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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-KSB
ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended June 30, 1997
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Commission file number 000-21881
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CENTURY BANCORP, INC.
(Name of small business issuer in its charter)
North Carolina 56-1981518
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
22 Winston Street
Thomasville, North Carolina 27360
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(Address of principal executive offices) (Zip Code)
(910) 475-4663
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(Issuer's telephone number)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
Common Stock, no par value Nasdaq SmallCap Market
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(Title of class) (Name of each exchange on which registered)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act of 1934 during the past 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.
Yes X No
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Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will 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-KSB
or any amendment to this Form 10-KSB. [X]
State issuer's revenues for its most recent fiscal year $6,709,691.00
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State the aggregate market value of the voting stock held by non-affiliates
computed by reference to the price at which the stock was sold, or the average
bid and asked prices of such stock, as of a specified date within the past 60
days.
Common Stock, no par value -- $27,916,345 (based on the price at which the stock
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was sold on September 12, 1997).
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date.
Common Stock, no par value 407,330
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(Class) (Outstanding at September 12, 1997)
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Annual Report to Stockholders for the year ended June 30, 1997
(the "1997 Annual Report"), are incorporated by reference into Part I and Part
II.
Portions of the Proxy Statement for the Annual Meeting of Stockholders to be
held on October 23, 1997 (the "Proxy Statement"), are incorporated by reference
into Part III.
Transitional Small Business Disclosure Format (Check one): Yes No X
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
General
Prior to December 20, 1996, Home Savings, Inc., SSB (the "Bank") operated
as a mutual North Carolina-chartered savings bank. On December 20, 1996, the
Bank converted from a North Carolina-chartered mutual savings bank to a North
Carolina-chartered stock savings bank (the "Conversion"). In connection with
the Conversion, all of the issued and outstanding capital stock of the Bank was
acquired by Century Bancorp, Inc., a North Carolina corporation (the "Company")
which was organized to become the Bank's holding company. At that time, the
Company had an initial public offering of its common stock, no par value (the
"Common Stock").
The Company is a bank holding company registered with the Board of
Governors of the Federal Reserve System (the "Federal Reserve") under the Bank
Holding Company Act of 1956, as amended (the "BHCA") and the savings bank
holding company laws of North Carolina. The Company's and the Bank's principal
office is located at 22 Winston Street, Thomasville, North Carolina. The
Company's activities consist of investing the proceeds of the Conversion which
were retained at the holding company level, holding the indebtedness outstanding
from the ESOP, and owning the Bank. The Company's principal sources of income
are earnings on capital retained by the Company, interest payments received from
the Home Savings, Inc., SSB Employee Stock Ownership Plan (the "ESOP") with
respect to the ESOP loan, and dividends paid by the Bank to the Company, if any.
The Bank was organized in 1915, and has been a member of the Federal Home
Loan Bank (the "FHLB") system and its deposits have been federally insured since
the late 1950's. The deposits of the Bank are insured by the Savings
Association Insurance Fund (the "SAIF") of the Federal Deposit Insurance
Corporation (the "FDIC") to the maximum amount permitted by law.
The Bank conducts business through its full service office in Thomasville,
North Carolina. The Bank's primary market area encompasses the communities
within a 10-mile radius of its office, which includes portions of Davidson,
Randolph and Guilford counties in North Carolina. At June 30, 1997, the Company
had total assets of $100,640,000, net loans of $62,333,000, deposits of
$69,699,000, investment securities of $35,180,000 and stockholders' equity of
$30,303,000.
At June 30, 1997, the Company and the Bank had a total of 11 full-time
employees.
The Company has no operations and conducts no business of its own other
than owning the Bank, investing its portion of the net proceeds received in the
Conversion and lending funds to the ESOP. Accordingly, the discussion of the
business which follows in this Form 10-KSB concerns the business conducted by
the Bank, unless indicated otherwise.
Lending Activities
The Bank is engaged primarily in the business of attracting deposits from
the general public and using such deposits to make mortgage loans secured by
real estate. The Bank's primary source of revenue is interest and fee income
from its lending activities, consisting primarily of mortgage loans for the
purchase or refinancing of one-to-four family residential real property located
in its primary market area. The Bank also makes loans secured by multi-family
and commercial properties, construction loans, home equity loans, savings
account loans and various types of consumer loans. Only 1% of the Bank's loan
portfolio, before net items, is not secured by real estate. On June 30, 1997,
the Bank's largest single outstanding loan had a balance of approximately
$705,000. In addition to interest earned on loans, the Bank receives fees in
connection with loan originations, loan servicing, loan modifications, late
payments, loan
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assumptions and other miscellaneous services. The Bank generally does not sell
its loans; both fixed and adjustable rate loans are originated with the
intention that they will be held in the Bank's loan portfolio.
The Bank's net loan portfolio totaled approximately $62.30 million at June
30, 1997 representing 61.9% of the Bank's total assets at such date. At June
30, 1997, 75.3% of the Bank's loan portfolio, before net items, was composed of
one-to four-family residential mortgage loans. Multi-family residential and
commercial real estate loans represented 14.5% of the Bank's loan portfolio,
before net items, on such date. Construction loans and home equity loans
represented 6.4% and 1.8%, respectively, of the Bank's loan portfolio, before
net items, on such date. As of June 30, 1997, 22.7% of the loans in the Bank's
loan portfolio had adjustable interest rates. Loans maturing or repricing on or
after June 30, 1998, consist of fixed rate real estate loans of $46.3 million,
adjustable rate real estate loans of $11,000 and other fixed rate loans of
$714,000; the Bank has no other adjustable rate loans. See Note C Loans
Receivable to the Financial Statements Contained in the 1997 Annual Report.
Investment Securities
Interest and dividend income from investment securities generally provides
the second largest source of income to the Bank after interest on loans. In
addition, the Bank receives interest income from deposits in other financial
institutions. The Company also has interest and dividend income from investing
the proceeds of the Conversion. At June 30, 1997, the Company's and the Bank's
investment portfolio totaled approximately $35.2 million and consisted of U.S.
government and agency securities, mortgage-backed securities, municipal bonds,
interest-earning deposits in other financial institutions, and stock of the
Federal Home Loan Mortgage Corporation and the FHLB of Atlanta.
Investments in mortgage-backed securities involve a risk that, because of
changes in the interest rate environment, actual prepayments will be greater
than estimated prepayments over the life of the security, which may require
adjustments to the amortization of any premium or accretion of any discount
relating to such instruments, thereby reducing the net yield on such securities.
There is also reinvestment risk associated with the cash flows from such
securities. In addition, the market value of such securities may be adversely
affected by changes in interest rates. See Note B Investment Securities to the
Financial Statements Contained in the 1997 Annual Report.
As a member of the FHLB of Atlanta, the Bank is required to maintain an
investment in stock of the FHLB of Atlanta equal to the greater of 1% of the
Bank's outstanding home loans or 5% of its outstanding advances from the FHLB of
Atlanta. No ready market exists for such stock, which is carried at cost. As
of June 30, 1997, the Bank's investment in stock of the FHLB of Atlanta was
$586,500.
North Carolina regulations require the Bank to maintain a minimum amount of
liquid assets which may be invested in specified short-term securities. See "--
Regulation of the Bank - Liquidity." The Bank is also permitted to make certain
other securities investments.
Deposits and Borrowings
Deposits. Deposits are the primary source of the Bank's funds for lending
and other investment purposes. The Bank attracts both short-term and long-term
deposits from the general public by offering a variety of accounts and rates.
The Bank offers passbook savings accounts, statement savings accounts,
negotiable order of withdrawal accounts, money market demand accounts, non-
interest-bearing accounts, and fixed interest rate certificates with varying
maturities. At June 30, 1997, 72.8% of the Bank's deposits consisted of
certificate accounts, 7.8% consisted of passbook and statement savings accounts,
19.3% consisted of interest-bearing transaction accounts and 0.1% consisted of
noninterest-bearing transaction accounts. Deposit flows are greatly influenced
by economic conditions, the general level of interest rates, competition, and
other factors, including the restructuring of the thrift industry. The Bank's
savings deposits traditionally have been obtained primarily from its primary
market area. The Bank utilizes traditional marketing methods to attract new
customers and savings deposits, including print media advertising and direct
mailings.
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The Bank does not advertise for deposits outside of its local market area or
utilize the services of deposit brokers. See Note F Deposit Accounts to the
Financial Statements Contained in the 1997 Annual Report.
In addition to deposits, the Bank derives funds from loan principal
repayments, interest payments, investment income and principal repayments,
interest from its own interest-earning deposits, interest income and repayments
from mortgage-backed securities and otherwise from its operations. Loan
repayments are a relatively stable source of funds while deposit inflows and
outflows may be significantly influenced by general interest rates and money
market conditions.
Borrowings. Borrowings may be used on a short-term basis to compensate for
reductions in the availability of funds from other sources. They may also be
used on a longer term basis for general business purposes. Although it has not
done so in several years, the Bank may obtain advances from the FHLB of Atlanta
to supplement its liquidity needs. The FHLB system functions in a reserve
credit capacity for savings institutions. As a member, the Bank is required to
own capital stock in the FHLB of Atlanta and is authorized to apply for advances
from the FHLB of Atlanta on the security of that stock and a floating lien on
certain of its real estate secured loans and other assets. Each credit program
has its own interest rate and range of maturities. Depending on the program,
limitations on the amount of advances are based either on a fixed percentage of
an institution's net worth or on the FHLB of Atlanta's assessment of the
institution's creditworthiness. At June 30, 1997, the Bank had no outstanding
borrowings.
Results of Operations
The Bank's results of operations are dependent primarily on net interest
income, which is the difference between the income earned on its interest-
earning assets, such as loans and investments, and the cost of its interest-
bearing liabilities, consisting of deposits. The Bank's operations are affected
to a much lesser degree by non-interest income, such as transaction and other
service fee income, and other sources of income. The Bank's net income is also
affected by, among other things, provisions for loan losses and operating
expenses. The Bank's principal operating expenses, aside from interest
expense, consist of compensation and employee benefits, office occupancy costs,
data processing expenses and federal deposit insurance premiums. The Bank's
results of operations are also significantly affected by general economic and
competitive conditions, particularly changes in market interest rates,
government legislation and policies concerning monetary and fiscal affairs,
housing and financial institutions and the attendant actions of regulatory
authorities.
Market Area
The Bank's primary market area consists of the communities in a 10-mile
radius around its office in Thomasville, North Carolina. This area includes
portions of Davidson, Randolph and Guilford counties in North Carolina.
Employment in the Bank's primary market area is diversified among manufacturing,
agricultural, retail and wholesale trade, government, services and utilities.
The High Point-Thomasville area of North Carolina is considered to be the
furniture capital of the world, so the economy of the Bank's primary market area
is greatly affected by the furniture and home furnishings industry. Thomasville
Furniture Industries, Inc. is the largest employer in Thomasville. Other major
employers include Community General Hospital and Parkdale Mills. Employment in
the Davidson County, North Carolina area as of June, 1997 was strong, with an
unemployment rate below that of North Carolina and national averages.
Comparative data indicates that the income levels in Davidson County and in
Thomasville are below national and North Carolina averages. From 1990 to 1995,
population in Davidson County increased by 7.7%, which was above national and
North Carolina averages, while the population of Thomasville increased by 5.3%
which was below the North Carolina average of 5.5%. Thomasville has a sizable
elderly population, and as a predominantly middle class manufacturing community,
Thomasville's residents have less formal education than residents of Davidson
County and North Carolina as a whole. As a result, comparative data indicates
that as of 1990 the median home value in Thomasville was only $48,200, well
below the Davidson County average of $60,800, the North Carolina average of
$65,800 and the national average of $79,090.
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Subsidiaries
The Bank is the only subsidiary of the Company. As a North Carolina
chartered savings bank, the Bank is able to invest up to 10% of its total assets
in subsidiary service corporations. However, any investment in service
corporation which would cause the Bank to exceed an investment of 3% of assets
must receive prior approval of the FDIC. The Bank has one subsidiary which is
not active and has never engaged in any business.
Competition
The Bank faces strong competition both in attracting deposits and making
real estate and other loans. Its most direct competition for deposits has
historically come from other savings institutions, credit unions and commercial
banks located in its primary market area, including large financial institutions
which have greater financial and marketing resources available to them. As of
June 30, 1997, there were eight depository institutions with 13 offices in
Thomasville, North Carolina. Based upon 1996 comparative data, the Bank had
16.7% of the deposits in Thomasville, and 5.8% of the deposits in Davidson
County. The Bank has also faced additional significant competition for
investors' funds from short-term money market securities and other corporate and
government securities. The ability of the Bank to attract and retain savings
deposits depends on its ability to generally provide a rate of return, liquidity
and risk comparable to that offered by competing investment opportunities.
The Bank experiences strong competition for real estate loans from other
savings institutions, commercial banks, and mortgage banking companies. It
competes for loans primarily through the interest rates and loan fees it
charges, the efficiency and quality of services it provides borrowers, and its
more flexible underwriting standards. Competition may increase as a result of
the continuing reduction of restrictions on the interstate operations of
financial institutions.
Supervision and Regulation
Bank holding companies and state savings banks are extensively regulated
under both federal and state law. The following is a brief summary of certain
statutes and rules and regulations that affect or will affect the Company and
the Bank. This summary is qualified in its entirety by reference to the
particular statute and regulatory provisions referred to below and is not
intended to be an exhaustive description of the statutes or regulations
applicable to the business of the Company and the Bank. Supervision, regulation
and examination of the Company and the Bank by the regulatory agencies are
intended primarily for the protection of depositors rather than shareholders of
the Company.
Regulation of the Company
General. The Company was organized for the purpose of acquiring and
holding all of the capital stock of the Bank to be issued in the Conversion. As
a savings bank holding company subject to the BHCA, the Company is subject to
certain regulations of the Federal Reserve. Under the BHCA, the Company's
activities and those of its subsidiaries are limited to banking, managing or
controlling banks, furnishing services to or performing services for its
subsidiaries or engaging in any other activity which the Federal Reserve
determines to be so closely related to banking or managing or controlling banks
as to be a proper incident thereto. The BHCA prohibits the Company from
acquiring direct or indirect control of more than 5% of the outstanding voting
stock or substantially all of the assets of any bank or savings bank or merging
or consolidating with another bank holding company or savings bank holding
company without prior approval of the Federal Reserve.
Additionally, the BHCA prohibits the Company from engaging in, or acquiring
ownership or control of, more than 5% of the outstanding voting stock of any
company engaged in a nonbanking business unless such business is determined by
the Federal Reserve to be so closely related to banking as to be properly
incident thereto.
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Similarly, Federal Reserve approval (or, in certain cases, non-disapproval)
must be obtained prior to any person acquiring control of the Company. Control
is conclusively presumed to exist if, among other things, a person acquires more
than 25% of any class of voting stock of the holding company or controls in any
manner the election of a majority of the directors of the holding company.
Control is presumed to exist if a person acquires more than 10% of any class of
voting stock and the stock is registered under Section 12 of the Exchange Act or
the acquiror will be the largest shareholder after the acquisition.
There are a number of obligations and restrictions imposed on bank holding
companies and their depository institution subsidiaries by law and regulatory
policy that are designed to minimize potential loss to the depositors of such
depository institutions and the FDIC insurance funds in the event the depository
institution becomes in danger of default or in default. For example, to avoid
receivership of an insured depository institution subsidiary, a bank holding
company is required to guarantee the compliance of any insured depository
institution subsidiary that may become "undercapitalized" with the terms of any
capital restoration plan filed by such subsidiary with its appropriate federal
banking agency up to the lesser of (i) an amount equal to 5% of the
institution's total assets at the time the institution became undercapitalized
or (ii) the amount which is necessary (or would have been necessary) to bring
the institution into compliance with all acceptable capital standards as of the
time the institution fails to comply with such capital restoration plan. Under
a policy of the Federal Reserve with respect to bank holding company operations,
a bank holding company is required to serve as a source of financial strength to
its subsidiary depository institutions and to commit resources to support such
institutions in circumstances where it might not do so absent such policy. The
Federal Reserve under the BHCA also has the authority to require a bank holding
company to terminate any activity or to relinquish control of a nonbank
subsidiary (other than a nonbank subsidiary of a bank) upon the Federal
Reserve's determination that such activity or control constitutes a serious risk
to the financial soundness and stability of any bank subsidiary of the bank
holding company.
In addition, insured depository institutions under common control are
required to reimburse the FDIC for any loss suffered by either the SAIF or the
Bank Insurance Fund (the "BIF") as a result of the default of a commonly
controlled insured depository institution or for any assistance provided by the
FDIC to a commonly controlled insured depository institution in danger of
default. The FDIC may decline to enforce the cross-guarantee provisions if it
determines that a waiver is in the best interest of the SAIF or the BIF or both.
The FDIC's claim for damages is superior to claims of stockholders of the
insured depository institution or its holding company but is subordinate to
claims of depositors, secured creditors and holders of subordinated debt (other
than affiliates) of the commonly controlled insured depository institutions.
Federal regulations require that the Company must notify the Federal
Reserve Bank of Richmond prior to repurchasing Common Stock in excess of ten
percent of its net worth during a rolling twelve month period. As a result of
the Company's ownership of the Bank, the Company is registered under the savings
bank holding company laws of North Carolina. Accordingly, the Company is also
subject to regulation and supervision by the Administrator.
Capital Adequacy Guidelines for Holding Companies. The Federal Reserve has
adopted capital adequacy guidelines for bank holding companies and banks that
are members of the Federal Reserve system and have consolidated assets of $150
million or more. For bank holding companies with less than $150 million in
consolidated assets, the guidelines are applied on a bank-only basis unless the
parent bank holding company (i) is engaged in nonbank activity involving
significant leverage or (ii) has a significant amount of outstanding debt that
is held by the general public.
Bank holding companies are required to comply with the Federal Reserve's
risk-based capital guidelines. Under these regulations, the minimum ratio of
total capital to risk-weighted assets (including certain off-balance sheet
activities, such as standby letters of credit) is 8%. At least half of the
total capital is required to be "Tier I capital," principally consisting of
common stockholders' equity, noncumulative perpetual preferred stock, and a
limited amount of cumulative perpetual preferred stock, less certain goodwill
items. The remainder ("Tier II capital") may consist of a limited amount of
subordinated debt, certain hybrid capital instruments and other debt securities,
perpetual preferred stock, and a limited amount of the general loan loss
allowance. In addition to the risk-based capital guidelines, the
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Federal Reserve has adopted a minimum Tier I capital (leverage) ratio, under
which a bank holding company must maintain a minimum level of Tier I capital to
average total consolidated assets of at least 3% in the case of a bank holding
company which has the highest regulatory examination rating and is not
contemplating significant growth or expansion. All other bank holding companies
are expected to maintain a Tier I capital (leverage) ratio of at least 1% to 2%
above the stated minimum.
Federal Securities Law
The Company has registered its Common Stock with the SEC pursuant to
Section 12(g) of the Securities Exchange Act of 1934 (the "Exchange Act") and
will not deregister the Common Stock for a period of three years following the
completion of the Conversion. As a result of such registration, the proxy and
tender offer rules, insider trading reporting requirements, annual and periodic
reporting and other requirements of the Exchange Act are applicable to the
Company.
Regulation of the Bank
General. Federal and state legislation and regulation have significantly
affected the operations of federally insured savings institutions and other
federally regulated financial institutions in the past several years and have
increased competition among savings institutions, commercial banks and other
providers of financial services. In addition, federal legislation has imposed
new limitations on investment authority, and higher insurance and examination
assessments on savings institutions and has made other changes that may
adversely affect the future operations and competitiveness of savings
institutions with other financial institutions, including commercial banks and
their holding companies. The operations of regulated depository institutions,
including the Bank, will continue to be subject to changes in applicable
statutes and regulations from time to time.
The Bank is a North Carolina-chartered savings bank, is a member of the
FHLB system, and its deposits are insured by the FDIC through the SAIF. It is
subject to examination and regulation by the FDIC and the Administrator and to
regulations governing such matters as capital standards, mergers, establishment
of branch offices, subsidiary investments and activities, and general investment
authority. Generally, North Carolina state chartered savings banks whose
deposits are issued by the SAIF are subject to restrictions with respect to
activities and investments, transactions with affiliates and loans-to-one
borrower similar to those applicable to SAIF insured savings associations. Such
examination and regulation is intended primarily for the protection of
depositors and the federal deposit insurance funds.
The Bank is subject to various regulations promulgated by the Federal
Reserve including, without limitation, Regulation B (Equal Credit Opportunity),
Regulation D (Reserves), Regulation E (Electronic Fund Transfers), Regulation O
(Loans to Executive Officers, Directors and Principal Shareholders), Regulation
Z (Truth in Lending), Regulation CC (Availability of Funds) and Regulation DD
(Truth in Savings). As creditors of loans secured by real property and as
owners of real property, financial institutions, including the Bank, may be
subject to potential liability under various statutes and regulations applicable
to property owners generally, including statutes and regulations relating to the
environmental condition of real property.
The FDIC has extensive enforcement authority over North Carolina-chartered
savings banks, including the Bank. This enforcement authority includes, among
other things, the ability to assess civil money penalties, to issue cease and
desist or removal orders and to initiate injunctive actions. In general, these
enforcement actions may be initiated in response to violations of laws and
regulations and unsafe or unsound practices.
The grounds for appointment of a conservator or receiver for a North
Carolina savings bank on the basis of an institution's financial condition
include: (i) insolvency, in that the assets of the savings bank are less than
its liabilities to depositors and others; (ii) substantial dissipation of assets
or earnings through violations of law or unsafe or unsound practices; (iii)
existence of an unsafe or unsound condition to transact business; (iv)
likelihood that the savings bank will be unable to meet the demands of its
depositors or to pay its obligations in the normal course of business; and (v)
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insufficient capital or the incurring or likely incurring of losses that will
deplete substantially all of the institution's capital with no reasonable
prospect of replenishment of capital without federal assistance.
Transactions with Affiliates. Under current federal law, transactions
between the Bank and any affiliate are governed by Sections 23A and 23B of the
Federal Reserve Act. An affiliate of the Bank is any company or entity that
controls, is controlled by or is under common control with the savings bank.
Generally, subsidiaries of a bank, other than a bank subsidiary, and certain
other types of companies are not considered to be affiliates. Generally,
Sections 23A and 23B (i) limit the extent to which the Bank or its subsidiaries
may engage in "covered transactions" with any one affiliate to an amount equal
to 10% of such the Bank's capital stock and surplus, and contain an aggregate
limit on all such transactions with all affiliates to an amount equal to 20% of
such capital stock and surplus and (ii) require that all such transactions be on
terms substantially the same, or at least as favorable, to the Bank or the
subsidiary as those provided to a nonaffiliate. The term "covered transaction"
includes the making of loans or other extensions of credit to an affiliate, the
purchase of assets from an affiliate, the purchase of, or an investment in, the
securities of an affiliate, the acceptance of securities of an affiliate as
collateral for a loan or extension of credit to any person, or issuance of a
guarantee, acceptance or letter of credit on behalf of an affiliate.
Further, current federal law has extended to savings banks the restrictions
contained in Section 22(h) of the Federal Reserve Act and its implementing
regulations with respect to loans to directors, executive officers and principal
stockholders. Under Section 22(h), loans to directors, executive officers and
stockholders who own more than 10% of a savings bank, and certain affiliated
entities of any of the foregoing, may not exceed, together with all other
outstanding loans to such person and affiliated entities, the savings bank's
loans-to-one borrower limit as established by federal law and all loans to such
persons may not exceed the institution's unimpaired capital and unimpaired
surplus. Section 22(h) also prohibits loans above amounts prescribed by the
appropriate federal banking agency to directors, executive officers and
stockholders who own more than 10% of a savings bank, and their respective
affiliates, unless such loan is approved in advance by a majority of the
disinterested directors of the board of directors of the savings bank and the
Company. Any "interested" director may not participate in the voting. The
Federal Reserve has prescribed the loan amount (which includes all other
outstanding loans to such person), as to which such prior board of director
approval is required, as being the greater of $25,000 or 5% of unimpaired
capital and unimpaired surplus (up to $500,000). Further, pursuant to Section
22(h) the Federal Reserve requires that loans to directors, executive officers,
and principal stockholders be made on terms substantially the same as offered in
comparable transactions to other persons and not involve more than the normal
risk of repayment or present other unfavorable features. Section 22(h) also
generally prohibits a depository institution from paying the overdrafts of any
of its executive officers or directors.
Deposit Insurance. The Bank is required to pay assessments based on a
percentage of its insured deposits to the FDIC for insurance of its deposits by
the SAIF. Under the FDIC's risk-based deposit insurance assessment system, the
assessment rate for an insured depository institution depends on the assessment
risk classification assigned to the institution by the FDIC, which is determined
by the institution's capital level and supervisory evaluations. Based on the
data reported to regulators for the date closest to the last day of the seventh
month preceding the semi-annual assessment period, institutions are assigned to
one of three capital groups -- well capitalized, adequately capitalized or
undercapitalized -- using the same percentage criteria as in the prompt
corrective action regulations. See "-- Regulation of the Bank - Prompt
Corrective Regulatory Action." Within each capital group, institutions are
assigned to one of three subgroups on the basis of supervisory evaluations by
the institution's primary supervisory authority and such other information as
the FDIC determines to be relevant to the institution's financial condition and
the risk posed to the deposit insurance fund. Subgroup A consists of
financially sound institutions with only a few minor weaknesses. Subgroup B
consists of institutions that demonstrate weaknesses which, if not corrected,
could result in significant deterioration of the institution and increased risk
of loss to the deposit insurance fund. Subgroup C consists of institutions that
pose a substantial probability of loss to the deposit insurance fund unless
effective corrective action is taken. The assessment rate for SAIF members had
ranged from 0.23% of deposits for well capitalized institutions in Subgroup A to
0.31% of deposits for undercapitalized institutions in Subgroup C while
assessments for over 90% of the BIF members had been the statutory minimum of
$2,000. Recently enacted legislation provided for a one-time assessment of 65.7
basis points of insured deposits as of March 31, 1995, that fully capitalized
the SAIF and had the effect of reducing future SAIF
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assessments. Accordingly, although the special assessment resulted in a one-
time charge to the Bank of approximately $409,000 pre-tax, the recapitalization
of the SAIF had the effect of reducing the Bank's future deposit insurance
premiums to the SAIF. Under the recently enacted legislation, both BIF and SAIF
members will be assessed an amount for the Financing Corporation Bond payments.
BIF members will be assessed approximately 1.3 basis points while the SAIF rate
will be approximately 6.4 basis points until January 1, 2000. At that time, BIF
and SAIF members will begin pro rata sharing of the payment at an expected rate
of 2.43 basis points.
Community Reinvestment Act. The Bank, like other financial institutions, is
subject to the Community Reinvestment Act, as amended ("CRA"). A purpose of this
Act is to encourage financial institutions to help meet the credit needs of its
entire community, including the needs of low- and moderate-income neighborhoods.
During the Bank's last compliance examination the Bank received a "satisfactory"
rating with respect to CRA compliance. The Bank's rating with respect to CRA
compliance would be a factor to be considered by the Federal Reserve and FDIC in
considering applications submitted by the Bank to acquire branches or to acquire
or combine with other financial institutions and take other actions and could
result in the denial of such applications.
The federal banking regulatory agencies have issued a rewrite of the CRA
regulations, which became effective on January 1, 1996, to implement a new
evaluation system that rates institutions based on their actual performance in
meeting community credit needs. Under the regulations, a savings bank will be
evaluated and rated under three categories: a lending test, an investment test
and a service test. For each of these three tests, the savings bank will be
given a rating of either "outstanding," "high satisfactory," "low satisfactory,"
"needs to improve" or "substantial non-compliance." A set of criteria for each
rating has been developed and is included in the regulation. If an institution
disagrees with a particular rating, the institution has the burden of rebutting
the presumption by clearly establishing that the quantitative measures do not
accurately present its actual performance, or that demographics, competitive
conditions or economic or legal limitations peculiar to the service area should
be considered. The ratings received under the three tests will be used to
determine the overall composite CRA rating. The composite ratings will be the
same as those that are currently given: "outstanding," "satisfactory," "needs to
improve" or "substantial non-compliance."
Capital Requirements Applicable To The Bank. The FDIC requires the Bank to
have a minimum leverage ratio of Tier I capital (principally consisting of
common stockholders' equity, noncumulative perpetual preferred stock and
minority interests in consolidated subsidiaries, less certain intangible items,
goodwill items, identified losses and investments in securities subsidiaries) to
total assets of at least 3%; provided, however that all institutions, other than
those (i) receiving the highest rating during the examination process and (ii)
not anticipating or experiencing any significant growth, are required to
maintain a ratio of 1% or 2% above the stated minimum, with an absolute minimum
leverage ratio of not less than 4%. The FDIC also requires the Bank to have a
ratio of total capital to risk-weighted assets, including certain off-balance
sheet activities, such as standby letters of credit, of at least 8%. At least
half of the total capital is required to be Tier I capital. The remainder
("Tier II capital") may consist of a limited amount of subordinated debt,
certain hybrid capital instruments, other debt securities, certain types of
preferred stock and a limited amount of loan loss allowance.
An institution which fails to meet minimum capital requirements may be
subject to a capital directive which is enforceable in the same manner and to
the same extent as a final cease and desist order, and must submit a capital
plan within 60 days to the FDIC. If the leverage ratio falls to 2% or less, the
bank may be deemed to be operating in an unsafe or unsound condition, allowing
the FDIC to take various enforcement actions, including possible termination of
insurance or placement of the institution in receivership. At June 30, 1997, the
Bank had a leverage ratio of 20.3%.
The Administrator requires that net worth equal at least 5% of total
assets. Intangible assets must be deducted from net worth and assets when
computing compliance with this requirement.
At June 30, 1997, the Bank complied with each of the capital requirements
of the FDIC and the Administrator.
8
<PAGE>
Each federal banking agency is required to establish risk-based capital
standards that take adequate account of interest rate risk, concentration of
credit risk, and the risk of nontraditional activities, as well as reflect the
actual performance and expected risk of loss on multifamily mortgages.
On August 2, 1995, the federal banking agencies issued a joint notice of
adoption of final risk based capital rules to take account of interest rate
risk. The final regulation required an assessment of the need for additional
capital on a case-by-case basis, considering both the level of measured exposure
and qualitative risk factors. The final rule also stated an intent to, in the
future, establish an explicit minimum capital charge for interest rate risk
based on the level of a bank's measured interest rate risk exposure.
Effective June 26, 1996, the federal banking agencies issued a joint policy
statement announcing the agencies' election not to adopt a standardized measure
and explicit capital charge for interest rate risk at that time. Rather, the
policy statement (i) identifies the main elements of sound interest rate risk
management, (ii) describes prudent principles and practices for each of those
elements, and (iii) describes the critical factors affecting the agencies'
evaluation of a bank's interest rate risk when making a determination of capital
adequacy. The joint policy statement is not expected to have a material impact
on Bank's management of interest rate risk.
Loans-To-One-Borrower. The Bank is subject to the Administrator's loans-
to-one-borrower limits. Under these limits, no loans and extensions of credit
to any borrower outstanding at one time and not fully secured by readily
marketable collateral shall exceed 15% of the net worth of the savings bank.
Loans and extensions of credit fully secured by readily marketable collateral
may comprise an additional 10% of net worth. These limits also authorize
savings banks to make loans-to-one-borrower, for any purpose, in an amount not
to exceed $500,000. A savings bank also is authorized to make loans-to-one-
borrower to develop domestic residential housing units, not to exceed the lesser
of $30 million or 30% of the savings bank's net worth, provided that the
purchase price of each single-family dwelling in the development does not exceed
$500,000 and the aggregate amount of loans made under this authority does not
exceed 150% of net worth. These limits also authorize a savings bank to make
loans-to-one-borrower to finance the sale of real property acquired in
satisfaction of debts in an amount up to 50% of net worth.
As of June 30, 1997, the largest aggregate amount of loans which the Bank
had to any one borrower was $1.5 million. The Bank had no loans outstanding
which management believes violate the applicable loans-to-one-borrower limits.
The Bank does not believe that the loans-to-one-borrower limits will have a
significant impact on its business, operations and earnings.
Federal Home Loan Bank System. The FHLB system provides a central credit
facility for member institutions. As a member of the FHLB of Atlanta, the Bank
is required to own capital stock in the FHLB of Atlanta in an amount at least
equal to the greater of 1% of the aggregate principal amount of its unpaid
residential mortgage loans, home purchase contracts and similar obligations at
the end of each calendar year, or 5% of its outstanding advances (borrowings)
from the FHLB of Atlanta. On June 30, 1997, the Bank was in compliance with
this requirement with an investment in FHLB of Atlanta stock of $586,500.
Each FHLB is required to contribute at least 10% of its reserves and
undivided profits to fund the principal and a portion of the interest on certain
bonds and certain other obligations which are used to fund the resolution of
troubled savings association cases, and to transfer a percentage of its annual
net earnings to the Affordable Housing Program. These contributions continue to
reduce the FHLB of Atlanta's earnings and the Bank's dividends on its FHLB of
Atlanta stock.
Federal Reserve System. Federal Reserve regulations require savings banks,
not otherwise exempt from the regulations, to maintain reserves against their
transaction accounts (primarily negotiable order of withdrawal accounts) and
certain nonpersonal time deposits. The reserve requirements are subject to
adjustment by the Federal Reserve. As of June 30, 1997, the Bank was in
compliance with the applicable reserve requirements of the Federal Reserve.
9
<PAGE>
Restrictions on Acquisitions. Federal law generally provides that no
"person," acting directly or indirectly or through or in concert with one or
more other persons, may acquire "control," as that term is defined in FDIC
regulations, of a state savings bank without giving at least 60 days' written
notice to the FDIC and providing the FDIC an opportunity to disapprove the
proposed acquisition. Pursuant to regulations governing acquisitions of
control, control of an insured institution is conclusively deemed to have been
acquired by, among other things, the acquisition of more than 25% of any class
of voting stock. In addition, control is presumed to have been acquired,
subject to rebuttal, upon the acquisition of more than 10% of any class of
voting stock. Such acquisitions of control may be disapproved if it is
determined, among other things, that (i) the acquisition would substantially
lessen competition; (ii) the financial condition of the acquiring person might
jeopardize the financial stability of the savings bank or prejudice the
interests of its depositors; or (iii) the competency, experience or integrity of
the acquiring person or the proposed management personnel indicates that it
would not be in the interest of the depositors or the public to permit the
acquisitions of control by such person.
Liquidity. The Bank is subject to the Administrator's requirement that the
ratio of liquid assets to total assets equal at least 10%. The computation of
liquidity under North Carolina regulation allows the inclusion of mortgage-
backed securities and investments which, in the judgment of the Administrator,
have a readily marketable value, including investments with maturities in excess
of five years. On June 30, 1997, the Bank's liquidity ratio, calculated in
accordance with North Carolina regulations, was approximately 29.6%.
Additional Limitations on Activities. Recent FDIC law and regulations
generally provide that the Bank may not engage as principal in any type of
activity, or in any activity in an amount, not permitted for national banks, or
directly acquire or retain any equity investment of a type or in an amount not
permitted for national banks. The FDIC has authority to grant exceptions from
these prohibitions (other than with respect to non-service corporation equity
investments) if it determines no significant risk to the insurance fund is posed
by the amount of the investment or the activity to be engaged in and if the Bank
is and continues to be in compliance with fully phased-in capital standards.
National banks are generally not permitted to hold equity investments other than
shares of service corporations and certain federal agency securities. Moreover,
the activities in which service corporations are permitted to engage are limited
to those of service corporations for national banks.
Savings banks are also generally prohibited from directly or indirectly
acquiring or retaining any corporate debt security that is not of investment
grade (generally referred to as "junk bonds"). State savings banks are also
required to notify the FDIC at least 30 days prior to the establishment or
acquisition of any subsidiary, or at least 30 days prior to conducting any such
new activity. Any such activities must be conducted in accordance with the
regulations and orders of the FDIC and the Administrator.
Prompt Corrective Regulatory Action. Federal law provides the federal
banking agencies with broad powers to take corrective action to resolve problems
of insured depository institutions. The extent of these powers depends upon
whether the institutions in question are "well capitalized," "adequately
capitalized," "undercapitalized," "significantly undercapitalized," or
"critically undercapitalized." Under the FDIC regulations applicable to the
Bank, an institution is considered "well capitalized" if it has (i) a total
risk-based capital ratio of 10% or greater, (ii) a Tier I risk-based capital
ratio of 6% or greater, (iii) a leverage ratio of 5% or greater and (iv) is not
subject to any order or written directive to meet and maintain a specific
capital level for any capital measure. An "adequately capitalized" institution
is defined as one that has (i) a total risk-based capital ratio of 8% or
greater, (ii) a Tier I risk-based capital ratio of 4% or greater and (iii) a
leverage ratio of 4% or greater (or 3% or greater in the case of an institution
with the highest examination rating and which is not experiencing or
anticipating significant growth). An institution is considered (A)
"undercapitalized" if it has (i) a total risk-based capital ratio of less than
8%, (ii) a Tier I risk-based capital ratio of less than 4% or (iii) a leverage
ratio of less than 4% (or 3% in the case of an institution with the highest
examination rating and which is not experiencing or anticipating significant
growth); (B) "significantly undercapitalized" if the institution has (i) a total
risk-based capital ratio of less than 6%, or (ii) a Tier I risk-based capital
ratio of less than 3% or (iii) a leverage ratio of less than 3% and (C)
"critically undercapitalized" if the institution has a ratio of tangible equity
to total assets equal to or less than 2%.
10
<PAGE>
Interstate Banking. The Riegle-Neal Interstate Banking and Branching
Efficiency Act of 1994 (the "Interstate Banking Act"), effective September 29,
1995, permits adequately capitalized bank and savings bank holding companies to
acquire control of banks and savings banks in any state. The states may
specifically permit interstate acquisitions prior to September 29, 1995, by
enacting legislation that provides for such transactions. North Carolina
adopted nationwide reciprocal interstate acquisition legislation in 1994.
Such interstate acquisitions are subject to certain restrictions. States
may require the bank or savings bank being acquired to have been in existence
for a certain length of time but not in excess of five years. In addition, no
bank or saving bank may acquire more than 10% of the insured deposits in the
United States or more than 30% of the insured deposits in any one state, unless
the state has specifically legislated a higher deposit cap. States are free to
legislate stricter deposit caps.
The Interstate Banking Act also provides for interstate branching,
effective June 1, 1997, allowing interstate branching in all states, provided
that a particular state has not specifically denied interstate branching by
legislation prior to such time. Unlike interstate acquisitions, a state may
deny interstate branching if it specifically elects to do so by June 1, 1997.
States may choose to allow interstate branching prior to June 1, 1997 by opting-
in to a group of states that permits these transactions. These states generally
allow interstate branching via a merger of an out-of-state bank with an in-state
bank, or on a de novo basis. North Carolina has enacted legislation permitting
branching transactions.
It is anticipated that the Interstate Banking Act will increase competition
within the markets in which the Bank now operates, although the extent to which
such competition will increase in such markets or the timing of such increase
cannot be predicted.
Restrictions on Dividends and Other Capital Distributions. A North
Carolina-chartered stock savings bank may not declare or pay a cash dividend on,
or repurchase any of, its capital stock if the effect of such transaction would
be to reduce the net worth of the institution to an amount which is less than
the minimum amount required by applicable federal and state regulations. In
addition, a North Carolina-chartered stock savings bank, for a period of five
years after its conversion from mutual to stock form, must obtain the written
approval from the Administrator before declaring or paying a cash dividend on
its capital stock in an amount in excess of one-half of the greater of (i) the
institution's net income for the most recent fiscal year end, or (ii) the
average of the institution's net income after dividends for the most recent
fiscal year end and not more than two of the immediately preceding fiscal year
ends, if applicable. Under FDIC regulations, stock repurchases may be made by
the savings bank only upon receipt of FDIC approval.
Also, without the prior written approval of the Administrator, a North
Carolina-chartered stock savings bank, for a period of five years after its
conversion from mutual to stock form, may not repurchase any of its capital
stock. The Administrator will give approval to repurchase only upon a showing
that the proposed repurchase will not adversely affect the safety and soundness
of the institution.
In addition, the Bank is not permitted to declare or pay a cash dividend on
or repurchase any of its capital stock if the effect thereof would be to cause
its net worth to be reduced below the amount required for the liquidation
account established in connection with the Bank's conversion from mutual to
stock ownership.
Other North Carolina Regulations. As a North Carolina-chartered savings
bank, the Bank derives its authority from, and is regulated by, the
Administrator. The Administrator has the right to promulgate rules and
regulations necessary for the supervision and regulation of North Carolina
savings banks under his jurisdiction and for the protection of the public
investing in such institutions. The regulatory authority of the Administrator
includes, but is not limited to, the establishment of reserve requirements; the
regulation of the payment of dividends; the regulation of stock repurchases, the
regulation of incorporators, stockholders, directors, officers and employees;
the establishment of permitted types of withdrawable accounts and types of
contracts for savings programs, loans and investments; and the regulation of the
conduct and management of savings banks, chartering and branching of
institutions, mergers,
11
<PAGE>
conversions and conflicts of interest. North Carolina law requires that the
Bank maintain federal deposit insurance as a condition of doing business.
The Administrator conducts regular examinations of North Carolina-chartered
savings banks. The purpose of such examinations is to assure that institutions
are being operated in compliance with applicable North Carolina law and
regulations and in a safe and sound manner. These examinations are usually
conducted on a joint basis with the FDIC. In addition, the Administrator is
required to conduct an examination of any institution when he has good reason to
believe that the standing and responsibility of the institution is of doubtful
character or when he otherwise deems it prudent. The Administrator is empowered
to order the revocation of the license of an institution if he finds that it has
violated or is in violation of any North Carolina law or regulation and that
revocation is necessary in order to preserve the assets of the institution and
protect the interests of its depositors. The Administrator has the power to
issue cease and desist orders if any person or institution is engaging in, or
has engaged in, any unsafe or unsound practice or unfair and discriminatory
practice in the conduct of its business or in violation of any other law, rule
or regulation.
A North Carolina-chartered savings bank must maintain net worth, computed
in accordance with the Administrator's requirements, of 5% of total assets and
liquidity of 10% of total assets, as discussed above. Additionally, a North
Carolina-chartered savings bank is required to maintain general valuation
allowances and specific loss reserves in the same amounts as required by the
FDIC.
Subject to limitation by the Administrator, North Carolina-chartered
savings banks may make any loan or investment or engage in any activity which is
permitted to federally chartered institutions. However, a North Carolina-
chartered savings bank cannot invest more than 15% of its total assets in
business, commercial, corporate and agricultural loans. In addition to such
lending authority, North Carolina-chartered savings banks are authorized to
invest funds, in excess of loan demand, in certain statutorily permitted
investments, including but not limited to (i) obligations of the United States,
or those guaranteed by it; (ii) obligations of the State of North Carolina;
(iii) bank demand or time deposits; (iv) stock or obligations of the federal
deposit insurance fund or a FHLB; (v) savings accounts of any savings
institution as approved by the board of directors; and (vi) stock or obligations
of any agency of the State of North Carolina or of the United States or of any
corporation doing business in North Carolina whose principal business is to make
education loans.
North Carolina law provides a procedure by which savings institutions may
consolidate or merge, subject to approval of the Administrator. The approval is
conditioned upon findings by the Administrator that, among other things, such
merger or consolidation will promote the best interests of the members or
stockholders of the merging institutions. North Carolina law also provides for
simultaneous mergers and conversions and for supervisory mergers conducted by
the Administrator.
Future Requirements. Statutes and regulations are regularly introduced
which contain wide-ranging proposals for altering the structures, regulations
and competitive relationships of financial institutions. It cannot be predicted
whether or what form any proposed statute or regulation will be adopted or the
extent to which the business of the Company and the Bank may be affected by such
statute or regulation.
ITEM 2. DESCRIPTION OF PROPERTY
The following table sets forth the location of the Bank's headquarters
office in Thomasville, North Carolina, as well as certain other information
relating to this office as of June 30, 1997:
12
<PAGE>
<TABLE>
<CAPTION>
Net Book
Value of
Property or Owned or
Improvements Leased
------------ --------
<S> <C> <C>
22 Winston Street
Thomasville, North Carolina 27360 $605,446 Owned
</TABLE>
The Bank's headquarters is the only real property owned by the Company
that is used in its operations. The Bank's management considers the property to
be in good condition and is of the opinion that it is adequately covered by
insurance. The total net book value of the Bank's furniture, fixtures and
equipment at June 30, 1997 was $103,675. Any property acquired as a result of
foreclosure or by deed in lieu of foreclosure is classified as real estate owned
until such time as it is sold or otherwise disposed of by the Bank in an effort
to recover its investment. As of June 30, 1997 the Bank recorded $53,002 in
real estate acquired in settlement of loans.
ITEM 3. LEGAL PROCEEDINGS
In the opinion of management, neither the Company nor the Bank is involved
in any pending legal proceedings other than routine litigation that is
incidental to the business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of the Company's stockholders during the
quarter ended June 30, 1997.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
See the information under the section captioned "Common Stock Information"
on page 41 of the Company's 1997 Annual Report, which section is incorporated
herein by reference. See "ITEM 1. DESCRIPTION OF BUSINESS -- Regulation of the
Bank -- Restrictions on Dividends and Other Capital Distributions" above for
regulatory restrictions which limit the ability of the Bank to pay dividends to
the Company.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS
See the information set forth under ITEM 1 above and the information set
forth under the section captioned "Management's Discussion and Analysis" on
pages 3 through 11 in the Company's 1997 Annual Report, which section is
incorporated herein by reference.
ITEM 7. FINANCIAL STATEMENTS
The consolidated financial statements of the Company set forth on pages 12
through 40 in the Company's 1997 Annual Report are incorporated herein by
reference.
13
<PAGE>
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
N/A.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH 16(a) OF THE EXCHANGE ACT
The information required by this Item regarding directors and executive
officers of the Company is set forth under the sections captioned "Proposal 1 -
Election of Directors" on page 6 of the Proxy Statement and "Executive Officers"
on page 8 of the Proxy Statement, which sections are incorporated herein by
reference.
The information required by this Item regarding compliance with Section
16(a) of the Securities Exchange Act of 1934 is set forth under the section
captioned "Section 16(a) Beneficial Ownership Reporting Compliance" set forth on
page 5 of the Proxy Statement, which is incorporated herein by reference.
ITEM 10. EXECUTIVE COMPENSATION
The information required by this Item is set forth under the sections
captioned "Proposal 1 - Election of Directors - Directors Compensation" on page
8 and "- Management Compensation" on pages 8 through 11 of the Proxy Statement,
which sections are incorporated herein by reference.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item is incorporated by reference from the
section captioned "Security Ownership of Certain Beneficial Owners" on pages 2
through 5 of the Proxy Statement.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
See also the section captioned "Certain Indebtedness and Transactions of
Management" on page 11 of the Proxy Statement, which section is incorporated
herein by reference.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
Exhibits
(3)(i) Certificate of Incorporation, incorporated herein by reference to
Exhibit 3.1 to the Registration Statement on Form S-1, Registration
No. 333-8625, dated July 23, 1996 and amended on October 8, 1996
and November 7, 1996.
(3)(ii) Bylaws, incorporated herein by reference to Exhibit 3.2 to the
Registration Statement on Form S-1, Registration No. 333-8625,
dated July 23, 1996 and amended on October 8, 1996 and November 7,
1996.
14
<PAGE>
(4) Specimen Stock Certificate incorporated herein by reference to
Exhibit 4.1 to the Registration Statement on Form S-1, Registration
No. 333-8625, dated July 23, 1996 and amended on October 8, 1996
and November 7, 1996.
10(a) Employment Agreement with James G. Hudson, Jr.
10(b) Special Termination Agreements with John E. Todd and Drema A.
Michael.
10(c) Supplemental Income Agreements with James G. Hudson, Jr.
(11) Statement Regarding Computation of Per Share Earnings
(13) Portions of 1997 Annual Report to Stockholders
(21) See ITEM 1. - "DESCRIPTION OF BUSINESS --Subsidiaries." for
discussion of subsidiaries
(27) Financial Data Schedule
Reports on Form 8-K
The Company filed no reports on Form 8-K during the last quarter of the
fiscal year ended June 30, 1997. There have been no reportable transactions
during the two most recent fiscal years nor are there any reportable
transactions proposed as of the date of this Form 10-KSB.
15
<PAGE>
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.
CENTURY BANCORP, INC.
Date: September 23, 1997 By: /s/ James G. Hudson, Jr.
------------------------------------
James G. Hudson, Jr.
President, Treasurer, 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 and on the dates indicated:
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
/s/ James G. Hudson, Jr. President, Chief Executive September 23, 1997
- --------------------------- Officer, Treasurer and
James G. Hudson, Jr. Director
/s/ John E. Todd Senior Vice-President and September 23, 1997
- --------------------------- Director
John E. Todd
/s/ Drema A. Michael Assistant Treasurer September 23, 1997
- ---------------------------
Drema A. Michael
/s/ Henry H. Darr Director September 23, 1997
- ---------------------------
Henry H. Darr
/s/ John R. Hunnicutt Director September 23, 1997
- ---------------------------
John R. Hunnicutt
/s/ F. Stuart Kennedy Director September 23, 1997
- ---------------------------
F. Stuart Kennedy
/s/ Milton T. Riley, Jr. Director September 23, 1997
- ---------------------------
Milton T. Riley, Jr.
</TABLE>
16
<PAGE>
HOME SAVINGS, INC., SSB
EMPLOYMENT AGREEMENT
THIS AGREEMENT entered into as of December 20, 1996, by and between HOME
SAVINGS, INC., SSB (hereinafter referred to as the "Savings Bank") and JAMES G.
HUDSON, JR. (hereinafter referred to as the "Officer") and is joined in by
CENTURY BANCORP, INC., the parent holding company of the Savings Bank
(hereinafter referred to as the "Holding Company").
WHEREAS, the Officer has heretofore been employed by the Savings Bank as
its President, Chief Executive Officer and Treasurer; and
WHEREAS, the Savings Bank is a state-chartered stock savings bank and the
wholly-owned subsidiary of the Holding Company; and
WHEREAS, the Savings Bank desires to retain the services of the Officer as
the President, Chief Executive Officer and Treasurer of the Savings Bank upon
the terms and conditions set forth herein; and
WHEREAS, the services of the Officer, his experience and knowledge of the
affairs of the Savings Bank, and his reputation and contacts in the industry and
the local community are extremely valuable to the Savings Bank; and
WHEREAS, the Savings Bank wishes to attract and retain such well-qualified
executives and it is in the best interest of the Savings Bank and of the Officer
to secure the continued services of the Officer notwithstanding any change in
control of the Savings Bank or the Holding Company; and
WHEREAS, the Savings Bank considers the establishment and maintenance of a
sound and vital management to be part of its overall corporate strategy and to
be essential to protecting and enhancing the best interests of the Holding
Company, the Savings Bank and their stockholders; and
WHEREAS, the parties desire to enter into this Agreement in order to set
forth the terms and conditions of the Officer's employment relationship with the
Savings Bank.
<PAGE>
NOW, THEREFORE, for and in consideration of the premises and mutual
promises, covenants and conditions hereinafter set forth and other good and
valuable considerations, the receipt and sufficiency of which hereby are
acknowledged, the parties hereby do agree as follows:
1. Employment. The Savings Bank hereby agrees to employ the Officer and
----------
the Officer hereby agrees to accept employment, upon the terms and conditions
stated herein, as the President and Chief Executive Officer of the Savings Bank.
The Officer shall render such administrative and management services to the
Savings Bank as are customarily performed by persons situated in a similar
executive capacity. The Officer shall promote the business of the Savings Bank
and perform such other duties as shall, from time to time, be reasonably
prescribed by the Board of Directors of the Savings Bank (the "Board").
2. Compensation. The Savings Bank shall pay the Officer during the term
------------
of this Agreement, as compensation for all service rendered by him to the
Savings Bank, a base salary at the rate of $93,600 per annum, payable in cash
not less frequently than monthly; provided that the rate of such salary shall be
reviewed by the Board prior to January 1, 1997 and not less often than annually
thereafter. Such rate of salary, or increased rate of salary, as the case may
be, may be further increased from time to time in such amounts as the Board, in
its discretion, may decide. In determining salary increases, the Board shall
compensate the Officer for increases in the cost of living and may also provide
for performance or merit increases. Participation in incentive compensation,
deferred compensation, discretionary bonus, profit-sharing, retirement, stock
option and other employee benefit plans that the Savings Bank or the Holding
Company have adopted or may from time to time adopt, and participation in any
fringe benefits, shall not reduce the salary payable to the Officer under this
Section. The Officer will be entitled to such customary fringe benefits,
vacation and sick leave as are consistent with the normal practices and
established policies of the Savings Bank. In the event of a Change of Control
(as
2
<PAGE>
defined in Section 10), the Officer's rate of salary shall be increased not less
than six percent (6%) annually during the term of this Agreement.
3. Bonus Compensation. During the term of this Agreement, the Officer
------------------
shall be entitled in an equitable manner with all other key management personnel
of the Savings Bank, to such discretionary bonuses as may be authorized,
declared and paid by the Savings Bank to the Savings Bank's key management
employees. In addition, the Officer shall be entitled to participate in any
other bonus compensation plans adopted by the Directors of the Savings Bank and
applicable to key management personnel. No other compensation provided for in
this Agreement shall be deemed a substitute for the Officer's right to such
discretionary and other bonuses when and as declared by the Directors of the
Savings Bank.
4. Participation in Retirement and Employee Benefit Plans; Fringe
--------------------------------------------------------------
Benefits. The Officer shall be entitled to participate in any plan relating to
deferred compensation, stock awards, stock options, stock purchases, pension,
thrift, profit sharing, group life insurance, medical and dental coverage,
disability coverage, education, or other retirement or employee benefits that
the Savings Bank or the Holding Company have adopted, or may, from time to time
adopt, for benefit of their executive employees and for employees generally,
subject to the eligibility rules of such plans.
The Officer shall also be entitled to participate in any other fringe
benefits which are now or may be or become applicable to the Officer or the
Savings Bank's other executive employees. The Savings Bank shall pay all
reasonable expenses incurred by the Officer and his wife in attending the annual
conventions of the North Carolina Community Bankers Association and Americas
Community Bankers and their successor organizations, and the Savings Bank shall
pay all reasonable expenses incurred by the Officer in attending such other
meetings at which the Savings Bank deems the Officer's attendance to be
desirable. In addition, the Officer shall be entitled to participate in any
other benefits which are
3
<PAGE>
commensurate with the duties and responsibilities to be performed by the Officer
under this Agreement. Additionally, the Officer shall be entitled to such
vacation and sick leave as shall be established under uniform employee policies
promulgated by the Directors. The Savings Bank shall reimburse the Officer for
all out-of-pocket reasonable and necessary business expenses which the Officer
may incur in connection with his services on behalf of the Savings Bank.
The Officer shall be furnished with an automobile of make, model and age
consistent with prior practice of the Savings Bank, which automobile may be used
by the Officer for business and personal purposes. The Savings Bank shall pay
to the Colonial Country Club and to the Thomasville Rotary Club all membership
dues and assessments associated with the Officer's regular membership in such
clubs.
5. Term. The initial term of employment under this Agreement shall be for
----
the period commencing upon the effective date of this Agreement and ending three
(3) calendar years from the effective date of this Agreement. On each
anniversary of the effective date of this Agreement, the term of this Agreement
shall automatically be extended for an additional one year period beyond the
then effective expiration date unless written notice from the Savings Bank or
the Officer is received 90 days prior to an anniversary date advising the other
party that this Agreement shall not be further extended; provided that the
Directors shall review the Officer's performance annually and make a specific
determination pursuant to such review to renew this Agreement prior to the 90
day notice period.
6. Loyalty. The Officer shall devote his full efforts and entire business
-------
time to the performance of his duties and responsibilities under this Agreement.
The Officer agrees that he will hold in confidence all knowledge or
information of a confidential nature with respect to the respective businesses
of the Holding Company, the Savings Bank or of their subsidiaries, if any,
received by him during the term of this Agreement and will not disclose or make
4
<PAGE>
use of such information, except in the ordinary course of his duties under this
Agreement, without the prior written consent of the Holding Company or the
Savings Bank.
7. Standards. The Officer shall perform his duties and responsibilities
---------
under this Agreement in accordance with such reasonable standards expected of
employees with comparable positions in comparable organizations and as may be
established from time to time by the Board. The Savings Bank will provide the
Officer with the working facilities and staff customary for similar executives
and necessary for him to perform his duties.
8. Termination and Termination Pay.
-------------------------------
(a) The Officer's employment under this Agreement shall be terminated upon
the death of the Officer during the term of this Agreement, in which event, the
Officer's estate shall be entitled to receive the compensation due the Officer
through the last day of the calendar month in which his death shall have
occurred and for a period of one month thereafter.
(b) The Officer's employment under this Agreement may be terminated at any
time by the Officer upon sixty (60) days' written notice to the Board of
Directors. Upon such termination, the Officer shall be entitled to receive
compensation through the effective date of such termination.
(c) The Board may terminate the Officer's employment at any time, but any
termination by the Board, other than termination for cause, shall not prejudice
the Officer's right to compensation or other benefits under this Agreement for
the remaining period which would have been covered by this Agreement if such
termination had not occurred. The Officer shall have no right to receive
compensation or other benefits for any period after termination for "cause."
Termination for "cause" shall include termination because of the Officer's
personal dishonesty, incompetence, willful misconduct, breach of fiduciary duty
involving personal profit, intentional failure to perform stated
5
<PAGE>
duties, willful violation of any law, rule, regulation (other than traffic
violations or similar offenses) or final cease-and-desist order, or material
breach of any provisions of this Agreement.
9. Additional Regulatory Requirements.
----------------------------------
(a) If the Officer is suspended and/or temporarily prohibited from
participating in the conduct of the Savings Bank's affairs by a notice served
under Section 8(e)(3) or Section 8(g)(1) of the Federal Deposit Insurance Act
(12 U.S.C. 1818(e)(3) and (g)(1)), the Savings Bank's obligations under this
Agreement shall be suspended as of the date of service, unless stayed by
appropriate proceedings. If the charges in the notice are dismissed, the Savings
Bank shall (i) pay the Officer all of the compensation withheld while its
contract obligations were suspended and (ii) reinstate (in whole or in part) any
of its obligations which were suspended.
(b) If the Officer is removed and/or permanently prohibited from
participating in the conduct of the Savings Bank's affairs by an order issued
under Section 8(e)(4) of Section 8(g)(1) of the Federal Deposit Insurance Act
(12 U.S.C. 1818(e)(4) and (g)(1)), all obligations of the Savings Bank under
this Agreement shall terminate as of the effective date of the order, but vested
rights of the contracting parties shall not be affected.
(c) If the Savings Bank is in default as defined in Section 3(x)(1) of the
Federal Deposit Insurance Act (12 U.S.C. (S) 1818(x)(1)), all obligations under
this Agreement shall terminate as of the date of default, but this paragraph
shall not affect any vested rights of the contracting parties.
(d) All obligations under this Agreement shall be terminated, except to
the extent determined that continuation of the Agreement is necessary for the
continued operation of the Savings Bank, (i) by the Federal Deposit Insurance
Corporation (the "Corporation"), at the time the Corporation enters into an
agreement to provide assistance to or on behalf of the Savings Bank under the
authority contained in Section 13(c) of the Federal Deposit Insurance Act (12
U.S.C. (S) 1818(c)); or (ii) by the Administrator
6
<PAGE>
of the Savings Institution Division of the North Carolina Department of Commerce
(the "Administrator"), at the time the Administrator approves a supervisory
merger to resolve problems related to operation of the Savings Bank or when the
Savings Bank is determined by the Administrator to be in an unsafe or unsound
condition. Any rights of the parties that have already vested, however, shall
not be affected by such action.
10. Change in Control.
-----------------
(a) In the event of a "Change in Control" (as defined in Subsection (b)
below), the term of employment under this Agreement shall automatically be
extended for a period of three (3) years beginning on the date of the Change in
Control, and the acquiror shall be bound by the terms of this Agreement and
shall be prohibited, during the remainder of the term of this Agreement, from:
(i) Assigning Officer any duties and/or responsibilities that are
inconsistent with his position, duties, responsibilities or status at
the time of the Change in Control or with his reporting
responsibilities or equivalent titles with the Savings Bank in effect
at such time; or
(ii) Adjusting Officer's annual base salary rate other than in
accordance with the provisions of Section 2 of this Agreement; or
(iii) Reducing in level, scope or coverage or eliminating Officer's
life insurance, medical or hospitalization insurance, disability
insurance, profit sharing plans, stock option plans, stock purchase
plans, deferred compensation plans, bonus compensation plans,
management retention plans, retirement plans or similar plans or
benefits or other benefits being provided by the Savings Bank or the
Holding Company to the Officer as of the effective date of the Change
in Control; or
(iv) Transferring Officer to a location more than forty (40) miles
distant from Officer's primary work station at the time of a Change in
Control, without the Officer's express written consent.
(b) For the purposes of this Agreement, the term "Change in Control" shall
mean any of the following events:
7
<PAGE>
(i) a change in control of a nature that would be required to be
reported by the Holding Company in response to Item 1 of the Current
Report on Form 8-K, as in effect on the date hereof, pursuant to
Section 13 or 15(d) of the Exchange Act; or
(ii) such time as any "person" (as such term is used in Sections
13(d) and 14(d) of the Exchange Act) is or becomes the "beneficial
owner" (as defined in Rule 13d-3 under the Exchange Act), directly or
indirectly, of securities of the Holding Company or Savings Bank
representing 25 percent or more of the combined voting power of the
outstanding Common Stock of the Holding Company or Common Stock of the
Savings Bank, as applicable; or
(iii) individuals who constitute the Board or board of directors of
the Holding Company on the date hereof (the "Incumbent Board" and
"Incumbent Holding Company Board," respectively) cease for any reason
to constitute at least a majority thereof, provided that any person
becoming a director subsequent to the date hereof whose election was
approved by a vote of at least three-quarters of the directors
comprising the Incumbent Board or Incumbent Holding Company Board, as
applicable, or whose nomination for election by the Savings Bank's or
Holding Company's shareholders was approved by the Savings Bank's or
Holding Company's Board of Directors or Nominating Committee, as
applicable, shall be considered as though he or she were a member of
the Incumbent Board or Incumbent Holding Company Board, as applicable;
or
(iv) either the Holding Company or the Savings Bank consolidates or
merges with or into another corporation, association or entity or is
otherwise reorganized, where neither the Holding Company nor the
Savings Bank, respectively, is the surviving corporation in such
transaction; or
(v) all or substantially all of the assets of either the Holding
Company or the Savings Bank are sold or otherwise transferred to or
are acquired by any other entity or group.
Notwithstanding the other provisions of this Section 10, a transaction or
event shall not be considered a Change in Control if, prior to the consummation
or occurrence of such transaction or event, Officer and Savings Bank agree in
writing that the same shall not be treated as a Change in Control for purposes
of this Agreement.
8
<PAGE>
(c) In the event any dispute shall arise between the Officer and the
Savings Bank as to the terms or interpretation of this Agreement, including this
Section 10, whether instituted by formal legal proceedings or otherwise,
including any action taken by the Officer to enforce the terms of this Section
10 or in defending against any action taken by the Savings Bank, the Savings
Bank shall reimburse the Officer for all costs and expenses incurred in such
proceedings or actions, including attorney's fees, in the event the Officer
prevails in any such action.
11. Successors and Assigns.
----------------------
(a) This Agreement shall inure to the benefit of and be binding upon any
corporate or other successor of the Savings Bank which shall acquire, directly
or indirectly, by conversion, merger, consolidation, purchase or otherwise, all
or substantially all of the assets of the Holding Company or the Savings Bank.
(b) Since the Savings Bank is contracting for the unique and personal
skills of the Officer, the Officer shall be precluded from assigning or
delegating his rights or duties hereunder without first obtaining the written
consent of the Savings Bank.
12. Modification; Waiver; Amendments. No provision of this Agreement may
--------------------------------
be modified, waived or discharged unless such waiver, modification or discharge
is agreed to in writing, signed by the Officer and on behalf of the Savings Bank
by such officer as may be specifically designated by the Directors. No waiver
by either party hereto, at any time, of any breach by the other party hereto of,
or compliance with, any condition or provision of this Agreement to be performed
by such other party shall be deemed a waiver of similar or dissimilar provisions
or conditions at the same or at any prior or subsequent time. No amendments or
additions to this Agreement shall be binding unless in writing and signed by
both parties, except as herein otherwise provided.
9
<PAGE>
13. Applicable Law. This Agreement shall be governed in all respects
--------------
whether as to validity, construction, capacity, performance or otherwise, by the
laws of North Carolina, except to the extent that federal law shall be deemed to
apply.
14. Severability. The provisions of this Agreement shall be deemed
------------
severable and the invalidity or unenforceability of any provision shall not
affect the validity or enforceability of the other provisions hereof.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the day
and year first hereinabove written.
HOME SAVINGS, INC., SSB
By: /s/ John E. Todd
-----------------------------------
Vice President
/s/ James G. Hudson, Jr.
----------------------------- (SEAL)
James G. Hudson, Jr.
The foregoing Agreement is consented and agreed to by Century Bancorp,
Inc., the parent holding company of Home Savings, Inc., SSB.
CENTURY BANCORP, INC.
By: /s/ John E. Todd
-----------------------------------
Vice President
10
<PAGE>
SPECIAL TERMINATION AGREEMENT
THIS AGREEMENT entered into as of December 20, 1996, by and between CENTURY
BANCORP, INC., a North Carolina corporation (the "Holding Company") and JOHN E.
TODD (the "Officer").
WHEREAS, the Officer is employed by Home Savings, Inc., SSB, a North
Carolina-chartered savings bank (the "Savings Bank") as its Vice President; and
WHEREAS, the Savings Bank is the wholly-owned subsidiary of the Holding
Company; and
WHEREAS, the services of the Officer, his experience and knowledge of the
affairs of the Savings Bank, and his reputation and contacts in the industry are
extremely valuable to the Savings Bank and the Holding Company; and
WHEREAS, the Holding Company and the Savings Bank wish to attract and
retain such well-qualified executives and it is in the best interests of the
Holding Company and the Savings Bank and of the Officer to secure the continued
services of the Officer notwithstanding any change in control of the Savings
Bank or the Holding Company; and
WHEREAS, the Holding Company considers the establishment and maintenance of
a sound and vital management to be part of its overall corporate strategy and to
be essential to protecting and enhancing the best interests of the Savings Bank,
the Holding Company and their shareholders; and
WHEREAS, the parties desire to enter into this Agreement to provide the
Officer with security in the event of a change in control of the Savings Bank or
the Holding Company in order to ensure the continued loyalty of the Officer.
NOW, THEREFORE, for and in consideration of the promises and mutual
promises, covenants and conditions hereinafter set forth, and other good and
valuable considerations, the receipt and sufficiency of which hereby are
acknowledged, the parties hereby to agree as follows:
<PAGE>
1. Term. The initial term of this Agreement shall be for a period of three (3)
----
years commencing upon the date of execution of this Agreement. On each
anniversary of the effective date of this Agreement, the term of this Agreement
shall automatically be extended for an additional one year period beyond the
then effective expiration date unless written notice from the Holding Company to
the Officer is received 90 days prior to an anniversary date advising the
Officer that this Agreement shall not be further extended; provided that the
Directors of the Holding Company shall review the Officer's performance annually
and make a specific determination pursuant to such review to renew this
Agreement prior to the 90 day notice period. The Officer shall have rights and
benefits pursuant to this Agreement only if a Change in Control occurs during
the term of this Agreement. In such event, the Officer shall have the rights
set forth below with respect to any termination of employment or "Termination
Event" (as defined below) even though the termination or Termination Event shall
occur after the expiration of the terms of this Agreement.
1. Change in Control.
-----------------
(a) In the event of a termination of the Officer's employment in
connection with, or within twenty-four (24) months after, a "Change in
Control" (as defined in Subparagraph (e) below) of the Savings Bank or the
Holding Company, for reasons other than for "cause" (as defined in
Subparagraph (b) below), the Officer shall be entitled to receive the
amount set forth in Subparagraph (d) below. Said sum shall be payable as
provided in Subparagraph (f) below.
(b) For purposes of this Agreement, termination for "cause" shall
include termination because of the Officer's personal dishonesty,
incompetence, willful misconduct, breach of fiduciary duty involving
personal profit, intentional failure to perform stated duties, or willful
violation of any law, rule, or regulation (other than traffic violations or
similar offenses) or final cease-and-desist order.
2
<PAGE>
(c) The Officer shall have the right to terminate his employment with the
Savings Bank upon the occurrence of any of the following events (the
"Termination Events") within twenty-four (24) months following a Change in
Control of the Holding Company or the Savings Bank:
(i) Officer is assigned any duties and/or responsibilities that
are inconsistent with his position, duties, responsibilities or
status at the time of the Change in Control or with his reporting
responsibilities or titles with the Savings Bank in effect at
such time; or
(ii) Officer's annual base salary rate is reduced below the
annual amount in effect as of the effective date of a Change in
Control or as the same shall have been increased from time to
time following such effective date; or
(iii) Officer's life insurance, medical or hospitalization
insurance, disability insurance, stock option plans, stock
purchase plans, deferred compensation plans, management retention
plans, retirement plans or similar plans or benefits or other
benefits being provided by the Savings Bank or the Holding
Company to the Officer as of the effective date of the Change in
Control are reduced in their level, scope or coverage, or any
such insurance, plans or benefits are eliminated, unless such
reduction or elimination applies proportionately to all salaried
employees of the Savings Bank or the Holding Company who
participated in such benefits prior to such Change in Control; or
(iv) Officer is transferred to a location which is more than
forty (40) miles distant from his current principal work
location, without the Officer's express written consent.
A Termination Event shall be deemed to have occurred on the date such
action or event is implemented or takes effect.
(d) In the event that the Officer's employment is terminated as set forth
in Paragraphs 2(a) or 2(c), the Holding Company will be obligated to pay or
cause to be paid to Officer an amount equal to two (2.0) times the Officer's
salary and bonuses from the Savings
3
<PAGE>
Bank and Holding Company for the most recently completed calendar year prior to
such termination.
(e) For the purposes of this Agreement, the term "Change in Control" shall
mean: (i) a change in control of a nature that would be required to be reported
in response to Item 1 of the Current Report on Form 8-K, as in effect on the
date hereof, pursuant to Section 13 or 15(d) of the Exchange Act; (ii) such time
as any "person" (as such term is used in Sections 13(d) and 14(d) of the
Exchange Act) is or becomes the "beneficial owner" (as defined in Rule 13d-3
under the Exchange Act), directly or indirectly, of securities of the Holding
Company or Savings Bank representing 25 percent or more of the combined voting
power of the outstanding Common Stock of the Holding Company or outstanding
common stock of the Savings Bank, as applicable; or (iii) individuals who
constitute the board of directors of the Holding Company or board of directors
of the Savings Bank on the date hereof (the "Incumbent Board" and "Incumbent
Savings Bank Board," respectively) cease for any reason to constitute at least a
majority thereof, provided that any person becoming a director subsequent to the
date hereof whose election was approved by a vote of at least three-quarters of
the directors comprising the Incumbent Board or Incumbent Savings Bank Board, as
applicable, or whose nomination for election by the Holding Company's or Savings
Bank's shareholders was approved by the Holding Company's or Savings Bank's
board of directors or Nominating Committee, shall be considered as though he or
she were a member of the Incumbent Board or Incumbent Savings Bank Board, as
applicable; or (iv) either the Holding Company or the Savings Bank consolidates
or merges with or into another corporation, association or entity or is
otherwise reorganized, where neither the Holding Company nor the Savings Bank,
respectively, is the surviving corporation in such
4
<PAGE>
transaction or; or (v) all or substantially all of the assets of either the
Holding Company or the Savings Bank are sold or otherwise transferred to or are
acquired by any other entity or group.
Notwithstanding the other provisions of this Paragraph 2, a
transaction or event shall not be considered a Change in Control if, prior to
the consummation of occurrence of such transaction or event, Officer and Holding
Company agree in writing that the same shall not be treated as a Change in
Control for purposes of this Agreement. In addition, the Holding Company's
acquisition of all of the stock of the Savings Bank and initial public offering
in connection with the conversion of the Savings Bank from the mutual to the
stock form of ownership shall not be considered a change in control.
(f) Such amounts payable pursuant to this Paragraph 2 shall be paid, at
the irrevocable option of the Officer, as follows:
Participant's Initials
- ----------------------
(i) /s/ JET Payment in a lump-sum.
----------------------------------
(ii) Payment in monthly installments over a
---------------------------------- fixed reasonable period of time. Such
payments shall begin within thirty (30)
days following the calendar month in
which the Officer terminates his
employment with the Savings Bank.
(g) Following a Termination Event which gives rise to the Officer's rights
hereunder, the Officer shall have twelve (12) months from the date of occurrence
of the Termination Event to terminate his employment with the Savings Bank
pursuant to this Paragraph 2. Any such termination shall be deemed to have
occurred only upon delivery to the Savings Bank (or to any successor
corporation) of written notice of termination which describes the Change in
Control and Termination Event. If the Officer does not so terminate his
employment with the Savings Bank within such twelve (12) month period, he shall
thereafter have no further rights hereunder
5
<PAGE>
with respect to that Termination Event, but shall retain rights, if any,
hereunder with respect to any other Termination Event as to which such period
has not expired.
(h) It is the intent of the parties hereto that all payments made pursuant
to this Agreement be deductible by the Holding Company for federal income tax
purposes and not result in the imposition of an excise tax on the Officer.
Notwithstanding anything contained in this Agreement to the contrary, any
payments to be made to or for the benefit of the Officer which are deemed to be
"parachute payments" as that term is defined in Section 280G of the Code, shall
be modified or reduced to the extent deemed to be necessary by the Holding
Company's Board of Directors to avoid the imposition of excise taxes on the
Officer under Section 4999 of the Code or the disallowance of a deduction to the
Holding Company under Section 280G(a) of the Code.
(i) In the event any dispute shall arise between the Officer and the
Holding Company as to the terms or interpretation of this Agreement, including
this Paragraph 2, whether instituted by formal legal proceedings or otherwise,
including any action taken by the Officer to enforce the terms of this Paragraph
2 or in defending against any action taken by the Holding Company, the Holding
Company shall reimburse the Officer for all costs and expenses incurred in such
proceedings or actions, including attorney's fees, in the event the Officer
prevails in any such action.
2. Successors and Assigns. This Agreement shall inure to the benefit of
----------------------
and be binding upon any corporate or other successor of the Holding Company
which shall acquire, directly or indirectly, by conversion, merger,
consolidation, purchase or otherwise, all or substantially all of the assets of
the Holding Company.
6
<PAGE>
3. Modification; Waiver; Amendments. No provision of this Agreement may
--------------------------------
be modified, waived or discharged unless such waiver, modification or discharge
is agreed to in writing and signed by the Officer and the Holding Company,
except as herein otherwise provided. No waiver by either party hereto, at any
time, of any breach by the other party hereto of, or compliance with, any
condition or provision of this Agreement to be performed by such other party
shall be deemed a waiver of similar or dissimilar provisions or conditions at
the same or at any prior or subsequent time. With the exception of Paragraph
2(f) of this Agreement which may not be amended, no amendments or additions to
this Agreement shall be binding unless in writing and signed by both parties,
except as herein otherwise provided.
4. Applicable Law. This Agreement shall be governed in all respects
--------------
whether as to validity, construction, capacity, performance or otherwise, by the
laws of North Carolina, except to the extent that federal law shall be deemed to
apply.
5. Severability. The provisions of this Agreement shall be deemed
------------
severable and the invalidity or unenforceability of any provision shall not
affect the validity or enforceability of the other provisions hereof.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the day
and year first hereinabove written.
CENTURY BANCORP, INC.
(CORPORATE SEAL)
By: /s/ James G. Hudson, Jr.
---------------------------------------------
President
----------
ATTEST:
/s/ Drema A. Michael
- --------------------------
Secretary
- -----------
/s/ John E. Todd
--------------------------------------- (SEAL)
JOHN E. TODD
7
<PAGE>
SPECIAL TERMINATION AGREEMENT
THIS AGREEMENT entered into as of December 20, 1996, by and between CENTURY
BANCORP, INC., a North Carolina corporation (the "Holding Company") and DREMA A.
MICHAEL (the "Officer").
WHEREAS, the Officer is employed by Home Savings, Inc., SSB, a North
Carolina-chartered savings bank (the "Savings Bank") as its Secretary and
Assistant Treasurer; and
WHEREAS, the Savings Bank is the wholly-owned subsidiary of the Holding
Company; and
WHEREAS, the services of the Officer, her experience and knowledge of the
affairs of the Savings Bank, and her reputation and contacts in the industry are
extremely valuable to the Savings Bank and the Holding Company; and
WHEREAS, the Holding Company and the Savings Bank wish to attract and
retain such well-qualified executives and it is in the best interests of the
Holding Company and the Savings Bank and of the Officer to secure the continued
services of the Officer notwithstanding any change in control of the Savings
Bank or the Holding Company; and
WHEREAS, the Holding Company considers the establishment and maintenance of
a sound and vital management to be part of its overall corporate strategy and to
be essential to protecting and enhancing the best interests of the Savings Bank,
the Holding Company and their shareholders; and
WHEREAS, the parties desire to enter into this Agreement to provide the
Officer with security in the event of a change in control of the Savings Bank or
the Holding Company in order to ensure the continued loyalty of the Officer.
NOW, THEREFORE, for and in consideration of the promises and mutual
promises, covenants and conditions hereinafter set forth, and other good and
valuable considerations, the receipt and sufficiency of which hereby are
acknowledged, the parties hereby to agree as follows:
8
<PAGE>
2. Term. The initial term of this Agreement shall be for a period of three
----
(3) years commencing upon the date of execution of this Agreement. On each
anniversary of the effective date of this Agreement, the term of this Agreement
shall automatically be extended for an additional one year period beyond the
then effective expiration date unless written notice from the Holding Company to
the Officer is received 90 days prior to an anniversary date advising the
Officer that this Agreement shall not be further extended; provided that the
Directors of the Holding Company shall review the Officer's performance annually
and make a specific determination pursuant to such review to renew this
Agreement prior to the 90 day notice period. The Officer shall have rights and
benefits pursuant to this Agreement only if a Change in Control occurs during
the term of this Agreement. In such event, the Officer shall have the rights
set forth below with respect to any termination of employment or "Termination
Event" (as defined below) even though the termination or Termination Event shall
occur after the expiration of the terms of this Agreement.
1. Change in Control.
-----------------
(a) In the event of a termination of the Officer's employment in
connection with, or within twenty-four (24) months after, a "Change in
Control" (as defined in Subparagraph (e) below) of the Savings Bank or the
Holding Company, for reasons other than for "cause" (as defined in
Subparagraph (b) below), the Officer shall be entitled to receive the
amount set forth in Subparagraph (d) below. Said sum shall be payable as
provided in Subparagraph (f) below.
(b) For purposes of this Agreement, termination for "cause" shall
include termination because of the Officer's personal dishonesty,
incompetence, willful misconduct, breach of fiduciary duty involving
personal profit, intentional failure to perform stated duties, or willful
violation of any law, rule, or regulation (other than traffic violations or
similar offenses) or final cease-and-desist order.
9
<PAGE>
(c) The Officer shall have the right to terminate her employment with
the Savings Bank upon the occurrence of any of the following events (the
"Termination Events") within twenty-four (24) months following a Change in
Control of the Holding Company or the Savings Bank:
(i) Officer is assigned any duties and/or responsibilities that
are inconsistent with her position, duties, responsibilities or
status at the time of the Change in Control or with his reporting
responsibilities or titles with the Savings Bank in effect at
such time; or
(ii) Officer's annual base salary rate is reduced below the
annual amount in effect as of the effective date of a Change in
Control or as the same shall have been increased from time to
time following such effective date; or
(iii) Officer's life insurance, medical or hospitalization
insurance, disability insurance, stock option plans, stock
purchase plans, deferred compensation plans, management retention
plans, retirement plans or similar plans or benefits or other
benefits being provided by the Savings Bank or the Holding
Company to the Officer as of the effective date of the Change in
Control are reduced in their level, scope or coverage, or any
such insurance, plans or benefits are eliminated, unless such
reduction or elimination applies proportionately to all salaried
employees of the Savings Bank or the Holding Company who
participated in such benefits prior to such Change in Control; or
(iv) Officer is transferred to a location which is more than
forty (40) miles distant from her current principal work
location, without the Officer's express written consent.
A Termination Event shall be deemed to have occurred on the date such
action or event is implemented or takes effect.
(d) In the event that the Officer's employment is terminated as set forth
in Paragraphs 2(a) or 2(c), the Holding Company will be obligated to pay or
cause to be paid to Officer an amount equal to two (2.0) times the Officer's
salary and bonuses from the Savings
10
<PAGE>
Bank and Holding Company for the most recently completed calendar year prior to
such termination.
(e) For the purposes of this Agreement, the term "Change in Control" shall
mean: (i) a change in control of a nature that would be required to be reported
in response to Item 1 of the Current Report on Form 8-K, as in effect on the
date hereof, pursuant to Section 13 or 15(d) of the Exchange Act; (ii) such time
as any "person" (as such term is used in Sections 13(d) and 14(d) of the
Exchange Act) is or becomes the "beneficial owner" (as defined in Rule 13d-3
under the Exchange Act), directly or indirectly, of securities of the Holding
Company or Savings Bank representing 25 percent or more of the combined voting
power of the outstanding Common Stock of the Holding Company or outstanding
common stock of the Savings Bank, as applicable; or (iii) individuals who
constitute the board of directors of the Holding Company or board of directors
of the Savings Bank on the date hereof (the "Incumbent Board" and "Incumbent
Savings Bank Board," respectively) cease for any reason to constitute at least a
majority thereof, provided that any person becoming a director subsequent to the
date hereof whose election was approved by a vote of at least three-quarters of
the directors comprising the Incumbent Board or Incumbent Savings Bank Board, as
applicable, or whose nomination for election by the Holding Company's or Savings
Bank's shareholders was approved by the Holding Company's or Savings Bank's
board of directors or Nominating Committee, shall be considered as though he or
she were a member of the Incumbent Board or Incumbent Savings Bank Board, as
applicable; or (iv) either the Holding Company or the Savings Bank consolidates
or merges with or into another corporation, association or entity or is
otherwise reorganized, where neither the Holding Company nor the Savings Bank,
respectively, is the surviving corporation in such
11
<PAGE>
transaction or; or (v) all or substantially all of the assets of either the
Holding Company or the Savings Bank are sold or otherwise transferred to or are
acquired by any other entity or group.
Notwithstanding the other provisions of this Paragraph 2, a transaction or
event shall not be considered a Change in Control if, prior to the consummation
of occurrence of such transaction or event, Officer and Holding Company agree in
writing that the same shall not be treated as a Change in Control for purposes
of this Agreement. In addition, the Holding Company's acquisition of all of the
stock of the Savings Bank and initial public offering in connection with the
conversion of the Savings Bank from the mutual to the stock form of ownership
shall not be considered a change in control.
(f) Such amounts payable pursuant to this Paragraph 2 shall be paid, at
the irrevocable option of the Officer, as follows:
Participant's Initials
- ----------------------
(i) /s/ dm Payment in a lump-sum.
-------------------------
(ii) Payment in monthly installments over a fixed
------------------------ reasonable period of time. Such payments shall
begin within thirty (30) days following the
calendar month in which the Officer terminates
his employment with the Savings Bank.
(g) Following a Termination Event which gives rise to the Officer's rights
hereunder, the Officer shall have twelve (12) months from the date of occurrence
of the Termination Event to terminate her employment with the Savings Bank
pursuant to this Paragraph 2. Any such termination shall be deemed to have
occurred only upon delivery to the Savings Bank (or to any successor
corporation) of written notice of termination which describes the Change in
Control and Termination Event. If the Officer does not so terminate her
employment with the Savings Bank within such twelve (12) month period, she shall
thereafter have no further rights hereunder
12
<PAGE>
with respect to that Termination Event, but shall retain rights, if any,
hereunder with respect to any other Termination Event as to which such period
has not expired.
(h) It is the intent of the parties hereto that all payments made pursuant
to this Agreement be deductible by the Holding Company for federal income tax
purposes and not result in the imposition of an excise tax on the Officer.
Notwithstanding anything contained in this Agreement to the contrary, any
payments to be made to or for the benefit of the Officer which are deemed to be
"parachute payments" as that term is defined in Section 280G of the Code, shall
be modified or reduced to the extent deemed to be necessary by the Holding
Company's Board of Directors to avoid the imposition of excise taxes on the
Officer under Section 4999 of the Code or the disallowance of a deduction to the
Holding Company under Section 280G(a) of the Code.
(i) In the event any dispute shall arise between the Officer and the
Holding Company as to the terms or interpretation of this Agreement, including
this Paragraph 2, whether instituted by formal legal proceedings or otherwise,
including any action taken by the Officer to enforce the terms of this Paragraph
2 or in defending against any action taken by the Holding Company, the Holding
Company shall reimburse the Officer for all costs and expenses incurred in such
proceedings or actions, including attorney's fees, in the event the Officer
prevails in any such action.
2. Successors and Assigns. This Agreement shall inure to the benefit of and
----------------------
be binding upon any corporate or other successor of the Holding Company which
shall acquire, directly or indirectly, by conversion, merger, consolidation,
purchase or otherwise, all or substantially all of the assets of the Holding
Company.
13
<PAGE>
3. Modification; Waiver; Amendments. No provision of this Agreement may
--------------------------------
be modified, waived or discharged unless such waiver, modification or discharge
is agreed to in writing and signed by the Officer and the Holding Company,
except as herein otherwise provided. No waiver by either party hereto, at any
time, of any breach by the other party hereto of, or compliance with, any
condition or provision of this Agreement to be performed by such other party
shall be deemed a waiver of similar or dissimilar provisions or conditions at
the same or at any prior or subsequent time. With the exception of Paragraph
2(f) of this Agreement which may not be amended, no amendments or additions to
this Agreement shall be binding unless in writing and signed by both parties,
except as herein otherwise provided.
4. Applicable Law. This Agreement shall be governed in all respects
--------------
whether as to validity, construction, capacity, performance or otherwise, by the
laws of North Carolina, except to the extent that federal law shall be deemed to
apply.
5. Severability. The provisions of this Agreement shall be deemed
------------
severable and the invalidity or unenforceability of any provision shall not
affect the validity or enforceability of the other provisions hereof.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the day
and year first hereinabove written.
CENTURY BANCORP, INC.
(CORPORATE SEAL)
By: /s/ James G. Hudson, Jr.
----------------------------------
President
----------------------------------
ATTEST:
/s/ Drema A. Michael
- ------------------------------
Secretary
- ------------------------------
/s/ Drema A. Michael
-------------------------------- (SEAL)
DREMA A. MICHAEL
14
<PAGE>
SUPPLEMENTAL INCOME AGREEMENT
AGREEMENT entered into as of the 1st day of October, 1989, between Home
Savings and Loan Association, a domestic Corporation having its principal office
in Thomasville, North Carolina (hereinafter referred to as the Company) and
James G. Hudson, Jr. hereinafter referred to as the Employee).
W I T N E S S E T H:
WHEREAS, the Employee has been an Employee of the Company since October 2,
1972, and,
WHEREAS, the value of the Employee is such that assurance of his continued
service is essential to the future growth and profits of the Company; and,
WHEREAS, the Company desires to retain the service of the Employee, and
realizes that if the Employee were to terminate his employment it would suffer a
substantial financial loss;
NOW, THEREFORE, in consideration of the premises contained herein, the
parties hereto mutually agree as follows:
1. Remuneration: During the period of the Employee's employment with the
------------
Company, the Company will pay the Employee for services to be rendered:
A. Cash amounts at rates and times mutually agreed upon; and,
B. Additional amounts, payment of which will be deferred pursuant to
the terms hereinafter set forth.
2. Retirement Benefit: Upon the attainment of the first day of the month
------------------
following the Employee's 65th birthday, the Company will commence to pay the
Employee $1,500 monthly for a continuous period of fifteen years. Such initial
monthly income shall be increased 5% for each additional full year of service of
the employee, beginning after the first year from the date of this agreement,
except that there will be no increases in benefits after the attainment of age
65 and also no increases in benefits for more than ten years. In the event of
the death of the last named beneficiary before all the unpaid payments have been
made, the balance of any amount which remains unpaid at said death shall be
commuted on the basis of eight percent per annum compounded interest and shall
be paid in a single sum to the executor or administrator of the estate of the
last named beneficiary to die. In the absence of such beneficiary designation,
any amount remaining unpaid at the Employee's death shall be commuted on the
basis of eight percent per annum compound interest and shall be paid in a single
sum to the executor or administrator of the Employee's estate.
<PAGE>
3. Death Benefit: Should the Employee die prior to the attainment of the
-------------
first day of the month following his birthday, the Company (beginning at a date
to be determined by the Company but within six months from the date of such
death) will commence to pay $1,500 monthly for a continuous period of fifteen
years to such beneficiary or beneficiaries as the Employee has directed by
filing with the Company a notice in writing. Such initial monthly income
increases shall be increased 5% for each additional full year of service of the
employee beginning after the attainment of age 65 and no increases in benefits
for more then ten years. Irrespective of the above, however, if the Employee
dies as a result of suicide within two years of the execution of this agreement,
no death benefit shall be payable. In the event of the death of the last named
beneficiary before all the unpaid payments have been made, the balance of any
amount which remains unpaid at said death shall be commuted on the basis of
eight percent per annum compound interest and shall be paid in a single sum to
the executor or administrator of the state of the last named beneficiary to die.
In the absence of any such beneficiary designation, any amount remaining unpaid
at the Employee's death shall be commuted on the basis of eight percent per
annum compound interest and shall be paid in a single sum to the executor or
administrator of the Employee's estate.
4. Termination of Employment: If the Employee voluntarily terminates his
-------------------------
Employment for reasons other than death or the attainment of his 65th birthday,
he or his beneficiary, as applicable, shall be entitled upon the attainment of
his 65th birthday, or his prior death, to a percentage of the retirement
benefits stated in Section 2 of this Agreement as determined by the following
table:
<TABLE>
<CAPTION>
PERCENTAGE OF RETIREMENT
FULL YEARS OF SERVICE UPON BENEFITS STATED IN SECTION 2 OF
VOLUNTARILY TERMINATION OF THIS AGREEMENT TO WHICH THE
EMPLOYMENT EMPLOYEE IS ENTITLED
---------- --------------------
<S> <C>
Under 20 0%
20 50%
21 60%
22 70%
23 80%
24 90%
25 100%
</TABLE>
Irrespective of the above, however, if the Employee's employment is terminated
by the Employer for reasons other than cause, he or his beneficiary, as
applicable, shall be entitled upon the attainment of his 65th birthday, or his
prior death to 100% of the retirement benefits stated in Section 2 of this
2
<PAGE>
agreement. If the Employee's employment is terminated for cause, neither he or
his beneficiary shall receive any benefit payments under this agreement.
5. Forfeiture Provisions:
---------------------
A. During the period the retirement benefit is payable to the Employee
under Section 2 of this Agreement, the Employee shall not engaged in
business activities in Davidson County, North Carolina, which are in
competition with the Company without first obtaining the written consent of
the Company.
B. During the period the retirement payment is payable to the Employee
under Section 2 of the Agreement, the Employee shall be available to render
consulting services to the Company upon request by an officer of the
Company, but such requests shall not be made more frequently than once each
month. The Employee shall not be considered to have breached this condition
if he is unable to consult because of his mental or physical disability.
C. Payment of the retirement benefit under this Agreement may be
terminated by the Company, if the Employee fails to comply with either of
the conditions set forth in paragraph (A) and (B) of this Section 5.
6. General Provisions:
------------------
A. Except as otherwise provided by this Agreement, it is agreed that
neither the Employee, nor his beneficiary shall have any right to commute,
sell, assign, transfer or otherwise convey the right to receive any
payments hereunder, which payments and the right thereto are expressly
declared to be nonassignable and nontransferable.
B. The benefits payable under this Agreement shall be independent of,
and in addition to, any other employment agreements that may exist from
time to time between the parties hereto, concerning any other compensation
payable by the Company to the Employee whether as salary, bonus, or
otherwise. This Agreement shall not be deemed to constitute a contract of
employment between the parties hereto, nor shall any provision hereof
restrict the right of the Company to discharge the Employee or restrict the
right of the Employee to terminate his employment.
C. The rights of the Employee under this Agreement and of any
beneficiary of the Employee shall be solely those of an unsecured creditor
of the Company. Any asset acquired by the Company in connection with the
liabilities assumed by it hereunder, shall not be deemed to be held under
any trust for the benefit of the Employee or his beneficiaries or to be
considered security for the performances of the obligations of the Company
but shall be, and remain, a general, unpledged, unrestricted asset of the
Company.
3
<PAGE>
D. The Company hereby reserves the right to accelerate the payments
specified in Section 2, 3 and 4 above without the consent of the Employee,
his estate, beneficiaries, or any other person claiming through or under
him.
E. The Company agrees that it will not merge or consolidate with any
other Company or organization, or permit its business activities to be
taken over by any other organization unless and until the succeeding or
continuing Company or other organization shall expressly assume the rights
and obligations of the Company herein set forth. The Company further agrees
that it will not cease its business activities or terminate its existence,
other than as heretofore set forth in this Section, without having made
adequate provision for the fulfilling of its obligations hereunder.
F. This Agreement shall be binding upon and inure to the benefit of
the parties, their respective legal representatives, and any "Successor" of
the Company, which shall be deemed substituted for the Company under the
terms of this Agreement. As used in this Agreement the term "Successor"
shall include any person, firm, corporation or other business entity which
at anytime, whether by merger purchase or otherwise, acquire all or
substantially all of the Corporation's assets or business.
G. This Agreement may be revoked or amended in whole or in part by a
writing signed by both of the parties hereto.
H. This Agreement shall be subject to and construed under the laws of
the State of North Carolina.
IN WITNESS WHEREOF, the said Company has caused this Agreement to be signed
in its Corporate name by its duly authorized officer, and impressed with its
corporate seal, attested by its secretary, and the said Employee has hereunto
set his hand and seal, all on the day and year first above written.
HOME SAVINGS & LOAN ASSOCIATION
By: /s/ James G. Hudson, Jr., President
------------------------------------
/s/ James G. Hudson, Jr.,
------------------------------------
The Employee
ATTEST:
/s/ Drema Michael
- -----------------------------------
- -----------------------------------
Witness
4
<PAGE>
SUPPLEMENTAL INCOME AGREEMENT
AGREEMENT entered into as of the 1st day of March, 1991, between Home
Savings and Loan Association of Thomasville, a domestic corporation having its
principal office in Thomasville, North Carolina (hereinafter referred to as the
"Company") and James G. Hudson, Jr. (hereinafter referred to as the "Employee").
WITNESSETH:
WHEREAS, the Employee has been an Employee of the Company since October 2,
1972; and
WHEREAS, the value of the Employee is such that assurance of his continued
service is essential to the future growth and profits of the Company; and
WHEREAS, the Company desires to retain the service of the Employee, and
realizes that if the Employee were to terminate his employment it would suffer a
substantial financial loss;
NOW, THEREFORE, in consideration of the premises contained herein, the
parties hereto mutually agree as follows:
1. Remuneration: During the period of the Employee's employment with the
------------
Company, the Company will pay the Employee for services to be rendered;
A. Cash amounts at rates and time mutually agreed upon; and
B. Additional amounts, payment of which will be deferred pursuant to
the terms hereinafter set forth.
2. Retirement Benefit: Upon the attainment of the first day of the month
------------------
following the Employee's 65th birthday, the Company will commence to pay the
Employee $592 monthly for a continuous period of fifteen years. Such initial
annual income shall be increased 5% annually for each additional full year of
service of the Employee, beginning after the first year from the date of this
agreement, except that there will be no increases in benefits after the
attainment of age 65 and also no increases in benefits for more than 10 years.
In the event of the death of the last named beneficiary before all of the unpaid
payments have been made, the balance of any amount which remains unpaid at said
death shall be commuted on the basis of eight percent per annum compound
interest and shall be paid in a single sum to the executor or administrator of
the estate of the last named beneficiary to die. In the absence of such
beneficiary designation, any amount remaining unpaid at the Employee's death
shall be commuted on the basis of eight percent per annum compound interest and
shall be paid in a single sum to the executor or administrator of the Employee's
estate.
5
<PAGE>
3. Death Benefit: Should the Employee die prior to the attainment of the
-------------
first day of the month following his 65th birthday, the Company (beginning at a
date to be determined by the Company but within six months from the date of such
death) will commence to pay $592 monthly for a continuous period of fifteen
years to such beneficiary or beneficiaries as the Employee has directed by
filing with the Company a notice in writing. Such initial monthly income
increases shall be increased 5% annually for each additional full year of
service of the Employee beginning after the attainment of age 65 and no
increases in benefits for more than 10 years. Irrespective of the above,
however, if the Employee dies as a result of suicide within two years of the
execution of this agreement, no death benefit shall be payable. In the event of
the death of the last named beneficiary before all the unpaid payments have been
made, the balance of any amount which remains unpaid at said death shall be
commuted on the basis of eight percent per annum compound interest and shall be
paid in a single sum to the executor or administrator of the estate of the last
named beneficiary to die. In the absence of any such beneficiary designation
any amount remaining unpaid at the Employee's death shall be commuted on the
basis of eight percent per annum compound interest shall be paid in a single sum
to the executor or administrator of the Employee's estate.
4. Termination of Employment: If the Employee terminates his employment
-------------------------
for reasons other than death or the attainment of his 65th birthday, he or his
beneficiary, as applicable, shall be entitled upon the attainment of his 65th
birthday, or his prior death, to a percentage of the retirement benefits stated
in Section 2 of this Agreement as determined by the following table:
<TABLE>
<CAPTION>
PERCENTAGE OF RETIREMENT
FULL YEARS OF SERVICE UPON BENEFITS STATED IN SECTION 2 OF
VOLUNTARILY TERMINATION OF THIS AGREEMENT TO WHICH THE
EMPLOYMENT EMPLOYEE IS ENTITLED
---------- --------------------
<S> <C>
Under 20 0%
20 50%
21 60%
22 70%
23 80%
24 90%
25 100%
</TABLE>
Irrespective of the above, however, if the Employee's employment is terminated
by the Employer for reasons other than cause, he or his beneficiary, as
applicable, shall be entitled upon the attainment of his 65th birthday, or his
prior death, to 100% of the retirement benefits stated in Section 2 of this
agreement. If the Employee's employment is terminated for cause, neither he nor
his beneficiary shall receive any benefit payments under this agreement.
6
<PAGE>
5. Forfeiture Provisions:
---------------------
A. During the period the retirement benefit is payable to the Employee
under Section 2 of this Agreement, the Employee shall not engage in business
activities in Davidson County, North Carolina, which are in competition with the
Company, without first obtaining the written consent of the Company.
B. During the period the retirement payment is payable to the Employee
under Section 2 of the Agreement, the Employee shall be available to render
consulting services to the Company upon request by an officer of the Company,
but such requests shall not be made more frequently than once each month. The
Employee shall not be considered to have breached this condition if he is unable
to consult because of his mental or physical disability.
C. Payments of the retirement benefit under this Agreement may be
terminated by the Company, if the Employee fails to comply with either of the
conditions set forth in paragraph (A) and (B) of this Section 5.
6. General Provisions:
------------------
A. Except as otherwise provided by this Agreement, it is agreed that
neither the Employee, nor his beneficiary, shall have any right to commute,
sell, assign, transfer or otherwise convey the right to receive any payments
hereunder, which payments and the right thereto are expressly declared to be
nonassignable and nontransferable.
B. The benefits payable under this Agreement shall be independent of, and
in addition to, any other employment agreements that may exist from time to time
between the parties hereto, concerning any other compensation payable by the
Company to the Employee whether as salary, bonus or otherwise. This Agreement
shall not be deemed to constitute a contract of employment between the parties
hereto, nor shall any provision hereof restrict the right of the Company to
discharge the Employee or restrict the right of the Employee to terminate his
employment.
C. The rights of the Employee under this Agreement and of any beneficiary
of the Employee shall be solely those of an unsecured creditor of the Company.
Any asset acquired by the Company in connection with the liabilities assumed by
it hereunder shall not be deemed to be held under any trust for the benefit of
the Employee or his beneficiaries or to be considered security for the
performances of the obligations of the Company but shall be, and remain, a
general, unpledged, unrestricted asset of the Company.
D. The Company hereby reserves the right to accelerate the payments
specified in Section, 2, 3 and 4 above without the consent of the Employee, his
estate, beneficiaries, or any other person claiming through or under him.
7
<PAGE>
E. The Company agrees that it will not merge or consolidate with any
other Company or organization, or permit its business activities to be
taken over by any other organization unless and until the succeeding or
continuing Company or other organization shall expressly assume the rights
and obligations of the Company herein set forth. The Company further agrees
that it will not cease its business activities or terminate its existence
other than as heretofore set forth in this Section, without having made
adequate provision for the fulfilling of its obligations hereunder.
F. This Agreement shall be binding upon and inure to the benefit of
the parties, their respective legal representatives, and any "Successor" of
the Company, which shall be deemed substituted for the Company under the
terms of this Agreement. As used in this Agreement, the term "Successor"
shall include any person, firm, corporation or other business entity which
at anytime, whether by merger, purchase or otherwise, acquire all or
substantially all of the Corporation's assets or business.
G. This Agreement may be revoked or amended in whole or in part by a
writing signed by both of the parties hereto.
H. This Agreement shall be subject to and construed under the laws
of the State of North Carolina.
IN WITNESS WHEREOF, the said Company has caused this Agreement to be signed
in its corporate name by its duly authorized officer, and impressed with its
corporate seal, attested by its secretary, and the said Employee has hereunto
set his hand and seal, all on the date and year first above written.
HOME SAVINGS AND LOAN ASSOCIATION
By: /s/ James G. Hudson, Jr., President
---------------------------------------
/s/ James G. Hudson, Jr.
---------------------------------------
The Employee
ATTEST:
/s/ Drema Michael
- -----------------------------------
WITNESS:
--------------------------
8
<PAGE>
AMENDMENT TO SUPPLEMENTAL INCOME AGREEMENTS
THIS AGREEMENT entered into as of the 3rd day of October, 1996 between HOME
SAVINGS, SSB, a North Carolina-chartered savings bank (the "Company") and JAMES
G. HUDSON, JR. (the "Employee").
WITNESSETH:
----------
WHEREAS, the Company and the Employee have entered into two separate
Supplemental Income Agreements dated as of October 1, 1989 (the "1989 Income
Agreement") and March 1, 1991 (the "1991 Income Agreement"); and
WHEREAS, the parties desire to amend the 1989 Income Agreement and 1991
Income Agreement to provide that the retirement benefit provided for under the
Agreements shall not become payable until the actual retirement of the Employee
and to make certain amendments to the death benefit provided for therein.
NOW, THEREFORE, in consideration of the mutual covenants and agreements set
forth herein and other good and valuable consideration, the parties agree as
follows:
1. The first sentence of Paragraph 2 of the 1989 Income Agreement shall
be deleted and replaced with the following:
"Upon the first day of the month following the Employee's voluntary
termination of his employment on or after the attainment of his 65th
birthday, for reasons other than death, the Company will commence to
pay the Employee $1,500.00 monthly for a continuous period of 15
years."
2. The first sentence of the 1991 Income Agreement shall be deleted and
replaced with the following:
"Upon the first day of the month following the Employee's voluntary
termination of his employment on or after the attainment of his 65th
birthday, for reasons other than death, the Company will commence to
9
<PAGE>
pay the Employee $592.00 monthly for a continuous period of 15 years."
3. The first two sentences of Paragraph 3 of the 1989 Income Agreement
entitled "Death Benefit" shall be deleted and replaced with the following:
"Should the Employee die prior to his actual retirement on or after
age 65, the Company (beginning at a date to be determined by the
Company but within six months from the date of such death) will
commence to pay $1,500.00 monthly for a continuous period of 15 years
to such beneficiary or beneficiaries as the Employee has directed by
filing with the Company a notice in writing. Such initial monthly
income shall be increased 5% for each additional full year of service
of the Employee beginning after the first year from the date of this
Agreement, except that there will be no increases in benefits for more
than 10 years."
4. The first two sentences of Paragraph 3 of the 1991 Income Agreement
entitled "Death Benefit" shall be deleted and replaced with the following:
"Should the Employee die prior to his actual retirement on or after
age 65, the Company (beginning at a date to be determined by the
Company but within six months from the date of such death) will
commence to pay $592.00 monthly for a continuous period of 15 years to
such beneficiary or beneficiaries as the Employee has directed by
filing with the Company a notice in writing. Such initial monthly
income shall be increased 5% for each additional full year of service
of the Employee beginning after the first year from the date of this
Agreement, except that there will be no increases in benefits for more
than 10 years."
5. Except as set forth above, the 1989 Income Agreement and the 1991
Income Agreement shall remain in full force and effect and be unchanged.
WITNESS the signatures and seals of the undersigned, this the day and year
first above written.
HOME SAVINGS, SSB
By: /s/ James G. Hudson, Jr.
-------------------------------------
President
/s/ James G. Hudson, Jr. (SEAL)
----------------------------------------
James G. Hudson, Jr.
10
<PAGE>
STATEMENT REGARDING COMPUTATION OF PER SHARE EARNINGS
The Conversion was effective December 20, 1996. Accordingly, earnings
per share data for the year ended June 30, 1997 is comprised of the earnings for
the post-Conversion period. The weighted average number of shares outstanding
includes all shares issued and outstanding of 407,330 less 32,586 shares
purchased by the ESOP at the time of the Conversion plus the pro-rata portion of
shares committed to be released through June 30, 1997.
Net income for the period from December 20, 1996 to June 30, 1997 $926,914
Weighted average number of shares outstanding $375,627
Earnings per share $2.47
<PAGE>
Century Bancorp, Inc. and Subsidiary
Selected Financial and Other Data
===============================================================================
<TABLE>
<CAPTION>
At or for the Year Ended June 30,
-------------------------------------------------------------------------
1997 1996 1995 1994 1993
----------- ------------ ----------- ------------ -----------
(Dollars in thousands, except per share amounts)
<S> <C> <C> <C> <C> <C>
Financial Condition Data:
Total assets $ 100,640 $ 81,304 $ 75,508 $ 73,843 $ 70,864
Investments/(1)/ 35,180 22,823 18,852 18,012 15,833
Loans receivable, net 62,333 55,193 54,020 53,802 53,566
Deposits 69,699 69,669 64,448 63,937 62,129
Stockholders' equity 30,303 11,245 10,640 9,610 8,439
Book value per common share 74.39 - - - -
Operating Data:
Interest income $ 6,663 $ 5,869 $ 5,371 $ 5,337 $ 5,402
Interest expense 3,512 3,541 2,788 2,487 2,736
----------- ------------ ----------- ------------ -----------
Net interest income 3,151 2,328 2,583 2,850 2,666
Provision for loan losses 17 165 105 114 165
----------- ------------ ----------- ------------ -----------
Net interest income after provision for
loan losses 3,134 2,163 2,478 2,736 2,501
Non-interest income 47 35 15 40 40
Non-interest expense 1,507 1,169 979 910 833
----------- ------------ ----------- ------------ -----------
Income before income taxes 1,674 1,029 1,514 1,866 1,708
Income tax expense 558 352 593 694 639
----------- ------------ ----------- ------------ -----------
Net income $ 1,116 $ 677 $ 921 $ 1,172 $ 1,069
=========== ============ =========== ============ ===========
Net income per common share/(2),(3)/ $ 2.47 $ - $ - $ - $ -
Dividend per common share/(2)/ 0.50 - - - -
Dividend payout ratio 20.24% - - - -
Selected Other Data:
Return on average assets 1.22% .86% 1.25% 1.59% 1.55%
Return on average equity 5.43% 6.19% 9.15% 12.82% 13.37%
Average equity to average assets 22.44% 13.94% 13.68% 12.43% 11.56%
Interest rate spread 2.53% 2.41% 3.10% 3.55% 3.53%
Net yield on average interest-earning assets 3.56% 3.05% 3.61% 3.97% 3.97%
Average interest-earning assets to average
interest-bearing liabilities 125.89% 113.86% 113.08% 112.12% 110.59%
Ratio of non-interest expense to average total
assets 1.64% 1.49% 1.33% 1.24% 1.20%
Nonperforming assets to total assets 0.13% 0.76% 1.21% 2.32% 2.53%
Nonperforming loans to total loans 0.12% 0.52% 1.56% 2.98% 2.99%
Allowance for loan losses to total loans 0.88% 0.97% 0.74% 0.55% 0.37%
Allowance for loan losses to nonperforming loans 423.08% 187.02% 47.68% 18.38% 12.37%
</TABLE>
/(1)/Includes interest-bearing deposits, federal funds sold, FHLB stock and
investment securities.
/(2)/On December 20, 1996, Home Savings, Inc., SSB converted from a
state-chartered mutual savings bank to a state-chartered stock savings bank
and became a wholly-owned subsidiary of Century Bancorp, Inc.
/(3)/Net income per common share is based on earnings from December 20, 1996 to
June 30, 1997 divided by the weighted average number of shares outstanding
during the same period.
- --------------------------------------------------------------------------------
Page 1
<PAGE>
Century Bancorp, Inc. and Subsidiary
Management's Discussion and Analysis
================================================================================
Management's discussion and analysis is intended to assist readers in the
understanding and evaluation of the financial condition and results of
operations of Century Bancorp, Inc. and its wholly-owned subsidiary, Home
Savings, Inc., SSB. It should be read in conjunction with the audited
consolidated financial statements and accompanying notes included in this report
and the supplemental financial data appearing throughout this discussion and
analysis.
Description of Business
Century Bancorp, Inc. ("Century" or "Parent") was incorporated under the laws of
the State of North Carolina for the purpose of becoming the bank holding company
of Home Savings, Inc., SSB (the "Bank" or "Home Savings") in connection with the
Bank's conversion from a state-chartered mutual savings bank to a
state-chartered stock savings bank (the "Conversion"), pursuant to its Plan of
Conversion. Century was organized to acquire all of the common stock of Home
Savings upon its conversion to stock form. A subscription and community offering
(the "Offering") of Century's common stock closed on December 20, 1996, at which
time Century acquired all of the outstanding common stock of the Bank and
commenced operations.
In accordance with the Plan of Conversion, Century issued common stock with a
value of $20,366,500 in the Offering and received proceeds of $19,453,837, net
of Conversion costs. Century transferred $8,950,949 of the net proceeds to Home
Savings for the purchase of all of the outstanding common stock of the Bank.
Century has no operations and conducts no business of its own other than owning
Home Savings, investing its portion of the net proceeds received in the
Conversion, and lending funds to the Home Savings, Inc., SSB Employee Stock
Ownership Plan (the "ESOP") which was formed in connection with the Conversion.
The principal business of the Bank is accepting deposits from the general public
and using those deposits and other sources of funds to make loans secured by
real estate located in the Bank's primary market area of Davidson County in
North Carolina. On June 30, 1997, approximately 98% of the Bank's net loan
portfolio was composed of real estate loans.
Century's principal sources of income are earnings on capital retained by
Century, interest payments received from the ESOP with respect to the ESOP loan,
and dividends paid by the Bank to Century, if any. Revenues of Home Savings are
derived primarily from interest on loans. In addition, Home Savings receives
interest income from its investment securities and interest-bearing deposit
balances. The major expenses of Home Savings are interest on deposits and
general and administrative expenses such as salaries, employee benefits, federal
deposit insurance premiums and occupancy and related expenses.
Because Century has no operations and conducts no business other than as
described above, the discussion contained in this "Management's Discussion and
Analysis" concerns primarily the business of the Bank; however, for ease of
reading, and because the financial statements are presented on a consolidated
basis, Century and Home Savings are collectively referred to herein as the
"Company," unless otherwise noted.
- --------------------------------------------------------------------------------
Page 3
<PAGE>
Century Bancorp, Inc. and Subsidiary
Management's Discussion and Analysis (Continued)
================================================================================
Asset/Liability Management
The Company's asset/liability management, or interest rate risk management,
program is focused primarily on evaluating and managing the composition of its
assets and liabilities in view of various interest rate scenarios. Factors
beyond the Company's control, such as market interest rates and competition, may
also have an impact on the Company's interest income and interest expense.
In the absence of other factors, the yield or return associated with the
Company's earning assets generally will increase from existing levels when
interest rates rise over an extended period of time, and conversely interest
income will decrease when interest rates decrease. In general, interest expense
will increase when interest rates rise over an extended period of time, and
conversely interest expense will decrease when interest rates decrease.
Interest Rate Gap Analysis. As a part of its interest rate risk management
policy, the Company calculates an interest rate "gap." Interest rate "gap"
analysis is a common, though imperfect, measure of interest rate risk, which
measures the relative dollar amounts of interest-earning assets and
interest-bearing liabilities which reprice within a specific time period, either
through maturity or rate adjustment. The "gap" is the difference between the
amounts of such assets and liabilities that are subject to repricing. A
"negative" gap for a given period means that the amount of interest-bearing
liabilities maturing or otherwise repricing within that period exceeds the
amount of interest-earning assets maturing or otherwise repricing within the
same period. Accordingly, in a declining interest rate environment, an
institution with a negative gap would generally be expected, absent the effects
of other factors, to experience a lower decrease in the yield of its assets
relative to the cost of its liabilities and its income should be positively
affected. Conversely, the cost of funds for an institution with a negative gap
would generally be expected to increase more quickly than the yield on its
assets in a rising interest rate environment, and such institution's net
interest income generally would be expected to be adversely affected by rising
interest rates. Changes in interest rates generally have the opposite effect on
an institution with a "positive gap."
The Company's one-year interest sensitivity gap as a percentage of total
interest-earning assets at June 30, 1997 was a negative 29.87%. At June 30,
1997, the Company's three-year and five-year cumulative interest sensitivity
gaps as a percentage of total interest-earning assets were a negative 35.57% and
a negative 23.57%, respectively.
The following table sets forth the amounts of interest-earning assets and
interest-bearing liabilities outstanding at June 30, 1997 which are projected to
reprice or mature in each of the future time periods shown. Except as stated
below, the amounts of assets and liabilities shown which reprice or mature
within a particular period were determined in accordance with the contractual
terms of the assets or liabilities. Loans with adjustable rates are shown as
being due at the end of the next upcoming adjustment period. Passbook accounts,
money market deposit accounts and negotiable order of withdrawal or other
transaction accounts are assumed to be subject to immediate repricing and
depositor availability and have been placed in the shortest period. In making
the gap computations, none of the assumptions sometimes made regarding
prepayment rates and deposit decay rates have been used for any other
interest-earning assets or interest-bearing liabilities. In addition, the table
does not reflect scheduled principal payments which will be received throughout
the lives of the loans. The
- --------------------------------------------------------------------------------
Page 4
<PAGE>
Century Bancorp, Inc. and Subsidiary
Management's Discussion and Analysis (Continued)
================================================================================
interest rate sensitivity of the Company's assets and liabilities illustrated in
the following table would vary substantially if different assumptions were used
or if actual experience differs from that indicated by such assumptions.
<TABLE>
<CAPTION>
Terms to Repricing at June 30, 1997
-------------------------------------------------------------------------
More Than More Than
1 Year 1 Year to 3 Years to More Than
or Less 3 Years 5 Years 5 Years Total
----------- ------------ ----------- ------------ -----------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS:
Loans receivable:
Adjustable rate residential 1-4 family $ 7,952 $ 11 $ - $ - $ 7,963
Fixed rate residential 1-4 family 1,008 421 1,984 40,560 43,973
Other secured - real estate - fixed - 21 507 2,838 3,366
Other secured - real estate - adjustable 6,295 - - - 6,295
Other loans 572 282 377 55 1,286
----------- ------------ ----------- ------------ -----------
Total loans receivable 15,827 735 2,868 43,453 62,883
Interest-bearing deposits 2,788 - - - 2,788
Investments 11,023 4,449 8,894 7,439 31,805
FHLB common stock - - - 587 587
----------- ------------ ----------- ------------ -----------
Total interest-earning assets $ 29,638 $ 5,184 $ 11,762 $ 51,479 $ 98,063
=========== ============ =========== ============ ===========
INTEREST-BEARING LIABILITIES:
Deposits:
Passbook and statement accounts $ 5,410 $ - $ - $ - $ 5,410
NOW and money market checking accounts 13,486 - - - 13,486
Non-interest-bearing accounts 52 - - - 52
Certificate accounts 39,985 10,766 - - 50,751
----------- ------------ ----------- ------------ -----------
Total interest-bearing liabilities $ 58,933 $ 10,766 $ - $ - $ 69,699
=========== ============ =========== ============ ===========
INTEREST SENSITIVITY GAP PER PERIOD $ (29,295) $ (5,582) $ 11,762 $ 51,479 $ 28,364
CUMULATIVE INTEREST SENSITIVITY GAP $ (29,295) $ (34,877) $ (23,115) $ 28,364 $ 28,364
CUMULATIVE GAP AS A PERCENTAGE OF
TOTAL INTEREST-EARNING ASSETS (29.87)% (35.57)% (23.57)% 28.92% 28.92%
CUMULATIVE INTEREST-EARNING ASSETS
AS A PERCENTAGE OF TOTAL INTEREST-
BEARING LIABILITIES 42.52% 49.96% 66.84% 140.69% 140.69%
</TABLE>
- --------------------------------------------------------------------------------
Page 5
<PAGE>
Century Bancorp, Inc. and Subsidiary
Management's Discussion and Analysis (Continued)
================================================================================
Net Interest Income
Net interest income represents the difference between income derived from
interest-earning assets and interest expense incurred on interest-bearing
liabilities. Net interest income is affected by both (i) the difference between
the rates of interest earned on interest-earning assets and the rates paid on
interest-bearing liabilities ("interest rate spread") and (ii) the relative
amounts of interest-earning assets and interest-bearing liabilities ("net
earning balance"). The following table sets forth information relating to
average balances of the Company's assets and liabilities for the years ended
June 30, 1997 and 1996. For the periods indicated, the table reflects the
average yield on interest-earning assets and the average cost of
interest-bearing liabilities (derived by dividing income or expense by the
monthly average balance of interest-earning assets or interest-bearing
liabilities, respectively) as well as the net yield on interest-earning assets
(which reflects the impact of the net earning balance). Nonaccruing loans were
included in the computation of average balances.
<TABLE>
<CAPTION>
Year Ended June 30, 1997 Year Ended June 30, 1996
--------------------------------------- ---------------------------------------
Average Average Average Average
Balance Interest Rate Balance Interest Rate
---------- ---------- -------- ---------- ----------- --------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Interest-bearing balances $ 5,611 $ 342 6.09% $ 6,913 $ 336 4.86%
Investments 24,818 1,505 6.06% 15,354 949 6.18%
Loans 58,008 4,816 8.30% 54,066 4,584 8.48%
---------- ---------- -------- ---------- --------- -------
Total interest-earning assets 88,437 6,663 7.53% 76,333 5,869 7.69%
Other assets 3,174 2,084
---------- ----------
Total assets $ 91,611 $ 78,417
========== ==========
Interest-bearing liabilities:
Deposits $ 70,252 3,512 5.00% $ 67,042 3,540 5.28%
---------- -------- --------- -------
Other liabilities 806 440
Stockholders' equity 20,553 10,935
---------- ----------
Total liabilities and
stockholders' equity $ 91,611 $ 78,417
========== ==========
Net interest income and interest
rate spread $ 3,151 2.53% $ 2,329 2.41%
========== ======== ========= =======
Net yield on average interest-earning
assets 3.56% 3.05%
Ratio of average interest-earning assets
to average interest-bearing liabilities 125.89% 113.86%
</TABLE>
- --------------------------------------------------------------------------------
Page 6
<PAGE>
Century Bancorp, Inc. and Subsidiary
Management's Discussion and Analysis (Continued)
================================================================================
Rate/Volume Analysis
The following table analyzes the dollar amount of changes in interest income and
interest expense for major components of interest-earning assets and
interest-bearing liabilities. The table distinguishes between (i) changes
attributable to volume (changes in volume multiplied by the prior period's
rate), (ii) changes attributable to rate (changes in rate multiplied by the
prior period's volume), and (iii) net change (the sum of the previous columns).
The change attributable to both rate and volume (changes in rate multiplied by
changes in volume) has been allocated equally to both the changes attributable
to volume and the changes attributable to rate.
<TABLE>
<CAPTION>
Year Ended June 30, 1997 vs. 1996
-----------------------------------------------------
Increase (Decrease) Due To
-----------------------------------------------------
Volume Rate Total
-------------- -------------- --------------
(Dollars in Thousands)
<S> <C> <C> <C>
Interest income:
Interest-bearing balances $ (71) $ 77 $ 6
Investments 579 (23) 556
Loans 331 (99) 232
-------------- -------------- --------------
Total interest income 839 (45) 794
Interest expense:
Deposits 165 (193) (28)
-------------- -------------- --------------
Net interest income $ 674 $ 148 $ 822
============== ============== ==============
</TABLE>
Comparison of Financial Condition at June 30, 1997 and 1996
Principally as a result of net proceeds of $19.5 million received on December
20, 1996 from issuance of the Company's common stock, consolidated total assets
increased by $19.3 million, from $81.3 million at June 30, 1996 to $100.6
million at June 30, 1997. Funds generated from the stock sale were used
principally to acquire investments, with investment securities increasing by
$13.2 million during the year ended June 30, 1997. Loan demand has also been
relatively strong, however, with net loans receivable increasing by $7.1 million
from $55.2 million to $62.3 million during the year ended June 30, 1997.
Customer deposit accounts initially declined as a result of deposit withdrawals
by customers who used the funds thus provided to purchase shares of the
Company's common stock, but by June 30, 1997 had increased to the same level as
the beginning of the year.
Total stockholders' equity was $30.3 million at June 30, 1997 as compared with
$11.2 million at June 30, 1996. As of that date, Century and Home Savings
substantially exceeded all regulatory capital requirements.
Nonperforming Assets
Nonperforming assets, composed of nonaccrual loans and foreclosed real estate,
decreased significantly during the year, from a total of $618,000 at June 30,
1996 to $130,000 at June 30, 1997, a decrease of $488,000 or 79%. Nonaccrual
loans totaled $77,000 and $285,000 and foreclosed real estate totaled $53,000
and $333,000 at June 30, 1997 and 1996, respectively.
- --------------------------------------------------------------------------------
Page 7
<PAGE>
Century Bancorp, Inc. and Subsidiary
Management's Discussion and Analysis (Continued)
================================================================================
Comparison of Results of Operations for the Years Ended June 30, 1997 and 1996
Net Income. The Company earned consolidated net income of $1,116,000 during the
year ended June 30, 1997 as compared with net income of $677,000 during the
prior year, an increase of $439,000. The increase resulted from increased
interest income earned from investment of proceeds from the sale of the
Company's common stock, and would have been a larger increase were it not for a
special insurance assessment imposed on all SAIF-insured institutions by the
FDIC to recapitalize the SAIF fund. Home Savings' assessment was $409,000. Net
of an income tax benefit of $149,000, this special assessment decreased earnings
during the year by $260,000. If this special assessment had not been incurred,
net income during the year ended June 30, 1997 would have been $1,376,000.
Net Interest Income. Net interest income increased to $3,151,000 during the year
ended June 30, 1997 as compared with $2,329,000 during the previous year, an
increase of $822,000. This increase resulted from increases of $3.9 million and
$9.5 million, respectively, in the average balances of loans receivable and
investments during the current fiscal year.
Provision for Loan Losses. The provision for loan losses was $17,000 and
$165,000 for the years ended June 30, 1997 and 1996, respectively. Management
believes that the provision for loan losses and the resulting loan loss
allowance at June 30, 1997 will be adequate to absorb losses on existing loans.
There were no net loan charge-offs during the year ended June 30, 1997 as
compared with net charge-offs of $33,000 during the year ended June 30, 1996.
General and Administrative Expenses. Exclusive of the FDIC special insurance
assessment explained under the caption "Net Income," general and administrative
expenses declined by $71,000 from $1,170,000 during the year ended June 30, 1996
to $1,099,000 during the year ended June 30, 1997. The decrease relates
principally to the reduced rate of federal deposit insurance and to the decrease
in the provision for loss on foreclosed real estate.
Provision for Income Taxes. The provision for income taxes, as a percentage of
income before income taxes, was 33.3% and 34.2% for the years ended June 30,
1997 and 1996, respectively.
Liquidity and Capital Resources
On May 29, 1997, the Company paid its first quarterly dividend of $.50 a share.
Although the Company anticipates that it will continue to declare cash dividends
on a regular basis, the Board of Directors will continue to review its policy on
the payment of dividends on an ongoing basis, and such payment will be subject
to future earnings, cash flows, capital needs, and regulatory restrictions.
Maintaining adequate liquidity while managing interest rate risk is the primary
goal of the Company's asset and liability management strategy. Liquidity is the
ability to fund the needs of the Bank's borrowers and depositors, pay operating
expenses, and meet regulatory liquidity requirements. Maturing investments, loan
and mortgage-backed security principal repayments, deposits and income from
operations are the main sources of liquidity. The Company's primary uses of
liquidity are to fund loans and to make investments.
- --------------------------------------------------------------------------------
Page 8
<PAGE>
Century Bancorp, Inc. and Subsidiary
Management's Discussion and Analysis (Continued)
================================================================================
As of June 30, 1997, liquid assets (cash and cash equivalents, and marketable
investment securities) were approximately $36 million, which represents 51.6% of
deposits. As a North Carolina-chartered savings bank, Home Savings is required
to maintain liquid assets equal to at least 10% of its total assets. For
purposes of this requirement, liquid assets consist of cash and readily
marketable investment securities. At June 30, 1997, this liquidity ratio, based
on North Carolina regulations, was 29.6%. Management considers current liquidity
levels to be adequate to meet Home Savings' foreseeable needs.
At June 30, 1997, outstanding mortgage loan commitments were $702,000, available
line of credit balances were $699,000, and the undisbursed portion of
construction loans was $2.4 million. Funding for these commitments is expected
to be provided from deposits, loan and mortgage-backed securities principal
repayments, maturing investments and income generated from operations.
Under federal capital regulations, Home Savings must satisfy certain minimum
leverage ratio requirements and risk-based capital requirements. Failure to meet
such requirements can initiate certain mandatory and possibly additional
discretionary actions by regulators that, if undertaken, could have a direct
material effect on Home Savings' financial statements. At June 30, 1997 and
1996, Home Savings exceeded all such requirements.
The Bank is restricted in its ability to pay dividends and to make
distributions. A significant source of Century's funds are dividends received
from the Bank. In fiscal 1997, the amount of dividends that can be paid without
prior approval from regulators is approximately $450,000. These funds should be
adequate to cover Century's needs.
Impact of Inflation and Changing Prices
The financial statements and notes thereto presented herein have been prepared
in accordance with generally accepted accounting principles, which require the
measurement of financial position and operating results in terms of historical
dollars without considering the change in the relative purchasing power of money
over time and due to inflation. The impact of inflation is reflected in the
increased cost of operations. Unlike most industrial companies, nearly all the
assets and liabilities of the Company are monetary in nature. As a result,
interest rates have a greater impact on the Company's performance than do the
effects of general levels of inflation. Interest rates do not necessarily move
in the same direction or to the same extent as the price of goods and services.
Impact of New Accounting Standards
FASB Statement on Earnings Per Share. In March 1997, the Financial Accounting
Standards Board ("FASB") issued Statement of Financial Accounting Standards
("SFAS") No. 128. The Statement establishes standards for computing and
presenting earnings per share and applies to entities with publicly held common
stock or potential common stock. This Statement simplifies the standards for
computing earnings per share previously found in Accounting Principles Board
("APB") Opinion No. 15, "Earnings per Share" ("EPS"), and makes them comparable
to international EPS standards. It replaces the presentation of primary EPS with
the presentation of basic EPS. It also requires dual presentation of basic and
diluted EPS on the face of the income statement for all entities with complex
capital
- --------------------------------------------------------------------------------
Page 9
<PAGE>
Century Bancorp, Inc. and Subsidiary
Management's Discussion and Analysis (Continued)
================================================================================
structures and requires a reconciliation of the numerator and the denominator of
the basic EPS computation to the numerator and denominator of the diluted EPS
computation. Basic EPS excludes dilution and is computed by dividing income
available to common stockholders by the weighted-average number of common shares
outstanding for the period. Diluted EPS reflects the potential dilution that
could occur if securities or other contracts to issue common stock were
exercised or converted into common stock or resulted in the issuance of common
stock that then shared in the earnings of the entity. Diluted EPS is computed
similarly to fully diluted EPS pursuant to APB Opinion No. 15. This Statement
supersedes Opinion 15 and AICPA Accounting Interpretation 1-102 of Opinion 15.
This Statement will be effective for the Company's fiscal year ending June 30,
1998. Management does not believe the impact of adopting SFAS No. 128 will be
material to the Company's consolidated financial statements.
FASB Statement on Accounting for Stock-Based Compensation. In October 1995, the
FASB issued SFAS No. 123. SFAS No. 123 defines a "fair value based method" of
accounting for an employee stock option whereby compensation cost is measured at
the grant date based on the value of the award and is recognized over the
service period. FASB has encouraged all entities to adopt the fair value based
method; however, it will allow entities to continue the use of the "intrinsic
value based method" prescribed by APB Opinion No. 25. Under the intrinsic value
based method, compensation cost is the excess of the market price of the stock
at the grant date over the amount an employee must pay to acquire the stock.
However, most stock option plans have no intrinsic value at the grant date and,
as such, no compensation cost is recognized under APB Opinion No. 25. Entities
electing to continue use of the accounting treatment of APB Opinion No. 25 must
make certain pro forma disclosures as if the fair value based method had been
applied. The accounting requirements of SFAS No. 123 are effective for
transactions entered into in fiscal years beginning after December 15, 1995. Pro
forma disclosures must include the effects of all awards granted in fiscal years
beginning after December 15, 1994. The Company expects to use the "intrinsic
value based method" as prescribed by APB Opinion No. 25. Accordingly, management
does not believe the impact of adopting SFAS No. 123 will be material to the
Company's consolidated financial statements.
FASB Statement on Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities. In June 1996, the FASB issued SFAS No. 125. 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. If a transfer does not meet the
criteria for a sale, the transfer is accounted for as a secured borrowing with
pledge of collateral. This Statement is effective for transfer and servicing of
financial assets and extinguishments of liabilities occurring after December 31,
1996, and is to be applied prospectively. The effective date for certain
provisions of this Statement have been postponed for one year. Management
anticipates that the adoption of the Statement should have no material impact on
its consolidated financial statements.
- --------------------------------------------------------------------------------
Page 10
<PAGE>
Century Bancorp, Inc. and Subsidiary
Management's Discussion and Analysis (Continued)
================================================================================
FASB Statement on Reporting Comprehensive Income. In June 1997, the FASB issued
SFAS No. 130. This Statement establishes standards of reporting and display of
comprehensive income and its components in a full set of general-purpose
financial statements. In addition to net income as has been historically
determined, comprehensive income for the Company would include net unrealized
holding gains and losses on investment securities available for sale. This
Statement will be effective for the Company's fiscal year ending June 30, 1999,
and the Company does not intend an early adoption of this Statement. If the
Company had adopted this Statement, it would have reported comprehensive income
of $1,363,000 and $606,000 for the years ended June 30, 1997 and 1996,
respectively.
- --------------------------------------------------------------------------------
Page 11
<PAGE>
[LETTERHEAD OF DIXON, ODOM & CO., L.L.P. APPEARS HERE]
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders
Century Bancorp, Inc.
Thomasville, North Carolina
We have audited the accompanying consolidated statements of financial condition
of Century Bancorp, Inc. and subsidiary as of June 30, 1997 and 1996 and the
related consolidated statements of operations, stockholders' equity, and cash
flows for the years then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these 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 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 at June 30, 1997 and 1996, and the results of their
operations and their cash flows for the years then ended in conformity with
generally accepted accounting principles.
/s/ Dixon, Odom & Co., L.L.P.
Southern Pines, North Carolina
July 25, 1997
-----------
Page 12
<PAGE>
CENTURY BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
June 30, 1997 and 1996
================================================================================
<TABLE>
<CAPTION>
ASSETS 1997 1996
------------------- -------------------
<S> <C> <C>
Cash on hand and in banks $ 1,368,525 $ 1,342,518
Interest-bearing balances in other banks 2,787,870 3,644,859
Investment securities available for sale, at fair value (amortized cost of
$20,278,239 and $11,646,081 at June 30, 1997 and 1996,
respectively) (Note B) 20,744,701 11,707,105
Investment securities held to maturity, at amortized cost
(fair value of $11,101,018 and $6,839,969 at June 30, 1997 and 1996,
respectively) (Note B) 11,060,458 6,857,506
Loans receivable, net (Note C) 62,332,801 55,192,567
Accrued interest receivable 840,503 556,670
Premises and equipment, net (Note D) 709,121 748,165
Stock in the Federal Home Loan Bank of Atlanta, at cost 586,500 613,700
Foreclosed real estate 53,002 332,874
Other assets 156,341 308,118
------------------- -------------------
$ 100,639,822 $ 81,304,082
=================== ===================
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Deposit accounts (Note F) $ 69,698,673 $ 69,669,236
Accrued interest payable 107,687 116,236
Advance payment by borrowers for property taxes and insurance 125,863 105,870
Deferred income taxes (Note I) 128,242 -
Accrued expenses and other liabilities 276,590 167,494
------------------- -------------------
TOTAL LIABILITIES 70,337,055 70,058,836
------------------- -------------------
Commitments and contingencies (Notes C and K)
STOCKHOLDERS' EQUITY (Notes G and J)
Preferred stock, no par value, 5,000,000 shares authorized,
no shares issued and outstanding - -
Common stock, 20,000,000 shares authorized, 407,330 shares
issued and outstanding at June 30, 1997 19,467,082 -
ESOP note receivable (1,585,150) -
Retained earnings, substantially restricted 12,136,999 11,208,260
Unrealized holding gains 283,836 36,986
------------------- -------------------
TOTAL STOCKHOLDERS' EQUITY 30,302,767 11,245,246
------------------- -------------------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 100,639,822 $ 81,304,082
=================== ===================
</TABLE>
- --------------------------------------------------------------------------------
See accompanying notes. Page 13
<PAGE>
CENTURY BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended June 30, 1997 and 1996
================================================================================
<TABLE>
<CAPTION>
1997 1996
-------------- --------------
<S> <C> <C>
INTEREST INCOME
Loans $ 4,815,505 $ 4,584,446
Investments and deposits in other banks 1,847,447 1,284,181
-------------- --------------
TOTAL INTEREST INCOME 6,662,952 5,868,627
INTEREST EXPENSE ON DEPOSIT
ACCOUNTS (Note F) 3,512,248 3,540,406
-------------- --------------
NET INTEREST INCOME 3,150,704 2,328,221
PROVISION FOR LOAN LOSSES (Note C) 16,500 165,000
-------------- --------------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 3,134,204 2,163,221
-------------- --------------
OTHER INCOME (EXPENSES)
Service charges and other fees 34,284 29,846
Loss on sale of investments (15,358) -
Gain on sale of foreclosed real estate 12,061 -
Other 15,752 5,124
-------------- --------------
46,739 34,970
-------------- --------------
TOTAL INCOME 3,180,943 2,198,191
-------------- --------------
GENERAL AND ADMINISTRATIVE EXPENSES
Compensation and benefits 618,051 570,773
Occupancy 80,577 81,021
Data processing expenses 102,645 91,444
Federal deposit insurance premiums 66,093 149,485
FDIC special assessment (Note H) 408,521 -
Provision for loss on foreclosed real estate - 80,000
Other expenses 231,245 197,096
-------------- --------------
TOTAL GENERAL AND
ADMINISTRATIVE EXPENSES 1,507,132 1,169,819
-------------- --------------
INCOME BEFORE INCOME TAXES 1,673,811 1,028,372
INCOME TAXES (Note I) 557,700 351,600
-------------- --------------
NET INCOME $ 1,116,111 $ 676,772
============== ==============
NET INCOME PER COMMON SHARE (Note A) $ 2.47 $ -
============== ==============
</TABLE>
- --------------------------------------------------------------------------------
See accompanying notes. Page 14
<PAGE>
CENTURY BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years Ended June 30, 1997 and 1996
================================================================================
<TABLE>
<CAPTION>
ESOP Unrealized Total
Common Note Retained Holding Stockholders'
Stock Receivable Earnings Gains (Losses) Equity
------------- ------------- ------------ ------------- -------------
<S> <C> <C> <C> <C> <C>
Balance at June 30, 1995 $ - $ - $ 10,531,488 $ 108,432 $ 10,639,920
Net income - - 676,772 - 676,772
Change in unrealized holding gains
(losses), net of income tax benefit of
$45,903 - - - (71,446) (71,446)
------------- ------------ ------------- ------------- ------------
Balance at June 30, 1996 - - 11,208,260 36,986 11,245,246
Net income - - 1,116,111 - 1,116,111
Net proceeds from issuance of 407,330
shares of no par value common stock 19,453,837 - - - 19,453,837
Purchase of 32,586 shares of common
stock by ESOP - (1,629,300) - - (1,629,300)
ESOP contribution 13,245 - - - 13,245
Repayment of ESOP note - 44,150 - - 44,150
Cash dividends paid ($.50 per share) - - (187,372) - (187,372)
Change in unrealized holding gains
(losses), net of income taxes of
$158,588 - - - 246,850 246,850
------------- ------------- ------------ ------------- -------------
Balance at June 30, 1997 $ 19,467,082 $ (1,585,150) $ 12,136,999 $ 283,836 $ 30,302,767
============= ============ ============= ============= =============
</TABLE>
- --------------------------------------------------------------------------------
See accompanying notes. Page 15
<PAGE>
CENTURY BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended June 30, 1997 and 1996
================================================================================
<TABLE>
<CAPTION>
1997 1996
--------------- ----------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 1,116,111 $ 676,772
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation 46,313 44,429
Deferred income taxes 65,592 (73,167)
Deferred compensation 22,000 22,000
Amortization of discounts and premiums on securities 9,079 (5,414)
Provision for loan losses 16,500 165,000
Provision for loss on foreclosed real estate - 80,000
Release of ESOP shares 57,395 -
Loss on sale of investment securities 15,358 -
Gain on sale of real estate acquired in foreclosure (12,061) -
Gain on disposal of fixed assets - (5,000)
Change in assets and liabilities
Increase in accrued interest receivable (283,833) (47,692)
Increase (decrease) in accrued interest on savings accounts (8,549) 12,693
Other 102,486 (95,019)
---------------- ---------------
NET CASH PROVIDED BY
OPERATING ACTIVITIES 1,146,391 774,602
---------------- ---------------
CASH FLOWS FROM INVESTING ACTIVITIES
Net decrease in interest-bearing balances in other banks 856,989 796,502
Purchases of:
Available for sale investment securities (12,922,555) (6,142,789)
Held to maturity investment securities (6,000,000) (4,051,719)
Proceeds from maturities and calls of:
Available for sale investment securities 2,263,008 2,965,391
Held to maturity investment securities 1,800,000 2,350,000
Proceeds from sales of:
Available for sale investment securities 2,000,000 -
Net increase in loans (7,156,734) (1,738,848)
Purchases of property and equipment (7,269) (33,743)
Proceeds from sale of property and equipment - 5,000
Proceeds from redemption of FHLB stock 27,200 -
Proceeds from sale of real estate acquired in settlement of loans 291,933 59,297
---------------- ---------------
NET CASH USED BY
INVESTING ACTIVITIES (18,847,428) (5,790,909)
---------------- ---------------
</TABLE>
- --------------------------------------------------------------------------------
See accompanying notes. Page 16
<PAGE>
CENTURY BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended June 30, 1997 and 1996
================================================================================
<TABLE>
<CAPTION>
1997 1996
---------------- ---------------
<S> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in demand deposits $ 1,299,423 $ (281,884)
Net increase (decrease) in certificate accounts (1,269,986) 5,502,937
Increase in advances from borrowers 19,993 5,894
(Increase) decrease in stock conversion costs incurred 40,449 (40,449)
Net proceeds from issuance of common stock 19,453,837 -
Loan to ESOP for purchase of common stock (1,629,300) -
Cash dividends paid (187,372) -
---------------- ---------------
NET CASH PROVIDED BY
FINANCING ACTIVITIES 17,727,044 5,186,498
---------------- ---------------
NET INCREASE IN CASH
ON HAND AND IN BANKS 26,007 170,191
CASH ON HAND AND IN BANKS,
BEGINNING 1,342,518 1,172,327
---------------- ---------------
CASH ON HAND AND
IN BANKS, ENDING $ 1,368,525 $ 1,342,518
================ ===============
SUPPLEMENTAL DISCLOSURES OF CASH
FLOW INFORMATION
Cash paid during the year for:
Interest $ 3,520,797 $ 3,527,713
================ ===============
Income taxes $ 482,300 $ 417,900
================ ===============
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING
ACTIVITIES
Loans receivable transferred to real estate acquired in
settlement of loans $ - $ 401,169
================ ===============
Unrealized gain (loss) on investment securities available
for sale, net of deferred income tax benefit (charge) of
$(158,588) and $45,903, respectively $ 246,850 $ (71,446)
================ ===============
</TABLE>
- --------------------------------------------------------------------------------
See accompanying notes. Page 17
<PAGE>
CENTURY BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1997 and 1996
================================================================================
NOTE A - SIGNIFICANT ACCOUNTING POLICIES
Organization and Operations
- ---------------------------
In December 1996, pursuant to a Plan of Conversion which was approved by its
members and regulators, Home Savings, Inc., SSB ("Home Savings" or "Bank")
converted from a North Carolina-chartered mutual savings bank to a North
Carolina-chartered stock savings bank (the "Conversion") and became a wholly-
owned subsidiary of Century Bancorp, Inc. ("Century" or "Parent"). Century was
formed to acquire all of the common stock of Home Savings upon its conversion to
stock form. Century has no operations and conducts no business on its own other
than owning Home Savings, investing its portion of the net proceeds received in
the Conversion and lending funds to the Employee Stock Ownership Plan (the
"ESOP") which was formed in connection with the Conversion.
Nature of Business
- ------------------
Home Savings maintains its offices and conducts its primary business in
Thomasville, Davidson County, North Carolina. The Bank is primarily engaged in
the business of attracting deposits from the general public and using such
deposits to make mortgage loans secured by one-to-four family residential real
estate located in its primary market area. The Bank also makes home equity line
of credit loans, multi-family residential loans, commercial loans, construction
loans, loans secured by deposit accounts, and various types of consumer loans.
Home Savings is a portfolio lender in that it does not originate its fixed or
adjustable rate loans for sale in the secondary market. Home Savings has been
and intends to continue to be a community-oriented financial institution
offering a variety of financial services to meet the needs of the communities it
serves.
Basis of Presentation
- ---------------------
The accompanying consolidated financial statements include the accounts of the
Parent and the Bank, together referred to as the "Company." All significant
intercompany transactions and balances are eliminated in consolidation.
Use of Estimates
- ----------------
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Material estimates that are particularly sensitive to significant change relate
to the determination of the allowance for losses on loans and the valuation of
real estate acquired in connection with foreclosures or in satisfaction of
loans. In connection with the determination of the allowances for losses on
loans and foreclosed real estate, management obtains independent appraisals for
significant properties.
- --------------------------------------------------------------------------------
Page 18
<PAGE>
CENTURY BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1997 and 1996
================================================================================
NOTE A - SIGNIFICANT ACCOUNTING POLICIES (Continued)
Use of Estimates (Continued)
- ---------------------------
A majority of the Bank's loan portfolio consists of single-family residential
loans in its market area. The regional economy is currently stable and consists
of various types of industry. Real estate prices in this market are also
stable; however, the ultimate collectibility of a substantial portion of the
Bank's loan portfolio is susceptible to changes in local market conditions.
While management uses available information to recognize losses on loans and
foreclosed real estate, future additions to the allowances may be necessary
based on changes in local economic conditions. In addition, regulatory
agencies, as an integral part of their examination process, periodically review
the Bank's allowances for losses on loans and foreclosed real estate. Such
agencies may require the Bank to recognize additions to the allowances based on
their judgments about information available to them at the time of their
examination. Because of these factors, it is reasonably possible that the
allowances for losses on loans and foreclosed real estate may change materially
in the near term.
Investment Securities
- ---------------------
The Company classifies its securities in one of three categories: trading,
available for sale, or held to maturity. There were no trading securities at
June 30, 1997 or 1996. Securities held to maturity are those securities for
which the Bank has the ability and intent to hold to maturity. All other
securities are classified as available for sale.
Available for sale securities consist of investment securities not classified as
trading securities or held to maturity securities and are recorded at fair
value. Held to maturity securities are recorded at cost, adjusted for the
amortization or accretion of premiums or discounts. Unrealized holding gains
and losses, net of the related tax effect, on securities available for sale are
excluded from earnings and are reported as a separate component of stockholders'
equity until realized. Transfers of securities between categories are recorded
at fair value at the date of transfer. Unrealized holding gains or losses
associated with transfers of securities from held to maturity to available for
sale are recorded as a separate component of stockholders' equity.
A decline in the market value of any available for sale or held to maturity
investment below cost that is deemed other than temporary is charged to earnings
and establishes a new cost basis for the security.
Premiums and discounts are amortized or accreted over the life of the related
security as an adjustment to the yield. Realized gains and losses are included
in earnings and the costs of securities sold are derived using the specific
identification method.
- --------------------------------------------------------------------------------
Page 19
<PAGE>
CENTURY BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1997 and 1996
================================================================================
NOTE A - SIGNIFICANT ACCOUNTING POLICIES (Continued)
Loans Receivable
- ----------------
Loans receivable are stated at unpaid balances, less the allowance for loan
losses and net deferred loan fees.
Loan origination and commitment fees, as well as certain direct origination
costs, are deferred and amortized as a yield adjustment over the lives of the
related loans using the interest method. Amortization of deferred loan fees is
discontinued when a loan is placed on nonaccrual status.
Loans are placed on nonaccrual when a loan is specifically determined to be
impaired or when principal or interest is delinquent for 90 days or more.
Interest income generally is not recognized on specific impaired loans unless
the likelihood of further loss is remote. Interest payments received on such
loans are applied as a reduction of the loan principal balance. Interest income
on other nonaccrual loans is recognized only to the extent of interest payments
received.
The Bank accounts for impaired loans in accordance with Statement of Financial
Accounting Standards ("SFAS") No. 114, "Accounting by Creditors for Impairment
of a Loan," amended for SFAS No. 118, "Accounting by Creditors for Impairment of
a Loan - Income Recognition and Disclosure." A loan is impaired when, based on
current information and events, it is probable that all amounts due according to
the contractual terms of the loan agreement will not be collected. Impaired
loans are measured based on the present value of expected future cash flows,
discounted at the loan's effective interest rate or at the loan's observable
market price, or the fair value of the collateral of the loan if the loan is
collateral dependent. Interest income from impaired loans is recognized using
the cash basis method of accounting during the time within that period in which
the loans were impaired.
Allowance for Loan Losses
- -------------------------
The Bank provides for loan losses on the allowance method. Accordingly, all
loan losses are charged to the related allowance and all recoveries are credited
to it. Additions to the allowance for loan losses are provided by charges to
operations based on various factors which, in management's judgment, deserve
current recognition in estimating possible losses. Such factors considered by
management include the market value of the underlying collateral, growth and
composition of the loan portfolio, the relationship of the allowance for loan
losses to outstanding loans, delinquency trends, and economic conditions.
Management evaluates the carrying value of loans periodically and the allowance
is adjusted accordingly. While management uses the best information available
to make evaluations, future adjustments to the allowance may be necessary if
conditions differ substantially from the assumptions used in making the
evaluations.
In addition, various regulatory agencies, as an integral part of their
examination process, periodically review the Bank's allowance for loan losses.
Such agencies may require the Bank to recognize additions to the allowance based
on their judgments of information available to them at the time of their
examination.
- --------------------------------------------------------------------------------
Page 20
<PAGE>
CENTURY BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1997 and 1996
================================================================================
NOTE A - SIGNIFICANT ACCOUNTING POLICIES (Continued)
Premises and Equipment
- ----------------------
Bank premises and equipment are stated at cost less accumulated depreciation.
Depreciation of premises and equipment is recorded on a straight-line basis over
the estimated useful lives of the related assets.
Expenditures for maintenance and repairs are charged to expense as incurred,
while those for improvements are capitalized. The costs and accumulated
depreciation relating to premises and equipment retired or otherwise disposed of
are eliminated from the accounts, and any resulting gains or losses are credited
or charged to earnings.
Investment in Federal Home Loan Bank Stock
- ------------------------------------------
As a requirement for membership, the Bank invests in stock of the Federal Home
Loan Bank of Atlanta ("FHLB"). This investment is carried at cost.
Real Estate Acquired In Settlement of Loans
- -------------------------------------------
Real estate acquired in settlement of loans is carried at the lower of cost or
fair value less estimated costs to dispose. Generally accepted accounting
principles define fair value as the amount that is expected to be received in a
current sale between a willing buyer and seller other than in a forced or
liquidation sale. Fair values at foreclosure are based on appraisals. Losses
arising from the acquisition of foreclosed properties are charged against the
allowance for loan losses. Subsequent writedowns are provided by a charge to
operations through the allowance for losses on other real estate in the period
in which the need arises.
Income Taxes
- ------------
Deferred tax assets and liabilities are recorded for the future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases. Future tax
benefits are recognized to the extent that realization of such benefits is more
likely than not. Deferred tax assets and liabilities are measured using enacted
tax rates expected to apply to taxable income in the years in which the assets
and liabilities are expected to be recovered or settled. The effect on deferred
tax assets and liabilities of a change in tax rates is recognized in income tax
expense in the period that includes the enactment date.
In the event the future tax consequences of differences between the financial
reporting bases and the tax bases of the Company's assets and liabilities result
in deferred tax assets, applicable accounting standards require an evaluation of
the probability of being able to realize the future benefits indicated by such
assets. A valuation allowance is provided when it is more likely than not that
some portion or all of the deferred tax assets will not be realized. In
assessing the realizability of the deferred tax assets, management considers the
scheduled reversals of deferred tax liabilities, projected future taxable
income, and tax planning strategies.
- --------------------------------------------------------------------------------
Page 21
<PAGE>
CENTURY BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1997 and 1996
================================================================================
NOTE A - SIGNIFICANT ACCOUNTING POLICIES (Continued)
Income Taxes (Continued)
- -----------------------
A deferred tax liability is not recognized for portions of the allowance for
loan losses for income tax purposes in excess of the financial statement
balance, as described in Note I. Such a deferred tax liability will only be
recognized when it becomes apparent that those temporary differences will
reverse in the foreseeable future.
Benefit Plans
- -------------
The Bank has an ESOP which covers substantially all of its employees. Minimum
contributions to the ESOP are based upon the amortization requirements of the
ESOP's debt to the Parent. Contributions are determined by the Board of
Directors based upon compensation limitations, and are expensed in accordance
with the AICPA's Statement of Position 93-6, "Employers' Accounting for Employee
Stock Ownership Plans." The Bank also has a defined benefit pension plan
covering substantially all of its employees. The Bank's funding policy has been
to make annual contributions as required by applicable regulations. As a result
of adoption of the ESOP, the Company's Board of Directors has decided to
terminate the pension plan.
Net Income Per Common Share
- ---------------------------
Net income per common share for the year ended June 30, 1997 is based on
unaudited net income earned from the date of Conversion, December 20, 1996, to
the end of the fiscal year, divided by the weighted average number of shares
outstanding during that period. For purposes of this computation, the number of
shares of common stock purchased by the Bank's ESOP which have not been
allocated to participant accounts are not assumed to be outstanding.
Recent Accounting Pronouncements
- --------------------------------
FASB Statement on Earnings Per Share. In March 1997, the Financial Accounting
Standards Board ("FASB") issued Statement of Financial Accounting Standards
("SFAS") No. 128. The Statement establishes standards for computing and
presenting earnings per share and applies to entities with publicly held common
stock or potential common stock. This Statement simplifies the standards for
computing earnings per share previously found in Accounting Principles Board
("APB") Opinion No. 15, "Earnings per Share" ("EPS"), and makes them comparable
to international EPS standards. It replaces the presentation of primary EPS
with the presentation of basic EPS. It also requires dual presentation of basic
and diluted EPS on the face of the income statement for all entities with
complex capital structures and requires a reconciliation of the numerator and
the denominator of the basic EPS computation to the numerator and denominator of
the diluted EPS computation. Basic EPS excludes dilution and is computed by
dividing income available to common stockholders by the weighted-average number
of common shares outstanding for the period. Diluted EPS reflects the potential
dilution that could occur if securities or other contracts to issue common stock
were exercised or converted into common stock or resulted in the issuance of
common stock that then shared in the earnings of the entity. Diluted EPS is
computed similarly to fully diluted EPS pursuant to APB Opinion No. 15. This
- --------------------------------------------------------------------------------
Page 22
<PAGE>
CENTURY BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1997 and 1996
================================================================================
NOTE A - SIGNIFICANT ACCOUNTING POLICIES (Continued)
Recent Accounting Pronouncements (Continued)
- -------------------------------------------
Statement supersedes Opinion 15 and AICPA Accounting Interpretation 1-102 of
Opinion 15. This Statement will be effective for the Company's fiscal year
ending June 30, 1998. Management does not believe the impact of adopting SFAS
No. 128 will be material to the Company's consolidated financial statements.
FASB Statement on Accounting for Stock-Based Compensation. In October 1995, the
FASB issued SFAS No. 123. SFAS No. 123 defines a "fair value based method" of
accounting for an employee stock option whereby compensation cost is measured at
the grant date based on the value of the award and is recognized over the
service period. FASB has encouraged all entities to adopt the fair value based
method; however, it will allow entities to continue the use of the "intrinsic
value based method" prescribed by APB Opinion No. 25. Under the intrinsic value
based method, compensation cost is the excess of the market price of the stock
at the grant date over the amount an employee must pay to acquire the stock.
However, most stock option plans have no intrinsic value at the grant date and,
as such, no compensation cost is recognized under APB Opinion No. 25. Entities
electing to continue use of the accounting treatment of APB Opinion No. 25 must
make certain pro forma disclosures as if the fair value based method had been
applied. The accounting requirements of SFAS No. 123 are effective for
transactions entered into in fiscal years beginning after December 15, 1995.
Pro forma disclosures must include the effects of all awards granted in fiscal
years beginning after December 15, 1994. The Company expects to use the
"intrinsic value based method" as prescribed by APB Opinion No. 25.
Accordingly, management does not believe the impact of adopting SFAS No. 123
will be material to the Company's consolidated financial statements.
FASB Statement on Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities. In June 1996, the FASB issued SFAS No. 125.
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. If a transfer does not meet the
criteria for a sale, the transfer is accounted for as a secured borrowing with
pledge of collateral. This Statement is effective for transfer and servicing of
financial assets and extinguishments of liabilities occurring after December 31,
1996, and is to be applied prospectively. The effective date for certain
provisions of this Statement have been postponed for one year. Management
anticipates that the adoption of the Statement should have no material impact on
its consolidated financial statements.
- --------------------------------------------------------------------------------
Page 23
<PAGE>
CENTURY BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1997 and 1996
================================================================================
NOTE A - SIGNIFICANT ACCOUNTING POLICIES (Continued)
Recent Accounting Pronouncements (Continued)
- --------------------------------------------
FASB Statement on Reporting Comprehensive Income. In June 1997, the FASB issued
SFAS No. 130. This Statement establishes standards of reporting and display of
comprehensive income and its components in a full set of general-purpose
financial statements. In addition to net income as has been historically
determined, comprehensive income for the Company would include net unrealized
holding gains and losses on investment securities available for sale. This
Statement will be effective for the Company's fiscal year ending June 30, 1999,
and the Company does not intend to early adopt. Had the Company early-adopted
this Statement, it would have reported comprehensive income of $1,363,000 and
$606,000 for the years ended June 30, 1997 and 1996, respectively.
NOTE B - INVESTMENT SECURITIES
The following is a summary of the securities portfolios by major classification:
<TABLE>
<CAPTION>
June 30, 1997
----------------------------------------------------------------------
Gross Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Securities available-for-sale:
U. S. government securities and obligations
of U. S. government agencies $ 14,852,472 $ 11,638 $ - $ 14,864,110
Mortgage-backed securities 4,542,979 - 47,403 4,495,576
Municipal bonds 868,336 79 - 868,415
Equity securities 14,452 502,148 - 516,600
-------------- -------------- -------------- --------------
$ 20,278,239 $ 513,865 $ 47,403 $ 20,744,701
============== ============== ============== ==============
Securities held-to-maturity:
U. S. government securities and obligations
of U. S. government agencies $ 10,676,038 $ 2,806 $ - $ 10,678,844
Municipal bonds 384,420 37,754 - 422,174
-------------- -------------- -------------- --------------
$ 11,060,458 $ 40,560 $ - $ 11,101,018
============== ============== ============== ==============
</TABLE>
- --------------------------------------------------------------------------------
Page 24
<PAGE>
CENTURY BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1997 and 1996
================================================================================
NOTE B - INVESTMENT SECURITIES (Continued)
<TABLE>
<CAPTION>
June 30, 1996
----------------------------------------------------------------------
Gross Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Securities available-for-sale:
U. S. government securities and obligations
of U. S. government agencies $ 7,029,658 $ - $ 42,118 $ 6,987,540
Mortgage-backed securities 3,977,141 - 176,448 3,800,693
Municipal bonds 624,830 - 21,453 603,377
Equity securities 14,452 301,043 - 315,495
-------------- -------------- -------------- --------------
$ 11,646,081 $ 301,043 $ 240,019 $ 11,707,105
============== ============== ============== ==============
Securities held-to-maturity:
U. S. government securities and obligations
of U. S. government agencies $ 6,476,811 $ 1,949 $ 40,930 $ 6,437,830
Municipal bonds 380,695 21,444 - 402,139
-------------- -------------- -------------- --------------
$ 6,857,506 $ 23,393 $ 40,930 $ 6,839,969
============== ============== ============== ==============
</TABLE>
The amortized cost and fair values of securities at June 30, 1997 by contractual
maturity are shown below. Expected maturities will differ from contractual
maturities because borrowers may have the right to call or prepay obligations
with or without call or prepayment penalties.
<TABLE>
<CAPTION>
Securities Available for Sale Securities Held to Maturity
-------------------------------- --------------------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Due within one year $ 9,824,971 $ 9,820,955 $ 1,202,117 $ 1,208,121
Due after one year through five years 4,860,657 4,869,539 8,473,922 8,468,144
Due after five years through ten years 4,200,008 4,168,827 1,000,000 1,002,580
Due after ten years 1,392,603 1,885,380 384,419 422,173
-------------- -------------- -------------- --------------
$ 20,278,239 $ 20,744,701 $ 11,060,458 $ 11,101,018
============== ============== ============== ==============
</TABLE>
Proceeds from sales and maturities of investment securities available for sale
during the year ended June 30, 1997 were $4,263,008. Gross losses of $15,358
were realized on those sales.
Proceeds from maturities of investment securities available for sale during the
year ended June 30, 1996 were $2,965,391.
Proceeds from maturities of investment securities held to maturity during the
years ended June 30, 1997 and 1996 were $1,800,000 and $2,350,000, respectively.
- --------------------------------------------------------------------------------
Page 25
<PAGE>
CENTURY BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1997 and 1996
================================================================================
NOTE B - INVESTMENT SECURITIES (Continued)
Securities with a carrying value of $3,015,322 and $2,784,715 and a fair value
of $3,022,735 and $2,785,410 at June 30, 1997 and 1996, respectively, were
pledged to secure public monies on deposit as required by law.
The following table sets forth certain information regarding the carrying value,
weighted average yields and contractual maturities of the Company's investment
portfolio at June 30, 1997:
<TABLE>
<CAPTION>
Carrying Value
---------------------------------------------------------------------------
After One After Five
One Year Year Through Years Through After
or Less Five Years Ten Years Ten Years Total
---------- ----------- ------------ ----------- -----------
(In Thousands)
<S> <C> <C> <C> <C> <C>
Securities available for sale
U. S. government and agency securities $ 9,821 $ 4,043 $ 1,000 $ - $ 14,864
Mortgage-backed securities - 208 3,169 1,119 4,496
Municipal bonds - 618 - 250 868
FHLMC stock - - - 517 517
Securities held to maturity:
U. S. government and agency securities 1,202 8,474 1,000 - 10,676
Municipal bonds - - - 384 384
Other investments:
Interest-earning balances in other banks 2,788 - - - 2,788
Federal Home Loan Bank stock - - - 587 587
----------- ----------- ------------ ----------- -----------
$ 13,811 $ 13,343 $ 5,169 $ 2,857 $ 35,180
=========== =========== ============ =========== ===========
<CAPTION>
Average Yield
----------------------------------------------------------------------------
After One After Five
One Year Year Through Years Through After
or Less Five Years Ten Years Ten Years Total
----------- ----------- ------------ ----------- -----------
<S> <C> <C> <C> <C> <C>
Securities available for sale
U. S. government and agency securities 5.49% 6.04% 5.60% -% 5.65%
Mortgage-backed securities -% 6.55% 6.75% 6.86% 6.76%
Municipal bonds -% 4.25% -% 5.22% 4.53%
FHLMC stock -% -% -% 1.04% 1.04%
Securities held to maturity:
U. S. government and agency securities 6.53% 6.66% 6.88% -% 6.67%
Municipal bonds -% -% -% 6.20% 6.20%
Other investments:
Interest-earning balances in other banks 4.99% -% -% -% 4.99%
Federal Home Loan Bank stock -% -% -% 7.25% 7.25%
-------- -------- --------- -------- --------
5.48% 6.36% 6.55% 5.65% 5.99%
======== ======== ========= ======== ========
</TABLE>
- --------------------------------------------------------------------------------
Page 26
<PAGE>
CENTURY BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1997 and 1996
================================================================================
NOTE C - LOANS RECEIVABLE
Loans receivable consist of the following:
<TABLE>
<CAPTION>
1997 1996
------------------------------- -----------------------------
Percentage Percentage
Amount of Total Amount of Total
-------------- ------------ ------------- ----------
<S> <C> <C> <C> <C>
Type of loan:
Real estate loans:
One-to-four family residential $ 49,415,155 79.28% $ 43,573,972 75.91%
Multi-family residential and
commercial 9,479,925 15.21 9,012,000 18.58
Construction 4,209,050 6.75 3,595,650 5.76
Home equity lines of credit 1,202,807 1.93 1,021,508 2.10
-------------- -------- ------------- --------
Total real estate loans 64,306,937 103.17 57,203,130 102.35
-------------- -------- ------------- --------
Other loans:
Consumer loans 1,115,449 1.79 322,204 .62
Loans secured by deposits 171,077 .27 226,796 .47
-------------- -------- ------------- --------
Total other loans 1,286,526 2.06 549,000 1.09
-------------- -------- ------------- --------
Total loans 65,593,463 105.23 57,752,130 103.44
Less:
Construction loans in process 2,382,580 3.82 1,764,112 2.25
Net deferred loan fees 328,084 .53 262,548 .45
Allowance for loan losses 549,998 .88 532,903 .74
-------------- -------- ------------- --------
$ 62,332,801 100.00% $ 55,192,567 100.00%
============== ======== ============= ========
The allowance for loan losses is summarized as follows:
<CAPTION>
1997 1996
---------------- ----------------
<S> <C> <C>
Balance at beginning of year $ 532,903 $ 401,047
---------------- ----------------
Loans charged off:
Real estate - (32,370)
Other (1,023) (2,204)
---------------- ----------------
Total loans charged off (1,023) (34,574)
---------------- ----------------
Recoveries:
Real estate - -
Other 1,618 1,430
---------------- ----------------
Total recoveries 1,618 1,430
---------------- ----------------
Provision for loan losses 16,500 165,000
---------------- ----------------
Balance at end of year $ 549,998 $ 532,903
================ ================
Ratio of net charge-offs to average loans outstanding -% .06%
========= ========
</TABLE>
- --------------------------------------------------------------------------------
Page 27
<PAGE>
CENTURY BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1997 and 1996
================================================================================
NOTE C - LOANS RECEIVABLE (Continued)
The allocation of the allowance for loan losses applicable to each category of
loans at June 30, 1997 and 1996 is as follows:
<TABLE>
<CAPTION>
1997 1996
------------------------------------- -----------------------------------
Percent of Percent Percent of Percent
Allowance of Loans Allowance of Loans
Amount of to Total to Total Amount of to Total to Total
Allowance Allowance Loans Allowance Allowance Loans
----------- ---------- --------- ----------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
Real estate loans:
One-to-four family residential $ 206,000 37.46% 75.34% $ 225,000 42.22% 75.45%
Multi-family residential and commercial 119,000 21.64 14.45 110,000 20.64 15.60
Construction 18,000 3.27 6.42 17,000 3.19 6.23
Home equity lines of credit 12,000 2.18 1.83 10,000 1.88 1.77
Other loans:
Consumer loans 33,000 6.00 1.70 11,000 2.06 .56
Loans secured by deposits - - .26 - - .39
Unallocated 161,998 29.45 - 159,903 30.01 -
----------- --------- --------- ----------- --------- ---------
$ 549,998 100.00% 100.00% $ 532,903 100.00% 100.00%
=========== ========= ========= =========== ========= =========
</TABLE>
Nonaccrual loans, which consisted of loans on which principal or interest were
delinquent for 90 days or more, totaled approximately $77,000 and $285,000 at
June 30, 1997 and 1996, respectively. Such loans had the effect of reducing
interest income by approximately $4,000 and $11,000 during the years ended June
30, 1997 and 1996, respectively.
At June 30, 1997, the Bank had mortgage loan commitments outstanding of $702,000
and pre-approved but unused lines of credit totaling $699,146. In management's
opinion, these commitments, and undisbursed proceeds on construction loans in
process reflected above, represent no more than normal lending risk to the Bank
and will be funded from normal sources of liquidity.
The Bank has had loan transactions with its directors and executive officers.
Such loans were made in the ordinary course of business and also on
substantially the same terms and collateral as those comparable transactions
prevailing at the time and did not involve more than the normal risk of
collectibility or present other unfavorable features. A summary of related party
loan transactions is as follows:
<TABLE>
<CAPTION>
1997 1996
-------------- ---------------
<S> <C> <C>
Balance at beginning of year $ 415,257 $ 415,028
Additional borrowings - 183,000
Loan repayments (13,501) (182,771)
-------------- ---------------
Balance at end of year $ 401,756 $ 415,257
============== ===============
</TABLE>
- --------------------------------------------------------------------------------
Page 28
<PAGE>
CENTURY BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1997 and 1996
================================================================================
NOTE D - PREMISES AND EQUIPMENT
Premises and equipment consist of the following:
<TABLE>
<CAPTION>
1997 1996
-------------- --------------
<S> <C> <C>
Land $ 61,203 $ 61,203
Building and improvements 735,416 735,416
Office furniture, fixtures and equipment 223,862 216,593
Automotive equipment 29,772 29,772
-------------- --------------
1,050,253 1,042,984
Accumulated depreciation (341,132) (294,819)
-------------- --------------
$ 709,121 $ 748,165
============== ==============
</TABLE>
NOTE E - FEDERAL INSURANCE OF DEPOSITS
Eligible deposit accounts are insured up to $100,000 by the Federal Deposit
Insurance Corporation.
NOTE F - DEPOSIT ACCOUNTS
A comparative summary of deposit accounts at June 30, 1997 and 1996 follows:
<TABLE>
<CAPTION>
1997 1996
------------------------------- -------------------------------
Weighted Weighted
Balance Avg. Rate Balance Avg. Rate
--------------- --------- -------------- ----------
<S> <C> <C> <C> <C>
Demand deposits:
Negotiable orders of withdrawal $ 3,477,858 2.75% $ 2,718,489 2.75%
Passbook and statement accounts 5,410,379 3.00 4,983,937 3.00
Money market checking 10,007,355 4.16 9,829,868 4.05
Non-interest-bearing checking 52,211 - 116,085 -
--------------- --------------
18,947,803 3.56 17,648,379 3.53
Certificates of deposit 50,750,870 5.58 52,020,857 5.61
--------------- --------------
Total deposit accounts $ 69,698,673 5.03% $ 69,669,236 5.09%
=============== ==============
</TABLE>
- --------------------------------------------------------------------------------
Page 29
<PAGE>
CENTURY BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1997 and 1996
================================================================================
NOTE F - DEPOSIT ACCOUNTS (Continued)
A summary of certificate accounts by maturity as of June 30, 1997 follows:
<TABLE>
<CAPTION>
Less than $100,000
$100,000 or More Total
---------------- --------------- ------------
(In Thousands)
<S> <C> <C> <C>
Three months or less $ 9,000 $ 2,480 $ 11,480
Over three months through six months 6,767 4,652 11,419
Over six months through twelve months 10,991 6,095 17,086
Over twelve months through twenty-four months 7,444 2,186 9,630
Over twenty-four months 906 230 1,136
-------------- --------------- --------------
$ 35,108 $ 15,643 $ 50,751
============== =============== ==============
<CAPTION>
Interest expense on deposits for the years ended June 30 is summarized as
follows:
1997 1996
-------------- --------------
<S> <C> <C>
Passbook and statement accounts $ 182,892 $ 155,335
NOW accounts 62,902 49,077
Money market accounts 436,637 414,404
Certificates of deposit 2,837,261 2,927,930
-------------- ---------------
3,519,692 3,546,746
Penalties for early withdrawal 7,444 6,340
-------------- ---------------
$ 3,512,248 $ 3,540,406
============== ===============
</TABLE>
NOTE G - EMPLOYEE AND DIRECTOR BENEFIT PLANS
Defined Benefit Plan
- --------------------
The Bank established a pension plan for the benefit of its employees on March 1,
1973. The pension plan covered all full-time employees who had completed five
months continuous service with the Bank. The plan was funded by the purchase of
level premium insurance policies and an annual contribution to an auxiliary
fund.
- --------------------------------------------------------------------------------
Page 30
<PAGE>
CENTURY BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1997 and 1996
================================================================================
NOTE G - EMPLOYEE AND DIRECTOR BENEFIT PLANS (Continued)
Defined Benefit Plan
- --------------------
The following is a summary of the plan's funded status as of June 30, 1997 and
1996:
<TABLE>
1997 1996
-------------- ---------------
<S> <C> <C>
Actuarial present value of benefit obligations:
Vested benefits $ 369,644 $ 310,252
============== ===============
Accumulated benefits $ 369,644 $ 310,877
============== ===============
Projected benefits $ 369,644 $ 603,526
Plan assets, at fair value 390,956 360,060
-------------- ---------------
Plan assets in excess (deficit) of projected benefit obligation 21,312 (243,466)
Unrecognized transition account - 183,214
Unrecognized prior service cost - 75,590
Unrecognized net loss - 43,928
-------------- ---------------
Net pension asset $ 21,312 $ 59,266
============== ===============
<CAPTION>
Assumptions used in determining the funded status of the pension plan are as
follows for June 30, 1997 and 1996:
1997 1996
-------------- ---------------
<S> <C> <C>
Discount rate 7.0% 7.0%
Rates of increase in compensation levels 6.0% 6.0%
Expected long-term rate of return on plan assets 7.0% 7.0%
<CAPTION>
Net pension cost includes the following components:
1997 1996
-------------- ---------------
<C> <C> <C>
Service cost $ 28,101 $ 33,149
Interest cost on projected benefit obligation 40,040 37,072
Actual return on assets (35,757) (51,833)
Other - net 21,587 44,248
-------------- ---------------
Net periodic pension cost $ 53,971 $ 62,636
============== ===============
</TABLE>
The Bank's Board of Directors has decided to terminate the pension plan.
- --------------------------------------------------------------------------------
Page 31
<PAGE>
CENTURY BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1997 and 1996
================================================================================
NOTE G - EMPLOYEE AND DIRECTOR BENEFIT PLANS (Continued)
Employee Stock Ownership Plan
- -----------------------------
The Bank has established an ESOP to benefit all qualified employees. The ESOP
purchased 32,586 shares of common stock in the Conversion with proceeds received
from a loan of $1,629,300 from the Parent. The loan is to be repaid over fifteen
years in quarterly installments of principal and interest. Interest is based
upon the prime rate, and will be adjusted annually. Dividends, if any, paid on
shares held by the ESOP may also be used to reduce the loan. Dividends used to
repay the loan are not reported as dividends in the financial statements. The
loan may be prepaid without penalty. The unallocated shares of stock held by the
ESOP are pledged as collateral for the loan. The ESOP is funded by contributions
made by the Bank in amounts sufficient to retire the debt. At June 30, 1997, the
outstanding balance of the loan is $1,585,150, and is presented as a reduction
of stockholders' equity.
Shares released as the debt is repaid and earnings from the common stock held by
the ESOP are allocated among active participants on the basis of compensation in
the year of allocation. Benefits become 100% vested after five years of credited
service. Forfeitures of nonvested benefits will be reallocated among remaining
participating employees in the same proportion as contributions.
Expense of $57,395 has been incurred during the year ended June 30, 1997 in
connection with the ESOP. The expense includes, in addition to the cash
contribution necessary to fund the ESOP, $13,245, which represents the
difference between the fair market value of the shares which have been released
or committed to be released to participants, and the cost of these shares to the
ESOP. The Bank has credited this amount to common stock and charged this amount
to compensation expense in accordance with the provisions of AICPA Statement of
Position 93-6.
At June 30, 1997, 883 shares held by the ESOP have been released or committed to
be released to the plan's participants for purposes of computing earnings per
share. The fair value of the unallocated shares amounted to approximately $2.2
million at June 30, 1997.
Executive's Deferred Compensation Plan
- --------------------------------------
The Bank has a deferred compensation plan for its chief executive officer under
which he will be paid specified amounts during the fifteen-year period following
retirement at age 65, or upon death or permanent disability. The Bank has made
current provision for future payments under this plan, and the related liability
and deferred income tax benefits are included in the accompanying financial
statements. The Bank has purchased life insurance policies with the Bank named
as beneficiary to fund the benefits. Expenses associated with this plan were
$22,000 for each of the years ended June 30, 1997 and 1996.
- --------------------------------------------------------------------------------
Page 32
<PAGE>
CENTURY BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1997 and 1996
================================================================================
NOTE G - EMPLOYEE AND DIRECTOR BENEFIT PLANS (Continued)
Employment Agreement
- --------------------
The Bank has entered into an employment agreement with its chief executive
officer to ensure a stable and competent management base. The agreement provides
for a three-year term, but upon each anniversary, the agreement may be extended
for an additional year so that the remaining term shall always be three years.
The agreement provides for benefits as spelled out in the contract and cannot be
terminated by the Board of Directors, except for cause, without prejudicing the
officer's right to receive certain vested rights, including compensation, for
the remaining term of the agreement. In the event of a change in control of the
Bank, as defined in the agreement, the agreement will automatically be extended
for three years from the date of such change in control and the acquirer will be
bound to the terms of the contract for that period.
Termination Agreements
- ----------------------
The Bank has entered into special termination agreements with two key employees
which provide for severance pay benefits in the event of a change in control of
the Bank which results in the termination of such employee or diminished
compensation, duties or benefits within two years of a change in control. The
employees covered under this agreement are entitled to a cash payment equal to
two times their annual compensation for income tax purposes for the most recent
tax year prior to the change in control. The agreement is initially effective
for a three-year period and may be extended annually for an additional year.
Severance Plan
- --------------
The Bank has also adopted a severance plan for the benefit of its employees in
the event of a change in control of the Bank which provides for varying
severance benefits for employees based on their salaries and length of service
with the Bank.
Proposed Management Recognition and Stock Option Plans
- ------------------------------------------------------
The Company's stockholders will be asked to consider at a future stockholders'
meeting approval of a management recognition plan. Such a plan is designed to
provide the directors, officers and certain employees of the Bank with an
ownership interest in the Company to encourage their continued service to the
Bank. Up to 16,293 shares of the Company's stock would be awarded under the
plan. The stockholders will also be asked to approve certain stock option plans
for directors, officers and employees of the Bank. The plans may provide for the
issuance of incentive or non-incentive options. As many as 32,586 shares are
expected to be reserved for future issuance under the stock option plans. The
Company may elect to fund any approved plans through the issuance of authorized
but unissued shares, or may elect to purchase the shares to fund the plans in
the open market.
- --------------------------------------------------------------------------------
Page 33
<PAGE>
CENTURY BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1997 and 1996
================================================================================
NOTE H - SPECIAL SAIF ASSESSMENT
On September 30, 1996, the Deposit Insurance Funds Act of 1996 was signed into
law. The legislation included a special assessment to recapitalize the SAIF
insurance fund up to its statutory goal of 1.25% of insured deposits. The
assessment required the Bank to pay an amount equal to 65.7 basis points of its
SAIF-assessable deposit base as of March 31, 1995, which resulted in a charge to
income during the year ended June 30, 1997 of $408,521.
NOTE I - INCOME TAXES
The components of income tax expense are as follows for the years ended June 30,
1997 and 1996:
<TABLE>
1997 1996
-------------- ---------------
<S> <C> <C>
Current tax expense $ 492,108 $ 424,767
Net deferred tax expense (benefit) included in operations 65,592 (73,167)
-------------- ---------------
$ 557,700 $ 351,600
============== ===============
<CAPTION>
The differences between the provision for income taxes and the amount computed
by applying the statutory federal income tax rate of 34% to income before income
taxes were as follows for the years ended June 30, 1997 and 1996:
1997 1996
-------------- ---------------
<S> <C> <C>
Income tax at federal statutory rate $ 569,100 $ 349,600
State income tax, net of federal tax benefit 7,300 2,000
Other (18,700) -
-------------- ---------------
$ 557,700 $ 351,600
============== ===============
</TABLE>
- --------------------------------------------------------------------------------
Page 34
<PAGE>
CENTURY BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1997 and 1996
================================================================================
NOTE I - INCOME TAXES (Continued)
Deferred tax assets and liabilities arising from temporary differences at June
30, 1997 and 1996 are summarized as follows:
<TABLE>
1997 1996
-------------- ---------------
<S> <C> <C>
Deferred tax assets relating to:
Loan fees and costs $ 2,922 $ 43,840
Deferred compensation 73,927 65,322
Bad debt reserves 124,898 159,361
-------------- ---------------
Gross deferred tax assets 201,747 268,523
Valuation allowance - -
-------------- ---------------
Net deferred tax assets 201,747 268,523
-------------- ---------------
Deferred tax liabilities relating to:
Property and equipment (42,531) (43,715)
FHLB stock dividends (104,832) (104,832)
Net unrealized gain on securities available for sale (182,626) (24,038)
-------------- ---------------
Total deferred tax liabilities (329,989) (172,585)
-------------- ---------------
Net deferred tax asset (liability) $ (128,242) $ 95,938
============== ===============
</TABLE>
Retained earnings at June 30, 1997 includes approximately $1,534,000 for which
no deferred income tax liability has been recognized. This amount represents an
allocation of income to bad debt deductions for income tax purposes only.
Reductions of the amount so allocated for purposes other than tax bad debt
losses or adjustments arising from carryback of net operating losses would
create income for tax purposes only, which would be subject to the then current
corporate income tax rate.
During 1996, Congress enacted certain tax legislation that exempted thrift
institutions from being taxed on these pre-1987 bad debt reserves. Further, the
use of the reserve method is now required for all thrifts. The Bank will be
recapturing $264,000 of its tax bad debt reserve created subsequent to 1986 by
using the percentage of taxable income method, requiring payment of additional
income taxes of approximately $100,000. Deferred income taxes have been
previously established for the taxes arising from the reserve recapture, and
thus the ultimate payment of the taxes will not result in a charge to earnings.
Capital Requirements
- --------------------
The Parent is regulated by the Board of Governors of the Federal Reserve System
and is subject to securities registration and public reporting regulations of
the Securities and Exchange Commission. The Bank is regulated by the Federal
Deposit Insurance Corporation ("FDIC") and the Administrator, Savings
Institutions Division, North Carolina Department of Commerce (the
"Administrator").
- --------------------------------------------------------------------------------
Page 35
<PAGE>
CENTURY BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1997 and 1996
================================================================================
NOTE J - REGULATORY RESTRICTIONS
Capital Requirements (Continued)
- -------------------------------
The Bank is subject to the capital requirements of the FDIC and the
Administrator. The FDIC requires the Bank to maintain minimum ratios of Tier 1
capital to risk-weighted assets and total capital to risk-weighted assets of 4%
and 8%, respectively. Tier 1 capital consists of total shareholders' equity
calculated in accordance with generally accepted accounting principles less
intangible assets, and total capital is comprised of Tier 1 capital plus certain
adjustments, the only one of which applies to the Bank is the allowance for
possible loan losses. Risk-weighted assets refer to the on- and off-balance
sheet exposures of the Bank adjusted for their relative risk levels using
formulas set forth in FDIC regulations. The Bank is also subject to an FDIC
leverage capital requirement, which calls for a minimum ratio of Tier 1 capital
(as defined above) to quarterly average total assets of 3% to 5%, depending on
the institution's composite ratings as determined by its regulators. The
Administrator requires a net worth equal to at least 5% of total assets.
At June 30, 1997, the Bank was in compliance with all of the aforementioned
capital requirements as shown below:
<TABLE>
<CAPTION>
Leverage Tier I Risk-
Ratio of Adjusted Risk-Based N. C. Savings
Tier I Capital Capital Capital Bank Capital
-------------- ----------- ----------- ---------------
<S> <C> <C> <C> <C>
Consolidated stockholders' equity $ 30,302,767 $ 30,302,767 $ 30,302,767 $ 30,302,767
Separate equity of Century Bancorp, Inc. (11,027,878) (11,027,878) (11,027,878) (11,027,878)
Unrealized gain on securities (283,836) (283,836) (283,836) (283,836)
Loan loss allowance - - 549,998 549,998
--------------- --------------- --------------- ---------------
Regulatory capital 18,991,053 18,991,053 19,541,051 19,541,051
Minimum capital requirement 2,802,000 1,842,000 3,684,000 4,584,000
--------------- --------------- --------------- ---------------
Excess regulatory capital $ 16,189,053 $ 17,149,053 $ 15,857,051 $ 14,957,051
=============== =============== =============== ===============
</TABLE>
Liquidation Account
- -------------------
At the time of Conversion, the Bank established a liquidation account in an
amount equal to its net worth at June 30, 1996. The liquidation account will be
maintained for the benefit of eligible deposit account holders who continue to
maintain their deposit accounts in the Bank after Conversion. Only in the event
of a complete liquidation will each eligible deposit account holder be entitled
to receive a liquidation distribution from the liquidation account in the amount
of the then current adjusted subaccount balance for deposit accounts then held
before any liquidation distribution may be made from the Bank to Century.
Dividends cannot be paid from this liquidation account.
- --------------------------------------------------------------------------------
Page 36
<PAGE>
CENTURY BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1997 and 1996
================================================================================
NOTE J - REGULATORY RESTRICTIONS (Continued)
Dividends
- ---------
Subject to applicable law, the Boards of Directors of the Bank and the Parent
may each provide for the payment of dividends. Future declarations of cash
dividends, if any, by the Parent may depend upon dividend payments by the Bank
to the parent. Subject to regulations of the Administrator, the Bank may not
declare or pay a cash dividend on or repurchase any of its common stock if its
stockholders' equity would thereby be reduced below either the aggregate amount
then required for the liquidation account or the minimum regulatory capital
requirements imposed by federal and state regulations. In addition, for a period
of five years after the Conversion, the Bank will be required, under existing
North Carolina regulations, to obtain prior written approval of the
Administrator before it can declare and pay a cash dividend on its capital stock
in an amount in excess of one-half of the greater of (i) its net income for the
most recent fiscal year, or (ii) the average of its net income after dividends
for the most recent fiscal year and not more than two of the immediately
preceding fiscal years, if applicable.
NOTE K - CONCENTRATION OF CREDIT RISK AND OFF-BALANCE SHEET RISK
The Bank generally originates single-family residential loans within its primary
lending area of Davidson County. The Bank's underwriting policies require such
loans to be made at no greater than 80% loan-to-value based upon appraised
values unless private mortgage insurance is obtained. These loans are secured by
the underlying properties.
The Bank is a 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 include commitments to fund loans, standby letters of
credit and equity lines of credit. Those instruments involve, to varying
degrees, elements of credit and interest rate risk in excess of the amount
recognized in the statements of financial condition. The contract or notional
amounts of those instruments reflect the extent of involvement the Bank has in
particular classes of financial instruments.
A summary of the contract amount of the Bank's exposure to off-balance sheet
risk as of June 30, 1997 is as follows:
<TABLE>
<CAPTION>
Financial instruments whose contract amounts represent credit risk:
<S> <C>
Commitments to extend credit, mortgage loans $ 702,000
Undisbursed construction loans 2,382,580
Undisbursed lines of credit 699,146
</TABLE>
- --------------------------------------------------------------------------------
Page 37
<PAGE>
CENTURY BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1997 and 1996
================================================================================
NOTE L - DISCLOSURES ABOUT FAIR VALUES OF FINANCIAL INSTRUMENTS
The Company has implemented Statement of Financial Accounting Standards No. 107,
Disclosures about Fair Value of Financial Instruments ("SFAS 107"), which
requires disclosure of the estimated fair values of the Company's financial
instruments whether or not recognized in the balance sheet, where it is
practical to estimate that value. Such instruments include cash and cash
equivalents, investment securities, loans, accrued interest receivable, stock in
the Federal Home Loan Bank of Atlanta, deposit accounts, and commitments. Fair
value estimates are made at a specific point in time, based on relevant market
information and information about the financial instrument. These estimates do
not reflect any premium or discount that could result from offering for sale at
one time the Company's entire holdings of a particular financial instrument.
Because no active market readily exists for a portion of the Company's financial
instruments, fair value estimates are based on judgments regarding future
expected loss experience, current economic conditions, risk characteristics of
various financial instruments, and other factors. These estimates are subjective
in nature and involve uncertainties and matters of significant judgment and,
therefore, cannot be determined with precision. Changes in assumptions could
significantly affect the estimates.
The following methods and assumptions were used to estimate the fair value of
each class of financial instruments for which it is practicable to estimate that
value:
Cash and Cash Equivalents
The carrying amounts for cash and cash equivalents approximate fair
value because of the short maturities of those instruments.
Investment Securities
Fair value for investment securities equals quoted market price if
such information is available. If a quoted market price is not
available, fair value is estimated using quoted market prices for
similar securities.
Loans
For certain homogenous categories of loans, such as residential
mortgages, fair value is estimated using the quoted market prices
for securities backed by similar loans, adjusted for differences in
loan characteristics. The fair value of other types of loans is
estimated by discounting the future cash flows using the current
rates at which similar loans would be made to borrowers with similar
credit ratings and for the same remaining maturities.
Stock in Federal Home Loan Bank of Atlanta
The fair value for FHLB stock is its carrying value, since this is
the amount for which it could be redeemed. There is no active market
for this stock and the Bank is required to maintain a minimum
balance based on the unpaid principal of home mortgage loans.
- --------------------------------------------------------------------------------
Page 38
<PAGE>
CENTURY BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1997 and 1996
================================================================================
NOTE L - DISCLOSURES ABOUT FAIR VALUES OF FINANCIAL INSTRUMENTS (Continued)
Deposit Liabilities
The fair value of demand deposits is the amount payable on demand at
the reporting date. The fair value of certificates of deposit is
estimated using the rates currently offered for deposits of similar
remaining maturities.
Financial Instruments with Off-Balance Sheet Risk
With regard to financial instruments with off-balance sheet risk
discussed in Note K, it is not practicable to estimate the fair
value of future financing commitments.
The carrying amounts and estimated fair values of the Company's financial
instruments, none of which are held for trading purposes, are as follows at June
30, 1997 and 1996:
<TABLE>
<CAPTION>
1997 1996
--------------------------------- --------------------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
------------- ------------- ------------- --------------
<S> <C> <C> <C> <C>
Financial assets:
Cash and interest-bearing balances $ 4,156,395 $ 4,156,395 $ 4,987,377 $ 4,987,377
Investment securities:
Available for sale 20,744,701 20,744,701 11,707,105 11,707,105
Held to maturity 11,060,458 11,101,018 6,857,506 6,839,969
Loans 62,332,801 62,051,000 55,192,567 54,105,000
Stock in Federal Home Loan Bank of Atlanta 586,500 586,500 613,700 613,700
Financial liabilities:
Deposits $ 69,698,673 $ 68,820,000 $ 69,669,236 $ 69,274,000
</TABLE>
- --------------------------------------------------------------------------------
Page 39
<PAGE>
CENTURY BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1997 and 1996
================================================================================
NOTE M - PARENT COMPANY FINANCIAL DATA
The following is a summary of the condensed financial statements of Century
Bancorp, Inc. as of and for the year ended June 30, 1997:
<TABLE>
<CAPTION>
Condensed Statement of Financial Condition
June 30, 1997
<S> <C>
Assets:
Cash $ 595,908
Investment securities available for sale 8,819,705
Investment in Home Savings, Inc., SSB 20,864,250
Accrued interest receivable 241,778
Other assets 2,705
----------------
$ 30,524,346
================
Liabilities and Stockholders' Equity:
Liabilities:
Payable to Home Savings, Inc., SSB $ 160,000
Accounts payable 34,579
Income taxes payable 27,000
----------------
221,579
----------------
Stockholders' equity:
Common stock 19,467,082
ESOP note receivable (1,585,150)
Unrealized gain on available for sale securities, net of tax 283,836
Retained earnings 12,136,999
----------------
30,302,767
----------------
$ 30,524,346
================
<CAPTION>
Condensed Statement of Operations
Period from December 20, 1996 to June 30, 1997
<S> <C>
Interest income $ 313,117
Equity in earnings of Home Savings, Inc., SSB 727,797
Income taxes (114,000)
----------------
Net income $ 926,914
================
</TABLE>
- --------------------------------------------------------------------------------
Page 40
<PAGE>
CENTURY BANCORP, INC.
CORPORATE INFORMATION
===============================================================================
Executive Officers
James G. Hudson, Jr.
President, CEO and Treasurer
Drema A. Michael John E. Todd
Secretary and Assistant Treasurer Vice President
Directors
Henry H. Darr James G. Hudson, Jr. John R. Hunnicutt
President, President, CEO and Treasurer of President, McThom, Inc.
J. L. Darr & Son, Inc. Home Savings and the Company and McLex, Inc.
F. Stuart Kennedy Milton T. Riley, Jr.
Chairman of the Board, Personal Investments,
Rex Oil Company Retired Partner - Dixon, Odom & Co., L.L.P.,
Certified Public Accountant
Stock Transfer Agent Annual Meeting
Registrar and Transfer Company The 1997 annual meeting of stockholders
10 Commerce Street of Century Bancorp, Inc. will be held
Cranford, NJ 07016 at 5:00 p.m. on October 23, 1997 at the
Company's corporate office at 22 Winston
Street, Thomasville, NC.
Special Legal Counsel Form 10-KSB
Brooks, Pierce, McLendon, A copy of Form 10-KSB as filed with the
Humphrey & Leonard, L.L.P. Securities and Exchange Commission for the
2000 Renaissance Plaza Company's most recent fiscal year will be
230 North Elm Street furnished without charge to the Company's
Greensboro, NC 27420 stockholders upon written request to
James G. Hudson, Jr., Century Bancorp,
Inc., P. O. Box 987, Thomasville, NC
27360.
Independent Auditors Corporate Office
Dixon, Odom & Co., L.L.P. 22 Winston Street
6 Turnberry Wood Thomasville, NC 27360
Southern Pines, NC 28387
Common Stock Information
The Company's stock began trading on December 23, 1996. There are 407,330 shares
of common stock outstanding which were held by approximately 297 stockholders of
record (excluding shares held in street name) on June 30, 1997. The Company's
common stock is quoted on the Nasdaq SmallCap Market under the symbol "CENB."
The high and low sales prices for the common stock for the quarter ended
December 31, 1996 were $66 and $61, respectively; for the quarter ended March
31, 1997, $71 and $65, respectively; and for the quarter ended June 30, 1997,
$70 1/4 and $68 1/4, respectively. On May 29, 1997, the Company paid a dividend
of $.50 a share to stockholders of record on May 15, 1997. On August 29, 1997,
the Company paid a dividend of $.50 a share to stockholders of record on August
15, 1997.
Disclaimer
This Annual Report has not been reviewed or confirmed for accuracy or relevance
by the Federal Deposit Insurance Corporation.
- --------------------------------------------------------------------------------
Page 41
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-START> JUL-01-1996
<PERIOD-END> JUN-30-1997
<CASH> 1,369
<INT-BEARING-DEPOSITS> 2,788
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 20,745
<INVESTMENTS-CARRYING> 11,060
<INVESTMENTS-MARKET> 11,101
<LOANS> 62,333
<ALLOWANCE> 550
<TOTAL-ASSETS> 100,640
<DEPOSITS> 69,699
<SHORT-TERM> 0
<LIABILITIES-OTHER> 638
<LONG-TERM> 0
0
0
<COMMON> 19,467
<OTHER-SE> 10,836
<TOTAL-LIABILITIES-AND-EQUITY> 100,640
<INTEREST-LOAN> 4,816
<INTEREST-INVEST> 1,847
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 6,663
<INTEREST-DEPOSIT> 3,512
<INTEREST-EXPENSE> 3,512
<INTEREST-INCOME-NET> 3,151
<LOAN-LOSSES> 17
<SECURITIES-GAINS> (15)
<EXPENSE-OTHER> 1,507
<INCOME-PRETAX> 1,674
<INCOME-PRE-EXTRAORDINARY> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,116
<EPS-PRIMARY> 2.47
<EPS-DILUTED> 2.47
<YIELD-ACTUAL> 3.57
<LOANS-NON> 77
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 533
<CHARGE-OFFS> 1
<RECOVERIES> 1
<ALLOWANCE-CLOSE> 550
<ALLOWANCE-DOMESTIC> 388
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 162
</TABLE>
