10% of its deposit liabilities, or (ii) the amount of its surplus account is equal to at least the amount of its capital account. ITEM 6. SELECTED FINANCIAL DATA The information required herein is shown on page 19 and 20. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The information required herein is shown on pages 21 through 25. ITEM 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The information required herein is shown on page 23 and 24. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The information required herein is shown on pages 26 through 44. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. -18- 21
.................................................................. FINANCIAL HIGHLIGHTS ............. 1998 1997 1996 ........................................................................................ (dollars in thousands except share data) YEAR-END Total assets $ 853,326 $ 631,125 $ 560,857 Total loans 395,903 316,390 288,280 Total deposits 643,425 515,449 476,135 Total stockholders' equity 61,051 53,857 47,489 YEARLY AVERAGES Total assets $ 719,450 $ 566,827 $ 540,396 Total earning assets 663,481 509,934 483,109 Total securities available-for-sale 138,912 83,396 91,524 Total securities held-to-maturity 137,259 109,491 94,505 Total loans 358,498 304,147 281,943 Total deposits 578,461 475,809 468,476 Total borrowed funds 56,079 32,902 19,789 Total stockholders' equity 57,539 50,329 44,791 EARNINGS Net income $ 8,105 $ 6,823 $ 5,434 Net interest income, taxable equivalent 29,980 25,448 23,132 Other operating income 5,230 4,994 4,761 Operating expenses 21,326 18,600 17,874 PERFORMANCE MEASURES Earnings per share, basic $ 1.40 $ 1.18 $ 0.95 Earnings per share, diluted $ 1.39 $ 1.17 $ 0.93 Return on average stockholders' equity 14.09% 13.56% 12.13% Book value per share at December 31 $ 10.49 $ 9.30 $ 8.25 Return on average assets 1.13% 1.20% 1.01% Common Share Data Average shares outstanding, basic 5,806,445 5,772,135 5,736,230 Average shares outstanding, diluted 5,847,444 5,830,910 5,818,942 Shares outstanding at year-end 5,822,167 5,790,417 5,758,467 ...........
PER SHARE DATA
....................................................... 1998, Quarter Ended December 31, September 30, June 30, March 31, ....................................................................................... < Market price range (Class A) High $ 20.50 $21.75 $ 22.75 $ 23.75 Low 15.00 16.00 20.00 17.875 Dividends class A 0.06 0.05 0.05 0.05 Dividends class B 0.017 0.007 0.007 0.007 .......................................................
....................................................... 1997, Quarter Ended December 31, September 30, June 30, March 31, ....................................................................................... Market price range (Class A) High $19.00 $17.25 $13.875 $14.125 Low 16.625 13.25 12.625 12.75 Dividends class A 0.05 0.05 0.05 0.05 Dividends class B 0.007 0.007 0.007 0.007 .......................................................
-19- 22
............................................................................................SELECTED FINANCIAL DATA ............ 1998 1997 1996 1995 1994 ................................................................................................................... (dollars in thousands except share data) FOR THE YEAR Interest income $ 51,878 $ 41,216 $ 38,777 $ 35,988 $ 30,461 Interest expense 22,015 15,922 15,805 14,686 10,924 ---------------------------------------------------------------------- Net interest income 29,863 25,294 22,972 21,302 19,537 Provision for loan losses 800 660 1,020 1,560 1,620 ---------------------------------------------------------------------- Net interest income after provision for loan losses 29,063 24,634 21,952 19,742 17,917 Other operating income 5,230 4,994 4,761 4,722 5,420 Operating expenses 21,326 18,600 17,874 18,224 19,265 ---------------------------------------------------------------------- Income before income taxes 12,967 11,028 8,839 6,240 4,072 Provision for income taxes 4,862 4,205 3,405 1,666 768 ---------------------------------------------------------------------- Net income $ 8,105 $ 6,823 $ 5,434 $ 4,574 $ 3,304 ====================================================================== Average shares outstanding, basic 5,806,445 5,772,135 5,736,230 5,722,646 5,722,450 Average shares outstanding, diluted 5,847,444 5,830,910 5,818,942 5,831,042 5,832,093 Earnings per share: Basic $ 1.40 $ 1.18 $ 0.95 $ 0.80 $ 0.58 Diluted $ 1.39 $ 1.17 $ 0.93 $ 0.78 $ 0.57 Dividend payout ratio 10.3% 11.1% 10.9% 9.6% 10.9% AT YEAR-END Assets $ 853,326 $ 631,125 $ 560,857 $ 531,928 $ 465,419 Loans 395,903 316,390 288,280 285,438 272,721 Deposits 643,425 515,449 476,135 458,615 409,542 Stockholders' equity 61,051 53,857 47,489 42,935 37,553 Book value per share $ 10.49 $ 9.30 $ 8.25 $ 7.50 $ 6.56 SELECTED FINANCIAL PERCENTAGES Return on average assets 1.13% 1.20% 1.01% 0.92% 0.70% Return on average stockholders' equity 14.09% 13.56% 12.13% 11.33% 9.11% Net yield on average earning assets, taxable equivalent 4.52% 4.99% 4.79% 4.86% 4.70% Net charge-offs as a percent of average loans 0.12% 0.13% 0.37% 0.57% 0.94% Average stockholders' equity to average assets 7.99% 8.88% 8.29% 8.17% 7.67% ............
-20- 23 MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION....................................................................... OVERVIEW ................................................................................ Century Bancorp, Inc. (the "Company") had net income of $8,105,000 for the year ended December 31, 1998, compared with net income of $6,823,000 for year ended December 31, 1997 and net income of $5,434,000 for the year ended December 31, 1996. Basic earnings per share were $1.40 in 1998 compared to $1.18 in 1997 and $0.95 in 1996. Diluted earnings per share were $1.39 in 1998 compared to $1.17 in 1997 and $0.93 in 1996. Total assets were $853,326,000 at December 31, 1998, an increase of 35.2% from total assets of $631,125,000 on December 31, 1997, which, in turn, were 12.5% higher than total assets of $560,857,000 on December 31, 1996. On December 31, 1998, stockholders' equity totaled $61,051,000 compared with $53,857,000 on December 31, 1997, and $47,489,000 on December 31, 1996. Book value increased to $10.49 at December 31, 1998 from $9.30 on December 31, 1997, which had increased from $8.25 on December 31, 1996. On June 11, 1998 The Company acquired Haymarket Co-operative Bank ("Haymarket"), headquartered in Boston Massachusetts, and merged Haymarket into the Company's subsidiary, Century Bank and Trust Company (the "Bank"). The purchase price was $21.1 million and was accounted for using the purchase method of accounting. The results of operations include the effect of the purchase for the 203 day period beginning June 12, 1998. In May 1998 the Company, through its newly formed subsidiary, Century Bancorp Capital Trust, issued 2,875,000 shares of Cumulative Trust Preferred Securities with a liquidation value of $10 per share. These securities pay dividends at an annualized rate of 8.30%. The Company is using the proceeds primarily for general business purposes. YEAR 2000 ................................................................................ The Company has completed its assessment of Year 2000 issues and developed a plan, budget, and testing strategy for mission-critical systems. The Bank relies on its recently converted new core processing system for critical data warehousing and transaction processing. Other, less critical, systems are supported by purchased applications software. The Bank is continually evaluating mission-critical vendor plans and monitoring project milestones. The Bank has begun testing its key transaction processing system and is expected to substantially complete testing on its core processing system and on most other applications no later than March 31, 1999. The vendor, of the core processing system, has disclosed that its processing system is Year 2000 compliant. Currently, there are five vendors for which testing will not commence until the first quarter of 1999. There can be no guarantee that the systems of other companies, or third party vendors on which the Company's systems rely, will be remedied on a timely basis. Therefore, the Company could possibly be negatively impacted to the extent other entities not affiliated with the Company are unsuccessful in properly addressing their respective Year 2000 compliance responsibilities. Specific factors that might cause such material differences include, but are not limited to, the availability and cost of personnel trained in this area, the ability to locate and correct all relevant computer codes, and similar uncertainties. The Company will continue to utilize both internal and external resources to update, or replace, develop and test all software information systems for Year 2000 modification. The Bank's cost of Year 2000 remediation, which includes its cost of converting to new mainframe software and certain internal costs, is expected to approach $1.5 - $2.0 million of which approximately $1.2 million has been incurred. The Company expects that the majority of the costs yet to be incurred will be to replace or update existing hardware and software, which will be capitalized and amortized in accordance with the Company's existing accounting policy. In most instances, upgrades to computer hardware and software are being made to improve the capacity and performance of the systems as well as to achieve Year 2000 compliance. Maintenance and modification costs will be expensed as incurred. The costs of the project and the date on which the Bank plans to complete Year 2000 testing are based on management's best estimates, which were derived utilizing numerous assumptions of future events including the continued availability of certain resources, third party modification plans and other factors. The Bank has also assessed the impact of the Year 2000 issue on its major borrowing customers. Borrowers that could experience a significant disruption in their business due to a Year 2000 failure have been identified. Management is in the process of obtaining information as to the readiness of these borrowers for Year 2000. Management is expected to substantially complete this assessment process by March 31, 1999. After the Bank completes its testing of mission-critical systems, a contingency plan will be completed for non-compliant systems. The Bank's contingency plan is expected to be in place by the second quarter of 1999. -21- 24 ................................................................................ RESULTS OF OPERATIONS ................................................................................ The Company's operating results depend primarily on net interest income and fees received for providing services. Net interest income on a fully taxable equivalent basis increased 17.8% in 1998 to $29,980,000 compared with $25,448,000 in 1997. Interest income was affected positively by the acquisition of Haymarket. Net interest income is affected by the level of interest rates, the ability of the Company's earning assets and deposits to adjust to changes in interest rates and the mix of the Company's earning assets and deposits. The net yield on earning assets on a fully taxable equivalent basis decreased to 4.52% in 1998 from 4.99% in 1997 which, in turn, had increased from 4.79% in 1996. Average earning assets were $663,481,000 in 1998, an increase of $153,453,000 or 30.1% from the average in 1997, which was 5.6% higher than the average in 1996. Total average securities, including securities available for sale and securities held to maturity, increased 43.2% to $276,171,000. The increase in average securities-held-to-maturity increased primarily as a result of leveraged balance sheet transactions. Total securities available-for-sale increased primarily as a result of the acquisition of Haymarket. Haymarket securities contributed approximately $20,000,000 to the Bank's year-to-date average. This increase in securities volume resulted in higher securities income, which increased 39.5% to $16,957,000. Total average loans increased 17.9% to $358,498,000 after increasing $22,204,000 in 1997. Total loans increased in 1998 primarily as a result of the acquisition of Haymarket. Haymarket loans contributed approximately $42,000,000 to the Bank's year-to-date average. The increase in loan volume resulted in higher loan income, which increased by 17.7% or $5,008,000 to $33,361,000. Total loan income was $26,291,000 in 1996. The Company's sources of funds include deposits and borrowed funds. On average, deposits showed an increase of 21.6% in 1998 after increasing by 1.6% in 1997. Deposits increased in 1998, primarily as a result of the acquisition of Haymarket. Haymarket deposits contributed approximately $58,000,000 to the Bank's year-to-date average. Borrowed funds increased by 70.4% in 1998 following an increase of 66.3% in 1997. The majority of the Company's borrowed funds are in retail repurchase agreements. Interest expense totaled $22,015,000 in 1998, an increase of $6,093,000 or 38.3% from 1997 when interest expense increased .7% from 1996. This increase in interest expense is due primarily to the acquisition of Haymarket. PROVISION FOR LOAN LOSS ................................................................................ The provision for loan losses was $800,000 in 1998 compared with $660,000 in 1997 and $1,020,000 in 1996. These provisions are the result of management's evaluation of the quality of the loan portfolio considering such factors as loan status, collateral values, financial condition of the borrower, the state of the economy and other relevant information. The allowance for loan losses was $6,022,000 at December 31, 1998 compared with $4,446,000 at December 31, 1997 and $4,179,000 at December 31, 1996. Expressed as a percentage of outstanding loans at year-end, the allowance was 1.52% in 1998, 1.41% in 1997 and 1.45% in 1996. This increased ratio reflects the uncertain incremental risks associated with the acquisition of Haymarket. Also, a certain section of the consumer loan portfolio has had higher than anticipated charge-off activity, accordingly the reserve has been increased. Management believes that the allowance for loan losses is adequate. Management uses available information to provide for losses but recognizes that changes in economic conditions may result in additional losses and additional loss provisions. Also, the allowance is reviewed in conjunction with regulatory examinations. These reviews may require the Company to make additional provisions to the allowance based on judgements made by the regulators. The Company experienced a slight decrease in net charge-offs in 1998 with net charge-offs as a percent of average loans outstanding at 0.12%. The comparable figures for 1997 and 1996 were 0.13% and 0.37% respectively. Non-performing loans, which include all non-accruing loans, totaled $1,281,000 on December 31, 1998, compared with $1,705,000 on December 31, 1997. -22- 25 ................................................................................ OTHER OPERATING INCOME ................................................................................ The Company continued to experience good results in its fee-based services in 1998. These fee-based services include deposit related services, lock-box processing and securities brokerage services. Total other operating income in 1998, was $5,230,000 an increase of $236,000 or 4.7% compared to 1997. This increase followed an increase of $233,000 or 4.9% in 1997, compared to 1996. Service charge income, which continues to be the largest area of other operating income with $1,800,000 in 1998, saw an increase of $9,000 in 1998. Lock-box revenues totaled $1,660,000 up $193,000 in 1998, primarily as a result of an increase in the lock-box customer base. Brokerage commissions decreased slightly to $1,130,000 in 1998 from $1,171,000 in 1997, which, saw an increase of $99,000 from 1996. OPERATING EXPENSES ................................................................................ Total operating expenses were $21,326,000 in 1998 compared to $18,600,000 in 1997 and $17,874,000 in 1996. Salaries and employee benefits expenses increased by $1,312,000 or 10.8% in 1998 after increasing 3.2% in 1997. The majority of the 1998 increase was in the salaries category and was caused by an increase in the wage base increased accruals for incentive compensation, and personnel costs associated with the acquisition of Haymarket. Nearly all of the increase for 1997 was in the salaries category and was caused by an increase in the wage base. Occupancy expense increased by $182,000 or 14.3% in 1998 primarily because of the acquisition of Haymarket properties and the assumption of Haymarket leases. Occupancy expense decreased by 3.8% in 1997 primarily because of an increase in tenant rents. Equipment expense increased by $158,000 in 1998 primarily because of increased equipment depreciation associated with the purchase of Haymarket. Equipment expense increased by $5,000 in 1997 also because of increased equipment depreciation. Other operating expenses increased by $1,072,000 in 1998, which followed a $350,000 increase in 1997. In 1998 increase were primarily the result of costs associated with the purchase of Haymarket, amortization of costs associated with the Trust Preferred Offering, expenses relating to increased professional fees for certain strategic initiatives and amortization of costs associated with the new core processing system. In 1997 increases were primarily the result of increased marketing, Federal Deposit Insurance Corporation (the "FDIC") insurance and other operating expenses. PROVISION FOR INCOME TAXES ................................................................................ Income tax expense was $4,862,000 in 1998, $4,205,000 in 1997 and $3,405,000 in 1996. The effective tax rate was 37.5% in 1998, 38.1% in 1997 and 38.5% in 1996. The Company is realizing savings in this area as a result of strategic tax savings initiatives. MARKET RISK AND ASSET LIABILITY MANAGEMENT ................................................................................ Market risk is the risk of loss from adverse changes in market prices and rates. The Company's market risk arises primarily from interest rate risk inherent in its lending and deposit taking activities, to that end, management actively monitors and manages its interest rate risk exposure. -23- 26 ................................................................................ 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 on its net interest income using several tools. One measure of the Company's exposure to differential changes in interest rates between assets and liabilities is shown in the Company's gap table shown below. Another measure is an interest rate risk management test. This test measures the impact on net interest income of an immediate change in interest rates in 100 basis point increments.
- ------------------------------------------ ------------------------------------------- Change in Interest Rates (in Basis Points) Percentage Change in Net Interest Income(1) .......................................... ........................................... +200 4.7% +100 2.3% -100 (2.3%) -200 (4.6%)
(1) The percentage change in this column represents net interest income for 12 months in a stable interest rate environment versus the Net Interest Income in the various rate scenarios. 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. The Company manages the mix, maturity and pricing of its assets and liabilities so that changes in interest rates will not impact earnings adversely The interest rate gap is used to measure the Company's exposure. At December 31,1998 the gap was: ................................................................................ Subject to Interest Rate Changes Within Three Months Three to Twelve Months ................................................................................ (in thousands) Assets $309,020 $100,511 Liabilities $263,501 176,222 ................................................................................ Gap $ 45,519 $(75,711) ................................................................................ LIQUIDITY ................................................................................ Liquidity is provided by maintaining an adequate level of liquid assets that include cash and due from banks, federal funds sold and other temporary investments. Liquid assets totaled $61,019,000 on December 31, 1998 compared with $97,892,000 on December 31, 1997, and $67,681,000 on December 31, 1996. In each of the three years deposit activity has generally been adequate to support asset activity. The source of funds for dividends paid by the Company is dividends received from the Bank. The Company and the Bank are regulated enterprises and their abilities to pay dividends are subject to regulatory review and restriction. Certain regulatory and statutory restrictions exist regarding dividends, loans and advances from the Bank to the Company. Generally, the Bank has the ability to pay dividends to the Company subject to minimum regulatory capital requirements. CAPITAL ADEQUACY ................................................................................ Total stockholders' equity was $61,051,000 at December 31, 1998, compared with $53,857,000 at December 31, 1997 and $47,489,000 at December 31, 1996. The increases in all years reported were primarily the result of retained earnings less dividends paid, although there was a $120,000 increase in 1998, a $123,000 increase in 1997 and a $133,000 increase in 1996 from the execution of certain incentive stock options. Federal banking regulators have issued risk-based capital guidelines which assign risk factors to asset categories and off-balance sheet items. The current guidelines require a tier-I capital-to-risk assets ratio of 4.00% and a total capital-to-risk assets ratio of 8.00%. The Company and the Bank exceeded these requirements with a tier-1 capital-to-risk assets ratio of 16.66% and 10.62% respectively, and total capital-to-risk assets ratio of 19.72% and 11.87%, respectively at December 31, 1998. 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, 1998, the Company and the Bank exceeded this requirement with leverage ratios of 9.55% and 6.08%, respectively. -24- 27 ................................................................................ RECENT ACCOUNTING DEVELOPMENTS ................................................................................ In June 1997, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive Income." SFAS No. 130 establishes standards for reporting and displaying comprehensive income, which is defined as all changes to equity except investments by and distributions to shareholders. Net income is a component of comprehensive income, with all other components referred to in the aggregate as other comprehensive income. The Bank has adopted SFAS No. 130 effective for January 1, 1998. In February 1998, the FASB issued SFAS No. 132, "Employers' Disclosures about Pensions and Other Postretirement Benefits -- an amendment of FASB Statements No. 87, 88, and 106." This Statement revises employers' disclosures about pension and other postretirement benefit plans. It does not change the measurement or recognition of those plans. It standardizes the disclosure requirements for pensions and other postretirement benefits to the extent practicable, requires additional information on changes in the benefit obligations and fair values of plan assets that will facilitate analysis, and eliminates certain disclosures that are no longer as useful as they were when FASB Statements No. 87, "Employers' Accounting for Pensions," No. 88, "Employers' Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits," and No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions," were issued. The Statement suggests combined formats for presentation of pension and other postretirement benefit disclosures. The provisions of the statement has been adopted in the December 31, 1998 financial statements. In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities" which amends FASB Statements No. 52, 80, 105, and 107, as well as, nullifies or modifies the consenses reached in a number of issues addressed by the Emerging Issues Task Force. This statement establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, (collectively referred to as derivatives) and for hedging activities. It requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. If certain conditions are met, a derivative may be specifically designated as (a) a hedge of the exposure to changes in the fair value of a recognized asset or liability or an unrecognized firm commitment, (b) a hedge of the exposure to variable cash flows of a forecasted transaction, or (c) a hedge of the foreign currency exposure of a net investment in a foreign operation, an unrecognized firm commitment, an available-for-sale security or a foreign- currency-denominated forecasted transaction. Under this Statement, an entity that elects to apply hedge accounting is required to establish at the inception of the hedge the method it will use for assessing the effectiveness of the hedging derivative and the measurement approach for determining the ineffective aspect of the hedge. Those methods must be consistent with the entity's approach to managing risk. This Statement is effective for the year 2000 financial statements. This statement is not expected to have a material impact on the financial statements. -25- 28
..............................................................................CONSOLIDATED BALANCE SHEETS .......... December 31, 1998 1997 ......................................................................................................... (dollars in thousands except share data) ASSETS Cash and due from banks (note 2) $ 34,518 $ 46,868 Federal funds sold and interest-bearing deposits in other banks 26,501 51,024 ........................... Total cash and cash equivalents 61,019 97,892 Securities available-for-sale, amortized cost $210,290 in 1998 and $89,004 in 1997 (note 3) 210,157 89,190 Securities held-to-maturity, market value $160,109 in 1998 and $109,454 in 1997 (notes 4 and 9) 159,875 109,239 Loans, net (note 5) 395,903 316,390 Less: allowance for loan losses (note 6) 6,022 4,446 ........................... Net loans 389,881 311,944 Bank premises and equipment (note 7) 10,543 8,718 Accrued interest receivable 6,518 4,334 Other assets (note 12) 15,333 9,808 ........................... Total assets $853,326 $631,125 =========================== LIABILITIES AND STOCKHOLDERS' EQUITY Demand deposits $163,241 $123,301 Savings and NOW deposits 153,207 149,808 Money market accounts 84,848 71,061 Time deposits (note 8) 242,129 171,279 ........................... Total deposits 643,425 515,449 Securities sold under agreements to repurchase (note 9) 57,690 32,850 Other borrowed funds (note 10) 34,846 13,474 Other liabilities 27,564 15,495 Long term debt (note 10) 28,750 - ........................... Total liabilities 792,275 577,268 Commitments and contingencies (notes 7, 14 and 15) Stockholders' equity (note 11): Class A common stock, $1.00 par value per share; authorized 10,000,000 shares; issued 3,673,397 shares in 1998 and 3,541,447 in 1997 3,673 3,541 Class B common stock, $1.00 par value per share; authorized 5,000,000 shares; issued 2,226,320 shares in 1998 and 2,326,520 in 1997 2,227 2,327 Additional paid-in-capital 10,965 10,877 Retained earnings 44,451 37,180 Treasury stock, Class A, 30,000 shares in 1998 and 1997, at cost (136) (136) Treasury stock, Class B, 47,550 shares in 1998 and 1997, at cost (41) (41) ........................... 61,139 53,748 Accumulated other comprehensive income (loss), net of taxes (note 3) (88) 109 ........................... Total stockholders' equity 61,051 53,857 ........................... Total liabilities and stockholders' equity $853,326 $631,125 ===========================
See accompanying Notes to Consolidated Financial Statements. -26- 29
CONSOLIDATED STATEMENTS OF INCOME.............................................................................. ............ Year Ended December 31, 1998 1997 1996 ............................................................................................................... (dollars in thousands except share data) INTEREST INCOME Loans $ 33,361 $ 28,353 $ 26,291 Securities held-to-maturity 8,612 7,049 6,016 Securities available-for-sale 8,345 5,107 5,661 Federal funds sold and interest-bearing deposits in other banks 1,560 707 809 -------------------------------------- Total interest income 51,878 41,216 38,777 INTEREST EXPENSE Savings and NOW deposits 4,167 3,994 3,806 Money market accounts 2,255 1,888 2,084 Time deposits (note 8) 11,445 8,474 9,020 Securities sold under agreements to repurchase 1,574 1,075 713 Other borrowed funds 2,574 491 182 -------------------------------------- Total interest expense 22,015 15,922 15,805 -------------------------------------- Net interest income 29,863 25,294 22,972 Provision for loan losses (Note 6) 800 660 1,020 -------------------------------------- Net interest income after provision for loan losses 29,063 24,634 21,952 OTHER OPERATING INCOME Service charges on deposit accounts 1,800 1,791 1,627 Lockbox fees 1,660 1,467 1,280 Brokerage commissions 1,130 1,171 1,072 Gain on sales of loans 49 136 290 Other income 591 429 492 ------------------------------------- Total other operating income 5,230 4,994 4,761 OPERATING EXPENSES Salaries and employee benefits (note 13) 13,432 12,120 11,741 Occupancy 1,454 1,272 1,322 Equipment 1,298 1,140 1,135 Other (note 16) 5,142 4,068 3,676 -------------------------------------- Total operating expenses 21,326 18,600 17,874 -------------------------------------- Income before income taxes 12,967 11,028 8,839 Provision for income taxes (Note 12) 4,862 4,205 3,405 -------------------------------------- NET INCOME $ 8,105 $ 6,823 $ 5,434 ====================================== SHARE DATA (NOTE 11) Weighted average number of shares outstanding, basic 5,806,445 5,772,135 5,736,230 Weighted average number of shares outstanding, diluted 5,847,444 5,830,910 5,818,942 Net income per share, basic $ 1.40 $ 1.18 $ 0.95 Net income per share, diluted $ 1.39 $ 1.17 $ 0.93 ............
See accompanying Notes to Consolidated Financial Statements. -27- 30
.........................................................................CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY Accumulated Class A Class B Additional Treasury Treasury Other Total Common Common Paid-In Retained Stock Stock Comprehensive Stockholders' Stock Stock Capital Earnings Class A Class B Income(Loss) Equity .................................................................................................................................... (dollars in thousands except share data) BALANCE, DECEMBER 31, 1995 $3,406 $2,396 $10,687 $26,278 $(136) $(41) $345 $42,935 Net income - - - 5,434 - - - 5,434 Other comprehensive income, net of tax: Increase in unrealized losses on securities available-for-sale, net of $299 in taxes - - - - - - (418) (418) .......... Comprehensive income 5,016 Conversion of Class B common stock to Class A common stock, 48,200 shares 48 (48) - - - - - - Stock options exercised, 34,350 shares 34 - 99 - - - - 133 Cash dividends, Class A common stock $0.16 per share - - - (543) - - - (543) Cash dividends, Class B common stock $0.0224 per share - - - (52) - - - (52) ....................................................................................... BALANCE, DECEMBER 31, 1996 3,488 2,348 10,786 31,117 (136) (41) (73) 47,489 Net income - - - 6,823 - - - 6,823 Other comprehensive income, net of tax: Increase in unrealized gains on securities available-for-sale, net of $129 in taxes - - - - - - 182 182 .......... Comprehensive income 7,005 Conversion of Class B common stock to Class A common stock, 21,200 shares 21 (21) - - - - - - Stock options exercised, 31,950 shares 32 - 91 - - - - 123 Cash dividends, Class A common stock $0.20 per share - - - (696) - - - (696) Cash dividends, Class B common stock $0.028 per share - - - (64) - - - (64) ....................................................................................... BALANCE, DECEMBER 31, 1997 3,541 2,327 10,8773 7,180 (136) (41) 109 53,857 ....................................................................................... Net income - - - 8,105 - - - 8,105 Other comprehensive income, net of tax: Increase in unrealized losses on securities available-for-sale, net of $102 in taxes - - - - - - (197) (197) .......... Comprehensive income 7,908 Conversion of Class B common stock to Class A common stock, 100,200 shares 100 (100) - - - - - - Stock options exercised, 31,750 shares 32 - 88 - - - - 120 Cash dividends, Class A common stock $0.21 per share - - - (749) - - - (749) Cash dividends, Class B common stock $0.038 per share - - - (85) - - - (85) ....................................................................................... BALANCE, DECEMBER 31, 1998 $3,673 $2,227 $10,965 $44,451 $(136) $(41) $(88) $61,051 =======================================================================================
See accompanying Notes to Consolidated Financial Statements. -28- 31
CONSOLIDATED STATEMENTS OF CASH FLOWS.................................................................... ........... Year Ended December 31, 1998 1997 1996 ......................................................................................................... (in thousands) CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 8,105 $ 6,823 $ 5,434 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses 800 660 1,020 Deferred income taxes (434) (710) (616) Net depreciation and amortization 1,389 586 668 (Increase) decrease in accrued interest receivable (1,506) (51) 9 (Increase) decrease in other assets (2,174) (1,818) 72 Loans originated for sale (2,532) (9,442) (18,033) Proceeds from sales of loans 3,179 10,507 19,317 Gain on sales of loans (48) (137) (290) (Gain) loss on sales of other real estate owned (7) 1 (82) (Decrease) increase in other liabilities (31) 8,405 189 ---------------------------------------- Net cash provided by operating activities 6,741 14,824 7,688 CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from maturities of securities available-for-sale 111,641 30,235 49,193 Purchase of securities available-for-sale (179,295) (37,934) (29,999) Proceeds from maturities of securities held-to-maturity 89,659 39,013 53,946 Purchase of securities held-to-maturity (140,304) (40,418) (83,675) Increase in investments purchased payable 11,493 - - Net cash paid for acquired institution (5,786) - - Net increase in loans (5,521) (29,400) (4,823) Proceeds from sales of real estate owned 137 566 1,121 Capital expenditures (1,801) (1,533) (608) ---------------------------------------- Net cash used in investing activities (119,777) (39,471) (14,845) CASH FLOWS FROM FINANCING ACTIVITIES: Net (decrease) increase in time deposit accounts (31,483) 6,412 9,849 Net increase in demand, savings, money market and NOW deposits 33,398 32,902 7,671 Net proceeds from the issuance of common stock 120 123 133 Cash Dividends (834) (760) (595) Net increase (decrease) in securities sold under agreements to repurchase 24,840 15,060 (3,790) Net increase in FHLB borrowings and other borrowed funds 21,372 1,121 10,456 Issuance of long term debt 28,750 - - ---------------------------------------- Net cash provided by financing activities 76,163 54,858 23,724 ---------------------------------------- Net (decrease) increase in cash and cash equivalents (36,873) 30,211 16,567 Cash and cash equivalents at beginning of year 97,892 67,681 51,114 Cash and cash equivalents at end of year $ 61,019 $ 97,892 $ 67,681 ======================================== SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid during the year for: Interest $ 24,047 $ 14,800 $ 16,170 Income taxes 3,963 4,784 3,644 Noncash transactions: Property acquired through foreclosure $ 130 $ 385 $ 376 Change in unrealized (losses) gains on securities available-for-sale, net of taxes $ (197) $ 182 $ (418) ...........
See accompanying Notes to Consolidated Financial Statements. -29- 32 ......................................NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES ................................................................................ The consolidated financial statements include the accounts of Century Bancorp, Inc. (the "Company") and its wholly-owned subsidiary, Century Bank and Trust Company (the "Bank"). The Company provides a full range of banking services to individual, business and municipal customers in Massachusetts. As a bank holding company, the Company is subject to the regulation and supervision of the Federal Reserve Board. The Bank, a state chartered financial institution, is subject to supervision and regulation by applicable state and federal banking agencies, including the Federal Reserve Board, the Office of the Comptroller of the Currency (the "Comptroller"), the Federal Deposit Insurance Corporation (the "FDIC") and the Commonwealth of Massachusetts Commissioner of Banks. The Bank is also subject to various requirements and restrictions under federal and state law, including requirements to maintain reserves against deposits, restrictions on the types and amounts of loans that may be granted and the interest that may be charged thereon, and limitations on the types of investments that may be made and the types of services that may be offered. Various consumer laws and regulations also affect the operations of the Bank. In addition to the impact of regulation, commercial banks are affected significantly by the actions of the Federal Reserve Board as it attempts to control the money supply and credit availability in order to influence the economy. All aspects of the Company's business are highly competitive. The Company faces aggressive competition from other lending institutions and from numerous other providers of financial services. The Company has one reportable operating segment under FASB 131. BASIS OF FINANCIAL STATEMENT PRESENTATION ................................................................................ The financial statements have been prepared in conformity with generally accepted accounting principles and to general practices within the banking industry. In preparing the financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the balance sheet and revenues and expenses for the period. Actual results could differ from those estimates. Material estimates that are susceptible to change in the near-term relate to the allowance for losses on loans. Management believes that the allowance for losses on loans is adequate based on independent appraisals and review of other factors associated with the assets. While management uses available information to recognize losses on loans, future additions to the allowance for loans may be necessary based on changes in economic conditions. In addition, regulatory agencies periodically review the Company's allowance for losses on loans. Such agencies may require the Company to recognize additions to the allowance for loans based on their judgements about information available to them at the time of their examination. INVESTMENT SECURITIES ................................................................................ Debt securities that the Company has the positive intent and ability to hold to maturity are classified as held-to-maturity and reported at amortized cost; debt and equity securities that are bought and held principally for the purpose of selling are classified as trading and reported at fair value, with unrealized gains and losses included in earnings; and debt and equity securities not classified as either held-to-maturity or trading are classified as available-for-sale and reported at fair value, with unrealized gains and losses excluded from earnings and reported as a separate component of stockholders' equity, net of estimated related income taxes. The Company has no securities held for trading. Premiums and discounts on investment securities are amortized or accreted into income by use of the level-yield method. If a decline in fair value below the amortized cost basis of an investment is judged to be other than temporary, the cost basis of the investment is written down to fair value. The amount of the writedown is included as a charge to earnings. Gains and losses on the sale of investment securities are recognized at the time of sale on a specific identification basis. LOANS ................................................................................ Interest on loans is recognized based on the daily principal amount outstanding. Accrual of interest is discontinued when loans become 90 days delinquent unless the collateral is sufficient to cover both principal and interest and the loan is in the process of collection. Loans, including impaired loans, on which the accrual of interest has been discontinued are designated non-accrual loans. When a loan is placed on non-accrual, all income which has been accrued but remains unpaid is reversed against current period income and all amortization of deferred loan fees is discontinued. Non-accrual loans may be returned to an accrual status when principal and interest payments are not delinquent and the risk characteristics of the loan have improved to the extent that there no longer exists a concern as to the collectibility of principal and income. Income received on non-accrual loans is either recorded in income or applied to the principal balance of the loan depending on management's evaluation as to the collectibility of principal. -30- 33 ................................................................................ Loans held for sale are carried at the lower of aggregate cost or market value. Gain or loss on sales of loans is recognized at the time of sale when the sales proceeds exceed or are less than the Bank's investment in the loans. The resulting excess service fee receivables, if any, are amortized using the interest method over the estimated life of the loans, adjusted for estimated prepayments. Discounts and premiums on loans purchased from failed financial institutions that represent market yield adjustments are accreted or amortized to interest income over the estimated lives of the loans using the level-yield method. Loan origination fees and related direct incremental loan origination costs are offset and the resulting net amount is deferred and amortized over the life of the related loans using the level-yield method. The Bank accounts for impaired loans, except those loans that are accounted for at fair value or at lower of cost or fair value, at the present value of the expected future cash flows discounted at the loan's effective interest rate. This method applies to all loans, uncollateralized as well as collateralized, except large groups of smaller-balance homogeneous loans that are collectively evaluated for impairment, loans that are measured at fair value and leases and debt securities. Management considers the payment status, net worth and earnings potential of the borrower, and the value and cash flow of the collateral as factors to determine if a loan will be paid in accordance with its contractual terms. Management does not set any minimum delay of payments as a factor in reviewing for impaired classification. Impaired loans are charged-off when management believes that the collectibility of the loan's principal is remote. In addition, criteria for classification of a loan as in-substance foreclosure has been modified so that such classification need be made only when a lender is in possession of the collateral. The Bank measures the impairment of troubled debt restructurings using the pre-modification rate of interest. The Bank recognizes the rights to service mortgage loans for others as an asset, including rights acquired through both purchases and originations. Capitalized mortgage servicing rights are amortized over the period of estimated net servicing income and are periodically evaluated for impairment based on their fair value. 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. While management uses available information in establishing the allowance for loan losses, future adjustments to the allowance may be necessary if economic conditions differ substantially from the assumptions used in making the evaluations. Loans are charged-off in whole or in part when, in management's opinion, collectibility is not probable. Management believes that the allowance for loan losses is adequate. In addition, various regulatory agencies, as part of their examination process, periodically review the Company's allowance for loan losses. Such agencies may require the Company to recognize additions to the allowance based on their judgements about information available to them at the time of their examination. BANK PREMISES AND EQUIPMENT ................................................................................ Bank premises and equipment are stated at cost less accumulated depreciation and amortization. Depreciation is computed using the straight-line method over the estimated useful lives of the assets or the terms of leases, if shorter. It is general practice to charge the cost of maintenance and repairs to operations when incurred; major expenditures for improvements are capitalized and depreciated. INCOME TAXES ................................................................................ The Company uses the asset and liability method of accounting for income taxes. Under the asset and liability method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which temporary differences are expected to be recovered or settled. Under this method, the effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. -31- 34 ......................................NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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 $0 at December 31, 1998 and $471,000 at December 31, 1997. 3. SECURITIES AVAILABLE-FOR-SALE ................................................................................
................................................ December 31, 1998 December 31, 1997 ................................................ ................................................ Gross Gross Estimated Gross Gross Estimated Amortized Unrealized Unrealized Market Amortized Unrealized Unrealized Market Cost Gains Losses Value Cost Gains Losses Value ............................................................................. ................................................ (in thousands) U.S. Government and Agencies $202,903 $343 $323 $202,923 $84,582 $237 $56 $84,763 Obligations of states and political subdivisions - - - - 750 - - 750 FHLB Stock 4,415 - - 4,415 3,419 - - 3,419 Other 2,972 18 171 2,819 253 5 - 258 ................................................ ................................................ $210,290 $361 $494 $210,157 $89,004 $242 $56 $89,190 ================================================ ================================================
Included in U.S. Government and Agency Securities are Securities pledged to secure public deposits and repurchase agreements amounting to $53,972,000 at December 31, 1998 and $13,137,000 at December 31, 1997. The following tables show the maturity distribution of the Company's securities available-for-sale at December 31, 1998 and 1997:
........................................................ December 31, 1998 December 31, 1997 ........................................................ ..................................................... Obligations Obligations U.S. of States Estimated U.S. of States Estimated Government and Political Market Government and Political Market and Agencies Subdivisions Other Total Value and Agencies Subdivisions Other Total Value .............................................................................. ..................................................... (in thousands) Within one year $ 20,445 $ - $ - $ 20,445 $ 20,525 $ 29,460 $750 $ - $30,210 $30,253 After one but within five years 138,475 - 100 138,575 138,585 54,122 - - 54,122 54,251 After five but within ten years 42,984 - 256 43,240 43,188 1,000 - 250 1,250 1,259 More than ten years 999 - 49 1,048 1,050 - - - - - Non-maturing - - $6,982 6,982 6,809 - - 3,422 3,422 3,427 ........................................................ ..................................................... $202,903 $ - $7,387 $210,290 $210,157 $84,582 $750 $3,672 $89,004 $89,190 ======================================================== =====================================================
The weighed average remaining life of investment securities available-for-sale at December 31, 1998 and 1997 was 4.0 years and 2.0 years, respectively. Included in the weighted average remaining life calculation at December 31, 1998 were $138.6 million 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. SECURITIES HELD-TO-MATURITY
................................................ December 31, 1998 December 31, 1997 ................................................ ................................................ Gross Gross Estimated Gross Gross Estimated Amortized Unrealized Unrealized Market Amortized Unrealized Unrealized Market Cost Gains Losses Value Cost Gains Losses Value ............................................................................. ................................................ (in thousands) U.S. Government and Agencies $202,903 $343 $323 $202,923 $ 84,582 $237 $ 56 $ 84,763 U.S. Government and Agencies $142,447 $607 $275 $142,779 $107,117 $347 $124 $107,340 Obligations of states and political subdivisions 11 - - 11 22 - - 22 Other 17,417 - 98 17,319 2,100 - 8 2,092 ................................................ ................................................ $159,875 $607 $373 $160,109 $109,239 $347 $132 $109,454 =============================================== ================================================
Included in U.S. Government and Agency securities are securities pledged to secure public deposits and repurchase agreements amounting to $11,676,000 at December 31, 1998 and $27,119,000 at December 31, 1997. -32- 35 ................................................................................ The following tables show the maturity distribution of the Company's securities held-to-maturity at December 31, 1997 and 1996:
........................................................ December 31,1998 December 31,1997 ........................................................ ..................................................... Obligations Obligations U.S. of States Estimated U.S. of States Estimated Government and Political Market Government and Political Market and Agencies Subdivisions Other Total Value and Agencies Subdivisions Other Total Value .............................................................................. ..................................................... (in thousands) Within one year $ 2,006 $11 $25 $ 2,042 $ 2,050 $ 9,970 $1l $2,025 $ 12,006 $12,009 After one but within five years 83,822 - 25 83,847 84,142 79,191 11 50 79,252 79,439 After five but within ten years 19,996 - 25 20,021 20,014 16,956 - 25 16,981 17,007 More than ten years 36,623 - 17,342 53,965 53,903 1,000 - - 1,000 999 .............................................................................................................. $142,447 $11 $17,417 $159,875 $160,109 $107,117 $22 $2,100 $109,239 $109,454 ........................................................ .....................................................
The weighted average remaining life of investment securities held-to-maturity at December 31, 1998 and 1997 was 11.1 years and 3.5 years, respectively. Included in the weighted average remaining life calculation at December 31, 1998 were $89.0 million 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 composition of the loan portfolio at December 31, 1998 and 1997 is as follows: ............ 1998 1997 ........................................................................ (in thousands) Construction and land development $ 21,691 $ 7,549 Commercial and industrial 64,822 50,560 Industrial revenue bonds 1,034 2,693 Commercial real estate 187,285 140,270 Residential real estate 87,518 76,160 Residential real estate held for sale - 225 Consumer 14,355 19,254 Home equity 18,839 19,031 Overdrafts 359 648 ........................ $395,903 $316,390 ........................ At December 31, 1997 and 1996, loans were carried net of discounts of $2,399,000 and $2,875,000 respectively. Included in these amounts at December 31, 1998 and 1997, residential real estate loans were carried net of discounts of $2,375,000 and $2,847,000 respectively, associated with a prior financial institution acquisition. The composition of non-accrual loans and impaired loans is as follows: ............ 1998 1997 ........................................................................ (in thousands) Loans on non-accrual $1,281 $1,705 Impaired loans on non-accrual included above 1,131 1,235 -------------------------------------------------------------------- Total recorded investment in impaired loans $2,992 $3,515 Average recorded value of impaired loans $3,048 $3,157 - ---------------------------------------------------------------------- Loans 90 days past due and still accruing $ 698 $ 7 - ---------------------------------------------------------------------- Interest income on non-accrual loans according to their original terms $ 166 $ 202 Interest income on non-accrual loans actually recorded $ 27 $ 84 Interest income recognized on impaired loans $ 142 $ 216 ............ -33- 36 ......................................NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The composition of impaired loans at December 31, is as follows: ............ 1998 1997 ........................................................................ (in thousands) Residential real estate: 1 to 4 family $ 330 $ 250 Multi-family 729 771 Construction and land development - - Commercial real estate 1,662 2,323 Commercial and industrial 271 171 ........................ Total $2,992 $3,515 Specific valuation allowance - - ........................ Total impaired loans $2,992 $3,515 ======================== There were no impaired loans with specific reserves at December 31, 1998 and 1997 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 $16,123,000 at December 31, 1998 and $18,053,000 at December 31, 1997. Additionally, the Company was servicing mortgage loans sold to others with limited recourse. The outstanding balance of these loans with limited recourse was approximately $501,000 at December 31, 1998 and $753,000 at December 31, 1997. 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 1998.
.................................................. Balance at Repayments Balance at December 31, 1997 Additions and Deletions December 31, 1998 ......................................................................................................... (in thousands) $1,427 $355 $517 $1,265 ========================================================================
6. ALLOWANCE FOR LOAN LOSSES ............ 1998 1997 1996 ............................................................................... (in thousands) Balance at beginning of year $4,446 $4,179 $4,193 Acquired allowance 1,194 - - Provision charged to operating expense 800 660 1,020 Loans charged-off (843) (689) (1,303) Loan recoveries 425 296 269 ....................................... Balance at end of year $ 6,022 $4,446 $4,179 ======================================= 7. BANK PREMISES AND EQUIPMENT ........... December 31, 1998 1997 ..................................................................... (in thousands) Land $ 1,839 $ 1,839 Bank premises 6,533 6,533 Furniture and equipment 12,504 9,468 Leasehold improvements 1,888 1,888 ........................ 22,764 19,728 Accumulated depreciation and amortization (12,221) (11,010) ........................ $ 10,543 $ 8,718 ======================== The Company and its subsidiaries are obligated under a number of noncancelable operating leases for premises and equipment expiring in various years through the year 2026. Total lease expense approximated $111,000, $85,000 and $144,000 for the years ended December 31, 1998, 1997 and 1996, respectively. -34- 37 ................................................................................ Future minimum rental commitments for noncancelable operating leases with initial or remaining terms of one year or more at December 31, 1998 were as follows:
Year Amount - -------------------------------------------------------------------------------- (in thousands) 1999 $ 126 2000 126 2001 89 2002 82 2003 82 Thereafter 582 ----------------------------------- $ 1,087 ===================================
8. DEPOSITS - ------------------------------------------------------------------------------- Time deposits as of December 31 are as follows:
1998 1997 - -------------------------------------------------------------------------------- (in thousands) Three months or less 78,845 $101,719 Three through twelve months $121,732 55,263 Over twelve months 41,552 14,297 ------------------------------------ $242,129 $171,279 ====================================
Time deposits in denominations of $100,000 or more totaled $71,832,000 and $63,214,000 at December 31, 1998 and 1997, respectively. Interest expense associated with deposits in denominations of $100,000 or more was $3,547,000, $2,251,000 and $2,124,000 for the years ended 1998, 1997 and 1996, respectively. 9. SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE - --------------------------------------------------------------------------------
1998 1997 1996 - ----------------------------------------------------------------------------------------------------- (dollars in thousands) Average rate at December 31, 3.53% 4.49% 4.34% Average balance outstanding during the year $36,953 $24,994 $16,654 Average rate during the year 4.26% 4.30% 4.28% Maximum amount outstanding at any month-end $57,690 $39,060 $17,790 Amount outstanding at December 31, $57,690 $32,850 $17,790
Amounts outstanding at December 31, 1998, 1997 and 1996 carried maturity dates of the next business day. U.S. Government and Agency securities with a total book value of $57,654,000, $32,776,000 and $17,762,000 were pledged as collateral and held by custodians to secure the agreements at December 31, 1998, 1997 and 1996, respectively. The approximate market value of the collateral at those dates was $57,626,000, $32,814,000 and $17,605,000, respectively. 10. OTHER BORROWED FUNDS AND LONG TERM DEBT - --------------------------------------------------------------------------------
December 31, 1998 1997 - ----------------------------------------------------------------------------------- (in thousands) Treasury tax and loan note $ 1,234 $ 834 Federal Home Loan Bank-IDEAL Advance 5,000 -- Federal Home Loan Bank-Advance 27,415 11,454 Other 1,196 1,186 ------------------------ Total other borrowed funds $34,846 $13,474 ========================
The Bank serves as a Treasury Tax and Loan depository under a note option with the Federal Reserve Bank of Boston. This open-ended interest bearing borrowing carries an interest rate equal to the daily Federal funds rate less 0.25%. The Bank had a credit line advance of $5,000,000 with the Federal Home Loan Bank on December 31, 1998. The interest rate on this line was 5.40%. The Bank also borrowed $1,500,000 from the Federal Home Loan Bank in July 1996. The borrowing bears interest at a fixed rate of 7.20%, has a remaining principal balance of $1,415,000 and matures on July 24, 2006. In addition, the Bank borrowed three term loans with the Federal Home Loan Bank on July 31, 1998. These loans total $26,000,000, bear a weighted average interest rate of 5.39% and mature on July 30, 2008. In May 1998 the Company, through its newly formed subsidiary, Century Bancorp Capital Trust, issued 2,875,000 shares of Cumulative Trust Preferred Securities with a liquidation value of $10 per share. These securities pay dividends at an annualized rate of 8.30% and mature on June 30, 2029. The Company is using the proceeds primarily for general business purposes. -35- 38 11. STOCKHOLDERS' EQUITY - -------------------------------------------------------------------------------- Dividends Holders of the Class A common stock may not vote in the election of directors, but may vote as a class to approve certain extraordinary corporate transactions. Class A common stockholders are entitled to receive dividends per share equal to at least 200% per share of that paid, if any, on each share of Class B common stock. Class A common stock is publicly traded. Class B common stock is not publicly traded, however, it can be converted on a share for share basis to Class A common stock at any time. Dividend payments by the Company are dependent in part on the dividends it receives from its bank subsidiary, which are subject to certain regulatory restrictions. Earnings Per Share In February 1997, the FASB issued SFAS No. 128, "Earnings per Share," which is effective for financial statements for both interim and annual periods ending December 31, 1997. Primary earnings per share ("EPS") has been replaced with basic EPS and fully diluted EPS has been replaced with diluted EPS. Diluted EPS includes the dilutive effect of common stock equivalents; basic EPS excludes all common stock equivalents. Diluted EPS is very similar to fully diluted EPS. The statement also requires a reconciliation of basic EPS to diluted EPS. The only common stock equivalents for the Company are the stock options discussed below. The dilutive effect of these stock options for 1998, 1997 and 1996 was an increase of 37,999, 58,775 and 82,712 shares, respectively. Stock Option Plan On March 10, 1987, the common stockholders of the Company approved a stock option plan (the "Option Plan") that provides for granting of options for not more than 150,000 shares of Class A common stock. Under the Option Plan, all officers and key employees of the Company are eligible to receive non-qualified and incentive stock options to purchase shares of Class A common stock. The Option Plan is administered by the Compensation Committee whose members are ineligible to participate in the Option Plan. Based on management's recommendations, the Committee submits its recommendations to the Board of Directors as to persons to whom options are to be granted, the number of shares to be granted to each, the option price (which may not be less than 85% of the fair market value for non-qualified stock options, or the fair market value for incentive stock options, of the shares on the date of grant) and the time period over which the options are exercisable (no more than ten years from the date of grant). Options exercisable at December 31, 1998 totaled 46,783 with a weighted average option price of $3.75. Information with regard to the stock option plan is as follows:
Number of Weighted Average Option Shares Option Price Per Share - ------------------------------------------------------------------------------------------------------ Outstanding at December 31, 1995 144,833 $3.80 Granted -- -- Exercised (34,350) 3.89 Cancelled -- -- - -------------------------------------------------------------------------------------------- Outstanding at December 31, 1996 110,483 3.78 Granted -- -- Exercised (31,950) 3.84 Cancelled -- -- - -------------------------------------------------------------------------------------------- Outstanding at December 31, 1997 78,533 3.75 Granted -- -- Exercised (31,750) 3.75 Cancelled -- -- - -------------------------------------------------------------------------------------------- Outstanding at December 31, 1998 46,783 $3.75 ============================================================================================
A summary of options by maturity is as follows:
Expiring During the Number of Weighted average Year Ended December 31, Shares Option Price Per Share - -------------------------------------------------------------------------------------------- 1999 -- -- 2000 46,783 $3.75 - -------------------------------------------------------------------------------------------- 46,783 $3.75 ============================================================================================
-36- 39 The Company measures compensation cost for stock-based compensation plans using the intrinsic value based method prescribed by Accounting Principles Board Opinion No. 25. The Company granted no stock options during 1998, 1997 or 1996 and, therefore, no disclosures of proforma net income and earnings per share as if the fair value method had been applied are required. The new disclosures will be provided when additional stock options are granted. Capital and Other Regulatory Requirements The Bank is subject to various regulatory requirements administered by federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory- and possibly additional discretionary-actions by regulators that, if undertaken, could have a direct material affect on the Company's financial statements. Under capital adequacy guidelines and regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the Bank's assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The Bank's capital amounts and classification are also qualitative 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 I capital (as defined in the regulations) to risk weighted assets (as defined), and Tier I capital (as defined) to average assets (as defined). Management believes, as of December 31, 1998 that the Bank meets all capital adequacy requirements to which it is subject. As of December 31, 1997, the most recent notification from the FDICcategorized 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 I risk-based, and Tier I leverage ratios as set forth in the table. There are no conditions or events since that notification that management believes would cause a change in the Bank's categorization. The Bank's actual capital amounts and ratios are presented in the following table.
To Be Well Capitalized Under Prompt Corrective Actual For Capital Adequacy Purposes Action Provisions - --------------------------------------------------------------------------------------------------------------------------------- Amount Ratio Amount Ratio Amount Ratio - --------------------------------------------------------------------------------------------------------------------------------- (dollars in thousands) As of December 31, 1998: Total capital (to risk-weighted assets) $54,777 11.87% $36,922 8.0% $46,153 10.6% Tier I capital (to risk-weighted assets) 49,005 10.62% 18,461 4.0% 27,692 6.0% Tier I capital (to average assets) 49,005 6.08% 32,254 4.0% 40,318 5.0% As of December 31, 1997: Total capital (to risk-weighted assets) $49,735 14.64% $27,179 8.0% $33,974 10.0% Tier I capital (to risk-weighted assets) 45,474 13.38% 13,590 4.0% 20,384 6.0% Tier I capital (to average assets) 45,474 7.85% 22,670 4.0% 28,338 5.0%
12. INCOME TAXES - -------------------------------------------------------------------------------- The current and deferred components of income tax expense for the years ended December 31 are as follows:
1998 1997 1996 - ----------------------------------------------------------------------------------------------- (in thousands) Current expense: Federal $4,884 $3,824 $2,959 State 349 1,091 1,062 ------------------------------------------ Total current expense 5,233 4,915 4,021 ------------------------------------------ Deferred expense: Federal (1,001) (541) (238) State 630 (169) (78) Change in valuation allowance -- -- (300) ------------------------------------------ Total deferred expense (371) (710) (616) ------------------------------------------ Provision for income taxes $4,862 $4,205 $3,405 ==========================================
Income tax accounts included in other assets and other liabilities at December 31 are as follows:
1998 1997 - ------------------------------------------------------------------------------------ (in thousands) Currently payable $(1,112) $ (419) Deferred income tax asset, net 1,834 2,235 -------------------------- $ 722 $1,816 ==========================
-37- 40 Income tax expense for the years presented is different from the amounts computed by applying the statutory Federal income tax rate of 34% 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:
1998 1997 1996 - ------------------------------------------------------------------------------------------- (in thousands) Federal income tax expense at statutory rates $4,409 $3,750 $3,005 State income taxes, net of Federal income tax benefit 646 608 649 Effect of tax-exempt interest (77) (102) (105) Change in valuation allowance -- -- (300) Other (116) (51) 156 ---------------------------------------- $4,862 $4,205 $3,405 ======================================== Effective Tax Rate 37.5% 38.1% 38.5%
Management believes that it is more likely than not that the net deferred income tax asset of $1,834,000 at December 31, 1998 will be realized. The federal tax portion of $1,834,000 of the deferred tax asset is supported by the availability of federal income taxes paid in prior carryback years. The valuation allowance was reduced by $300,000 in 1996 in recognition of the operating results achieved and the increase in recoverable federal income taxes paid in prior years. The following table sets forth the Company's gross deferred income tax assets and gross deferred income tax liabilities at December 31:
1998 1997 - ------------------------------------------------------------------------------------ (in thousands) Deferred income tax assets: Allowance for loan losses $1,578 $1,055 Deferred compensation 1,554 1,625 Unrealized loss on securities available-for-sale 45 -- Acquisition premium 114 95 Capital loss carryforward 79 -- Investments writedown 62 -- Deferred origination fees 47 -- Other -- 12 ---------------------- Gross deferred income tax asset 3,479 2,787 Valuation allowance (79) -- ---------------------- Net deferred income tax asset 3,400 2,787 Deferred income tax liabilities: Unrealized gain on securities available-for-sale -- (77) Purchase accounting (276) (297) Depreciation (186) (157) Limited partnerships (1,099) -- Other (5) (21) ---------------------- Deferred income tax asset, net $1,834 $2,235 ======================
13. EMPLOYEE BENEFITS - ------------------------------------------------------------------------------- The Company has a qualified Defined Benefit Pension Plan (the "Plan"), which is offered to all employees reaching minimum age and service requirements. A decrease in the discount rate and a stable work force in 1998 resulted in an increase in pension cost. The Company has a Supplemental Insurance/Retirement Plan(the "Supplemental Plan"), which is limited to certain officers and employees of the Company. The Supplemental Plan is voluntary and participants are required to contribute to its cost. Under the Supplemental Plan, each participant will receive a retirement benefit based on compensation and length of service. Individual life insurance policies, which are owned by the Company, are purchased covering the lives of each participant. -38- 41
Defined Benefit Pension Plan Supplemental Insurance/Retirement Plan - ----------------------------------------------------------------------------------------------------------------------------- 1998 1997 1998 1997 Change in benefit obligation: Benefit obligation at beginning of year $ 6,319 $ 4,859 $ 4,260 $ 3,557 Service cost 413 357 107 78 Interest cost 442 340 298 263 Plan amendments -- -- -- 10 Actuarial gain 917 862 902 372 Benefits paid (139) (99) (10) (20) ------------------------------------------------------------ Benefit obligation at end of year $ 7,952 $ 6,319 $ 5,557 $ 4,260 ------------------------------------------------------------ Change in plan assets: Fair value of plan assets at beginning of year $ 4,171 $ 3,341 Actual return of plan assets 268 354 Employer contributions 575 575 Benefits paid (139) (99) ------------------------------------------------------------ Fair value of plan assets at end of year $ 4,875 $ 4,171 ------------------------------------------------------------ Funded status $(3,077) $(2,148) $(5,557) $(4,260) Unrecognized transition obligation (2) (3) (309) (412) Unrecognized prior service cost (622) (722) 955 1,023 Unrecognized net actuarial loss (1,941) (987) (1,929) (1,245) ------------------------------------------------------------ Accrued benefit cost $ (512) $ (436) $(4,274) $(3,626) ============================================================ Weighted-average assumptions as of December 31: Discount rate 6.25% 7.00% 6.25% 7.00% Expected return on plan assets 8.00% 8.00% N/A N/A Rate of compensation increase 5.00% 5.00% 5.00% 5.00% Components of net periodic benefit cost: Service cost $ 413 $ 357 $ 107 $ 78 Interest cost 442 340 298 263 Expected return on plan assets (328) (270) 0 0 Amortization of unrecognized transition obligation 1 1 103 103 Recognized prior service cost 99 99 (68) (69) Recognized net gains 24 0 54 20 ------------------------------------------------------------ Net periodic cost $ 651 $ 527 $ 494 $ 395 ============================================================
The Company offers a 401(k) defined contribution plan for all employees reaching minimum age and service requirements. The plan is voluntary and, as of January 1, 1998, employee contributions are matched by the Company at a rate of 25% for the first 4% of compensation contributed by each employee. The Company's match totaled $67,000 for 1998. Administrative costs associated with the plan are absorbed by the Company. The Company does not offer any post retirement programs other than pensions. 14. COMMITMENTS AND CONTINGENCIES - -------------------------------------------------------------------------------- A number of legal claims against the Bank arising in the normal course of business were outstanding at December 31, 1998. Management, after reviewing these claims with legal counsel, is of the opinion that their resolution will not have a material adverse affect on the Company's consolidated financial position. 15. FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK - -------------------------------------------------------------------------------- The Company is party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments primarily include commitments to originate and sell loans, standby letters of credit, unused lines of credit and unadvanced portions of construction loans. The instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the consolidated balance sheet. The contract or notional amounts of those instruments reflect the extent of involvement the Company has in these particular classes of financial instruments. The Company's exposure to credit loss in the event of non-performance by the other party to the financial instrument for loan commitments and standby letters of credit is represented by the contractual amount of those instruments. The Company uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments. -39- 42 Financial instruments with off-balance sheet risk at December 31 are as follows:
Contract or Notional Amount 1998 1997 - -------------------------------------------------------------------------------------- (in thousands) Financial instruments whose contract amount represents credit risk: Commitments to originate 1-4 family mortgages $ 1,146 $ 163 Standby letters of credit 1,935 1,561 Unused lines of credit 73,926 85,204 Unadvanced portions of construction loans 1,308 321 Financial instruments whose contract amount exceeds the amount of credit risk: Commitments to sell 1-4 family mortgages -- 388
Commitments to originate loans, unadvanced portions of construction loans and unused lines of credit are generally agreements to lend to a customer provided there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Company evaluates each customer's credit worthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Company upon extension of credit, is based on management's credit evaluation of the borrower. Standby letters of credit are conditional commitments issued by the Company to guarantee the performance by a customer to a third party. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. In addition to general commitments, the Company originates 1-4 family mortgages for sale in the secondary markets. These loans are sold with and without recourse and no loan is originated without its sale having been pre-arranged. The Company was servicing mortgage loans sold to others with a maximum recourse provision of 10% of the outstanding balance of approximately $501,000 at December 31, 1998 and $753,000 at December 31, 1997. 16. OTHER OPERATING EXPENSES - --------------------------------------------------------------------------------
Year Ended December 31, 1998 1997 1996 - --------------------------------------------------------------------------------------------------------- (in thousands) Marketing $1,079 $1,024 $ 835 Supplies 488 441 471 Telephone 267 227 218 Postage and delivery 459 465 512 Legal and audit 381 330 316 Insurance 172 187 184 FDIC assessment 70 57 2 Core deposit intangible amortization 200 200 200 Goodwill amortization 171 -- -- Other 1,855 1,137 938 ----------------------------------------- $5,142 $4,068 $3,676 =========================================
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. -40- 43 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, such as noninterest bearing demand deposits, savings, N.O.W. and money market accounts, is equal to the amount payable on demand as of the balance sheet date. The fair value of certificates of deposit is based on the discounted value of contractual cash flows. The discount rate used is estimated based on the rates currently offered for deposits of similar remaining maturities. Repurchase agreements and other borrowed funds: The carrying amounts reported in the balance sheet for repurchase agreements and other borrowed funds approximate the fair values of those liabilities because of the short-term nature of these financial instruments. Off-balance sheet instruments: The fair values of the Company's unused lines of credit, commitments to originate and sell loans and standby letters of credit are estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the counterparties' credit standing. The fair value of the Company's commitments to sell mortgage loans approximates the estimated cost to terminate or otherwise settle the obligations with the counterparties. Therefore, at December 31, 1998 and 1997, there was no fair value adjustment. The carrying amounts and fair values of the Company's financial instruments at December 31 are as follows:
1998 1997 - ------------------------------------------------------------------------------------------ Carrying Carrying Amounts Fair Value Amounts Fair Value - ------------------------------------------------------------------------------------------ (in thousands) Financial assets: Cash and cash equivalents $ 61,019 $ 61,019 $ 97,892 $ 97,892 Securities available-for-sale 210,157 210,157 89,190 89,190 Investment securities held-to-maturity 159,875 160,109 109,239 109,454 Net loans 389,881 395,751 311,944 315,653 Accrued interest receivable 6,518 6,518 4,334 4,334 Financial liabilities: Deposits 643,425 644,885 515,449 515,904 Repurchase agreements and other borrowed funds 92,536 92,536 46,324 46,324 Accrued interest payable 1,612 1,612 3,123 3,123
Limitations Fair value estimates are made at a specific point in time, based on relevant market information and information about the type of financial instrument. These estimates do not reflect any premium or discount that could result from offering for sale at one time the Bank's entire holdings of a particular financial instrument. Because no active market exists for some of the Bank's financial instruments, fair value estimates are based on judgements regarding future expected loss experience, cash flows, current economic conditions, risk characteristics and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgement and therefore cannot be determined with precision. Changes in assumptions and changes in the loan, debt and interest rate markets could significantly affect the estimates. Further, the income tax ramifications related to the realization of the unrealized gains and losses can have a significant effect on the fair value estimates and have not been considered. 18. QUARTERLY RESULT OF OPERATIONS - --------------------------------------------------------------------------------
1998 Quarters Fourth Third Second First - ------------------------------------------------------------------------------------------------ (in thousands, except per share data) Interest income $ 14,451 $ 14,403 $ 12,090 $ 10,934 Interest expense 6,301 6,595 5,039 4,080 ------------------------------------------------------- Net interest income 8,150 7,808 7,051 6,854 Provision for loan losses 225 225 185 165 ------------------------------------------------------- Net-interest income after provisions for loan losses 7,925 7,583 6,866 6,689 Other operating income 1,365 1,251 1,367 1,247 Operating expenses 5,667 5,472 5,115 5,072 ------------------------------------------------------- Income before income taxes 3,623 3,362 3,118 2,864 Provision for income taxes 1,394 1,273 1,133 1,062 ------------------------------------------------------- Net income $ 2,229 $ 2,089 $ 1,985 $ 1,802 ======================================================= Share Data Average shares outstanding, basic 5,818,156 5,817,667 5,809,420 5,792,160 Average shares outstanding, diluted 5,855,477 5,858,784 5,851,732 5,853,993 Earnings per share, basic $ 0.38 $ 0.36 $ 0.34 $ 0.31 Earnings per share, diluted $ 0.38 $ 0.36 $ 0.34 $ 0.31
-41- 44
1997 Quarters Fourth Third Second First - -------------------------------------------------------------------------------------------------------- (in thousands, except per share data) Interest income $ 10,593 $ 10,395 $ 10,332 $ 9,896 Interest expense 4,094 3,991 3,992 3,845 ------------------------------------------------------- Net interest income 6,499 6,404 6,340 6,051 Provision for loan losses 135 135 135 255 ------------------------------------------------------- Net-interest income after provisions for loan losses 6,364 6,269 6,205 5,796 Other operating income 1,347 1,248 1,255 1,144 Operating expenses 4,613 4,693 4,663 4,630 Income before income taxes 3,098 2,824 2,797 2,310 Provision for income taxes 1,045 1,093 1,133 934 ------------------------------------------------------- Net income $ 2,053 $ 1,731 $ 1,664 $ 1,376 ======================================================= Share Data Average shares outstanding, basic 5,779,946 5,777,767 5,769,282 5,761,278 Average shares outstanding, diluted 5,842,167 5,846,473 5,834,441 5,835,391 Earnings per share, basic $ 0.36 $ 0.30 $ 0.29 $ 0.24 Earnings per share, diluted $ 0.35 $ 0.30 $ 0.29 $ 0.24 =======================================================
19. PARENT COMPANY FINANCIAL STATEMENTS - ------------------------------------------------------------------------------- The balance sheets of Century Bancorp, Inc. ("Parent Company") as of December 31, 1998 and 1997 and the statements of income and cash flows for each of the years in the three-year period ended December 31, 1998 are presented below. The statements of changes in stockholders' equity are identical to the consolidated statements of changes in stockholders' equity and are therefore not presented here.
Balance Sheets - ------------------------------------------------------------------ December 31, 1998 1997 - ------------------------------------------------------------------ (in thousands) Assets: Cash $35,162 $ 7,602 Investment in subsidiary, at equity 53,383 46,550 Other assets 1,672 83 ------------------- Total assets 90,217 54,235 =================== Liabilities and Stockholders' Equity: Liabilities $ 416 $ 378 Long term debt 28,750 -- Stockholders' equity 61,051 53,857 ------------------- Total liabilities and stockholders' equity $90,217 $54,235 ===================
Statements of Income - --------------------------------------------------------------------------------- Year Ended December 31, 1998 1997 1996 - --------------------------------------------------------------------------------- (in thousands) Income: Dividends from subsidiary $ 1,435 $ 1,702 $ 1,544 Interest income from deposits in bank 1,159 289 253 Other income 12 12 12 -------------------------------- Total income 2,606 2,003 1,809 Interest expense 1,485 -- -- Operating expenses 212 73 69 -------------------------------- Income before income taxes and equity in undistributed income of subsidiary 909 1,930 1,740 Income tax expense (167) 112 89 -------------------------------- Income before equity in undistributed income of subsidiary 1,076 1,818 1,651 Equity in undistributed income of subsidiary 7,029 5,005 3,783 -------------------------------- Net income $ 8,105 $ 6,823 $ 5,434 ================================
-42- 45 Statements of Cash Flows - --------------------------------------------------------------------------------
Year Ended December 31, 1998 1997 1996 - ------------------------------------------------------------------------------------------- (in thousands) Cash flows from operating activities: Net income $ 8,105 $ 6,823 $ 5,434 Adjustments to reconcile net income to net cash provided by operating activities: Undistributed income of subsidiary (7,029) (5,005) (3,783) Depreciation and amortization 138 6 6 Increase in other assets (1,728) (2) (1) Increase in liabilities 38 81 29 ------------------------------------ Net cash (used in) provided by operating activities (476) 1,830 1,785 ------------------------------------ Cash flows from financing activities: Stock options exercised 120 123 133 Cash dividends paid (834) (760) (595) Issuance of long term debt 28,750 -- -- ------------------------------------ Net cash provided by (used in) financing activities 28,036 (637) (462) ----------------------------------- Net increase in cash 27,560 1,193 1,323 Cash at beginning of year 7,602 6,409 5,086 ------------------------------------ Cash at end of year $ 35,162 $ 7,602 $ 6,409 ==================================== Supplemental disclosures of cash flow information: Cash paid during the year for: Income taxes $ 25 $ 111 $ 93
20. ACQUISITION - -------------------------------------------------------------------------------- On June 11, 1998 The Company acquired Haymarket Co-operative Bank ("Haymarket"), headquartered in Boston, Massachusetts and merged Haymarket into the Bank. The purchase price was $21.1 million and was accounted for using the purchase method of accounting. The results of operations include the effect of the purchase for the 203 day period beginning June 12, 1998. In connection with the acquisition, the fair value of the assets acquired and liabilities assumed were as follows:
June 11, 1998 - --------------------------------------------------------------- (in thousands) Assets acquired: Cash and due from banks $ 4,035 Federal funds sold and interest-bearing deposits in other banks 11,300 Securities available-for-sale 53,473 Net loans 73,823 Accrued interest receivable 678 Premises and equipment 1,649 Other Assets 84 -------- Total assets acquired 145,042 Liabilities assumed: Deposits accounts 126,572 Accrued expenses and other liabilities 1,045 -------- Total liabilities assumed 127,617 -------- Assets in excess of liabilities 17,425 Cash paid to Haymarket shareholders 21,121 Goodwill $ 3,696 ========
Goodwill is included as a component of other assets. The following condensed consolidated pro-forma results of the Company were prepared as if the acquisition had taken place on January 1 of the respective year. The pro-forma results are not necessarily indicative of the actual results of operations had the Company's acquisition of Haymarket actually occurred on January 1 of the respective year.
1998 1997 - --------------------------------------------------------------------- Net interest income $31,736 $30,336 Net income 8,453 7,964 Basic earnings per share $ 1.46 $ 1.38 Diluted earnings per share $ 1.45 $ 1.37
-43- 46 Independent Auditors' Report KPMG Peat Marwick LLP Certified Public Accountants 99 High Street Boston, Massachusetts 02110 THE BOARD OF DIRECTORS CENTURY BANCORP, INC.: We have audited the accompanying consolidated balance sheets of Century Bancorp, Inc. and subsidiary (the Company) as of December 31, 1998 and 1997, 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, 1998. 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 generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Century Bancorp, Inc. and subsidiary as of December 31, 1998 and 1997, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1998 in conformity with generally accepted accounting principles. KPMG Peat Marwick LLP January 8, 1999 -44- 47 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The directors of the Company and their ages as of December 31, 1998 are as follows:
NAME AGE POSITION George R. Baldwin 55 Director, Century Bancorp, Inc., and Century Bank and Trust Co., Roger S. Berkowitz 46 Director, Century Bancorp, Inc., and Century Bank and Trust Co. Karl E. Case, Ph. D. 52 Director, Century Bancorp, Inc., and Century Bank and Trust Co. Henry L. Foster, D.V.M. 73 Director, Century Bancorp, Inc., and Century Bank and Trust Co. Marshall I. Goldman, Ph. D. 68 Director, Century Bancorp, Inc., and Century Bank and Trust Co. Russell B. Higley, Esquire 59 Director, Century Bancorp, Inc., and Century Bank and Trust Co. Jonathan B. Kay 39 Director, Century Bancorp, Inc., and Century Bank and Trust Co. Fraser Lemley 58 Director, Century Bancorp, Inc., and Century Bank and Trust Co. Joseph P. Mercurio 50 Director, Century Bancorp, Inc., and Century Bank and Trust Co. Joseph J. Senna, Esquire 59 Director, Century Bancorp, Inc., and Century Bank and Trust Co. Barry R. Sloane 43 Director, Century Bancorp, Inc., and Century Bank and Trust Co. Jonathan G. Sloane 40 Director and Senior Vice President, Century Bancorp, Inc.; President and COO, Century Bank and Trust Company Marshall M. Sloane 72 Chairman, President and CEO, Century Bancorp, Inc., Chairman and CEO, Century Bank and Trust Company Stephanie Sonnabend 45 Director, Century Bancorp, Inc., and Century Bank and Trust Co. George F. Swansburg 56 Director, Century Bancorp, Inc., and Century Bank and Trust Co. Jon Westling 56 Director, Century Bancorp, Inc., and Century Bank and Trust Co.
-45- 48 Mr. Baldwin became a director of the Company in 1996. He has been a Director of Century Bank and Trust Company since January 1995. Mr. Baldwin is President and CEO of Baldwin & Co. Mr. Berkowitz became a director of the Company in 1996. He was elected a director of Century Bank/Suffolk in 1986 and has been a director of Century Bank and Trust Company since the banks merged in 1992. Mr. Berkowitz is President of Legal SeaFoods, Inc. Dr. Case became a director of the Company in 1996. Dr. Case has been a director of Century Bank and Trust Company since March 1995. He is the Marion Butler McLean Professor of Economics at Wellesley College and a Visiting Scholar at the Federal Reserve Bank of Boston. Dr. Foster has been a director of the Company since its organization in 1972. He was a founding director of Century Bank and Trust Company in 1969. For over 40 years he has been Chairman of the Board of Charles River Laboratories, Inc. Dr. Goldman has been a director of the Company since its organization in 1972. He was also a founding director of Century Bank and Trust Company in 1969. He has been a Professor of Economics at Wellesley College since 1968 and Associate Director of the Russian Research Center at Harvard University since 1975. Mr. Higley became a director of the Company in 1996. He has been a director of Century Bank and Trust Company since April 1986. Mr. Higley is an attorney. Mr. Kay became a director of the Company in January 1997. He was also elected a director of Century Bank and Trust Company in January 1997. Mr. Kay is President of The Kay Companies. Mr. Lemley became a director of the Company in 1996. He has been a director of Century Bank and Trust Company since March 1988. Mr. Lemley is Chairman of the Board of Sentry Ford, Inc., Sentry Lincoln-Mercury, Inc., and Sentry South Lincoln-Mercury, Inc. Mr. Mercurio became a director of the Company in 1991. He was formerly a director of Century Bank and Trust Company from 1989 to 1991. He is an Executive Vice President of Boston University. Mr. Senna became a director of the Company in 1986. He has been a director of Century Bank and Trust Company since 1979. Mr. Senna is an attorney. Mr. Barry R. Sloane became a director of the Company in January 1997. He was also elected a director of Century Bank and Trust Company in January 1997. Mr. Sloane is Region Head of The Citibank Private Bank. Mr. Jonathan G. Sloane became a director of the Company in 1986. He was elected President and director of Century Bank/Suffolk in 1983. In 1992 he was elected Executive Vice President of Century Bank and Trust Company and in 1995 promoted to Senior Executive Vice President. Mr. Sloane is currently Executive Vice President of Century Bancorp Inc. and President and COO of Century Bank and Trust Company. Mr. Marshall M. Sloane is the founder of the Company and has been Chairman, President and CEO since its organization in 1972. He founded Century Bank and Trust Company in 1969 and is currently its Chairman and CEO. Ms. Sonnabend became a director of the Company in July 1997. She has been a director of Century Bank and Trust Company since April 1997. Ms. Sonnabend is President of Sonesta International Hotels Corporation. Mr. Swansburg became a director of the Company in 1986 and was elected Executive Vice President in 1995. He was President of Century North Shore Bank and Trust Company. In 1992 he was elected President and COO of Century Bank and Trust Company. He is now retired. Mr. Westling became a director of the Company in 1996. He has been a director of Century Bank and Trust Company since April 1995. Mr. Westling is President of Boston University. All of the Company's directors are elected annually and hold office until their successors are duly elected and qualified. There are no family relationships between any of the directors or executive officers, except that Barry R. Sloane and Jonathan G. Sloane are the sons of Marshall M. Sloane and Jonathan B. Kay is the son-in-law of Marshall M. Sloane. -46- 49 The Company has a Compensation and Audit Committee. The Compensation Committee is a committee of the Board of Directors composed of Joseph P. Mercurio as Chairman, Fraser Lemley and Roger S. Berkowitz. It reviews the salaries of the Company's officers and administers the Company's Supplemental Executive Insurance/Retirement Income Plan, Incentive Compensation Plan and Stock Option Plan. The Audit Committee is composed of Joseph Senna, Chairman and George Baldwin, Russell B. Higley and Jon Westling. It meets with KPMG Peat Marwick LLP, independent certified public accountants, in connection with the annual audit of the Company's financial statements and reviews the findings and recommendations of the FRB, FDIC and Massachusetts Bank Commissioner's staff in connection with their examinations and the internal audit reports and procedures for the Company and its subsidiary. Directors not employed by the Company receive $100 per Board meeting attended and $200 per committee meeting attended. ITEM 11. EXECUTIVE COMPENSATION AND OTHER INFORMATION Executive officers are elected annually by the Board prior to the Annual Meeting of Shareholders to serve for a one year term and until their successors are elected and qualified. The following table sets forth the name of each executive officer of the Company and the principal positions and offices he holds with the Company. Unless otherwise noted, each of these officers has served as an executive officer of the Company or its principal subsidiary for at least five years. Marshall M. Sloane Chairman, President and CEO; Chairman and CEO, Century Bank and Trust Company. Mr. Sloane is 72 years of age. Jonathan G. Sloane Director and Executive Vice President; Director, President and COO, Century Bank and Trust Company. Mr. Sloane is 40 years of age. Paul V. Cusick, Jr. Vice President and Treasurer; Executive Vice President, Chief Financial Officer and Treasurer, Century Bank and Trust Company. Mr. Cusick is 54 years of age. Kenneth M. Johnson President, Century Financial Services, Inc. Mr. Johnson is 38 years of age. Donald H. Lang Executive Vice President, Century Bank and Trust Company with responsibility for lending. Mr. Lang is 58 years of age. William J. Sloboda Executive Vice President, Century Bank and Trust Company with responsibility for operations. Mr. Sloboda is 56 years of age. COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION Decisions on compensation of the Company's executives are generally made by the Compensation Committee of the Board of Directors. Each member of the Compensation Committee is a non-employee director. The goal of the Committee is to provide competitive levels of compensation in order to attract and retain qualified executive personnel. The Compensation Committee believes that the actions of each executive officer have the potential to affect the short and long term profitability of the Company. Accordingly, the Compensation Committee places considerable importance on the design and administration of the executive compensation program. The Company has an executive compensation program that is driven by the overall performance of the Company, the increase in shareholder value, the performance of the business unit directly affected by the executive and by the performance of the individual executive. The three primary components of the executive compensation program are base salary, cash incentive plan and stock based incentive plans. -47- 50 BASE SALARY Base salary levels are set so that the Company has the management talent to meet the challenges in the financial services industry. Several factors are included in setting base salaries including the responsibilities of the executive officer, the scope of the executive's position, individual performance and salary levels at peer banks. Historically, the Company's executive compensation practices have been designed to provide total compensation in the middle range of compensation levels at similar banking institutions. Salary increases for the senior management group have averaged 3% to 6% during the last several years. CASH INCENTIVE PLANS The Company has a cash incentive compensation plan which provides for the award of bonuses up to a percentage of base salary to officers of the Company or its subsidiaries. Recipients of incentive compensation are selected by the Compensation Committee, upon the recommendation of management, as eligible to participate in the plan. Awards are based upon the attainments of established objectives including profitability, expense control, sales volume and overall job performance. No bonuses are paid unless actual earnings are at least 90% of budgeted net income. Upon recommendation of the Compensation Committee, the Board of Directors determines the amounts, if any, to be awarded. Earned bonuses for 1998, 1997 and 1996 are shown in the Summary Compensation Table. STOCK INCENTIVE PLANS One of the Compensation Committee's priorities is for executives to be significant shareholders so that the interest of the executives are aligned with the shareholders and decisions are made as owners of the Company. On March 10, 1987, the stockholders approved a Stock Option Plan (the "Option Plan") that the Board of Directors adopted on February 24, 1987, that provides for grants of options to purchase no more than 150,000 shares of Class A Common Stock. Options may be granted, in the discretion of the Board of Directors, to officers and other key employees of the Company. Options granted under the Option Plan may be either incentive stock options as defined in the Internal Revenue Code or non-qualified stock options. The Option Plan is administrated by the Compensation Committee (whose members are ineligible to participate in the Option Plan) which makes recommendations, based upon management's recommendations, to the Board of Directors as to persons to whom options are to be granted, the number of shares to be optioned 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 periods during which options are exercisable (no more than ten years from the date of grants). In the event of a reorganization, as defined in the Option Plan, the Board of Directors may terminate the exercise period by giving 30 days notice to all participants, during which time all outstanding options may be exercised. Options for 146,500 shares were granted in 1994. EXECUTIVE BENEFITS The Company's executive compensation package includes a special benefits component in addition to base salary and cash and stock incentive plans. These special benefits are viewed as less important than the above. Where such benefits are provided, they are intended to support other business purposes including facilitating business development efforts. CHIEF EXECUTIVE OFFICER COMPENSATION Mr. Marshall Sloane is eligible to participate in the same executive compensation plans available to other executive officers described above. The 1998 cash compensation for Mr. Sloane was $603,500 of which $464,500 was base salary. CONCLUSION The Compensation Committee believes that the executive compensation package will motivate the management team to produce the results the Company has historically achieved. -48- 51 COMPARISON OF FIVE-YEAR CUMULATIVE TOTAL RETURN*
$600 $500 $400 Century $300 NASDAQ Bank Stocks $200 NASDAQ U.S. $100 $ 0 12/31/93 12/31/94 12/31/95 12/31/96 12/31/97 12/31/98
Value of $100 Invested on December 31, 1993 at:
12/31/94 12/31/95 12/31/96 12/31/97 12/31/98 -------- -------- -------- -------- -------- Century 232.49 298.07 391.50 540.26 557.67 Nasdaq Banks 99.64 148.38 195.91 328.02 324.90 Nasdaq U.S. 97.75 138.26 170.01 208.58 293.21 * Assumes that the value of the investment in the Company's Common Stock and each index was $100 on December 31, 1993 and that all dividends were reinvested. -49-
52 SUMMARY OF CASH AND CERTAIN OTHER COMPENSATION The following table shows, for fiscal years ending December 31, 1996, 1997 and 1998, the cash compensation paid by the Company and its subsidiaries, as well as certain other compensation paid, accrued or granted for those years to the five most highly compensated executive officers of the Company.
SUMMARY COMPENSATION TABLE ==================================================================================================================================== Long-Term Compensation ---------------------------------- Annual Compensation Awards Payouts ====================================================================================================================== Restricted Securities Stock Underlying LTIP All Other Salary Bonus(1) Other Awards Options/ Payouts Compensation Name and Principal Position Year ($) ($) ($) ($) SARs(#) ($) ($) - ------------------------------------------------------------------------------------------------------------------------------------ Marshall M. Sloane 1998 464,500 199,400 0 0 0 0 0 Chairman, President and 1997 438,200 139,000 0 0 0 0 0 CEO, Century Bancorp, Inc. 1996 413,400 125,260 0 0 0 0 0 Chairman and CEO, Century Bank and Trust Company - ------------------------------------------------------------------------------------------------------------------------------------ Jonathan G. Sloane 1998 200,000 79,760 0 0 0 0 0 Executive Vice President 1997 154,000 40,905 0 0 0 0 0 Century Bancorp, Inc. 1996 148,000 36,852 0 0 0 0 0 President and COO, Century Bank and Trust Company - ------------------------------------------------------------------------------------------------------------------------------------ Kenneth M. Johnson 1998 202,947 0 0 0 0 0 0 President 1997 218,827 0 0 0 0 0 0 Century Financial Services, 1996 177,859 0 0 0 0 0 0 Inc. - ------------------------------------------------------------------------------------------------------------------------------------ William J. Sloboda 1998 152,400 30,000 0 0 0 0 0 Executive Vice President 1997 147,900 36,827 0 0 0 0 0 Century Bank and Trust 1996 145,000 29,000 0 0 0 0 0 Company - ------------------------------------------------------------------------------------------------------------------------------------ Donald H. Lang 1998 132,000 40,000 0 0 0 0 0 Executive Vice President 1997 127,000 30,793 0 0 0 0 0 Century Bank and Trust 1996 123,300 27,742 0 0 0 0 0 Company ====================================================================================================================================
(1) Bonus amounts are based on performance for the years shown. STOCK OPTION PLAN The Company has granted incentive stock options to purchase 126,500 shares of Class A Common Stock, at 100% of the January 19, 1994 closing price of $3.75 per share, to 18 officers and employees. The Company also granted incentive stock options to purchase 20,000 shares of Class A Common Stock at $4.125 to Marshall M. Sloane. Options granted to the officers listed below are as follows.
NAME OF INDIVIDUAL NUMBER OF SHARES ------------------ ---------------- Marshall M. Sloane 20,000 Donald H. Lang 15,000 Jonathan G. Sloane 16,000 William J. Sloboda 16,000
Options for the eighteen participants have six year terms and become exercisable in increments of 33.3% of the shares covered thereby per year, commencing in January of 1995. Mr. Sloane's options have five year terms. -50- 53 SUPPLEMENTAL EXECUTIVE INSURANCE/RETIREMENT INCOME PLAN Executive officers of the Company or its subsidiaries who have at least one year of service may participate in the Supplemental Executive Insurance/Retirement Income Plan (the "Supplemental Plan"). The Company maintains split dollar life insurance policies for participants, in addition to the group term life insurance, which provides life insurance equal to twice the individual's salary with a maximum of $200,000, which they receive under a policy the Company maintains for its employees generally. The split dollar insurance provides death benefits if the participant dies while in the employ of the Company, equal to $2,322,500, $1,000,000, $762,000, $660,000 for Messrs. Marshall M. Sloane, Jonathan G. Sloane, Sloboda and Lang. Premiums paid by the Company in 1998 amounted to $87,800, $8,300, $28,400, $27,600, for policies on the lives of Messrs. Marshall M. Sloane, Jonathan G. Sloane, Sloboda, and Lang,. The policies are on an "insurance bonus" basis, which means that the Company pays the full amount of all premiums on the policies but an amount equal to the one-year term cost of the insurance is treated for tax purposes as a bonus to the insured. The Company is the owner of these policies and each participating employee has received an assignment of a portion of each policy's proceeds. Upon the death of a participant, the Company will receive benefits equal to the difference between the death benefits payable to the named beneficiary under the Supplemental Plan and the face amount of the policy (less any policy loans then in force). A participant in the Supplemental Plan is also entitled to retirement benefits. Participants, upon retirement at age 65, after a specified number of years of service, are entitled to receive for life, with ten years certain, 75% of their highest 60 months salary for certain executives, or 66% of such salary if the participants are Senior Officers (as determined by the Compensation Committee), less the primary social security benefits and the benefit received from the defined benefit retirement plan. If a participant retires or terminates employment prior to age 65 such person is entitled to a reduced benefit. Five years of service are required for any benefits to become vested. Thereafter benefits vest incrementally. The following table illustrates representative annual retirement benefits at various compensation levels for executive management employees under the Supplemental Plan who retire at age 65 and with 15 years of service, without reflecting the required offset of benefits from social security and the defined benefit retirement plan.
Five Year Average Compensation Annual Benefit -------------------- -------------- $ 50,000 $ 37,500 100,000 75,000 150,000 112,500 200,000 150,000 250,000 187,500 300,000 225,000
As of January 1, 1998, Messrs. Marshall M. Sloane, Jonathan G. Sloane, Sloboda, and Lang, were 100%, 100%, 100%, and 92.5%, vested, respectively, under the Supplemental Plan. -51- 54 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table sets forth certain information as to the number and percentage of shares of Class A and Class B Common Stock beneficially owned as of December 31, 1998 (i) by each person known by the Company to own beneficially more than 5% of the Company's outstanding shares of Class A or Class B Common Stock (ii) by each of the Company's directors and certain officers; and (iii) by all directors and officers of the Company as a group.
NUMBER OF BENEFICIAL OWNER & ADDRESS OR NUMBER CLASS A % A CLASS B % B OF PERSONS IN GROUP OWNED OWNED OWNED OWNED - ------------------------------------ --------- ----- ---------- ------ Charles J. Moore (i) 222,000 6.09% The Banc Funds 208 South LaSalle Street Chicago, IL 60604 Warburg Pincus Asset Management, Inc. (i) 215,855 5.92% 466 Lexington Avenue New York, New York 10017 Marshall M. Sloane (i)(ii) 16,113(1) 0.44% 1,705,630(2) 78.28% 400 Mystic Ave. Medford, MA 02155 George R. Baldwin (ii) 6,270 0.17% Roger S. Berkowitz (ii) 2,013 0.06% Karl E. Case (ii) 422 0.01% Paul V. Cusick, Jr. (ii) 11,200 0.31% Henry L. Foster, D.V.M. (ii) 18,536 0.51% 1,000 0.05% Marshall I. Goldman (ii) 341(3) 0.01% 30,000(4) 1.38% Russell B. Higley, Esquire (ii) 4,527 0.12% Jonathan B. Kay (ii) 3,305(7) 0.09% 60,000(6) 2.75% Donald H. Lang (ii) 10,600 0.29% Fraser Lemley (ii) 4,052 0.11% 500(9) 0.02% Joseph P. Mercurio (ii) 1,628 0.04% Joseph J. Senna (ii) 44,905(5) 1.23% Barry R. Sloane (ii) 399 0.01% Jonathan G. Sloane (ii) 927(8) 0.03% 60,000 2.75% William J. Sloboda (ii) 11,509 0.32% 500 0.02% Stephanie Sonnabend (ii) 213 0.01% George F. Swansburg (ii) 30,040 0.82% Jon Westling (ii) 472 0.01% All directors and officers as a group (20 in number) (iii) 171,572 4.71% 1,857,730 85.27%
(1) Includes 2,500 shares owned by Mrs. Sloane and also includes 13,316 shares held in trust for Mr. Sloane's grandchildren. (2) Includes 1,500 shares owned by Mrs. Sloane, and does not include 120,000 shares owned by Mr. Sloane's children. Mr. Sloane disclaims beneficial ownership of such 120,000 shares. (3) Does not include 9,000 shares held of record by Mr. Goldman's children; Mr. Goldman disclaims beneficial ownership of such shares. (4) Does not include 9,000 shares held of record by Mr. Goldman's children; Mr.Goldman disclaims beneficial ownership of such shares. (5) Includes 34,800 shares owned by Mrs. Senna. (6) Entire 60,000 shares are owned by Mrs. Kay, Marshall Sloane's daughter. (7) Includes 10 shares owned by Mrs. Kay. (8) Includes 10 shares owned by Mrs. Debra Sloane and includes 320 shares owned by Mr. Jonathan Sloane's children. (9) Entire 500 shares owned by Mrs. Lemley. -52- 55 COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT Section 16(a) of the Exchange Act requires the Company's Executive Officers and Directors, and any persons who own more than 10% of a registered class of the Company's equity securities, to file reports of ownership and changes in ownership of securities with the SEC and NASDAQ. Executive Officers, Directors, and greater than 10% stockholders (of which, to the Company's knowledge, there currently are none) are required by SEC regulation to furnish the Company's with copies of all Section 16(a) forms they file. Based solely on a review of the copies of such reports received by it or written representations from certain reporting persons that no other reports were required, the corporation believes that, during 1998, all Section 16(a) filing requirements applicable to its Executive Officers and Directors were complied with, except that reports on initial holdings and subsequent purchases by one director were filed late. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS None. PART IV ------- ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) (1) Financial Statements. The following financial statements of the company and its subsidiaries are presented in Item 8: Independent Auditors' Report Consolidated Balance Sheets -- December 31, 1998 and 1997 Consolidated Statements of Income -- Years Ended December 31, 1998, 1997 and 1996 Consolidated Statements of Changes in Stockholders' Equity -- Years ended December 31, 1998, 1997 and 1996 Consolidated Statements of Cash Flows -- Years Ended December 31, 1998, 1997 and 1996 Notes to Consolidated Financial Statements (2) Financial Statement Schedules All schedules are omitted because either the required information is shown in the financial statements or notes incorporated by reference, or they are not applicable, or the data is not significant. (3) Exhibits Those exhibits required by Item 601 of Regulation S-K and by paragraph (C) below previously filed. (b) Reports on Form 8K. There were no items reported on Form 8K during the last quarter of the period covered by this Form. (c) Exhibits required by Item 601 of Regulation S-K. Required exhibits previously filed (d) Financial Statement required by Regulation S-X. Schedules to Consolidated Financial Statements required by Regulation S-X are not required under the related instructions or are inapplicable, and therefore have been omitted. -53- 56 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on this 9th day of March 1999. Century Bancorp, Inc. /s/ MARSHALL M. SLOANE ----------------------------------------------- By: Marshall M. Sloane, Chairman, President and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated and on the date indicated. /s/ GEORGE R. BALDWIN /s/ BARRY R. SLOANE - ----------------------------------- -------------------------------------- George R. Baldwin, Director Barry R. Sloane, Director /s/ ROGER S. BERKOWITZ /s/ STEPHANIE SONNABEND - ----------------------------------- -------------------------------------- Roger S. Berkowitz, Director Stephanie Sonnabend, Director /s/ KARL E. CASE /s/ GEORGE F. SWANSBURG - ----------------------------------- -------------------------------------- Karl E. Case, Ph.D., Director George F. Swansburg, Director /s/ HENRY L. FOSTER /s/ JON WESTLING - ----------------------------------- -------------------------------------- Henry L. Foster, D.V.M., Director Jon Westling, Director /s/ MARSHALL I. GOLDMAN /s/ MARSHALL M. SLOANE - ----------------------------------- -------------------------------------- Marshall I. Goldman, Ph.D., Director Marshall M. Sloane, Chairman, President and Chief Executive Officer /s/ RUSSELL B. HIGLEY /s/ JONATHAN G. SLOANE - ----------------------------------- -------------------------------------- Russell B. Higley, Esquire, Director Jonathan G. Sloane, Director and Executive Vice President /s/ JONATHAN B. KAY /s/ PAUL V. CUSICK, JR. - ----------------------------------- -------------------------------------- Jonathan B. Kay, Director Paul V. Cusick, Jr., Vice President and Treasurer, Principal Financial Officer /s/ FRASER LEMLEY /s/ KENNETH A. SAMUELIAN - ----------------------------------- -------------------------------------- Fraser Lemley, Director Kenneth A. Samuelian, Vice President, Controller and Compliance Officer, Century Bank and Trust Company, Principal Accounting Officer /s/ JOSEPH P. MERCURIO - ----------------------------------- Joseph P. Mercurio, Director /s/ JOSEPH J. SENNA - ----------------------------------- Joseph J. Senna, Esquire, Director -54- EX-27 2 FINANCIAL DATA SCHEDULE
9 0000812348 CENTURY BANCORP, INC. 1,000 U.S. DOLLARS 12-MOS DEC-31-1998 JAN-01-1998 DEC-31-1998 1 34,518 1 26,500 0 210,157 159,875 160,109 395,903 6,022 853,326 643,425 66,536 27,564 54,750 0 0 5,900 55,151 853,326 33,361 16,957 1,560 51,878 17,867 22,015 29,863 800 0 21,326 12,967 8,105 0 0 8,105 1.40 1.39 4.52 1,281 698 1,011 8,700 4,446 843 425 6,022 6,022 0 0
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