-----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, EXF0vq++/pQcZj5x3ODjZOCWWBMyDB1fjSdf8y0Le+lFY2pApRDr4OHhsmcmJl4X PQUDL7mjI/p126tPBSG4tQ== 0000950135-97-001338.txt : 19970327 0000950135-97-001338.hdr.sgml : 19970327 ACCESSION NUMBER: 0000950135-97-001338 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970326 SROS: NASD 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: 1934 Act SEC FILE NUMBER: 000-15752 FILM NUMBER: 97563150 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 BANKCORP, 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, 1996 --------------------------------------------- [ ] 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: (617)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, 1997: $5,992,180 Indicate the number of shares outstanding of each of the registrant's classes of common stock as of February 28, 1997: CLASS A COMMON STOCK, $1.00 PAR VALUE 3,461,297 SHARES CLASS B COMMON STOCK, $1.00 PAR VALUE 2,300,170 SHARES i 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 17 HOLDERS 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 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 42-44 ITEM 11 EXECUTIVE COMPENSATION AND OTHER INFORMATION 44-48 ITEM 12 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS 49 AND MANAGEMENT ITEM 13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 50 PART IV ITEM 14 EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND 50 REPORTS ON FORM 8-K SIGNATURES 51 ii 3 PART I ITEM 1. BUSINESS THE COMPANY Century Bancorp, Inc. (together with its subsidiary, unless the context otherwise requires, the "Company"), is a 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. During November 1992, the Company merged two former banking subsidiaries, Century North Shore Bank and Trust Company and Century Bank/Suffolk, into Century Bank and Trust Company. The Company had total assets of $560.9 million on December 31, 1996. On that date the assets of Century Bank and Trust Company were $465.3 million. The Company presently operates 15 banking offices in 14 cities and towns 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 March 26, 1993 the Bank assumed $43.5 million in deposits of the former Wollaston Credit Union of Quincy, Massachusetts from the Massachusetts Credit Union Share Insurance Corporation. The Bank also acquired $25.2 million in residential and consumer loans, $6.2 million in investment securities and $12.9 million in cash. The Bank continues to operate the former branches of Wollaston and intends to continue to seek similar acquisitions in its market area or contiguous market areas. 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 the state. The Company's principal executive offices are located at 400 Mystic Avenue, Medford, Massachusetts 02155. Its telephone number is (617) 391-4000. -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, -------------------------------------------------------------------------- 1996 1995 ---- ---- Average Interest Rate Average Interest Rate Balance Income (1) Earned (1) Balance Income (1) Earned (1) ------- ---------- ---------- ------- ---------- ---------- (Dollars In Thousands) Assets Interest-earning assets: Loans(2) $ 281,943 $ 26,429 9.37% $ 279,555 $ 26,490 9.48% Securities available-for-sale: Taxable 90,652 5,627 6.21% 70,467 4,218 6.00% Tax-exempt 872 52 5.96% 1,372 91 6.63% Securities held-to-maturity: Taxable 94,335 6,007 6.37% 62,158 3,650 5.87% Tax-exempt 170 13 7.65% 180 15 8.33% Federal funds sold 15,090 807 5.35% 29,076 1,723 5.93% Interest bearing deposits in other banks 47 2 4.26% 29 1 3.45% --------- --------- --------- --------- Total interest-earning assets 483,109 38,937 8.06% 442,837 36,188 8.17% --------- ----- --------- ----- Non interest-earning assets 61,450 56,127 Allowance for loan losses (4,163) (4,479) --------- --------- Total assets $ 540,396 $ 494,485 ========= =========
YEAR ENDED DECEMBER 31, ---------------------------------- 1994 ---- Average Interest Rate Balance Income (1) Earned (1) --------- --------- --------- (Dollars In Thousands) Assets Interest-earning assets: Loans(2) $ 267,123 $ 23,418 8.77% Securities available-for-sale: Taxable 52,435 3,121 5.95% Tax-exempt 68 5 7.35% Securities held-to-maturity: Taxable 70,342 2,812 4.00% Tax-exempt 474 62 13.08% Federal funds sold 30,462 1,287 4.22% Interest bearing deposits in other banks 0 0 0.00% --------- --------- Total interest-earning assets 420,904 30,705 7.30% --------- ------ Non interest-earning assets 56,671 Allowance for loan losses (4,765) --------- Total assets $ 472,810 =========
- -------------------------------------------------------------------------------- (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, ------------------------------------------------------------------------- 1996 1995 ---- ---- Average Interest Income Rate Earned Average Interest Income Rate Earned Balance /Expense (1) /Paid (1) Balance /Expense (1) /Paid (1) -------- ----------- ---------- -------- --------------- ----------- (Dollars In Thousands) Liabilities and Stockholders' Equity Interest-bearing deposits: NOW accounts $ 84,620 $ 2,367 2.80% $ 82,628 $ 2,568 3.11% Savings accounts 55,905 1,439 2.57% 50,916 1,335 2.62% Money market accounts 70,735 2,084 2.95% 78,029 2,487 3.19% Time deposits 158,037 9,020 5.71% 134,769 7,612 5.65% -------- ------- -------- ------ Total interest-bearing deposits 369,297 14,910 4.04% 346,342 14,002 4.04% Securities sold under agreements to repurchase 16,654 713 4.28% 14,390 632 4.39% Other borrowed funds 3,135 182 5.81% 960 52 5.42% -------- ------- -------- ------ Total interest-bearing liabilities 389,086 15,805 4.06% 361,692 14,686 4.06% ------- ---- ------ ----- Non interest-bearing liabilities Demand deposits 99,179 86,328 Other liabilities 7,340 6,084 -------- -------- Total liabilities 495,605 454,104 Stockholders' equity 44,791 40,381 -------- -------- Total liabilities & stockholders' equity $540,396 $494,485 ======== ======== Net interest income(1) $23,132 $21,502 ======= ======= Net interest spread 4.00% 4.11% ==== ==== Net yield on earnings assets 4.79% 4.86% ==== ====
YEAR ENDED DECEMBER 31, ----------------------------------- 1994 ---- Average Interest Income Rate Earned Balance /Expense (1) /Paid (1) -------- ------------ ----------- (Dollars In Thousands) Liabilities and Stockholders' Equity Interest-bearing deposits: NOW accounts $ 75,941 $ 1,721 2.27% Savings accounts 53,166 1,328 2.50% Money market accounts 94,820 2,330 2.46% Time deposits 124,963 5,245 4.20% -------- ------- Total interest-bearing deposits 348,890 10,624 3.05% Securities sold under agreements to repurchase 10,235 268 2.62% Other borrowed funds 732 32 4.37% -------- ------- Total interest-bearing liabilities 359,857 10,924 3.04% ------- ----- Non interest-bearing liabilities Demand deposits 70,994 Other liabilities 5,678 -------- Total liabilities 436,529 Stockholders' equity 36,281 -------- Total liabilities & stockholders' equity $472,810 ======== Net interest income(1) $19,781 ======= Net interest spread 4.26% ==== Net yield on earnings assets 4.70% ====
- -------------------------------------------------------------------------------- (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 the change in rate multiplied by the prior year's volume. Changes due to volume are the change in volume multiplied 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 1996. Interest income was affected positively by improvements in the interest earned in most categories of earning assets. Much of the Company's earning assets were repriced to improve their respective returns. Interest expense rose primarily because of a higher level of time deposit volume. Interest income on securities increased primarily because of volume.
Year Ended December 31, ----------------------- 1996 Compared with 1995 1995 Compared with 1994 ----------------------------------- ----------------------------- 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 $ 225 $ (286) $ (61) $ 1,122 $ 1,950 $ 3,072 Securities available-for-sale: Taxable 1,248 161 1,409 1,079 18 1,097 Tax-exempt (31) (8) (39) 87 (1) 86 Securities held-to-maturity: Taxable 2,027 330 2,357 (358) 1,196 838 Tax-exempt (1) (1) (2) (30) (17) (47) Federal funds sold (762) (154) (916) (61) 497 436 Interest-bearing deposits in other banks 1 0 1 0 1 1 ------- ------- ------- ------- ------- ------- Total interest income 2,707 42 2,749 1,840 3,643 5,483 ------- ------- ------- ------- ------- ------- Interest expense: Deposits: NOW accounts 61 (262) (201) 162 685 847 Savings accounts 129 (25) 104 (57) 64 7 Money market accounts (223) 180 403 (458) 615 157 Time deposits 1,327 81 1,408 438 1,929 2,367 ------- ------- ------- ------- ------- ------- Total interest-bearing deposits 1,294 (386) 908 84 3,294 3,378 Securities sold under agreements to repurchase 97 (16) 81 136 228 364 Other borrowed funds 126 4 130 11 9 20 ------- ------- ------- ------- ------- ------- Total interest expense 1,517 (398) 1,119 232 3,530 3,762 ------- ------- ------- ------- ------- ------- Change in net interest income $ 1,190 $ 440 $ 1,630 $ 1,608 $ 113 $ 1,721 ======= ======= ======= ======= ======= =======
-4- 7 ASSET/LIABILITY MANAGEMENT The Company's asset/liability management objective is 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 +/- 10% within 3 months or less and +/- 10% within 4 to 12 months with a cumulative 1 year Gap at +/- 10%. 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 and savings 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, 1996 3 months 4 months One year Over Non- or less to 12 months to 5 years 5 years Maturing(1) Total --------- --------- --------- --------- --------- --------- (Dollars in Thousands) Interest-earning assets: Loans $ 111,355 $ 54,950 $ 107,703 $ 12,132 $ 2,140 $ 288,280 Securities available-for-sale: Taxable 9,369 7,014 63,141 250 0 79,774 Tax exempt 250 991 0 0 0 1,241 Securities held-to-maturity: Taxable 1,529 1,008 85,684 19,460 0 107,681 Tax exempt 0 11 23 0 0 34 Federal funds sold 21,000 0 0 0 0 21,000 Interest-bearing deposits in other banks 0 0 0 0 0 0 --------- --------- --------- --------- --------- --------- Total interest-earning assets 143,503 63,974 256,551 31,842 2,140 498,010 --------- --------- --------- --------- --------- --------- Interest-bearing liabilities: Deposits: NOW accounts 75,836 0 0 0 0 75,836 Savings accounts 53,956 0 0 0 0 53,956 Money market deposits 50,470 19,302 0 0 0 69,772 Time deposits 60,569 57,369 46,929 0 0 164,867 --------- --------- --------- --------- --------- --------- Total interest-bearing deposits 240,831 76,671 46,929 0 0 364,431 Securities sold under agreements to repurchase 17,790 0 0 0 0 17,790 Other borrowed funds 10,864 0 0 1,489 0 12,353 --------- --------- --------- --------- --------- --------- Total interest-bearing liabilities 269,485 76,671 46,929 1,489 0 394,574 --------- --------- --------- --------- --------- --------- Interest-earning assets minus interest-bearing liabilities(Gap) ($125,982) ($ 12,697) $ 209,622 $ 30,353 $ 2,140 $ 103,436 Management adjustment 112,083 (25,861) (51,721) 0 0 34,501 --------- --------- --------- --------- --------- --------- Management-adjusted Gap ($ 13,899) ($ 38,558) $ 157,901 $ 30,353 $ 2,140 $ 137,937 Management-adjusted Cumulative Gap (52,457) 105,444 135,797 137,937 -- Management-adjusted Gap / Total Assets -2.46% -6.82% 27.95% 5.37% 0.38% 24.41% Management-adjusted Cumulative Gap / Total Assets -9.28% 18.66% 24.03% 24.41% --
(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, ------------ 1996 1995 1994 1993 1992 ---- ---- ---- ---- ---- 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 $ 3,576 1.2% $ 1,444 0.5% $ 1,924 0.7% $ 1,228 0.5% $ 1,647 0.6% Commercial and industrial 41,006 14.2 37,811 13.2 33,283 12.2 29,664 10.9 35,000 12.2 Industrial revenue bonds 3,030 1.1 3,362 1.2 3,873 1.4 4,186 1.5 5,256 1.8 Commercial real estate 133,757 46.4 130,173 45.6 122,538 44.9 120,064 44.2 132,659 46.2 Residential real estate 76,638 26.6 82,132 28.8 82,028 30.1 85,260 31.3 76,852 26.8 Consumer 12,749 4.4 9,243 3.2 12,017 4.4 15,208 5.6 15,650 5.4 Home equity 17,330 6.0 21,130 7.4 16,826 6.2 16,180 5.9 19,646 6.8 Overdrafts 194 0.1 143 0.1 232 0.1 250 0.1 612 0.2 -------- ----- ------- ----- -------- ----- -------- ---- ------- ----- Loans(net of unearned discount) $288,280 100.0% $285,438 100.0% $272,721 100.0% $272,040 100.0% $287,322 100.0% ======== ===== ======== ===== ======== ===== ======== ===== ======== =====
-6- 9 The following table summarizes the remaining maturity distribution of certain components of the Company's loan portfolio at December 31, 1996. 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, 1996
One Year One to Five Over or Less Years Five Years Total -------- -------- ---------- -------- (In Thousands) Construction and land development $ 3,392 $ 184 $ 0 $ 3,576 Commercial and industrial 31,431 6,520 3,055 41,006 Industrial revenue bonds 85 2,164 781 3,030 Commercial real estate 62,375 68,233 3,149 133,757 -------- -------- -------- -------- Total $ 97,283 $ 77,101 $ 6,985 $181,369 ======== ======== ======== ========
The following table indicates the rate variability of the above loans due after one year.
December 31, 1996 ----------------- One to Five Over Years Five Years Total ----------- ---------- ------- (In Thousands) Predetermined interest rates $55,777 $ 6,896 $62,673 Floating or adjustable interest rates 21,324 89 21,413 ------- ------- ------- Total $77,101 $ 6,985 $84,086 ======= ======= =======
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; George F. Swansburg, Executive Vice President; Jonathan G. Sloane, Senior 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 over 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 up to 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 the then prevailing interest rates. During recent years, the Bank has emphasized non-residential type owner-occupied properties. This emphasis 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. Although not robust, the environment has improved over the recent period and there has been little new construction for a number of years. 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 $17,000,000 of loans are classified as "Commercial and Industrial" type loans secured by 1-4 family real estate. Primarily, these are small businesses with modest capital or shorter operating histories 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 FNMA but normally only one or three year adjustable variable interest rates are used. The Bank does utilize mortgage insurance in order to provide lower down payment products and has provided a "First Time Homebuyer" product to encourage new home ownership. With rising interest rates, residential real estate loan volume has declined but nonetheless remains a core consumer product. The regional environment impacts on the risks to this category. In the recent period, the environment has improved, and the market has generally been stable. Further increases to interest rates could negatively impact the 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 value of 75%. The Bank does intend 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 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, 1996, the Company was obligated to advance a total of $2.4 million to complete projects under construction. At December 31, 1996 approximately 46% of the Company's loan portfolio consisted of commercial real estate loans. Construction loans had increased to 1.2 % of the Company's outstanding loans. At December 31, 1996, the Company's residential mortgage loans amounted to $76.6 million. The Company's consumer loan portfolio amounted to $30.1 million at December 31, 1996, primarily consisting of home equity loans amounting to $17.3 million and personal lines of credit, motor vehicle loans and other installment loans amounting to $12.7 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, ------------ 1996 1995 1994 1993 1992 ------- ------- ------- ------- ------- (Dollars in Thousands) Loans on nonaccrual $ 2,140 $ 3,751 $ 2,954 $ 4,676 $11,117 Loans not included above which are nonperforming troubled debt restructurings 1,164 1,457 3,113 5,427 1,344 Other real estate owned , net 182 845 3,192 10,388 13,067 ------- ------- ------- ------- ------- Total nonperforming assets $ 3,486 $ 6,053 $ 9,259 $20,491 $25,528 ======= ======= ======= ======= ======= Percentage of nonperforming assets to total loans and other related assets 1.21% 2.11% 3.36% 7.26% 8.50% ======= ======= ======= ======= =======
The lower level of nonperforming assets in 1996 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 $2,541,000 of troubled debt restructurings and performing impaired loans at December 31, 1996 amounted to $175,000 for the year then ended. Interest income for the same period would have amounted to $211,000 under the original terms and agreements of the notes. As a result of placing loans on non-accrual status, the Company has foregone $172,000 of interest income during 1996 compared to $274,000 during 1995. In addition to the above, the Company is monitoring closely $9.8 million of loans on which management is concerned with 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, 1996, 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, 1996 and 1995 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, ------------ 1996 1995 1994 1993 1992 ---- ---- ---- ---- ---- (Dollars in Thousands) Loans past due 90 days or more and still accruing $ 191 $ 87 $ 114 $ 502 $2,243 Impaired Loans $3,227 $3,356 n/a n/a 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, ----------------------- 1996 1995 1994 1993 1992 -------- -------- -------- -------- -------- (Dollars in Thousands) Year end loans outstanding (net of unearned discount) $288,280 $285,438 $272,721 $272,040 $287,322 ======== ======== ======== ======== ======== Average loans outstanding (net of unearned discount) $281,943 $279,555 $267,123 $289,007 $307,108 ======== ======== ======== ======== ======== Balance of allowance for loan losses at beginning of year $ 4,193 $ 4,239 $ 5,129 $ 5,644 $ 4,879 -------- -------- -------- -------- -------- Loans charged-off: Commercial 2 2 781 657 841 Construction and land development 0 0 292 23 111 Commercial real estate 380 1,144 433 2,024 1,758 Residential real estate 801 551 1,016 1,075 652 Consumer 120 131 242 408 425 -------- -------- -------- -------- -------- Total loans charged-off 1303 1,828 2,764 4,187 3,787 -------- -------- -------- -------- -------- Recoveries of loans previously charged-off: Commercial 78 39 23 32 4 Real estate 163 134 204 297 67 Consumer 28 49 27 43 32 -------- -------- -------- -------- -------- Total recoveries of loans previously charged-off 269 222 254 372 103 -------- -------- -------- -------- -------- Net loans charged-off 1,034 1,606 2,510 3,815 3,684 -------- -------- -------- -------- -------- Additions to allowance charged to operating expense 1,020 1,560 1,620 1,800 4,449 Acquired allowance -- -- -- 1,500 -- -------- -------- -------- -------- -------- Balance at end of year $ 4,179 $ 4,193 $ 4,239 $ 5,129 $ 5,644 ======== ======== ======== ======== ======== Ratio of net charge-offs during the year to average loans outstanding 0.37% .57% .94% 1.32% 1.20% ======== ======== ======== ======== ======== Ratio of allowance for loan losses to loans outstanding 1.45% 1.47% 1.55% 1.89% 1.96% ======== ======== ======== ======== ========
For 1992, the provision for loan losses was high because of the deterioration in the economy. The provision for 1996, which is below the prior four year average, reflects significant improvements in the quality of the loan portfolio. At December 31, 1996 nonperforming assets were $5.1 million or 1.75 % of loans and related assets. Such figures are significantly lower than those at the end of each of the last four years. While the Company expects a declining level of charge-offs, the pace of the improvement 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.
1996 1995 1994 1993 1992 ---- ---- ---- ---- ---- 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 $ 48 1.2% $ 21 0.5% $ 49 0.7% $ 102 0.5% $ 31 0.6% Commercial and industrial 660 14.2 595 13.2 530 12.2 958 10.9 796 12.2 Industrial revenue bonds 17 1.1 23 1.2 26 1.4 23 1.5 124 1.8 Commercial real estate 2,201 46.4 2,095 45.6 2,158 44.9 2,422 44.2 3,336 46.2 Residential real estate 830 26.6 1,031 28.8 1,025 30.1 1,023 31.3 842 26.8 Consumer 233 4.4 228 3.2 293 4.4 462 5.6 360 5.4 Home equity 187 6.0 198 7.4 155 6.2 139 5.9 155 6.8 Overdrafts 3 0.1 2 0.1 3 0.1 0 0.1 0 0.2 ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ $4,179 100.0% $4,193 100.0% $4,239 100.0% $5,129 100.0% $5,644 100.0% ====== ====== ====== ====== ====== ====== ====== ====== ====== ======
Investment Activities The following table sets forth certain information regarding the Company's investment portfolio. Dollar amounts reflect carrying values. The market value of securities available-for-sale was $81.0 million compared to the amortized cost of $81.1 million for such securities. At December 31, 1996, the market value of securities held-to-maturity was $107.3 million, compared to the amortized cost of $107.7 million of such securities.
Securities available-for-sale Securities held-to-maturity December 31, December 31, -------------------------------- -------------------------------- 1996 1995 1994 1996 1995 1994 -------- -------- -------- -------- -------- -------- Balance at end of (In Thousands) (In Thousands) period applicable to U.S. Government and Agencies $ 77,155 $ 97,482 $ 67,484 $105,582 $ 74,710 $ 44,659 Obligations of states and political subdivison 1,241 1,510 979 34 179 294 Other 2,619 1,762 1,235 2,099 3,098 3,097 -------- -------- -------- -------- -------- -------- $ 81,015 $100,754 $ 69,698 $107,715 $ 77,987 $ 48,050 ======== ======== ======== ======== ======== ========
-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, 1996 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 $14,013 6.28% $63,142 6.09% $ 0 0.00% $ 0 0.00% $77,155 6.13% Obligations of states and political subdivisions 1,241 3.93% 0 0.00% 0 0.00% 0 0.00% 1,241 3.93% Other 0 0.00% 0 0.00% 250 7.80% 2,369 6.07% 2,619 6.23% ------- ------- ------- ------- ------- $15,254 6.09% $63,142 6.09% $ 250 7.80% $ 2,369 6.07% $81,015 6.10% ======= ======= ======= ======= ======= ======= ======= ======= ======= =======
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 $ 2,511 5.54% $ 83,636 6.43% $ 18,935 6.57% $ 500 6.73% $105,582 6.44% Obligations of states and political subdivisions 11 8.65% 23 8.65% 0 0.00% 0 0.00% 34 8.65% Other 2 4.00% 2,072 5.21% 25 5.50% 0 0.00% 2,099 5.21% -------- -------- -------- -------- -------- $ 2,524 5.55% $ 85,731 6.40% $ 18.960 6.57% $ 500 6.73% $107,715 6.38% ======== ======== ======== ======== ======== ======== ======== ======== ======== ========
-12- 15 Obligations of states and political subdivisions consist primarily of obligations of the Commonwealth of Massachusetts and entities within it having other relationships with the Company. The Company regularly bids on tax anticipation notes and other short-term instruments of municipalities who have 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. Except for obligations of the United States Government, the portfolio at December 31, 1996 did not include securities of any single issuer in an amount in excess of 10% of stockholders' equity. 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 weekly by the Treasurer, 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.
1996 1995 1994 ---------------------- ---------------------- ---------------------- Average Average Average Interest Interest Interest Average Rate Average Rate Average Rate Amount Paid Amount Paid Amount Paid --------- --------- --------- --------- --------- --------- Interest-bearing deposits: NOW accounts $ 84,620 2.80% $ 82,628 3.11% $ 75,941 2.27% Savings accounts 55,905 2.57% 50,916 2.62% 53,166 2.50% Money market accounts 70,735 2.95% 78,029 3.19% 94,820 2.46% Time deposits of $100,000 or more 34,542 5.19% 26,872 5.50% 19,042 3.97% Other time deposits 123,495 5.85% 107,897 5.69% 105,921 4.24% --------- --------- --------- Total interest-bearing deposits 369,297 4.04% 346,342 4.04% 348,890 3.04% Non interest-bearing demand deposits 99,179 86,328 70,994 --------- --------- --------- Total average deposits $ 468,476 3.18% $ 432,670 3.24% $ 419,884 2.53% ========= ========= ========= ========= ========= =========
Total deposits at December 31, 1996 amounted to $476 million, including $46 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, 1996 mature as follows.
(In Thousands) Three months or less $34,639 Three through six months 4,719 Six through twelve months 4,527 Over twelve months 1,761 ------- $45,646 =======
-13- 16 BORROWED FUNDS 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 is presented below.
1996 1995 1994 ---- ---- ---- (Dollars In Thousands) Securities sold under agreements to repurchase: Amount outstanding at year end $17,790 $21,580 $ 9,800 Weighted average interest rate at end of year 4.34% 4.25% 4.15% Maximum amount outstanding at any month end during year $17,790 $21,580 $51,789 Daily average amount outstanding during year $16,654 $14,390 $10,235 Weighted average interest rate during year 4.28% 4.39% 2.62% Other borrowed funds: Amount outstanding at year end $12,353 $ 1,897 $ 934 Weighted average interest rate at end of year 7.16% 5.21% 3.38% Maximum amount outstanding at any month end during year $17,577 $ 1,897 $ 934 Daily average amount outstanding during year $ 3,135 $ 960 $ 732 Weighted average interest rate during year 5.81% 5.42% 4.37%
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., a 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 Company provides full service securities brokerage services under the umbrella of Century Financial Services, a subsidiary of the Bank. Registered representatives employed by the Company 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 Company of a fixed fee and a share in the commission revenues. EMPLOYEES As of December 31, 1996, the Company had 206 full-time and 71 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 extension 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 extension 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 1996. -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, 1996, the Company's ratios were 15.49% and 16.74%, respectively. The Bank also exceeded these risk-weighted capital measures at December 31, 1996. 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, 1996 the Company's ratio was 8.58%. The Bank also exceeded the leverage requirement at December 31, 1996. 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 seeks to recapitalize the Bank Insurance Fund of the FDIC ("BIF") so that the BIF can continue to resolve its caseload of failed banks. The recapitalization will be funded through, among other things, increased deposit insurance assessments payable by BIF-insured institutions, which will increase the cost of doing business by all BIF-insured institutions, including the Company's subsidiary. 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 Company's subsidiary. Provisions of the 1991 Act relating to the activities of state-chartered banks may significantly impact the way the Company conducts its business. In this regard, the 1991 Act provides that, effective one year from date of enactment, insured state banks, such as the Company's subsidiary, 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. 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 14 other facilities in which its branch offices are located. The remaining offices are occupied under leases expiring on various dates from 1997 to 2026. The Company has renovated its Medford operations center to provide space for its Executive and Lending staff. 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, 1996. 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 common stock since January 1, 1995 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, 1996.
Approximate Number Title of Class of Record Holders Class A Common Stock 367 Class B Common Stock 83
(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 ------- ------- 1994 First quarter $ .025 $ .0035 Second quarter .025 .0035 Third quarter .025 .0035 Fourth quarter .025 .0035 1995 First quarter $ .030 $ .0042 Second quarter .030 .0042 Third quarter .030 .0042 Fourth quarter .030 .0042 1996 First quarter $ .040 $ .0056 Second quarter .040 .0056 Third quarter .040 .0056 Fourth quarter .040 .0056
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 liability, 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 23. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The information required herein is shown on pages 24 through 41. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. -18- 21 FINANCIAL HIGHLIGHTS
1996 1995 1994 - ----------------------------------------------------------------------------------------- (dollars in thousands except share data) YEAR-END Total assets $ 560,857 $ 531,928 $ 465,419 Total net loans 284,101 281,245 268,482 Total deposits 476,135 458,615 409,542 Total stockholders' equity 47,489 42,935 37,553 YEARLY AVERAGES Total assets $ 540,396 $ 494,485 $ 472,810 Total earning assets 483,109 442,837 420,904 Total securities available - for - sale 91,524 71,839 52,503 Total securities held - to - maturity 94,505 62,338 70,816 Total loans 281,943 279,555 267,123 Total deposits 468,476 432,670 419,884 Total borrowed funds 19,789 15,350 10,967 Total stockholders' equity 44,791 40,381 36,281 EARNINGS Net income $ 5,434 $ 4,574 $ 3,304 Net interest income, taxable equivalent 23,132 21,502 19,781 Other operating income 4,761 4,722 5,420 Operating expenses 17,874 18,224 19,265 PERFORMANCE MEASURES Earnings per share based on average shares outstanding $ .95 $ .80 $ .58 Return on average stockholders' equity 12.13% 11.33% 9.11% Book value per share at December 31 $ 8.25 $ 7.50 $ 6.56 Return on average assets 1.01% .92% .70% COMMON SHARE DATA Average shares outstanding 5,736,230 5,722,646 5,722,450 Shares outstanding at year-end 5,758,467 5,724,117 5,722,450
PER SHARE DATA
1996, Quarter Ended December 31, September 30, June 30, March 31, - ----------------------------------------------------------------------------------------- Market price range (Class A) High $ 14.50 $ 13.00 $ 12.875 $ 11.375 Low 12.25 11.50 11.00 10.00 Dividends class A .04 .04 .04 .04 Dividends class B .0056 .0056 .0056 .0056 1995, Quarter Ended December 31, September 30, June 30, March 31, - ----------------------------------------------------------------------------------------- Market price range (Class A) High $ 10.375 $ 10.625 $ 8.75 $ 9.125 Low 9.50 10.00 7.625 8.25 Dividends class A .03 .03 .03 .03 Dividends class B .0042 .0042 .0042 .0042
-19- 22 SELECTED FINANCIAL DATA
1996 1995 1994 1993 1992 - ------------------------------------------------------------------------------------------------------------------------- (dollars in thousands except share data) FOR THE YEAR Interest income $ 38,777 $ 35,988 $ 30,461 $ 29,262 $ 32,152 Interest expense 15,805 14,686 10,924 11,813 14,911 ------------------------------------------------------------------------ Net interest income 22,972 21,302 19,537 17,449 17,241 Provision for loan losses 1,020 1,560 1,620 1,800 4,449 ------------------------------------------------------------------------ Net interest income after provision for loan losses 21,952 19,742 17,917 15,649 12,792 Other operating income 4,761 4,722 5,420 6,833 6,099 Operating expenses 17,874 18,224 19,265 20,654 20,567 ------------------------------------------------------------------------ Income (loss) before income taxes and cumulative effect of change in accounting principle 8,839 6,240 4,072 1,828 (1,676) Provision for income taxes 3,405 1,666 768 605 1,012 ------------------------------------------------------------------------ Income (loss) before cumulative effect of change in accounting principle 5,434 4,574 3,304 1,223 (2,688) Cumulative effect of change in method of accounting for income taxes -- -- -- -- 568 ------------------------------------------------------------------------ Net income (loss) $ 5,434 $ 4,574 $ 3,304 $ 1,223 $ (2,120) ======================================================================== Average shares outstanding 5,736,230 5,722,646 5,722,450 5,722,450 5,722,450 Per share amounts: Income (loss) before cumulative effect of change in accounting principle $ .95 $ .80 $ .58 $ .21 $ (.47) Cumulative effect of change in method of accounting for income taxes -- -- -- -- .10 ------------------------------------------------------------------------ Net income (loss) $ .95 $ .80 $ .58 $ .21 $ (.37) ======================================================================== Dividend payout ratio 10.9% 9.6% 10.9% 28.9% *n/m AT YEAR-END Assets $ 560,857 $ 531,928 $ 465,419 $ 469,823 $ 440,607 Net loans 284,101 281,245 268,482 266,911 281,678 Deposits 476,135 458,615 409,542 421,395 385,385 Stockholders' equity 47,489 42,935 37,553 35,505 34,635 Book value per share $ 8.25 $ 7.50 $ 6.56 $ 6.20 $ 6.05 SELECTED FINANCIAL PERCENTAGES Return on average assets 1.01% .92% .70% .25% (.45)% Return on average stockholders' equity 12.13% 11.33% 9.11% 3.48% (5.82)% Net yield on average earning assets, taxable equivalent 4.79% 4.86% 4.70% 4.16% 4.26% Net charge-offs as a percent of average loans .37% .57% .94% 1.32% 1.20% Average stockholders' equity to average assets 8.29% 8.17% 7.67% 7.30% 7.72%
*not meaningful -20- 23 MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION OVERVIEW Century Bancorp, Inc. (the "Company") had net income of $5,434,000 for the year ended December 31, 1996, compared with net income of $4,574,000 for year ended December 31, 1995 and net income of $3,304,000 for the year ended December 31, 1994. Earnings per share were $0.95 in 1996 compared to $0.80 in 1995 and $0.58 in 1994. Total assets were $560,857,000 at December 31, 1996, an increase of 5.4% from total assets of $531,928,000 on December 31, 1995, which, in turn, were 14.3% higher than total assets of $465,419,000 on December 31, 1994. On December 31, 1996, stockholders' equity totaled $47,489,000 compared with $42,935,000 on December 31, 1995, and $37,553,000 on December 31, 1994. Book value increased to $8.25 at December 31, 1996 from $7.50 on December 31, 1995, which had increased from $6.56 on December 31, 1994. On January 25, 1995, the Bank purchased the assets of Nexus Integrated Service Corporation, a lockbox processing company, and negotiated the right to service its customers. On November 18, 1995, Century Bank and Trust Company (the "Bank") purchased The Co-operative Bank of Concord's branch office located at 55 High Street in Medford. The agreement called for the Bank to acquire approximately $20 million of deposits along with the real estate in which the branch is located. The Bank continues to seek similar acquisitions in its market area or contiguous market areas. 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 7.6% in 1996 to $23,132,000 compared with $21,502,000 in 1995. Interest income was affected positively by improvements in the interest earned in most categories of earning assets. Much of the Company's earning assets were repriced to improve their respective returns. 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 4.79% in 1996 from 4.86% in 1995 which, in turn, had improved from 4.70% in 1994. Average earning assets were $483,109,000 in 1996, an increase of $40,272,000 or 9.1% from the average in 1995, which was 5.2% higher than the average in 1994. Total securities, including securities available for sale and securities held to maturity, increased 38.6% to $186,029,000. The increase in securities volume combined with a slight lengthening in the maturity of the portfolios and resulted in higher securities income, which increased 47.1% to $11,677,000. Total loans increased 0.9% to $281,943,000 after increasing $12,432,000 in 1995. The increase in loan volume combined with a lower level of interest rates resulted in lower loan income, which decreased by 0.1% or $35,000 to $26,291,000. Total loan income was $23,203,000 in 1994. The Company's sources of funds include deposits and borrowed funds. On average, deposits showed an increase of 8.3% in 1996 after increasing by 3.0% in 1995. On average, borrowed funds increased by 28.9% in 1996 following an increase of 40.0% in 1995. The majority of the Company's borrowed funds are in repurchase agreements. Interest expense totaled $15,805,000 in 1996, an increase of $1,119,000 or 7.6% from 1995 when interest expense increased 34.4% from 1994. This increase in interest expense is due primarily to an increase in deposits and borrowed funds volume. PROVISION FOR LOAN LOSS The provision for loan losses was $1,020,000 in 1996 compared with $1,560,000 in 1995 and $1,620,000 in 1994. 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 $4,179,000 at December 31, 1996 compared with $4,193,000 at December 31, 1995 and $4,239,000 at December 31, 1994. Expressed as a percentage of outstanding loans at year-end, the allowance was 1.45% in 1996, 1.47% in 1995 and 1.55% in 1994. 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 decrease in net charge-offs in 1996 with net charge-offs as a percent of average loans outstanding at 0.37%. The comparable figures for 1995 and 1994 were 0.57% and 0.94% respectively. -21- 24 Non-performing loans, which include all non-accruing loans and certain restructured, accruing loans, totaled $3,304,000 on December 31, 1996, compared with $5,208,000 on December 31,1995. OTHER OPERATING INCOME The Company continued to experience good results in its fee-based services in 1996. These fee-based services include deposit related services, lock-box processing, mortgage origination services and securities brokerage services. Total other operating income in 1996, was $4,761,000 an increase of $39,000 or 0.8%. This increase followed a decrease of $968,000 or 17.0% in 1995. Service charge income, which continues to be the largest area of other operating income with $1,627,000 in 1996, saw an increase of $68,000 in 1996 as more customers paid demand deposit fees. Lock-box revenues totaled $1,280,000 down $141,000 in 1996, primarily as a result of a decrease in the lock-box customer base. The Company sold both sections of its credit card business in 1994 and recorded a gain of $156,000 in other income for the merchant card business and a gain of $85,000 for the consumer credit business. Merchant discount fees totaled $545,000 in 1994. Brokerage commissions increased slightly to $1,072,000 in 1996 from $1,027,000 in 1995, which, in turn, saw a decline of $20,000 from 1994. Revenues from mortgage sales increased to $290,000 in 1996 from $217,000 in 1995 and $255,000 in 1994. There were no security transactions in 1996 and 1995 but there was a net loss on sales of securities available-for-sale of $270,000 in 1994. OPERATING EXPENSES Total operating expenses excluding other real estate owned (OREO) expenses and writedowns were $17,894,000 in 1996 compared to $18,007,000 in 1995 and $17,521,000 in 1994. Total OREO expenses were $(20,000) in 1996, $217,000 in 1995 and $1,744,000 in 1994. Salaries and employee benefits expenses increased by $347,000 or 3.0% in 1996 after increasing 8.7% in 1995. Nearly all of the increase was in the salaries category and was caused by an increase in the wage base. The majority of the 1995 increase resulted from increased accruals for incentive compensation, increased staff as a result of the Nexus acquisition and additions to our lending staff. Occupancy expense decreased by $91,000 or 6.4% in 1996 primarily because of a decrease in building depreciation. Occupancy expense increased by 7.3% in 1995 primarily because of costs associated with branch relocations. Equipment expense increased by $54,000 in 1996 primarily because of increased equipment depreciation. Equipment expense increased by $213,000 or 24.5% in 1995 primarily because of higher depreciation and service contract expenses associated with the Nexus purchase and other related lock-box items. Other operating expenses decreased by $423,000 in 1996, which followed a $733,000 decrease in 1995. In 1996 decreases in FDIC insurance expense and legal expense were offset by increased marketing and amortization of the core deposit intangible associated with a branch acquisition during November, 1995. During 1995, decreases in FDIC insurance, credit card processing and general insurance expenses were offset by increased expenses in marketing, supplies and postage. Total OREO expense decreased to $(20,000) from $217,000 in 1995. At year-end the Company had $182,000 of OREO compared with $845,000 at December 31, 1995. PROVISION FOR INCOME TAXES Income tax expense was $3,405,000 in 1996, $1,666,000 in 1995 and $768,000 in 1994. Income tax expense in 1996 included reductions in the valuation reserve for deferred income taxes. The relatively low tax expense for 1995 and 1994 is a result of the recognition of benefits relating to a portion of the provision for loan losses and OREO writedowns which were not deductible for income tax purposes in prior periods and reductions in the valuation reserve for deferred income taxes. The effective tax rate was 38.5% in 1996, 26.7% in 1995 and 18.9% in 1994. -22- 25 LIQUIDITY AND ASSET LIABILITY MANAGEMENT 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 $67,681,000 on December 31, 1996 compared with $51,114,000 on December 31, 1995, and $57,144,000 on December 31, 1994. In each of the three years deposit activity has 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. 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, 1996 the gap was:
Subject to Interest Rate Changes Within Three Months Three to Twelve Months - ----------------------------------------------------------------------------------- (in thousands) Assets $ 178,004 $ 63,974 - ----------------------------------------------------------------------------------- Liabilities 191,903 102,532 - ----------------------------------------------------------------------------------- Gap $ (13,899) $ (38,558) - -----------------------------------------------------------------------------------
CAPITAL ADEQUACY Total stockholders' equity was $47,489,000 at December 31, 1996, compared with $42,935,000 at December 31,1995 and $37,553,000 at December 31, 1994. The increases in all years reported were primarily the result of earnings less dividends paid, although there was a $133,000 increase in 1996 and $6,000 increase in 1995 from the execution of certain stock options. Federal banking regulators have issued risk-based capital guidelines which assign risk factors to asset categories and off-balance sheet items. The current guidelines require a tier-1 capital-to-risk assets ratio of 4.00% and a total capital-to-risk assets ratio of 8.00%. The Company and the Bank exceeded these requirements with a tier-1 capital-to-risk assets ratio of 15.49% and 13.49% respectively, and total capital-to-risk assets ratio of 16.74% and 14.74%, respectively at December 31, 1996. 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, 1996, the Company and the Bank exceeded this requirement with leverage ratios of 8.58% and 7.46%, respectively. -23- 26 CONSOLIDATED BALANCE SHEETS
December 31, 1996 1995 - ------------------------------------------------------------------------------------------------------------------- (in thousands) ASSETS Cash and due from banks (note 2) $ 46,681 $ 41,061 Federal funds sold and interest-bearing deposits in other banks 21,000 10,053 ----------------------- Total cash and cash equivalents 67,681 51,114 ----------------------- Securities available-for-sale, amortized cost $81,140,000 in 1996 and $100,159,000 in 1995 (note 3) 81,015 100,754 Securities held-to-maturity, market value $107,331,000 in 1996 and $78,410,000 in 1995 (notes 4 and 10) 107,715 77,987 Loans, net (note 5) 288,280 285,438 Less: allowance for loan losses (note 6) 4,179 4,193 ----------------------- Net loans 284,101 281,245 ----------------------- Bank premises and equipment (note 7) 8,265 8,716 Accrued interest receivable 4,283 4,292 Other real estate owned, net of allowance for losses (note 8) 182 845 Other assets (note 13) 7,615 6,975 ----------------------- Total assets $ 560,857 $ 531,928 ======================= LIABILITIES AND STOCKHOLDERS' EQUITY Demand deposits $ 111,704 $ 99,953 Savings and NOW deposits 129,792 131,181 Money market accounts 69,772 72,463 Time deposits (note 9) 164,867 155,018 ----------------------- Total deposits 476,135 458,615 ----------------------- Securities sold under agreements to repurchase (note 10) 17,790 21,580 Other borrowed funds (note 11) 12,353 1,897 Other liabilities 7,090 6,901 ----------------------- Total liabilities 513,368 488,993 ======================== Commitments and contingencies (notes 7, 15 and 16) Stockholders' equity (note 12): Class A common stock, $1.00 par value per share; authorized 10,000,000 shares; issued 3,488,297 shares in 1996 and 3,405,747 in 1995 3,488 3,406 Class B common stock, $1.00 par value per share; authorized 5,000,000 shares; issued 2,347,720 shares in 1996 and 2,395,920 in 1995 2,348 2,396 Additional paid-in-capital 10,786 10,687 Retained earnings 31,117 26,278 Treasury stock, 77,550 shares in 1996 and 1995, at cost (177) (177) ----------------------- Realized stockholders' equity 47,562 42,590 Unrealized gains (losses) on securities available-for-sale, net of taxes (note 3) (73) 345 ----------------------- Total stockholders' equity 47,489 42,935 ----------------------- Total liabilities and stockholders' equity $ 560,857 $ 531,928 =======================
See accompanying Notes to Consolidated Financial Statements. -24- 27 CONSOLIDATED STATEMENTS OF INCOME
Year Ended December 31, 1996 1995 1994 - --------------------------------------------------------------------------------------------------------------------------------- (in thousands except share data) INTEREST INCOME Loans $ 26,291 $ 26,326 $ 23,203 Securities held-to-maturity 6,016 3,660 2,847 Securities available-for-sale 5,661 4,278 3,124 Federal funds sold and interest-bearing deposits in other banks 809 1,724 1,287 ----------------------------------------- Total interest income 38,777 35,988 30,461 ----------------------------------------- INTEREST EXPENSE Savings and NOW deposits 3,806 3,903 3,049 Money market accounts 2,084 2,487 2,330 Time deposits (note 9) 9,020 7,612 5,245 Securities sold under agreements to repurchase 713 632 268 Other borrowed funds 182 52 32 ----------------------------------------- Total interest expense 15,805 14,686 10,924 ----------------------------------------- Net interest income 22,972 21,302 19,537 PROVISION FOR LOAN LOSSES (NOTE 6) 1,020 1,560 1,620 Net interest income after provision for loan losses 21,952 19,742 17,917 ----------------------------------------- OTHER OPERATING INCOME Service charges on deposit accounts 1,627 1,559 1,733 Lockbox fees 1,280 1,421 1,087 Merchant discount fees -- 41 545 Brokerage commissions 1,072 1,027 1,047 Gain on sales of loans 290 217 255 Net loss on sales of securities available-for-sale (note 3) -- -- (270) Other income 492 457 1,023 ----------------------------------------- Total other operating income 4,761 4,722 5,420 ----------------------------------------- OPERATING EXPENSES Salaries and employee benefits (note 14) 11,741 11,394 10,484 Occupancy 1,322 1,413 1,317 Equipment 1,135 1,081 868 Other real estate owned (20) 217 1,744 Other (note 17) 3,696 4,119 4,852 ----------------------------------------- Total operating expenses 17,874 18,224 19,265 ----------------------------------------- Income before income taxes 8,839 6,240 4,072 PROVISION FOR INCOME TAXES (NOTE 13) 3,405 1,666 768 ----------------------------------------- Net income $ 5,434 $ 4,574 $ 3,304 ========================================= SHARE DATA (NOTE 12) Weighted average number of shares outstanding 5,736,230 5,722,646 5,722,450 Net income per share $ .95 $ .80 $ .58
See accompanying Notes to Consolidated Financial Statements. -25- 28 CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Unrealized Treasury Treasury Gains (losses) Stock Stock on Securities Class A Class B Additional Class A Class B available- Total Years Ended December 31, Common Common Paid-In Retained (30,000 (47,550 for-sale, Stockholders' 1996, 1995 and 1994 Stock Stock Capital Earnings shares) shares) net of taxes Equity - ------------------------------------------------------------------------------------------------------------------------------------ (in thousands) BALANCE, DECEMBER 31, 1993 $3,231 $ 2,569 $10,683 $ 19,199 $(136) $(41) $ -- $ 35,505 -------------------------------------------------------------------------------------------- Conversion of Class B common stock to Class A common stock, 80,780 shares 81 (81) -- -- -- -- -- -- Net income -- -- -- 3,304 -- -- -- 3,304 Cash dividends, Class A common stock $.10 per share -- -- -- (327) -- -- -- (327) Cash dividends, Class B common stock $.014 per share -- -- -- (34) -- -- -- (34) Change in unrealized gains (losses) on securities available-for-sale, net of taxes -- -- -- -- -- -- (895) (895) -------------------------------------------------------------------------------------------- BALANCE, DECEMBER 31, 1994 $3,312 $ 2,488 $10,683 $ 22,142 $(136) $(41) $ (895) $ 37,553 -------------------------------------------------------------------------------------------- Conversion of Class B common stock to Class A common stock, 91,698 shares 92 (92) -- -- -- -- -- -- Stock options exercised, 1,667 shares 2 -- 4 -- -- -- -- 6 Net income -- -- -- 4,574 -- -- -- 4,574 Cash dividends, Class A common stock $.12 per share -- -- -- (397) -- -- -- (397) Cash dividends, Class B common stock $.0168 per share -- -- -- (41) -- -- -- (41) Change in unrealized gains (losses) on securities available-for-sale, net of taxes -- -- -- -- -- -- 1,240 1,240 -------------------------------------------------------------------------------------------- BALANCE, DECEMBER 31, 1995 $3,406 $ 2,396 $10,687 $ 26,278 $(136) $(41) $ 345 $ 42,935 -------------------------------------------------------------------------------------------- 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 Net income -- -- -- 5,434 -- -- -- 5,434 Cash dividends, Class A common stock $.16 per share -- -- -- (543) -- -- -- (543) Cash dividends, Class B common stock $.0224 per share -- -- -- (52) -- -- -- (52) Change in unrealized gains (losses) on securities available-for-sale, net of taxes -- -- -- -- -- -- (418) (418) -------------------------------------------------------------------------------------------- BALANCE, DECEMBER 31, 1996 $3,488 $ 2,348 $10,786 $ 31,117 $(136) $(41) $ (73) $ 47,489 --------------------------------------------------------------------------------------------
See accompanying Notes to Consolidated Financial Statements. -26- 29 CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31, 1996 1995 1994 - ---------------------------------------------------------------------------------------------------------------- (in thousands) CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 5,434 $ 4,574 $ 3,304 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses 1,020 1,560 1,620 Deferred income taxes (616) (82) 423 Net depreciation and amortization 668 548 (145) Decrease (increase) in accrued interest receivable 9 (1,001) (729) Decrease (increase) in other assets 72 1,382 (1,398) Loss on sales of securities available-for-sale -- -- 270 Loans originated for sale (18,033) (16,407) (16,170) Proceeds from sales of loans 19,317 16,016 17,806 Gain on sales of loans (290) (217) (255) (Gain) loss on sales of real estate owned (82) (27) 75 Provision for losses on other real estate owned -- 70 1,100 Increase (decrease) in other liabilities 189 (690) 1,956 ---------------------------------- Net cash provided by operating activities 7,688 5,726 7,857 ---------------------------------- CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from sales of securities available-for-sale -- -- 11,092 Proceeds from maturities of securities available-for-sale 49,193 27,860 38,750 Purchase of securities available-for-sale (29,999) (56,543) (96,096) Proceeds from maturities of securities held-to-maturity 53,946 38,447 59,083 Purchase of securities held-to-maturity (83,675) (68,575) (13,875) Net cash and cash equivalents received from acquisitions -- 17,877 -- Net increase in loans (4,823) (13,618) (5,819) Proceeds from sales of real estate owned 1,121 2,744 7,816 Capital expenditures (608) (1,416) (900) ---------------------------------- Net cash (used in) provided by investing activities (14,845) (53,224) 51 ---------------------------------- CASH FLOWS FROM FINANCING ACTIVITIES: Net increase in time deposits 9,849 17,658 627 Net increase (decrease) in demand, savings, money market and NOW deposits 7,671 11,499 (12,455) Net proceeds from the issuance of common stock 133 6 -- Cash dividends (595) (438) (361) Net (decrease) increase in securities sold under agreements to repurchase (3,790) 11,780 3,660 Net increase (decrease) in other borrowed funds 10,456 963 (215) ---------------------------------- Net cash provided by (used in) financing activities 23,724 41,468 (8,744) ---------------------------------- Net increase (decrease) in cash and cash equivalents 16,567 (6,030) (836) Cash and cash equivalents at beginning of year 51,114 57,144 57,980 ---------------------------------- Cash and cash equivalents at end of year $ 67,681 $ 51,114 $ 57,144 ================================== SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid during the year for: Interest $ 16,170 $ 13,884 $ 11,393 Income taxes 3,644 1,512 689 Noncash transactions: Property acquired through foreclosure $ 376 $ 440 $ 1,795 Change in unrealized (losses) gain on securities available-for-sale, net of taxes $ (418) $ 1,240 $ (895) Assets acquired and liabilities assumed through acquisitions: Assets acquired, net of cash and cash equivalents received -- $ 2,040 -- Cash and cash equivalents received -- 17,877 -- Liabilities assumed -- 19,917 --
See accompanying Notes to Consolidated Financial Statements. -27- 30 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") and the Federal Deposit Insurance Corporation (the "FDIC"). The Bank is also subject to various requirements and restrictions under federal and state law, including requirements to maintain reserves against deposits, restrictions on the types and amounts of loans that may be granted and the interest that may be charged thereon, and limitations on 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. 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. Loans held for sale are carried at the lower of aggregate cost or market value. Gain or loss on sales of loans is recognized at the time of sale when the sales proceeds exceed or are less than the Bank's investment in the loans. Additionally, - 28 - 31 gains and losses are recognized when the average interest rate on the loans sold, adjusted for normal servicing fee, differs from the agreed yield to the buyer. The resulting excess service fee 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. Effective January 1, 1996, the Company adopted Financial Accounting Standards Board ("FASB") Statement of Financial Accounting Standards ("SFAS") No. 122, "Accounting for Mortgage Servicing Rights." This statement requires that the rights to service mortgage loans for others be recognized 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. The adoption of this pronouncement did not have a significant effect on the Company's financial position or results of operations. In June 1996 the FASB issued SFAS No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities." This statement provides accounting and reporting standards for transfers and servicing of financial assets and extinguishments of liabilities based on consistent application of a financial-components approach that focuses on control. It distinguishes transfers of financial assets that are sales from transfers that are secured borrowings. Under the financial-components approach, after a transfer of financial assets, an entity recognizes all financial and servicing assets it controls and liabilities it has incurred and derecognizes financial assets it no longer controls and liabilities that have been extinguished. The financial-components approach focuses on the assets and liabilities that exist after the transfer. Many of these assets and liabilities are components of financial assets that existed prior to the transfer. If a transfer does not meet the criteria for a sale, the transfer is accounted for as a secured borrowing with a pledge of collateral. The statement is effective for transfers and servicing of financial assets and extinguishments of liabilities occurring after December 31, 1996, and will be applied prospectively. However, SFAS No. 127, "Deferral of the Effective Date of Certain Provisions of SFAS No. 125," requires the deferral of implementation as it relates to repurchase agreements, dollar-rolls, securities lending and similar transactions until after December 31, 1997. Earlier or retroactive applications of this statement is not permitted. The Company has determined that the adoption of this statement will not have a material impact on its consolidated financial statements. ALLOWANCE FOR LOAN LOSSES The allowance for loan losses is based on management's evaluation of the quality of the loan portfolio and is used to provide for losses resulting from loans which ultimately prove uncollectible. In determining the level of the allowance, periodic evaluations are made of the loan portfolio which take into account such factors as the character of the loans, loan status, financial posture of the borrowers, value of collateral securing the loans and other relevant information sufficient to reach an informed judgement. The allowance is increased by provisions charged to income and reduced by loan charge-offs, net of recoveries. 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. - 29 - 32 OTHER REAL ESTATE OWNED Other real estate owned ("OREO") includes real estate acquired by foreclosure and real estate substantively repossessed. Real estate acquired by foreclosure is comprised of properties acquired through foreclosure proceedings or acceptance of a deed in lieu of foreclosure. Real estate substantively repossessed includes only those loans for which the Company has taken possession of the collateral, but has not completed legal foreclosure proceedings. Both in-substance foreclosures and real estate formally acquired in settlement of loans are recorded at the lower of the carrying value of the loan or the fair value of the property constructively or actually received. Loan losses from the acquisition of such properties are charged against the allowance for loan losses. After foreclosure, if the fair value of an asset minus its estimated cost to sell is less than the carrying value of the asset, such amount is recognized as a valuation allowance. If the fair value of an asset less its estimated cost to sell subsequently increases so that the resulting amount is more than the asset's current carrying value, the valuation allowance is reversed by the amount of the increase. Increases or decreases in the valuation allowance are charged or credited to income. Gains upon disposition of OREO are reflected in the statement of income as realized. Realized losses are charged to the valuation allowance. BANK PREMISES AND EQUIPMENT Bank premises and equipment are stated at cost less accumulated depreciation and amortization. Depreciation is computed using the straight-line method over the estimated useful lives of the assets or the terms of leases, if shorter. It is general practice to charge the cost of maintenance and repairs to operations when incurred; major expenditures for improvements are capitalized and depreciated. INCOME TAXES The Company uses the asset and liability method of accounting for income taxes. Under the asset and liability method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which temporary differences are expected to be recovered or settled. Under this method, the effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. 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 $10,768,000 at December 31,1996 and $10,743,000 at December 31,1995. 3. SECURITIES AVAILABLE-FOR-SALE
December 31,1996 December 31,1995 ---------------------------------------------- ------------------------------------------------ Gross Gross Estimated Gross Gross Estimated Amortized Unrealized Unrealized Market Amortized Unrealized Unrealized Market Cost Gains Losses Value Cost Gains Losses Value ---------------------------------------------- ------------------------------------------------ (in thousands) (in thousands) U.S. Government and Agencies $77,283 $ 93 $ 221 $ 77,155 $ 96,889 $622 $ 29 $ 97,482 Obligations of states and political subdivisions 1,241 -- -- 1,241 1,510 -- -- 1,510 FHLB Stock 2,364 -- -- 2,364 1,399 -- 1,399 Other 252 3 -- 255 361 2 -- 363 -------------------------------------------- ----------------------------------------------- $81,140 $ 96 $ 221 $ 81,015 $100,159 $624 $ 29 $100,754 ============================================ ===============================================
The following tables show the maturity distribution of the Company's securities available-for-sale at December 31, 1996 and 1995:
December 31,1996 ------------------------------------------------------------- Obligations FHLB U.S. of States Stock Estimated Government and Political and Market and Agencies Subdivisions Other Total Value ------------------------------------------------------------- (in thousands) Within one year $13,988 $1,241 $ -- $15,229 $15,254 After one but within five years 63,295 -- -- 63,295 63,142 After five but within ten years -- -- 250 250 250 Non-maturing -- -- 2,366 2,366 2,369 -------------------------------------------------------- $77,283 $1,241 $ 2,616 $81,140 $81,015 ======================================================== December 31,1995 --------------------------------------------------------------- Obligations FHLB U.S. of States stock Estimated Government and Political and Market and Agencies Subdivisions Other Total Value --------------------------------------------------------------- (in thousands) Within one year $33,495 $1,510 $ -- $ 35,005 $ 35,144 After one but within five years 63,394 -- -- 63,394 63,849 After five but within ten years -- -- 250 250 250 Non-maturing -- -- 1,510 1,510 1,511 ---------------------------------------------------------- $96,889 $1,510 $ 1,760 $100,159 $100,754 ==========================================================
- 30 - 33 Proceeds from sales of securities available-for-sale totaled $11,092,000 during 1994. Gross gains of $13,000 and gross losses of $283,000 were realized on those sales in 1994. There were no sales of securities available-for-sale in 1996 and 1995. 4. SECURITIES HELD-TO-MATURITY
December 31,1996 December 31,1995 ----------------------------------------------- ---------------------------------------------- Gross Gross Estimated Gross Gross Estimated Amortized Unrealized Unrealized Market Amortized Unrealized Unrealized Market Cost Gains Losses Value Cost Gains Losses Value ----------------------------------------------- ---------------------------------------------- (in thousands) (in thousands) U.S. Government and Agencies $105,582 $211 $ 574 $105,219 $74,710 $510 $ 69 $75,151 Obligations of states and political subdivisions 34 -- -- 34 179 -- -- 179 Other 2,099 -- 21 2,078 3,098 -- 18 3,080 ---------------------------------------------- -------------------------------------------- $107,715 $211 $ 595 $107,331 $77,987 $510 $ 87 $78,410 ============================================== ============================================
Included in U.S. Government and Agency securities are securities pledged to secure public deposits and repurchase agreements amounting to $24,746,000 at December 31, 1996 and $29,286,000 at December 31, 1995. The following tables show the maturity distribution of the Company's securities held-to-maturity at December 31, 1996 and 1995:
December 31,1996 ---------------------------------------------------------------- Obligations U.S. of States Estimated Government and Political Market and Agencies Subdivisions Other Total Value ---------------------------------------------------------------- (in thousands) Within one year $ 2,511 $ 11 $ 2 $ 2,524 $ 2,516 After one but within five years 83,636 23 2,072 85,731 85,562 After five but within ten years 18,935 -- 25 18,960 18,759 After ten years 500 -- -- 500 494 ------------------------------------------------------------ $105,582 $ 34 $ 2,099 $107,715 $107,331 ============================================================ December 31,1995 ---------------------------------------------------------------- Obligations U.S. of States Estimated Government and Political Market and Agencies Subdivisions Other Total Value ---------------------------------------------------------------- (in thousands) Within one year $15,385 $ 145 $ 1,000 $16,530 $16,502 After one but within five years 51,307 34 2,073 53,414 53,805 After five but within ten years 8,018 -- 25 8,043 8,103 After ten years -- -- -- -- -- ----------------------------------------------------------- $74,710 $ 179 $ 3,098 $77,987 $78,410 ===========================================================
There were no sales of securities held-to-maturity in 1996, 1995 or 1994. 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, 1996 and 1995 is as follows:
1996 1995 -------------------- (in thousands) Construction and land development $ 3,576 $ 1,444 Commercial and industrial 41,006 37,811 Industrial revenue bonds 3,030 3,362 Commercial real estate 133,757 130,173 Residential real estate 76,081 80,899 Residential real estate held for sale 557 1,233 Consumer 12,749 9,243 Home equity 17,330 21,130 Overdrafts 194 143 -------------------- $288,280 $285,438 ====================
At December 31, 1996 and 1995, loans were carried net of discounts of $3,360,000 and $3,844,000, respectively. Included in these amounts at December 31, 1996 and 1995, residential real estate loans were carried net of discounts of $3,319,000 and $3,791,000 respectively, associated with the acquisition of Wollaston. At December 31, 1996 and 1995, total impaired loans were $3,227,000 and $3,356,000, respectively. There were no impaired loans with specific reserves at December 31, 1996 and 1995. In the opinion of management, none of the $3,227,000 and $3,356,000 of impaired loans at December 31, 1996 and 1995, respectively, required a specific reserve. All of the $3,227,000 and $3,356,000 of impaired loans at December 31, 1996 and 1995, respectively, have been measured using the fair value of the collateral method. During the twelve months ended December 31, 1996 and 1995, the average - 31 - 34 recorded value of the impaired loans was $3,029,000 and $3,431,000, respectively. Interest income of $149,000 and $17,000 was recognized on these loans during 1996 and 1995, respectively, all of which was recorded on a cash basis. Interest income of $333,000 and $450,000 would have been recorded under the original terms of the loans during 1996 and 1995, respectively. The composition of impaired loans at December 31, is as follows:
1996 1995 ------------------ (in thousands) Residential real estate: 1 to 4 family $ 471 $ 727 Multi - family 1,201 497 Construction and land development -- 21 Commercial real estate 1,248 1,816 Commercial and industrial 307 295 ------------------ Total $3,227 3,356 Specific valuation allowance -- -- ------------------ Total impaired loans $3,227 $3,356 ==================
At December 31, 1996 there were $2,140,000 of loans on non-accrual, of which $1,676,000 were classified as impaired. Interest income of $270,000 would have been recorded in 1996 had these loans performed according to their original terms during the period. Interest income actually recorded on these loans was $98,000. At December 31, 1995 there were $3,751,000 of loans on non-accrual, of which $2,290,000 were classified as impaired. Interest income of $341,000 would have been recorded in 1995 had these loans performed according to their original terms during the period. Interest income actually recorded on these loans was $67,000. Additionally at December 31, 1996 and December 31, 1995, there were $192,000 and $87,000 respectively, of loans which were past due 90 days or more and still accruing, none of which were classified as impaired. At December 31, 1996, management had entered into troubled debt restructuring agreements totaling $2,541,000, of which $1,377,000 were classified as impaired. Troubled debt restructuring agreements at December 31, 1995 totaled $2,524,000, of which $1,067,000 were classified as impaired. The effect of interest foregone on these restructuring agreements is not material. The Company was servicing mortgage loans sold to others without recourse of approximately $20,359,000 at December 31, 1996 and $24,380,000 at December 31, 1995. Additionally, the Company was servicing mortgage loans sold to others with limited recourse. The outstanding balance of those loans sold to others with limited recourse was approximately $1,092,000 at December 31, 1996 and $1,110,000 at December 31, 1995. 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 1996.
Balance at Repayments Balance at December 31, 1995 Additions and Deletions December 31, 1996 ------------------------------------------------------------------- (in thousands) $1,794 $ 487 $1,353 $ 928 ========================================================
6. ALLOWANCE FOR LOAN LOSSES
1996 1995 1994 ----------------------------------- (in thousands) Balance at beginning of year $ 4,193 $ 4,239 $ 5,129 Provision charged to operating expense 1,020 1,560 1,620 Loans charged-off (1,303) (1,828) (2,764) Loan recoveries 269 222 254 ----------------------------------- Balance at end of year $ 4,179 $ 4,193 $ 4,239 ===================================
7. BANK PREMISES AND EQUIPMENT
December 31, 1996 1995 - ----------------------------------------------------------------------- (in thousands) Land $ 1,839 $ 1,839 Bank premises 6,254 6,254 Furniture and equipment 8,261 7,689 Leasehold improvements 1,888 1,860 ----------------------- 18,242 17,642 Accumulated depreciation and amortization (9,977) (8,926) ----------------------- $ 8,265 $ 8,716 =======================
- 32 - 35 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 $144,000, $168,000 and $189,000 for the years ended December 31, 1996, 1995 and 1994, respectively. Future minimum rental commitments for noncancelable operating leases with initial or remaining terms of one year or more at December 31, 1996 were as follows:
YEAR Amount ----------------------------- (in thousands) 1997 $ 81 1998 62 1999 64 2000 64 2001 28 Thereafter 574 ----------------------------- $873 =============================
8. ALLOWANCE FOR LOSSES ON OTHER REAL ESTATE OWNED
1996 1995 1994 ------------------------------ (in thousands) Balance at beginning of year $ 60 $ 238 $ 620 Valuation writedowns (41) (248) (1,482) Provision charged to expense -- 70 1,100 ------------------------------ Balance at end of year $ 19 $ 60 $ 238 ==============================
9. DEPOSITS Time deposits as of December 31, are as follows:
1996 1995 ---------------------- (in thousands) Three months or less $ 60,569 $ 47,253 Three through twelve months 57,369 87,151 Over twelve months 46,929 20,614 ---------------------- $164,867 $155,018 ======================
Time deposits in denominations of $100,000 or more totaled $45,646,000 and $42,933,000 at December 31, 1996 and 1995, respectively. Interest expense associated with deposits in denominations of $100,000 or more was $2,124,000, $1,749,000, and $930,000 for the years ended 1996, 1995 and 1994, respectively. 10. SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
1996 1995 1994 ----------------------------------- (dollars in thousands) Average rate at December 31, 4.34% 4.25% 4.15% Average balance outstanding during the year $16,654 $14,390 $10,235 Average rate during the year 4.28% 4.39% 2.62% Maximum amount outstanding at any month-end $17,790 $21,580 $51,789 Amount outstanding at December 31, $17,790 $21,580 $ 9,800
Amounts outstanding at December 31, 1996, 1995 and 1994 carried maturity dates of the next business day. U.S. Government and Agency securities with a total book value of $17,762,000, $21,497,000, and $9,850,000 were pledged as collateral and held by custodians to secure the agreements at December 31, 1996, 1995 and 1994, respectively. The approximate market value of the collateral at those dates was $17,605,000, $21,715,000, and $9,638,000, respectively. 11. OTHER BORROWED FUNDS
December 31, 1996 1995 --------------------------------------------------------------- (in thousands) Treasury tax and loan note $ 726 $1,759 Federal Home Loan Bank - IDEAL Advance 10,000 -- Federal Home Loan Bank - Advance 1,489 -- Other 138 138 ------------------- $12,353 $1,897 ===================
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 has a credit line with the Federal Home Loan Bank for $10,000,000, which was fully advanced on December 31, 1996. The interest rate on this line was 7.32%. The Bank also borrowed $1,500,000 during 1996 from Federal Home Loan Bank. The borrowing bears interest at a fixed rate of 7.20% and matures on July 24, 2006. - 33 - 36 12. 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. 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 other 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, 1996 totaled 61,657 with a weighted average option price of $3.76. 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, 1993 -- -- Granted 146,500 3.80 Exercised -- -- Cancelled -- -- ----------- ----------- Outstanding at December 31, 1994 146,500 3.80 Granted -- -- Exercised (1,667) 3.75 Cancelled -- -- ----------- ----------- 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 =========== ===========
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 - ----------------------- --------- ---------------------- 1997 - - 1998 - - 1999 7,500 4.13 2000 102,983 3.75 2001 - - -------- -------- 110,483 3.78 ======== ========
As allowed under SFAS No. 123, "Accounting for Stock Based Compensation", the Company will continue to measure compensation cost for stock-based compensation plans using the intrinsic value based method prescribed by Accounting Principles Board Opinion No. 25. SFAS No. 123, which is effective January 1, 1996, requires pro forma disclosure of net income and earnings per share computed as if the fair value based method had been applied. The Company granted no stock options during 1996 or 1995 and, therefore, no disclosures under SFAS No. 123 are provided. The new disclosures will be provided when additional stock options are granted. -34- 37 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, 1996 that the Bank meets all capital adequacy requirements to which it is subject. As of December 31, 1996, the most recent notification from the FDIC categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, the Bank must maintain minimum total risk-based, Tier risk-based, and Tier 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 ------- ------- ------- ------- ------- ------- As of December 31, 1996: (dollars in thousands) Total capital (to risk-weighted assets) $44,004 14.74% $23,882 8.0% $29,852 10.0% Tier I capital (to risk-weighted assets) 40,267 13.49% 11,941 4.0% 17,911 6.0% Tier I capital (to average assets) 40,267 7.46% 21,577 4.0% 26,971 5.0% As of December 31, 1995: Total capital (to risk-weighted assets) 39,802 14.18% 22,460 8.0% 28,075 10.0% Tier I capital (to risk-weighted assets) 36,284 12.92% 11,230 4.0% 16,845 6.0% Tier I capital (to average assets) 36,284 7.11% 20,407 4.0% 25,509 5.0%
13. INCOME TAXES - -------------------------------------------------------------------------------- The current and deferred components of income tax expense for the years ended December 31, are as follows:
1996 1995 1994 ------- ------- ----- (in thousands) Current expense: Federal $ 2,959 $ 1,302 $ 300 State 1,062 446 45 ------- ------- ----- Total current expense 4,021 1,748 345 ------- ------- ----- Deferred expense: Federal (238) 716 865 State (78) 337 433 Change in valuation reserve (300) (1,135) (875) ------- ------- ----- Total deferred expense (616) (82) 423 ------- ------- ----- Provision for income taxes $ 3,405 $ 1,666 $ 768 ======= ======= =====
Income tax accounts included in other assets and other liabilities at December 31, 1996, and included in other assets at December 31, 1995, are as follows:
1996 1995 ------- ------- (in thousands) Currently (payable) refundable $ (287) $ 92 Deferred income tax asset, net 1,655 736 ------- ------- $ 1,368 $ 828 ======= =======
-35- 38 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:
1996 1995 1994 ------- ------- ------- (in thousands) Federal income tax expense at statutory rates $ 3,005 $ 2,121 $ 1,385 State income taxes, net of Federal income tax benefit 649 517 315 Effect of tax-exempt interest (105) (132) (106) Change in valuation reserve (300) (1,135) (875) Other 156 295 49 ------- ------- ------- $ 3,405 $ 1,666 $ 768 ======= ======= ======= Effective Tax Rate 38.5% 26.7% 18.9%
Management believes that it is more likely than not that the net deferred income tax asset of $1,655,000 at December 31, 1996 will be realized. This amount is entirely supported by the availability of federal income taxes paid in prior carryback years. The valuation reserve 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:
1996 1995 ------- ------- (in thousands) Deferred income tax assets: Allowance for loan losses $ 722 $ 653 Other real estate owned writedowns 8 53 Deferred compensation 1,340 1,248 Unrealized loss on securities available-for-sale 52 -- Leveraged leases -- 11 Acquisition premium 50 -- Other 79 -- ------- ------- Gross deferred income tax asset 2,251 1,965 Valuation reserve -- (300) ------- ------- Net deferred income tax asset 2,251 1,665 ------- ------- Deferred income tax liabilities: Unrealized gain on securities available-for-sale -- (250) Purchase accounting (388) (413) Depreciation (183) (187) Other (25) (79) ------- ------- Deferred income tax asset, net $ 1,655 $ 736 ======= =======
14. EMPLOYEE BENEFITS - -------------------------------------------------------------------------------- The Company has a qualified defined benefit retirement 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 1996 resulted in an increase in pension cost. The following table sets forth the Plan's funding status and amounts recognized in the Company's consolidated financial statements at December 31:
1996 1995 ------- ------- (in thousands) Actuarial value of benefit obligations: Vested $ 3,360 $ 2,873 ------- ------- Non-vested 82 71 ------- ------- Total accumulated benefit obligation $ 3,442 $ 2,944 ======= ======= Actuarial present value of projected benefit obligation for services rendered to date $ 4,859 $ 4,397 ------- ------- Plan assets at fair value 3,341 2,882 ------- ------- Projected benefit obligation in excess of plan assets 1,518 1,515 ------- ------- Unrecognized net transition obligation being recognized over 15 years (4) (5) ------- ------- Unrecognized prior service cost being recognized over 15 years (821) (920) ------- ------- Unrecognized (loss)/gain (388) (423) ------- ------- Accrued pension cost (included in other liabilities) $ 305 $ 167 ======= =======
-36- 39 Net periodic pension cost for the years ended December 31, 1996, 1995 and 1994 included the following components:
1996 1995 1994 ----- ----- ----- (in thousands) Service costs-benefits earned during the period $ 318 $ 256 $ 299 Interest cost on projected benefit obligation 308 260 244 Actual return on plan assets (208) (181) (73) Net amortization and accrual 120 117 63 ----- ----- ----- $ 538 $ 452 $ 533 ----- ----- -----
Pension expense was computed using a discount rate of 7.0% in 1996 and 1994 and 8.0% in 1995, an expected long-term return of 8.0% and assumed salary increases of 5.0% in 1996, 1995 and 1994 respectively. A discount rate of 7.0% was used in determining benefit obligations in 1996 and 1995; a rate of 8.0% was used in 1994. In 1996, the Company offered a 410-k defined contribution plan for all employees reaching minimum age and service requirements. The plan is voluntary with no matching contributions. Administrative costs associated with the plan are absorbed by the Company. The Company has a Supplemental Insurance/Retirement Plan which is limited to certain officers and employees of the Company. The plan is voluntary and participants are required to contribute to its cost. Under the plan, each participant will receive a retirement benefit based on compensation and length of service. Individual life insurance policies are purchased covering the lives of each participant. The Company is the owner of these policies and is also the beneficiary of a portion of each policy's proceeds; The net cost to the Company for this plan was $306,000 in 1996, $247,000 in 1995 and $247,000 in 1994. The Company does not offer any post retirement benefits other than pensions. 15. COMMITMENTS AND CONTINGENCIES - -------------------------------------------------------------------------------- A number of legal claims against the Bank arising in the normal course of business were outstanding at December 31, 1996. 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. 16. 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. Financial instruments with off-balance sheet risk at December 31, are as follows:
Contract or Notional Amount 1996 1995 --------------------------- ------- ------- (in thousands) Financial instruments whose contract amount represents credit risk: Commitments to originate 1-4 family mortgages $ 106 $ 615 Standby letters of credit 945 1,056 Unused lines of credit 66,696 51,554 Unadvanced portions of construction loans 2,190 656 Financial instruments whose contract amount exceeds the amount of credit risk: Commitments to sell 1-4 family mortgages 663 1,848
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 -37- 40 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 $1,092,000 at December 31, 1996 and $1,110,000 at December 31, 1995. 17. OTHER OPERATING EXPENSES - --------------------------------------------------------------------------------
Year Ended December 31, 1996 1995 1994 - ----------------------- ------ ------ ------ (in thousands) Marketing $ 835 $ 650 $ 497 Supplies 471 522 365 Telephone 218 198 228 Postage and delivery 512 514 461 Legal and audit 316 486 571 Credit card processing -- 12 394 Insurance 184 192 248 FDIC assessment 2 473 999 Core deposit intangible amortization 200 25 -- Other 958 1,047 1,089 ------ ------ ------ $3,696 $4,119 $4,852 ====== ====== ======
18. FAIR VALUES OF FINANCIAL INSTRUMENTS - -------------------------------------------------------------------------------- SFAS No. 107, "Disclosures About Fair Value of Financial Instruments," requires disclosure of fair value information about financial instruments, whether or not recognized in the balance sheet, for which it is practicable to estimate that value. Statement 107 excludes certain financial instruments and all nonfinancial instruments from its disclosure requirements. Accordingly, the aggregate fair value amounts presented do not represent the underlying value of the Company. The following methods and assumptions were used by the Company in estimating fair values of its financial instruments: Cash and cash equivalents: The carrying amounts reported in the balance sheet for cash and cash equivalents approximate the fair values of these assets because of the short-term nature of these financial instruments. Securities held-to-maturity and securities available-for-sale: The fair value of these securities, excluding certain state and municipal securities whose fair value is estimated at book value because they are not readily marketable, is estimated based on bid prices published in financial newspapers or bid quotations received from securities dealers. Loans: For variable-rate loans that reprice frequently and with no significant change in credit risk, fair values are based on carrying amounts. The fair value of other loans is estimated using discounted cash flow analysis, based on interest rates currently being offered for loans with similar terms to borrowers of similar credit quality. Incremental credit risk for non-performing loans has been considered. Accrued interest receivable and payable: The carrying amounts for accrued interest receivable and payable approximate fair values because of the short-term nature of these financial instruments. 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, 1996 and 1995, there was no fair value adjustment. -38- 41 The carrying amounts and estimated fair values of the Company's financial instruments at December 31 are as follows:
1996 1995 ---- ---- Carrying Estimated Carrying Estimated Amounts Fair Value Amounts Fair Value --------- --------- --------- --------- (in thousands) (in thousands) Financial assets: Cash and cash equivalents $ 67,681 $ 67,681 $ 51,114 $ 51,114 Securities available-for-sale 81,015 81,015 100,754 100,754 Investment securities held-to-maturity 107,715 107,331 77,987 78,410 Loans (net of unearned discount) 288,280 285,438 Allowance for loan losses (4,179) (4,193) --------- --------- --------- --------- Loans, net 284,101 286,494 281,245 285,208 Accrued interest receivable 4,283 4,283 4,292 4,292 Financial liabilities: Deposits 476,135 476,787 458,615 459,557 Repurchase agreements and other borrowed funds 30,143 30,143 23,477 23,477 Accrued interest payable 2,000 2,000 2,365 2,365
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 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. 19. QUARTERLY RESULT OF OPERATIONS - --------------------------------------------------------------------------------
1996 Quarters Fourth Third Second First ---------- ---------- ---------- ---------- (in thousands, except per share data) Interest income $ 9,789 $ 9,887 $ 9,706 $ 9,395 Interest expense 3,809 4,052 4,041 3,903 ---------- ---------- ---------- ---------- Net interest income 5,980 5,835 5,665 5,492 Provision for loan losses 255 255 255 255 ---------- ---------- ---------- ---------- Net-interest income after provisions for loan losses 5,725 5,580 5,410 5,237 Other operating income 1,143 1,060 1,270 1,288 Operating expenses 4,417 4,337 4,502 4,618 ---------- ---------- ---------- ---------- Income before income taxes 2,451 2,303 2,178 1,907 Provision for income taxes 903 899 880 723 ---------- ---------- ---------- ---------- Net income $ 1,548 $ 1,404 $ 1,298 $ 1,184 ========== ========== ========== ========== Share Data Weighted average number of shares outstanding 5,743,657 5,738,706 5,736,220 5,726,227 Net income per share $ 0.27 $ 0.24 $ 0.23 $ 0.21 ========== ========== ========== ==========
1995 Quarters Fourth Third Second First ---------- ---------- ---------- ---------- (in thousands, except per share data) Interest income $ 9,342 $ 9,135 $ 9,037 $ 8,474 Interest expense 3,881 3,811 3,736 3,258 ---------- ---------- ---------- ---------- Net interest income 5,461 5,324 5,301 5,216 Provision for loan losses 375 375 405 405 ---------- ---------- ---------- ---------- Net-interest income after provisions for loan losses 5,086 4,949 4,896 4,811 Other operating income 1,254 1,215 1,174 1,079 Operating expenses 4,795 4,297 4,621 4,512 ---------- ---------- ---------- ---------- Income before income taxes 1,545 1,867 1,449 1,378 Provision for income taxes 388 575 368 335 ---------- ---------- ---------- ---------- Net income $ 1,157 $ 1,292 $ 1,081 $ 1,043 ========== ========== ========== ========== Share Data Weighted average number of shares outstanding 5,723,150 5,722,530 5,722,450 5,722,450 Net income per share $ 0.20 $ 0.23 $ 0.19 $ 0.18 ========== ========== ========== ==========
-39- 42 20. PARENT COMPANY FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- The balance sheets of Century Bancorp, Inc. ("Parent Company") as of December 31, 1996 and 1995 and the statements of income and cash flows for each of the years in the three-year period ended December 31, 1996 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, 1996 1995 ------- ------- (in thousands) Assets: Cash $ 6,409 $ 5,086 Investment in subsidiary, at equity 41,363 37,998 Other assets 87 92 ------- ------- Total assets $47,859 $43,176 ======= ======= Liabilities and Stockholders' Equity: Liabilities $ 370 241 Stockholders' equity 47,489 42,935 ------- ------- Total liabilities and stockholders' equity $47,859 $43,176 ======= =======
STATEMENTS OF INCOME Year Ended December 31, 1996 1995 1994 ------ ------ ------ (in thousands) Income: Dividends from subsidiary $1,544 $ 939 $ 300 Interest income from deposits in bank 253 216 131 Other income 12 12 46 ------ ------ ------ Total income 1,809 1,167 477 Operating expenses 69 79 83 ------ ------ ------ Income before income taxes and equity in undistributed income of subsidiary 1,740 1,088 394 Income tax expense 89 66 38 ------ ------ ------ Income before equity in undistributed income of subsidiary 1,651 1,022 356 Equity in undistributed income of subsidiary 3,783 3,552 2,948 ------ ------ ------ Net income $5,434 $4,574 $3,304 ====== ====== ======
STATEMENTS OF CASH FLOWS Year Ended December 31, 1996 1995 1994 ------- ------- ------- (in thousands) Cash flows from operating activities: Net income $ 5,434 $ 4,574 $ 3,304 Adjustments to reconcile net income to net cash provided by operating activities: Undistributed income of subsidiary (3,783) (3,552) (2,948) Depreciation and amortization 6 6 16 Increase in other assets (1) (3) -- Increase (decrease) in liabilities 129 (298) 52 ------- ------- ------- Net cash provided by operating activities 1,785 727 424 ------- ------- ------- Cash flows from investing activities: ------- ------- ------- Proceeds from transfer of premises -- -- 371 Cash flows from financing activities: Stock options excercised 133 6 -- Cash dividends paid (595) (438) (361) ------- ------- ------- Net cash used by financing activities (462) (432) (361) ------- ------- ------- Net increase in cash 1,323 295 434 Cash at beginning of year 5,086 4,791 4,357 ------- ------- ------- Cash at end of year $ 6,409 $ 5,086 $ 4,791 ======= ======= ======= Supplemental disclosures of cash flow information: Cash paid during the year for: Income taxes $ 93 $ 70 $ 44
-40- 43 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, 1996 and 1995, 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, 1996. 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, 1996 and 1995, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1996 in conformity with generally accepted accounting principles. /s/ KPMG PEAT MARWICK LLP January 10, 1997 -41- 44 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The directors of the Company and their ages as of December 31, 1996 are as follows:
NAME AGE POSITION George R. Baldwin 53 Director, Century Bancorp, Inc., and Century Bank and Trust Co., Roger S. Berkowitz 44 Director, Century Bancorp, Inc., and Century Bank and Trust Co. Karl E. Case, Ph. D. 50 Director, Century Bancorp, Inc., and Century Bank and Trust Co. Henry L. Foster, D.V.M. 71 Director, Century Bancorp, Inc., and Century Bank and Trust Co. Marshall I. Goldman, Ph. D. 66 Director, Century Bancorp, Inc., and Century Bank and Trust Co. Russell B. Higley, Esquire 57 Director, Century Bancorp, Inc., and Century Bank and Trust Co. Fraser Lemley 56 Director, Century Bancorp, Inc., and Century Bank and Trust Co. Joseph P. Mercurio 48 Director, Century Bancorp, Inc., and Century Bank and Trust Co. Gary L. Saunders, CHA 42 Director, Century Bancorp, Inc., and Century Bank and Trust Co. Joseph J. Senna, Esquire 57 Director, Century Bancorp, Inc., and Century Bank and Trust Co. Jonathan G. Sloane 38 Director and Senior Vice President, Century Bancorp, Inc.; Director and Senior Executive Vice President, Century Bank and Trust Company Marshall M. Sloane 70 Chairman, President and CEO, Century Bancorp, Inc., Chairman and CEO, Century Bank and Trust Company George F. Swansburg 54 Director and Executive Vice President, Century Bancorp, Inc.; Director, President, and COO, Century Bank and Trust Company George Traicoff 64 Director, Century Bancorp, Inc., and Century Bank and Trust Co. Jon Westling 54 Director, Century Bancorp, Inc., and Century Bank and Trust Co.
-42- 45 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 Arthur J. Gallagher & Co. of Massachusetts. Inc. 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 a 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. He is also Senior Vice President of Bausch & Lomb. 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. 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 President of Sentry Ford, Inc., and President of Sentry 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 at Boston University. Mr. Saunders became a director of the Company in 1996. He was elected a director of Century Bank/Suffolk in 1989 and has been a director of Century Bank and Trust Company since the banks merged in 1992. Mr. Saunders is Chairman and CEO of the Saunders Hotel Group. 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. Jonathan G. Sloane became a director of the Company in 1986 and was elected Senior Vice President in 1995. He was President and a director of Century Bank/Suffolk and became Treasurer in January 1987. He was an Assistant Vice President at Century Bank and Trust Company from 1980 to 1983. He is currently Senior Executive Vice President 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. Mr. Swansburg became a director of the Company in 1986 and was elected Executive Vice President in 1995. He was President and a director of Century North Shore Bank and Trust Company. He was Executive Vice President of BayBank Merrimack Valley N.A. from 1981 to 1985. He is currently Director, President and COO of Century Bank and Trust Company. Mr. Traicoff became a director of the Company in 1996. He was elected a director of Century North Shore Bank and Trust Company in April 1990 and has been a director of Century Bank and Trust Company since the banks merged in 1992. Mr. Traicoff is President of North Shore Community College. 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 Jonathan G. Sloane is the son of Marshall M. Sloane. There were no arrangements or understandings pursuant to which any director or executive officer was so selected. -43- 46 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, Henry L. Foster 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 Traicoff, 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. George F. Swansburg Director and Executive Vice President; President and COO, Century Bank and Trust Company. Jonathan G. Sloane Director and Senior Vice President; Director and Senior Executive Vice President, Century Bank and Trust Company with responsibility for retail banking and sales administration. Paul V. Cusick, Jr. Vice President and Treasurer; Executive Vice President, Chief Financial Officer and Treasurer, Century Bank and Trust Company. Mr. Cusick is 52 years of age. Donald H. Lang Executive Vice President, Century Bank and Trust Company with responsibility for lending. Mr. Lang is 56 years of age. William J. Sloboda Executive Vice President, Century Bank and Trust Company with responsibility for operations. Mr. Sloboda is 54 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. -44- 47 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 4% to 8% 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 85% 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 1996, 1995 and 1994 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 1996 cash compensation for Mr. Sloane was $520,650 of which $413,400 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. -45- 48 Comparison of Five-Year Cumulative Total Return.* [LINE CHART] Value of $100 Invested on December 31, 1991 at:
12/31/92 12/31/93 12/31/94 12/31/95 12/31/96 -------- -------- -------- -------- -------- Century 161.47 185.79 431.95 553.79 727.37 Nasdaq Banks 145.55 165.99 165.39 246.32 325.60 Nasdaq U.S. 116.38 133.60 130.59 184.67 227.16
* Assumes that the value of the investment in the Company's Common Stock and each index was $100 on December 31, 1991 and that all dividends were reinvested. -46- 49 SUMMARY OF CASH AND CERTAIN OTHER COMPENSATION The following table shows, for fiscal years ending December 31, 1994, 1995 and 1996, the cash compensation paid by the Company and its subsidiaries, as well as certain other compensation paid, accrued or granted for those years to the five most highly compensated executive officers of the Company. SUMMARY COMPENSATION TABLE
Long-Term Compensation ---------------------------------- Annual Compensation Awards Payouts ============================ ======== ================================== ===================== ======== Restricted Securities Name Stock Underlying LTIP All Other and Salary Bonus(1) Other Awards Options/ Payouts Compensation Principal Position Year ($) ($) ($) ($) SARs (#) ($) ($) - ---------------------------- -------- -------- -------- -------- -------- -------- -------- ------------ Marshall M. Sloane 1996 413,400 125,260 0 0 0 0 0 Chairman 1995 390,000 107,250 0 0 0 0 0 1994 386,756 65,625 0 0 0 0 0 George F. Swansburg 1996 183,800 45,582 0 0 0 0 0 President 1995 173,400 39,015 0 0 0 0 0 1994 158,112 15,750 0 0 0 0 0 Jonathan G. Sloane 1996 148,000 36,852 0 0 0 0 0 Senior Executive Vice 1995 140,000 31,500 0 0 0 0 0 President 1994 126,226 12,750 0 0 0 0 0 Donald H. Lang 1996 123,300 27,742 0 0 0 0 0 Executive Vice 1995 118,600 23,720 0 0 0 0 0 President 1994 114,292 11,400 0 0 0 0 0 William J. Sloboda 1996 145,000 29,000 0 0 0 0 0 Executive Vice 1995 141,900 28,380 0 0 0 0 0 President 1994 136,482 13,650 0 0 0 0 0 ============================ ======== ======== ======== ======== ======== ======== ======== ========
(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 aforementioned officers are as follows.
NAME OF INDIVIDUAL NUMBER OF SHARES - ------------------ ---------------- Marshall M. Sloane 20,000 George F. Swansburg 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. -47- 50 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 $2,067,000, $919,000, $616,500, $740,000, $725,000 for Messrs. Marshall M. Sloane, Swansburg, Lang, Jonathan G. Sloane and Sloboda. Premiums paid by the Company in 1996 amounted to $87,800, $31,700, $27,600, $8,300, $28,400, for policies on the lives of Messrs. Marshall M. Sloane, Swansburg, Lang, Jonathan G. Sloane and Sloboda. 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 the policies and each participant has the right to name a beneficiary. 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 Vice Presidents and equivalents (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, 1996, Messrs. Marshall M. Sloane, Swansburg, Lang, Jonathan G. Sloane, and Sloboda were 100%, 70.0%, 77.5%, 100%, and 100% vested, respectively, under the Supplemental Plan. -48- 51 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, 1996 (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 - ------------------- ----- ----- ----- ----- Marshall M. Sloane,(i),(ii) 15,816(1) 0.47% 1,714,330(2) 74.53% 400 Mystic Ave Medford, MA 02155 George R. Baldwin,(ii) 5,502 0.16% Roger S. Berkowitz,(ii) 1,820 0.05% Karl E. Case,(ii) 262 0.01% Paul V. Cusick, Jr., (ii) 4,200 0.12% Henry L. Foster, D.V.M.,(i),(ii) 352,543(3) 10.26% 1,000 0.04% Marshall I. Goldman,(ii) 144(4) 0.00% 30,000(5) 1.30% Russell B. Higley, Esquire,(ii) 4,315 0.12% Donald H. Lang,(ii) 3,600 0.10% Fraser Lemley,(ii) 822 0.02% Joseph P. Mercurio,(ii) 1,038 0.03% Gary L. Saunders, CHA,(ii) 363 0.01% Joseph J. Senna,(ii) 2,693 0.08% 42,000(6) 1.83% Jonathan G. Sloane,(ii) 500 0.01% 60,000 2.61% William J. Sloboda,(ii) 5,000 0.14% 500 0.02% George F. Swansburg,(ii) 17,100 0.49% George Traicoff,(ii) 655 0.02% Jon Westling,(ii) 294 0.01% All directors and officers as a group (19 in number),(iii) 419,267 12.12% 1,847,930 80.34%
(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 121,500 shares. (3) Includes 333,129 shares held in trust for Mr. Foster's children. (4) Does not include 9,000 shares held of record by Mr. Goldman's children; Mr. Goldman disclaims beneficial ownership of such shares. (5) Does not include 9,000 shares held of record by Mr. Goldman's children; Mr. Goldman disclaims beneficial ownership of such shares. (6) Includes 34,800 shares owned by Mrs. Senna. 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 1996, all Section 16(a) filing requirements applicable to its Executive Officers and Directors were complied with, except that reports relating to sales of stock owned indirectly by a director were filed late and one report was filed late by an Executive Officer relating to the exercise of stock options. -49- 52 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, 1996 and 1995 Consolidated Statements of Income -- Years Ended December 31, 1996, 1995 and 1994 Consolidated Statements of Changes in Stockholders' Equity -Years ended December 31, 1996, 1995 and 1994 Consolidated Statements of Cash Flows-Years Ended December 31, 1996, 1995 and 1994 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. -50- 53 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 11th day of March 1997. 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 - ----------------------------------- ---------------------------------------- George R. Baldwin, Director George Traicoff, Director /s/Roger S. Berkowitz /s/Jon Westling - ----------------------------------- ---------------------------------------- Roger S. Berkowitz, Director Jon Westling, Director /s/Karl E. Case /s/Jonathan G. Sloane - ----------------------------------- ---------------------------------------- Karl E. Case, Ph.D., Director Jonathan G. Sloane, Director and Senior Vice President /s/Marshall M. Sloane - ----------------------------------- ---------------------------------------- Henry L. Foster, D.V.M., Director Marshall M. Sloane, Chairman, President and Chief Executive Officer /s/Marshall I. Goldman /s/George F. Swansburg - ----------------------------------- ---------------------------------------- Marshall I. Goldman, Ph.D., Director George F. Swansburg, Director and Executive Vice President /s/Russell B. Higley /s/Paul V. Cusick - ----------------------------------- ---------------------------------------- Russell B. Higley, Esquire, 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 - ----------------------------------- Gary L. Saunders, CHA, Director /s/Joseph J. Senna - ----------------------------------- Joseph J. Senna, Esquire, Director -51- EX-27 2 FINANCIAL DATA SCHEDULE
9 0000812348 CENTURY BANCORP, INC. 1,000 U.S. DOLLARS YEAR DEC-31-1996 JAN-01-1996 DEC-31-1996 1 46,681 0 21,000 0 81,015 107,715 107,331 288,280 4,179 560,857 476,135 30,143 7,090 0 0 0 5,836 41,653 560,857 26,291 11,677 809 38,777 14,910 15,805 22,972 1,020 0 3,696 8,839 8,839 0 0 5,434 .95 .95 4.79 2,140 191 2,541 4,872 4,193 1,303 269 4,179 4,179 0 0
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