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LETTERHEAD OF CENTURY BANCORP, INC.
September 25, 1998
Branch Chief
Division of Corporate Finance
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
Re: Century Bancorp, Inc. Form 10-KSB
Dear Sir or Madam:
The consolidated financial statements contained in the Form 10-KSB
which were incorporated by reference from the 1998 Annual Report to Stockholders
reflect no changes from the preceding year in any accounting principles or
practices, or in the method of applying any such principles or practices, except
for the adoption by the Company of SFAS No. 128, as set forth in Note A to the
Notes to Consolidated Financial Statements.
Sincerely,
Century Bancorp, Inc.
/s/ James G. Hudson, Jr.
James G. Hudson, Jr.
President and Chief Executive Officer
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UNITED STATES
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------
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, 1998
Commission file number 000-21881
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(g) OF THE ACT:
Common Stock, no par value Nasdaq SmallCap Market
- ------------------------------- -------------------------------------------
(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
--- ---
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 $7,267,231
---------
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 -- $13,422,240 (based on the price at which the
stock was sold on September 14, 1998). 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 1,270,869
- -------------------------- ----------
(Class) (Outstanding at September 18, 1997)
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Annual Report to Stockholders for the year ended June 30, 1998
(the "1998 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 November 17, 1998 (the "Proxy Statement"), are incorporated by reference
into Part III.
Portions of the Proxy Statement for the Special Meeting of Stockholders held on
February 17, 1998 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 certain indebtedness
outstanding from the Bank's Employee Stock Ownership Plan (the "ESOP"), and
owning the Bank. The Company's principal sources of income are earnings on
capital retained by the Company, interest payments received on the indebtedness
from the ESOP, 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, 1998,
the Company had total assets of $96.9 million, net loans of $70 million,
deposits of $73 million, investment securities of $23.9 million and
stockholders' equity of $18.7 million.
At June 30, 1998, 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. Approximately 2% of the
Bank's loan portfolio, before net items, is not secured by real estate. On June
30, 1998,
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the Bank's largest single outstanding loan had a balance of approximately
$781,000. In addition to interest earned on loans, the Bank receives fees in
connection with loan originations, loan servicing, loan modifications, late
payments, loan 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 $70 million at June
30, 1998 representing approximately 70% of the Bank's total assets at such date.
At June 30, 1998, 77.4% 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 12.3% of the Bank's
loan portfolio, before net items, on such date. Construction loans and home
equity loans represented 6.4% and 1.7%, respectively, of the Bank's loan
portfolio, before net items, on such date. As of June 30, 1998, 16.8% of the
loans in the Bank's loan portfolio had adjustable interest rates. Loans maturing
or repricing on or after June 30, 1999, consist of fixed rate real estate loans
of $57 million, adjustable rate real estate loans of $631,000 and other loans of
$974,000; the Bank has no other adjustable rate loans. See Note C to the
Financial Statements Contained in the 1998 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, 1998, the Company's and
the Bank's investment portfolio totaled approximately $23.9 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 to the Financial Statements
Contained in the 1998 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, 1998, the Bank's investment in stock of the FHLB of Atlanta was
$652,600.
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, 1998, 71.9% of the Bank's deposits consisted of
certificate accounts, 7.3% consisted of passbook and statement savings accounts,
20.6% 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
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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 television advertising, print media advertising
and direct mailings. The Bank does not advertise for deposits outside of its
local market area or utilize the services of deposit brokers. See Note G to the
Financial Statements Contained in the 1998 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, 1998, the Company had $4.2 million
in outstanding borrowings. Such borrowings were repaid on July 2, 1998.
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 and borrowings. 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. 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
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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.
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 a 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, 1998, there were eight depository institutions with 14 offices in
Thomasville, North Carolina. Based upon 1997 comparative data, the Bank had
17.4% of the deposits in Thomasville, and 5.7% 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, credit unions 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 recent reductions in 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.
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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.
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
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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 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 significantly
affect the operations of federally insured savings institutions and other
federally regulated financial institutions. The operations of regulated
depository institutions, including the Bank, are subject to changes in
applicable statutes and regulations from time to time. Such changes may or may
not be favorable to the Bank.
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)
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.
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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 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
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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, 1998, the
Bank had a leverage ratio of 22.5%.
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, 1998, the Bank complied with each of the capital
requirements of the FDIC and the Administrator.
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.
8
<PAGE>
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, 1998, 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, 1998, the Bank was in compliance with this
requirement with an investment in FHLB of Atlanta stock of $652,600.
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, 1998, the Bank was in
compliance with the applicable reserve requirements of the Federal Reserve.
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
9
<PAGE>
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, 1998, the Bank's liquidity
ratio, calculated in accordance with North Carolina regulations, was
approximately 25.5%.
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%.
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.
10
<PAGE>
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 could
deny interstate branching if it specifically elected to do so by June 1, 1997.
States could choose to allow interstate branching prior to June 1, 1997 by
opting-in to a group of states that permitted 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.
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, 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
11
<PAGE>
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, 1998:
Net Book
Value of
Property and Owned or
Improvements Leased
------------ --------
22 Winston Street
Thomasville, North Carolina 27360 $590,112 Owned
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, 1998 was $97,183. 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, 1998 the Bank recorded $7,500 in real
estate acquired in settlement of loans.
12
<PAGE>
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, 1998.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
See the information under the section captioned "Common Stock
Information" on page 42 of the Company's 1998 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 12 in the Company's 1998 Annual Report, which section is
incorporated herein by reference.
ITEM 7. FINANCIAL STATEMENTS
The consolidated financial statements of the Company set forth on pages
13 through 41 in the Company's 1998 Annual Report are incorporated herein by
reference.
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.
13
<PAGE>
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 7 and "-- Management Compensation" on pages 8 through 16 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 the section captioned "Certain Indebtedness and Transactions of
Management" on page 16 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.
(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.
incorporated herein by reference to Exhibit 10(a) of the
Company's Annual Report on From 10-KSB for the fiscal year
ended June 30, 1997 filed September 25, 1997.
10(b) Special Termination Agreements with John E. Todd and Drema
A. Michael incorporated herein by reference to Exhibit
10(b) of the Company's Annual Report on From 10-KSB for
the fiscal year ended June 30, 1997 filed September 25,
1997.
10(c) Supplemental Income Agreements with James G. Hudson, Jr.
incorporated herein by reference to Exhibit 10(c) of the
Company's Annual Report on From 10-KSB for the fiscal year
ended June 30, 1997 filed September 25, 1997.
14
<PAGE>
10(d) Century Bancorp, Inc. Stock Option Plan incorporated
herein by reference to Appendix A to the Company's Proxy
Statement for the Special Meeting of Stockholders held on
February 17, 1998 and filed January 9, 1998.
10(e) Home Savings, Inc., SSB Management Recognition Plan and
Trust Agreement incorporated herein by reference to
Appendix A to the Company's Proxy Statement for the
Special Meeting of Stockholders held on February 17, 1998
and filed January 9, 1998.
(11) Statement Regarding Computation of Per Share Earnings
(13) Portions of 1998 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, 1998.
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 21, 1998 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 21, 1998
- ----------------------------------- Officer, Treasurer and Director
James G. Hudson, Jr.
/s/ John E. Todd Vice-President September 21, 1998
- -----------------------------------
John E. Todd
/s/ Drema A. Michael Assistant Treasurer and September 21, 1998
- ----------------------------------- Secretary
Drema A. Michael
/s/ Henry H. Darr Director September 21, 1998
- -----------------------------------
Henry H. Darr
/s/ John R. Hunnicutt Director September 21, 1998
- -----------------------------------
John R. Hunnicutt
/s/ F. Stuart Kennedy Director September 21, 1998
- -----------------------------------
F. Stuart Kennedy
/s/ Milton T. Riley, Jr. Director September 21, 1998
- -----------------------------------
Milton T. Riley, Jr.
</TABLE>
16
<PAGE>
EXHIBIT 11
STATEMENT REGARDING COMPUTATION OF PER SHARE EARNINGS
Net income per common share of $1.06 for the year ended June 30, 1998
was calculated by dividing net income of $1,203,707 for the year ended June 30,
1998 by the weighted average number of common shares outstanding of 1,136,778.
Net income per common share of $0.82 for the year ended June 30, 1997 was
calculated by dividing net income of $926,914 for the period from December 20,
1996 through June 30, 1997, by the weighted average number of common shares
outstanding of 1,126,881. Because the Conversion was not effective until
December 20, 1996, earnings per share data for the year ended June 30, 1997 is
comprised of the earnings for the post-conversion period. The number of shares
purchased by the ESOP which have not been allocated or committed to be released
to participant accounts are not assumed to be outstanding in calculating the
weighted average number of common shares outstanding. All information set forth
above regarding net income per share and weighted average common shares
outstanding. All information set forth above regarding net income per share and
weighted average common shares outstanding includes the effects of the
three-for-one stock split effected in the form of a dividend that occurred
during the quarter ended June 30, 1998.
<PAGE>
CENTURY BANCORP, INC.
1998 Annual Report
<PAGE>
Century Bancorp, Inc. and Subsidiary
- --------------------------------------------------------------------------------
TABLE OF CONTENTS
Page No.
-------
Selected Financial Data.............................................. 1
Report to Stockholders............................................... 2
Management's Discussion and Analysis................................. 3
Independent Auditors' Report......................................... 13
Consolidated Financial Statements
Consolidated Statements of Financial Condition.................... 14
Consolidated Statements of Operations............................. 15
Consolidated Statements of Stockholders' Equity................... 16
Consolidated Statements of Cash Flows............................. 17
Notes to Consolidated Financial Statements........................ 19
Corporate Information................................................ 42
This annual report to stockholders contains certain forward-looking statements
consisting of estimates with respect to the financial condition, results of
operations and other business of Century Bancorp, Inc. and its wholly-owned
subsidiary, Home Savings, Inc., SSB, that are subject to various factors which
could cause actual results to differ materially from those estimates. Factors
which could influence the estimates include changes in national, regional and
local market conditions, legislative and regulatory conditions, and an adverse
interest rate environment.
<PAGE>
<TABLE>
<CAPTION>
Century Bancorp, Inc. and Subsidiary
Selected Financial and Other Data
- -----------------------------------------------------------------------------------------------------------------------------
At or for the Year Ended June 30,
---------------------------------------------------------------------------
1998 1997 1996 1995 1994
----------- ------------ ----------- ------------ ------------
(Dollars in thousands, except per share amounts)
<S> <C> <C> <C> <C> <C>
Financial Condition Data:
Total assets $ 96,866 $ 100,640 $ 81,304 $ 75,508 $ 73,843
Investments/(1)/ 23,935 35,180 22,823 18,852 18,012
Loans receivable, net 69,997 62,333 55,193 54,020 53,802
Deposits 73,023 69,699 69,669 64,448 63,937
Stockholders' equity 18,732 30,303 11,245 10,640 9,610
Operating Data:
Interest income $ 7,225 $ 6,663 $ 5,869 $ 5,371 $ 5,337
Interest expense 3,709 3,512 3,541 2,788 2,487
----------- ------------ ----------- ------------ -----------
Net interest income 3,516 3,151 2,328 2,583 2,850
Provision for loan losses 18 17 165 105 114
----------- ------------ ----------- ------------ -----------
Net interest income after provision for
loan losses 3,498 3,134 2,163 2,478 2,736
Noninterest income 42 47 35 15 40
Noninterest expense 1,731 1,507 1,169 979 910
----------- ------------ ----------- ------------ -----------
Income before income taxes 1,809 1,674 1,029 1,514 1,866
Income tax expense 605 558 352 593 694
----------- ------------ ----------- ------------ -----------
Net income $ 1,204 $ 1,116 $ 677 $ 921 $ 1,172
=========== ============ =========== ============ ===========
Per Common Share Data:
Net income, basic/(2)/, /(4)/ $ 1.06 $ 0.82/(3)/ $ - $ - $ -
Net income, diluted /(2)/ /(4)/ 1.06 0.82/(3)/ - - -
Regular cash dividends/(4)/ 0.67 0.17 - - -
Dividend payment ratio /(5)/ 63.27% 20.73% - - -
Special return of capital dividend /(4)/ $ 10.00 - - - -
Book value per common share /(4)/ $ 14.74 24.80 - - -
Selected Other Data:
Return on average assets 1.19% 1.22% 0.86% 1.25% 1.59%
Return on average equity 4.51% 5.43% 6.19% 9.15% 12.82%
Average equity to average assets 26.40% 22.44% 13.94% 13.68% 12.43%
Interest rate spread 2.26% 2.54% 2.41% 3.10% 3.55%
Net yield on average interest-earning assets 3.59% 3.56% 3.05% 3.61% 3.97%
Average interest-earning assets to averag
interest-bearing liabilities 135.21% 125.89% 113.86% 113.08% 112.12%
Ratio of noninterest expense to average total
assets 1.71% 1.64% 1.49% 1.33% 1.24%
Nonperforming assets to total assets 0.35% 0.13% 0.76% 1.21% 2.32%
Nonperforming loans to total loans 0.47% 0.12% 0.52% 1.56% 2.98%
Allowance for loan losses to total loans 0.78% 0.88% 0.97% 0.74% 0.55%
Allowance for loan losses to nonperforming loans 166.82% 423.08% 187.02% 47.68% 18.38%
</TABLE>
/(1)/ Includes interest-earning balances in other banks, FHLB st ock 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 s avings bank and
became a wholly-owned subsidiary of Century Bancorp, Inc.
/(3)/ Earnings per 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.
/(4)/ Adjusted for the effects of the three-for-one stock split effected in the
form of a stock dividend paid April 6, 1998.
/(5)/ The dividend payment ratio represents regular dividends per share as a
percentage of earnings per share, and excludes the special nonrecurring
$10.00 return of capital dividend paid during the year ended June 30,
1998.
-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 within approximately a ten
mile radius of Thomasville, North Carolina. On June 30, 1998, 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-earning 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, data processing expenses 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.
-3-
<PAGE>
Century Bancorp, Inc. and Subsidiary
Management's Discussion and Analysis (Continued)
- --------------------------------------------------------------------------------
Market Risk
Market risk is the risk of loss from adverse changes in market prices and rates.
The Company's market risk primarily stems from interest rate risk, the potential
economic loss due to future changes in interest rates, which is inherent in
lending and deposit gathering activities. The Company's objective is to manage
the mix of interest-sensitive assets and liabilities to moderate interest rate
risk and stabilize the net interest margin while enhancing profitability.
Asset/Liability and Interest Rate Risk 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, 1998 was a negative 56.13%. At June 30,
1998, the Company's three-year and five-year cumulative interest sensitivity
gaps as a percentage of total interest-earning assets were a negative 54.94% and
a negative 46.55%, respectively.
-4-
<PAGE>
Century Bancorp, Inc. and Subsidiary
Management's Discussion and Analysis (Continued)
- -------------------------------------------------------------------------------
The following table sets forth the amounts of interest-earning assets and
interest-bearing liabilities outstanding at June 30, 1998 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 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, 1998
--------------------------------------------------------------------------
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 $ 6,561 $ 95 $ - $ - $ 6,656
Fixed rate residential 1-4 family 63 462 2,336 50,444 53,305
Other secured - real estate - fixed - 22 304 3,400 3,726
Other secured - real estate - adjustable 4,691 536 - - 5,227
Other loans 660 332 562 80 1,634
----------- ------------ ----------- ------------ -----------
Total loans receivable 11,975 1,447 3,202 53,924 70,548
Interest-earnings balances in other banks 5,356 - - - 5,356
Investments 705 5,830 4,722 6,669 17,926
FHLB common stock(1) - - - 653 653
----------- ------------ ----------- ------------ -----------
Total interest-earning assets $ 18,036 $ 7,277 $ 7,924 $ 61,246 $ 94,483
=========== ============ =========== ============ ===========
INTEREST-BEARING LIABILITIES:
Deposits:
Passbook and statement accounts $ 5,344 $ - $ - $ - $ 5,344
NOW and money market checking accounts 15,067 - - - 15,067
Noninterest-bearing accounts 78 - - - 78
Certificate accounts 46,384 6,150 - - 52,534
----------- ------------ ----------- ------------ -----------
66,873 6,150 - - 73,023
Note payable 4,200 - - - 4,200
----------- ------------ ----------- ------------ -----------
Total interest-bearing liabilities $ 71,073 $ 6,150 $ - $ - $ 77,223
=========== ============ =========== ============ ===========
INTEREST SENSITIVITY GAP PER PERIOD $ (53,037) $ 1,127 $ 7,924 $ 61,246 $ 17,260
CUMULATIVE INTEREST SENSITIVITY GAP $ (53,037) $ (51,910) $ (43,986) $ 17,260 $ 17,260
CUMULATIVE GAP AS A PERCENTAGE OF TOTAL
INTEREST-EARNING ASSETS (56.13)% (54.94)% (46.55)% 18.27% 18.27%
CUMULATIVE INTEREST-EARNING ASSETS AS A
PERCENTAGE OF TOTAL INTEREST-BEARING
LIABILITIES 25.38% 32.78% 43.04% 122.35% 122.35%
</TABLE>
/(1)/ Nonmarketable equity security; substantially all required to be maintained
and assumed to mature in periods greater than 10 years.
-5-
<PAGE>
Century Bancorp, Inc. and Subsidiary
Management's Discussion and Analysis (Continued)
================================================================================
In addition to the traditional gap analysis, the Company also uses a computer
based interest rate risk simulation model. This comprehensive model includes
rate sensitivity gap analysis, rate shock net interest margin analysis, and
asset/liability term and rate analysis. The Company uses this model to monitor
interest rate risk on a quarterly basis and to detect trends that may affect
overall interest income. As a result, this analysis more accurately predicts the
risk to net interest income over the upcoming twelve-month period. The Company
has a policy establishing the maximum allowable risk to net interest income
caused by changes in interest rates. The modeling results indicate that the
Company is within the established parameters of the interest rate risk policy.
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, 1998 and 1997. 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, 1998 Year Ended June 30, 1997
--------------------------------------- ---------------------------------------
Average Average Average Average
Balance Interest Rate Balance Interest Rate
---------- ---------- --------- ---------- ----------- --------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Interest-earning balances $ 3,125 $ 182 5.82% $ 5,611 $ 342 6.10%
Investments 28,493 1,730 6.07% 24,818 1,505 6.06%
Loans 66,213 5,313 8.02% 58,008 4,816 8.30%
---------- ---------- -------- ---------- ----------- -------
Total interest-earning assets 97,831 7,225 7.39% 88,437 6,663 7.53%
Other assets 3,192 3,174
---------- ----------
Total assets $ 101,023 $ 91,611
========== ==========
Interest-bearing liabilities:
Deposits $ 71,316 3,643 5.11% $ 70,252 3,512 5.00%
Borrowings 1,038 66 6.36% - - -
---------- ---------- -------- ---------- ----------- -------
Total interest-bearing liabilities 72,354 3,709 5.13% 70,252 3,512 5.00%
---------- -----------
Other liabilities 1,994 806
Stockholders' equity 26,675 20,553
---------- ----------
Total liabilities and stockholders'
equity $ 101,023 $ 91,611
========== ==========
Net interest income and interest rate spread $ 3,516 2.26% $ 3,151 2.54%
========== ======== =========== ======
Net yield on average interest-earning assets 3.59% 3.56%
======== ======
Ratio of average interest-earning assets to
average interest-bearing liabilities 135.21% 125.89%
========== ==========
</TABLE>
-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, 1998 vs. 1997
--------------------------------------------------
Increase (Decrease) Due To
--------------------------------------------------
Volume Rate Total
----------- ------------ ------------
(Dollars in Thousands)
<S> <C> <C> <C>
Interest income:
Interest-bearing balances $ (145) $ (15) $ (160)
Investments 223 2 225
Loans 651 (154) 497
----------- ----------- -----------
Total interest income 729 (167) 562
----------- ----------- -----------
Interest expense:
Deposits 54 77 131
Borrowings 66 - 66
----------- ----------- -----------
Total interest expense 120 77 197
----------- ----------- -----------
Net interest income $ 609 $ (244) $ 365
=========== =========== ===========
</TABLE>
Comparison of Financial Condition at June 30, 1998 and 1997
Total consolidated assets decreased by $3.7 million during 1998, from $100.6
million at June 30, 1997 to $96.9 million at June 30, 1998. This decrease
resulted from the payment during the fourth quarter of the current fiscal year
of a special $10.00 per share ($30.00 per share prior to the stock split) return
of capital dividend which aggregated $12.7 million, reducing both total assets
and stockholders' equity by that amount. Investment securities decreased by
$13.9 million from $31.8 million to $17.9 million during the year ended June 30,
1998, while loans receivable increased by $7.7 million from $62.3 million at
June 30, 1997 to $70.0 million at June 30, 1998. The funds provided from the
decrease in investments, net of the increase in loans, combined with an increase
in deposits of $3.3 million from $69.7 million to $73.0 million during the year
ended June 30, 1998, new borrowings of $4.2 million, and the Company's net
income of $1.2 million for the year ended June 30, 1998 were used to pay the
$12.7 million return of capital dividend, with the balance increasing cash and
interest-earning balances in other banks.
Total stockholders' equity was $18.7 million at June 30, 1998 as compared with
$30.3 million at June 30, 1997, a decrease of $11.6 million which resulted from
the special return of capital dividend discussed above. Net income for the year
was $1.2 million, while regular quarterly dividends
-7-
<PAGE>
Century Bancorp, Inc. and Subsidiary
Management's Discussion and Analysis (Continued)
- --------------------------------------------------------------------------------
aggregated $761,545 or $.67 per share. At June 30, 1998, Century and the Bank
continued to significantly exceed all applicable regulatory capital
requirements.
Asset Quality
Non-performing assets include non-accrual loans, accruing loans contractually
past due 90 days or more, restructured loans, other real estate and other real
estate under contract for sale. Loans are placed on non-accrual when management
has concerns relating to the ability to collect the loan principal and interest,
and generally when such loans are 90 days or more past due. While non-performing
assets represent potential losses to the Company, management does not anticipate
any aggregate material losses since most loans are believed to be adequately
secured. Management believes the allowance for loan losses is sufficient to
absorb known risks in the portfolio. No assurance can be given that economic
conditions will not adversely affect borrowers and result in increased losses.
The following table summarizes non-performing assets by type at the dates
indicated. Other than the amounts listed, there were no other loans that (i)
represent or result from trends or uncertainties which management reasonably
expects will materially impact future operating results, liquidity or capital
resources or (ii) represent material credits about which management has
information that causes them to have serious doubts as to the ability of such
borrowers to comply with the loan repayment terms.
Schedule of Non-Performing Assets
<TABLE>
<CAPTION>
At June 30,
------------------------
1998 1997
----------- ----------
<S> <C> <C>
Non-accrual loans $ 330 $ 77
Loans past due 90 days or more and still accruing - -
Other real estate 8 53
Renegotiated troubled debt - -
----------- ----------
Total non-performing assets $ 338 $ 130
=========== ==========
</TABLE>
Net Income
The Company earned consolidated net income of $1.2 million, or $1.06 per share,
during the year ended June 30, 1998 as compared with net income of $1.1 million
during the prior year, an increase of $88,000. This increase resulted primarily
from the absence of the special Savings Association Insurance Fund ("SAIF")
deposit insurance assessment of $407,000 which, net of an income tax benefit of
$149,000, decreased net income for the year ended June 30, 1997 by approximately
$260,000. An increase of $366,000 in net interest income was offset by increased
personnel costs of $563,000.
Net Interest Income
Net interest income increased to $3.5 million during the year ended June 30,
1998 as compared with $3.1 million during the previous year. This increase of
$366,000 resulted from an increase in net interest-earning assets. Average
interest-earning assets exceeded average interest-bearing liabilities by $25.4
million during the year ended June 30, 1998, and by $18.1 million during the
year ended June 30, 1997. A substantial portion of the growth in average
interest-earning assets was in higher
-8-
<PAGE>
Century Bancorp, Inc. and Subsidiary
Management's Discussion and Analysis (Continued)
- --------------------------------------------------------------------------------
yielding loans receivable. As a result of loan growth over the last two years,
the average balance of loans receivable increased from $58.0 million during
fiscal 1997 to $66.2 million during fiscal 1998. In addition, the average
balance of investments increased from $24.8 million during fiscal 1997 to $28.5
million during fiscal 1998.
Provision for Loan Losses
The provision for loan losses was $18,000 and $16,500 for the years ended June
30, 1998 and 1997, respectively. Management believes that the provision for loan
losses and the resulting loan loss allowance at June 30, 1998 will be adequate
to absorb losses on existing loans. There was $18,000 in net loan charge-offs
during the year ended June 30, 1998 as compared with net recoveries of $600
during the year ended June 30, 1997. Nonaccrual loans aggregated $330,000 at
June 30, 1998.
Other Income
Other income remained relatively stable, decreasing from $47,000 during fiscal
1997 to $42,000 during fiscal 1998, principally as a result of reduced income
from foreclosed real estate.
Other Expenses
Exclusive of the special SAIF assessment explained under the caption "Net
Income," (also see Note I to the consolidated financial statements) of $407,000
that was incurred during the year ended June 30, 1997, other expenses increased
by $633,000 from $1,099,000 during the year ended June 30, 1997 to $1,732,000
during the year ended June 30, 1998. This increase was primarily due to an
increase of $563,000 in personnel costs, $436,000 of which resulted from the
expense incurred under the Company's new Management Recognition Plan which was
approved by shareholder vote at the last annual meeting. In addition, expenses
of the Company's ESOP, which was in effect for the full year, increased by
$38,000.
Provision for Income Taxes
The provision for income taxes, as a percentage of income before income taxes,
was 33.5% and 33.3% for the years ended June 30, 1998 and 1997, respectively.
Liquidity and Capital Resources
Century paid regular cash dividends of $.67 a share. Century also paid a special
nonrecurring return of capital dividend of $10.00 per share during the last
quarter of 1998. Although Century Bancorp 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,
regulatory restrictions and other factors.
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.
-9-
<PAGE>
Century Bancorp, Inc. and Subsidiary
Management's Discussion and Analysis (Continued)
- --------------------------------------------------------------------------------
As of June 30, 1998, liquid assets (cash and marketable investment securities)
were approximately $24.7 million, which represents 33.9% 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, 1998, this liquidity ratio, based on North Carolina
regulations, was 25.5%. Management considers current liquidity levels to be
adequate to meet Home Savings' foreseeable needs.
At June 30, 1998, outstanding mortgage loan commitments were $2.5 million,
available line-of-credit balances were $825,000, 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, 1998 and
1997, Home Savings exceeded all such requirements. (See Note K to the
Consolidated Financial Statements.)
Accounting and Regulatory Matters
Management is not aware of any known trends, events, uncertainties or current
recommendations by regulatory authorities that will have or that are reasonably
likely to have a material effect on the Company's liquidity, capital resources,
or other operations.
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
In June 1997, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 130, Reporting Comprehensive
Income. 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 unrealized
holding gains and losses on available-for-sale securities. 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 $1,368,318 and $1,362,961 for the
years ended June 30, 1998 and 1997, respectively.
-10-
<PAGE>
Century Bancorp, Inc. and Subsidiary
Management's Discussion and Analysis (Continued)
- --------------------------------------------------------------------------------
In June 1997, the FASB issued SFAS No. 131, Disclosures about Segments of an
Enterprise and Related Information. This Statement establishes standards for the
way that public business enterprises report information about operating segments
and certain other information in annual financial statements and requires that
those enterprises report selected information about operating segments in
interim financial reports issued to shareholders. This Statement will be
effective for the Company's fiscal year ending June 30, 1999. Management
anticipates that this Statement will not have a material effect on the Company's
consolidated financial statements.
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities. SFAS No. 133 standardizes the accounting for
derivative instruments, including certain derivative instruments embedded in
other contracts. Under this standard, entities are required to carry all
derivative instruments in the statement of financial position at fair value. The
accounting for changes in the fair value (i.e., gains or losses) of a derivative
instrument depends on whether it has been designated and qualifies as part of a
hedging relationship and, if so, on the reason for holding it. If certain
conditions are met, entities may elect to designate a derivative instrument as a
hedge of exposure to changes in fair values, cash flows, or foreign currencies.
If the hedged exposure is a fair value exposure, the gain or loss on the
derivative instrument is recognized in earnings in the period of change together
with the offsetting loss or gain on the hedged item attributable to the risk
being hedged. If the hedged exposure is a cash flow exposure, the effective
portion of the gain or loss on the derivative instrument is reported initially
as a component of other comprehensive income (outside earnings) and subsequently
reclassified into earnings when the forecasted transaction affects earnings. Any
amounts excluded from the assessment of hedge effectiveness as well as the
ineffective portion of the gain or loss is reported in earnings immediately.
Accounting for foreign currency hedges is similar to accounting for fair value
and cash flow hedges. If the derivative \instrument is not designated as a
hedge, the gain or loss is recognized in earnings in the period of change.
Management anticipates that this statement will have no effect on its
consolidated financial statements.
Year 2000 Compliance
The "Year 2000" issue confronting the Company and its suppliers, customers,
customers' suppliers and competitors centers on the inability of computer
systems to recognize the year 2000. Many existing computer programs and systems
were originally programmed with six digit dates that provided only two digits to
identify the calendar year in the date field, without considering the upcoming
change in the century. With the impending new millennium, these programs and
computers will recognize "00" as the year 1900 rather than the year 2000. Like
most financial service providers, the Company and its operations may be
significantly affected by the Year 2000 issue due to its dependence on computer
generated financial information. Software, hardware, and equipment both within
and outside the Company's direct control and with whom the Company
electronically or operationally interfaces (e.g. third party vendors providing
data processing, information system management, maintenance of computer systems,
and credit bureau information) are likely to be affected. Furthermore, if
computer systems are not adequately changed to identify the Year 2000, many
computer applications could fail or create erroneous results. As a result, many
calculations which rely on date field information, such as interest, payment or
due dates and other operating functions, could generate results which are
significantly misstated, and the Company could experience a temporary inability
to process transactions, prepare statements or engage in similar
-11-
<PAGE>
Century Bancorp, Inc. and Subsidiary
Management's Discussion and Analysis (Continued)
- --------------------------------------------------------------------------------
normal business activities. In addition, under certain circumstances, failure to
adequately address the Year 2000 issue could adversely affect the viability of
the Company's suppliers and creditors and the creditworthiness of its borrowers.
Thus, if not adequately addressed, the Year 2000 matter could result in a
significant adverse impact on products, services and the competitive condition
of the Company.
Financial institution regulators have recently increased their focus upon Year
2000 compliance issues, issuing guidance concerning the responsibilities of
senior management and directors. The Federal Financial Institutions Examination
Council ("FFIEC") has issued several interagency statements on Year 2000 Project
Management Awareness. These statements require financial institutions to, among
other things, examine the Year 2000 implications of reliance on vendors, data
exchange and potential impact on customers, suppliers and borrowers. These
statements also require each federally regulated financial institution to survey
its exposure, measure its risk and prepare a plan in order to solve the Year
2000 issue. In addition, the federal banking regulators have issued safety and
soundness guidelines to be followed by insured depository institutions, such as
the Bank, to assure resolution of any Year 2000 problems. The federal banking
agencies have asserted that Year 2000 testing and certification is a key safety
and soundness issue in conjunction with regulatory exams, and thus an
institution's failure to address appropriately the Year 2000 issue could result
in supervisory action, including such enforcement actions as the reduction of
the institution's supervisory ratings, the denial of applications for approval
of a merger or acquisition, or the imposition of civil money penalties.
In order to address the Year 2000 issue and to minimize its potential adverse
impact, management is engaged in a process to identify areas that will be
affected by the Year 2000, assess their potential impact on operations, monitor
the progress of third party software vendors in addressing the matter, test
changes provided by these vendors, and develop contingency plans for any
critical systems which are not effectively reprogrammed. The plan is divided
into the five phases: (1) awareness, (2) assessment, (3) renovations, (4)
validation, and (5) implementation.
The Company has substantially completed the first two phases of the plan and is
currently working internally and with external vendors on the final three
phases. The Company outsources its item processing operations to a service
provider. The Company's Year 2000 compliance is being closely coordinated with
that of the service provider.
The Company does not currently expect that the cost of its Year 2000 compliance
program will be material to its financial condition or results of operations,
and expects that it will satisfy such compliance program without material
disruption of its operations. In the event that the Company's significant
suppliers do not successfully and timely achieve Year 2000 compliance, the
Company's business, results of operations or financial condition could be
adversely affected.
-12-
<PAGE>
[LETTERHEAD 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, 1998 and 1997 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, 1998 and 1997, 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 PLLC
Dixon Odom PLLC
Southern Pines, North Carolina
August 7, 1998
-13-
<PAGE>
CENTURY BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
June 30, 1998 and 1997
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ASSETS 1998 1997
---------------- -----------------
<S> <C> <C>
Cash on hand and in banks $ 1,449,725 $ 1,368,525
Interest-earning balances in other banks 5,355,957 2,787,870
Investment securities available for sale, at fair value (amortized cost of
$6,971,897 and $20,278,239 at June 30, 1998 and 1997,
respectively) (Note B) 7,708,723 20,744,701
Investment securities held to maturity, at amortized cost (fair
value of $10,325,595 and $11,101,018 at June 30, 1998 and 1997,
respectively) (Note B) 10,216,633 11,060,458
Loans receivable, net (Note C) 69,997,493 62,332,801
Accrued interest receivable 545,189 840,503
Premises and equipment, net (Note D) 687,295 709,121
Stock in the Federal Home Loan Bank of Atlanta, at cost 652,600 586,500
Foreclosed real estate 7,500 53,002
Other assets 244,601 156,341
---------------- -----------------
$ 96,865,716 $ 100,639,822
================ =================
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Deposit accounts (Note G) $ 73,022,971 $ 69,698,673
Note payable (Note F) 4,200,000 -
Accrued interest payable 151,578 107,687
Advance payment by borrowers for property taxes and insurance 171,140 125,863
Deferred income taxes (Note J) 184,995 128,242
Accrued expenses and other liabilities 403,359 276,590
---------------- -----------------
TOTAL LIABILITIES 78,134,043 70,337,055
---------------- -----------------
Commitments and contingencies (Notes C and L)
STOCKHOLDERS' EQUITY (Note K)
Preferred stock, no par value, 5,000,000 shares
authorized, no shares issued and outstanding - -
Common stock, no par value, 20,000,000 shares
authorized: 1,270,869 and 407,330 issued and
outstanding at June 30, 1998 and 1997, respectively 9,223,975 19,467,082
Deferred management recognition plan (Note H) (1,016,392) -
ESOP note receivable (1,525,938) (1,585,150)
Unearned ESOP compensation (Note H) (977,580) -
Retained earnings, substantially restricted 12,579,161 12,136,999
Unrealized holding gains 448,447 283,836
---------------- -----------------
TOTAL STOCKHOLDERS' EQUITY 18,731,673 30,302,767
---------------- -----------------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 96,865,716 $ 100,639,822
================ =================
</TABLE>
See accompanying notes.
-14-
<PAGE>
CENTURY BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended June 30, 1998 and 1997
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------
1998 1997
----------- -----------
<S> <C> <C>
INTEREST INCOME
Loans $ 5,312,884 $ 4,815,505
Investments and deposits in other banks 1,912,550 1,847,447
----------- -----------
TOTAL INTEREST INCOME 7,225,434 6,662,952
----------- -----------
INTEREST EXPENSE
Deposit accounts (Note G) 3,642,529 3,512,248
Borrowings 66,167 -
----------- -----------
TOTAL INTEREST EXPENSE 3,708,696 3,512,248
----------- -----------
NET INTEREST INCOME 3,516,738 3,150,704
PROVISION FOR LOAN LOSSES (Note C) 18,000 16,500
----------- -----------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 3,498,738 3,134,204
----------- -----------
OTHER INCOME (EXPENSES)
Service charges and other fees 29,420 34,284
Gain (loss) on sale of investments 11,628 (15,358)
Gain (loss) on sale of foreclosed real estate (1,077) 12,061
Other 1,826 15,752
----------- -----------
41,797 46,739
----------- -----------
TOTAL INCOME 3,540,535 3,180,943
----------- -----------
GENERAL AND ADMINISTRATIVE EXPENSES
Compensation and benefits 1,180,645 618,051
Occupancy 89,517 80,577
Data processing expenses 113,348 102,645
Federal deposit insurance premiums 43,860 66,093
FDIC special assessment (Note I) - 408,521
Provision for loss on foreclosed real estate 17,500 -
Other expenses 286,958 231,245
----------- -----------
TOTAL GENERAL AND
ADMINISTRATIVE EXPENSES 1,731,828 1,507,132
----------- -----------
INCOME BEFORE INCOME TAXES 1,808,707 1,673,811
INCOME TAXES (Note J) 605,000 557,700
----------- -----------
NET INCOME $ 1,203,707 $ 1,116,111
=========== ===========
NET INCOME PER COMMON SHARE (Note A)
Basic and diluted $ 1.06 $ 0.82
=========== ===========
Weighted average shares outstanding 1,136,778 1,126,881
=========== ===========
DIVIDENDS PER COMMON SHARE (Note A)
Regular dividends per common share $ .67 $ .17
=========== ===========
Special return of capital dividend per common share $ 10.00 $ -
=========== ===========
</TABLE>
See accompanying notes.
-15-
<PAGE>
CENTURY BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years Ended June 30, 1998 and 1997
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------
Deferred
Common stock management ESOP
----------------------------- recognition note
Shares Amount plan receivable
------------- ------------ ------------- ------------
<S> <C> <C> <C> <C>
Balance at June 30, 1996 - $ - $ - $ -
Net income - - - -
Net proceeds from issuance of 407,330
shares of no par value common stock 407,330 19,453,837 -
Purchase of 32,586 shares of common
stock by the ESOP - - - (1,629,300)
Principal payments on note receivable
from ESOP - - - 44,150
ESOP contribution 13,245 - -
Regualar cash dividends paid - - - -
Change in unrealized holding gains
(losses), net of income taxes of $158,588 - - - -
------------- ------------ ------------- -------------
Balance at June 30, 1997 407,330 19,467,082 - (1,585,150)
Net income - - - -
Regular cash dividends paid - - - -
Return of capital dividend - (11,731,110) - -
Adoption of deferred management
recognition plan 16,293 1,452,114 (1,452,114) -
Vesting of deferred management recognition
plan - - 435,722 -
Principal payments on note receivable from
ESOP - - - 59,212
ESOP contribution - 35,889 - -
Three-for-one stock split 847,246 - - -
Change in unrealized holding gains (losses),
net of income taxes of $105,753 - - - -
------------- ------------ ------------- -------------
Balance at June 30, 1998 1,270,869 $ 9,223,975 $ (1,016,392) $ (1,525,938)
============= ============ ============= =============
<CAPTION>
-----------------------------------------------------------
Unearned Unrealized Total
ESOP Retained holding stockholders'
compensation earnings gains equity
------------ ------------- ------------ --------------
<S> <C> <C> <C> <C>
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
Purchase of 32,586 shares of common
stock by the ESOP - - - (1,629,300)
Principal payments on note receivable
from ESOP - - - 44,150
ESOP contribution - - - 13,245
Regular cash dividends paid - (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 12,136,999 283,836 30,302,767
Net income - 1,203,707 - 1,203,707
Regular cash dividends paid - (761,545) - (761,545)
Return of capital dividend (977,580) - - (12,708,690)
Adoption of deferred management
recognition plan - - - -
Vesting of deferred management recognition
plan - - - 435,722
Principal payments on note receivable from
ESOP - - - 59,212
ESOP contribution - - - 35,889
Three-for-one stock split - - - -
Change in unrealized holding gains (losses) ,
net of income taxes of $105,753 - - 164,611 164,611
------------ ------------- ------------ --------------
Balance at June 30, 1998 $ (977,580) $ 12,579,161 $ 448,447 $ 18,731,673
============ ============= ============ ==============
</TABLE>
See accompanying notes.
-16-
<PAGE>
CENTURY BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended June 30, 1998 and 1997
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------
1998 1997
---------------- ---------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 1,203,707 $ 1,116,111
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation 48,526 46,313
Deferred income taxes (49,000) 65,592
Deferred compensation 22,000 22,000
Amortization of discounts and premiums on securities (88,650) 9,079
Provision for loan losses 18,000 16,500
Provision for loss on foreclosed real estate 17,500 -
ESOP contribution expense 35,889 13,245
Vesting of deferred management recognition plan 435,722 -
(Gain) loss on sale of investment securities (11,628) 15,358
(Gain) loss on sale of real estate acquired in foreclosure 1,077 (12,061)
Change in assets and liabilities
(Increase) decrease in accrued interest receivable 295,314 (283,833)
(Increase) decrease in other assets (88,260) 15,390
Increase (decrease) in accrued interest payable 43,891 (8,549)
Increase in accrued expense and other liabilities 104,769 87,096
---------------- ---------------
NET CASH PROVIDED BY
OPERATING ACTIVITIES 1,988,857 1,102,241
---------------- ---------------
CASH FLOWS FROM INVESTING ACTIVITIES
Net (increase) decrease in interest-earning balances in other banks (2,568,087) 856,989
Purchases of:
Available for sale investment securities (8,846,351) (12,922,555)
Held to maturity investment securities (3,095,650) (6,000,000)
Proceeds from maturities and calls of:
Available for sale investment securities 20,730,818 2,263,008
Held to maturity investment securities 3,950,000 1,800,000
Proceeds from sales of available for sale investment securities 1,511,628 2,000,000
Purchases of FHLB stock (66,100) -
Net increase in loans (7,682,692) (7,156,734)
Purchases of property and equipment (26,700) (7,269)
Proceeds from redemption of FHLB stock - 27,200
Proceeds from sale of real estate acquired in settlement of loans 26,925 291,933
---------------- ---------------
NET CASH PROVIDED (USED)
BY INVESTING ACTIVITIES 3,933,791 (18,847,428)
---------------- ---------------
</TABLE>
See accompanying notes.
-17-
<PAGE>
CENTURY BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended June 30, 1998 and 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1998 1997
---------------- ---------------
<S> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in demand deposits $ 1,540,839 $ 1,299,423
Net increase (decrease) in certificate accounts 1,783,459 (1,269,986)
Increase in advances from borrowers for property
taxes and insurance 45,277 19,993
Proceeds from note payable 4,200,000 -
Net proceeds from issuance of common stock - 19,453,837
Decrease in stock conversion costs incurred - 40,449
Loan to ESOP for purchase of common stock - (1,629,300)
Principal payments received on note receivable from ESOP 59,212 44,150
Regular cash dividends paid (761,545) (187,372)
Special return of capital dividend (12,708,690) -
---------------- ---------------
NET CASH PROVIDED (USED)
BY FINANCING ACTIVITIES (5,841,448) 17,771,194
---------------- ---------------
NET INCREASE IN CASH
ON HAND AND IN BANKS 81,200 26,007
CASH ON HAND AND IN BANKS, BEGINNING 1,368,525 1,342,518
---------------- ---------------
CASH ON HAND AND
IN BANKS, ENDING $ 1,449,725 $ 1,368,525
================ ===============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the year for:
Interest $ 3,664,805 $ 3,520,797
================ ===============
Income taxes $ 580,418 $ 482,300
================ ===============
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING ACTIVITIES
Unrealized gain on investment securities available
for sale, net of deferred income taxes $ 164,611 $ 246,850
================ ===============
Adoption of deferred management recognition plan $ 1,452,114 $ -
================ ===============
</TABLE>
See accompanying notes.
-18-
<PAGE>
CENTURY BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1998 and 1997
- --------------------------------------------------------------------------------
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.
-19-
<PAGE>
CENTURY BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1998 and 1997
- --------------------------------------------------------------------------------
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, 1998 or 1997. 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.
-20-
<PAGE>
CENTURY BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1998 and 1997
- --------------------------------------------------------------------------------
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, as amended by 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.
-21-
<PAGE>
CENTURY BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1998 and 1997
- --------------------------------------------------------------------------------
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.
-22-
<PAGE>
CENTURY BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1998 and 1997
- --------------------------------------------------------------------------------
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 J. Such a deferred tax liability will only be
recognized when it becomes apparent that those temporary differences will
reverse in the foreseeable future.
Net Income Per Common Share
- ---------------------------
Effective with the year ended June 30, 1998, the Company has implemented
Statement of Financial Accounting Standards ("SFAS") No. 128, Earnings Per
Share. This Statement simplifies the standards for computing earnings per share
previously found in Accounting Principles Board ("APB") Opinion No. 15, Earnings
Per Share, and makes them comparable to international earnings per share ("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 statement of operations for all entities with complex capital
structures. It also 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 it is computed by
dividing income available to common shareholders 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. For the years ended
June 30, 1998 and 1997, basic and diluted earnings per share are the same
amounts because the dilutive effect of stock options is not significant.
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 common
shares outstanding during that period. Net income per common share for the year
ended June 30, 1998 is based on net income earned divided by the weighted
average number of shares outstanding during the year. For purposes of this
computation, the number of shares of common stock purchased by the Bank's
Employee Stock Ownership Plan and Management Recognition Plan which has not been
allocated to participant accounts is not assumed to be outstanding.
On March 17, 1998, the Company's Board of Directors declared a three-for-one
stock split, effected in the form of a dividend, whereby all shareholders
received two additional shares of common stock for each share of stock held. The
dividend was paid on April 6, 1998 to shareholders of record on March 27, 1998.
Unless otherwise noted, all information presented in the consolidated financial
statements regarding earnings per share, dividends per share and weighted
average number of shares outstanding has been computed giving effect to this
stock dividend.
-23-
<PAGE>
CENTURY BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1998 and 1997
- --------------------------------------------------------------------------------
NOTE A - SIGNIFICANT ACCOUNTING POLICIES (Continued)
Stock-Based Compensation
- ------------------------
In October 1995, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 123, Accounting for
Stock Based Compensation. The Company accounts for its stock-based compensation
plans using the accounting prescribed by Accounting Principles Board Opinion No.
25, Accounting for Stock Issued to Employees. Since the Company is not required
to adopt the fair value based recognition provisions prescribed under SFAS No.
123, it has elected only to comply with the disclosure requirements set forth in
the Statement, which includes disclosing pro forma net income as if the fair
value based method of accounting had been applied. (See Note H.)
Recent Accounting Pronouncements
- --------------------------------
In June 1997, the FASB issued SFAS No. 130, Reporting Comprehensive Income. 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 unrealized holding gains and losses on available
for sale securities. 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 $1,368,318 and $1,362,961 for the years ended June 30, 1998 and 1997,
respectively.
In June 1997, the FASB issued SFAS No. 131, Disclosures about Segments of an
Enterprise and Related Information. This Statement establishes standards for the
way that public business enterprises report information about operating segments
and certain other information in annual financial statements and requires that
those enterprises report selected information about operating segments in
interim financial reports issued to shareholders. This Statement will be
effective for the Company's fiscal year ending June 30, 1999.
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities. SFAS No. 133 standardizes the accounting for
derivative instruments, including certain derivative instruments embedded in
other contracts. Under this standard, entities are required to carry all
derivative instruments in the statement of financial position at fair value. The
accounting for changes in the fair value (i.e., gains or losses) of a derivative
instrument depends on whether it has been designated and qualifies as part of a
hedging relationship and, if so, on the reason for holding it. If certain
conditions are met, entities may elect to designate a derivative instrument as a
hedge of exposure to changes in fair values, cash flows, or foreign currencies.
If the hedged exposure is a fair value exposure, the gain or loss on the
derivative instrument is recognized in earnings in the period of change together
with the offsetting loss or gain on the hedged item attributable to the risk
being hedged. If the hedged exposure is a cash flow exposure, the effective
portion of the gain or loss on the derivative instrument is reported initially
as a component of other comprehensive income (outside earnings) and subsequently
reclassified into earnings when the forecasted transaction affects earnings. Any
amounts excluded from the assessment of hedge effectiveness as well as the
ineffective portion of the gain or loss is reported in earnings immediately.
Accounting for foreign currency hedges is similar to accounting for fair value
and cash flow hedges. If the derivative instrument is not designated as a hedge,
the gain or loss is recognized in earnings in the period of change. Management
anticipates that this statement will have no effect on its consolidated
financial statements.
-24-
<PAGE>
CENTURY BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1998 and 1997
- --------------------------------------------------------------------------------
NOTE B - INVESTMENT SECURITIES
The following is a summary of the securities portfolios by major classification:
<TABLE>
<CAPTION>
June 30, 1998
----------------------------------------------------------------------
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 $ 3,376,213 $ 30,361 $ - $ 3,406,574
Mortgage-backed securities 2,254,645 4,343 - 2,258,988
Municipal bonds 1,326,587 21,924 - 1,348,511
Equity securities 14,452 680,198 - 694,650
-------------- -------------- -------------- --------------
$ 6,971,897 $ 736,826 $ - $ 7,708,723
============== ============== ============== ==============
Securities held to maturity:
U. S. government securities and obligations
of U. S. government agencies $ 9,728,827 $ 52,880 $ - $ 9,781,707
Municipal bonds 487,806 56,082 - 543,888
-------------- -------------- -------------- --------------
$ 10,216,633 $ 108,962 $ - $ 10,325,595
============== ============== ============== ==============
<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>
Gross realized gains and gross realized losses on sales of available for sale
securities were $16,539 and $4,911, respectively, during the year ended June 30,
1998 and $-0- and $15,358, respectively, during the year ended June 30, 1997.
-25-
<PAGE>
CENTURY BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1998 and 1997
- --------------------------------------------------------------------------------
NOTE B - INVESTMENT SECURITIES (Continued)
The amortized cost and fair values of securities at June 30, 1998 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 $ 503,248 $ 506,094 $ 199,361 $ 199,688
Due after one year through five years 2,635,307 2,668,526 7,882,509 7,953,594
Due after five years through ten years 3,573,225 3,576,722 2,012,056 2,031,807
Due after ten years 260,117 957,381 122,707 140,506
-------------- -------------- -------------- --------------
$ 6,971,897 $ 7,708,723 $ 10,216,633 $ 10,325,595
============== ============== ============== ==============
</TABLE>
For purposes of the maturity table, mortgage-backed securities, which are not
due at a single maturity date, have been allocated over maturity groupings based
on the weighted-average contractual maturities of underlying collateral. The
mortgage-backed securities may mature earlier than their weighted-average
contractual maturities because of principal prepayments.
Securities with a carrying value of $4,297,213 and $3,015,322 and a fair value
of $4,310,846 and $3,022,735 at June 30, 1998 and 1997, 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, 1998. FHLB and FHLMC common stock, nonmarketable equity
securities, substantially all of which are required to be maintained, are
assumed to mature in periods greater than ten years.
<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 $ 506 $ 2,042 $ 859 $ - $ 3,407
Mortgage-backed securities - - 2,259 - 2,259
Municipal bonds - 627 458 263 1,348
FHLMC stock - - - 695 695
Securities held to maturity:
U. S. government and agency securities 199 7,783 1,747 - 9,729
Municipal bonds - 100 265 123 488
Other investments:
Interest-earning balances in other banks 5,356 - - - 5,356
Federal Home Loan Bank stock - - - 653 653
----------- ----------- ------------ ----------- -----------
$ 6,061 $ 10,552 $ 5,588 $ 1,734 $ 23,935
=========== =========== ============ =========== ===========
</TABLE>
-26-
<PAGE>
CENTURY BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1998 and 1997
- --------------------------------------------------------------------------------
NOTE B - INVESTMENT SECURITIES (Continued)
<TABLE>
<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 6.02% 6.46% 5.40% -% 6.13%
Mortgage-backed securities -% -% 6.39% -% 6.39%
Municipal bonds -% 6.76% 5.94% 5.46% 5.93%
FHLMC stock -% -% -% 0.93% 0.93%
Securities held to maturity:
U. S. government and agency securities 6.15% 6.61% 6.08% -% 6.51%
Municipal bonds -% 4.30% 6.20% 6.20% 5.81%
Other investments:
Interest-earning balances in other banks 6.10% -% -% -% 6.10%
Federal Home Loan Bank stock -% -% -% 7.50% 7.50%
Weighted average 6.09% 6.59% 6.02% 4.47% 6.17%
</TABLE>
NOTE C - LOANS RECEIVABLE
Loans receivable consist of the following:
<TABLE>
<CAPTION>
1998 1997
------------------------------- -----------------------------
Percentage Percentage
Amount of Total Amount of Total
-------------- ------------ ------------- ----------
<S> <C> <C> <C> <C>
Type of loan:
Real estate loans:
One-to-four family residential $ 56,753,361 81.08% $ 49,415,155 79.28%
Multi-family residential and
commercial 9,026,127 12.89 9,479,925 15.21
Construction 4,709,350 6.73 4,209,050 6.75
Home equity lines of credit 1,230,152 1.76 1,202,807 1.93
-------------- -------- ------------- --------
Total real estate loans 71,718,990 102.46 64,306,937 103.17
-------------- -------- ------------- --------
Other loans:
Consumer loans 1,412,902 2.01 1,115,449 1.79
Loans secured by deposits 220,934 0.32 171,077 0.27
-------------- -------- ------------- --------
Total other loans 1,633,836 2.33 1,286,526 2.06
-------------- -------- ------------- --------
Total loans 73,352,826 104.79 65,593,463 105.23
Less:
Construction loans in process 2,412,740 3.45 2,382,580 3.82
Net deferred loan fees 392,095 0.56 328,084 0.53
Allowance for loan losses 550,498 0.78 549,998 0.88
-------------- -------- ------------- --------
$ 69,997,493 100.00% $ 62,332,801 100.00%
============== ========= ============= =========
</TABLE>
-27-
<PAGE>
CENTURY BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1998 and 1997
- --------------------------------------------------------------------------------
NOTE C - LOANS RECEIVABLE (Continued)
The allowance for loan losses is summarized as follows:
<TABLE>
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
Balance at beginning of year $ 549,998 $ 532,903
------------ ------------
Loans charged off:
Real estate (17,500) -
Other - (1,023)
------------ ------------
Total loans charged off (17,500) (1,023)
------------ ------------
Recoveries:
Real estate - -
Other - 1,618
------------ ------------
Total recoveries - 1,618
------------ ------------
Provision for loan losses 18,000 16,500
------------ ------------
Balance at end of year $ 550,498 $ 549,998
============ ============
Ratio of net charge-offs to average loans outstanding 0.03% -%
====== =====
</TABLE>
The allocation of the allowance for loan losses applicable to each category of
loans at June 30, 1998 and 1997 is as follows:
<TABLE>
<CAPTION>
1998 1997
------------------------------------ ------------------------------------
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 $ 258,210 46.91% 77.37% $ 206,000 37.46% 75.34%
Multi-family residential and commercial 109,383 19.87 12.30 119,000 21.64 14.45
Construction 22,966 4.17 6.42 18,000 3.27 6.42
Home equity lines of credit 12,302 2.23 1.68 12,000 2.18 1.83
Other loans:
Consumer loans 42,387 7.70 1.93 33,000 6.00 1.70
Loans secured by deposits - - 0.30 - - 0.26
Unallocated 105,250 19.12 - 161,998 29.45 -
----------- --------- --------- ----------- ---------- --------
$ 550,498 100.00% 100.00% $ 549,998 100.00% 100.00%
=========== ========= ========= =========== ========== ========
</TABLE>
Nonaccrual loans, which consisted of loans on which principal or interest was
delinquent for 90 days or more, totaled approximately $330,000 and $77,000 at
June 30, 1998 and 1997, respectively. Such loans had the effect of reducing
interest income by approximately $6,000 and $4,000 during the years ended June
30, 1998 and 1997, respectively.
-28-
<PAGE>
CENTURY BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1998 and 1997
- --------------------------------------------------------------------------------
NOTE C - LOANS RECEIVABLE (Continued)
At June 30, 1998, the Bank had mortgage loan commitments outstanding of
$2,544,000 and pre-approved but unused lines of credit totaling $825,000. 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>
1998 1997
----------- ----------
<S> <C> <C>
Balance at beginning of year $ 401,756 $ 415,257
Additional borrowings 261,700 -
Loan repayments (24,716) (13,501)
----------- ----------
Balance at end of year $ 638,740 $ 401,756
=========== ==========
<CAPTION>
NOTE D - PREMISES AND EQUIPMENT
Premises and equipment consist of the following:
1998 1997
----------- ----------
<S> <C> <C>
Land $ 61,203 $ 61,203
Building and improvements 737,557 735,416
Office furniture, fixtures and equipment 233,389 223,862
Automotive equipment 44,805 29,772
----------- ----------
1,076,954 1,050,253
Accumulated depreciation (389,659) (341,132)
----------- ----------
$ 687,295 $ 709,121
=========== ==========
<CAPTION>
NOTE E - FEDERAL INSURANCE OF DEPOSITS
Eligible deposit accounts are insured up to $100,000 by the Federal Deposit Insurance Corporation.
NOTE F - NOTE PAYABLE
1998 1997
----------- ----------
<S> <C> <C>
Note payable to a bank, due July 2, 1998, bearing interest at 6.46%, and secured
by the outstanding common stock of Home Savings.
This note was paid in full on July 2, 1998. $ 4,200,000 $ -
=========== ==========
</TABLE>
At June 30, 1998, Home Savings also had $10,000,000 available on a line of
credit from the Federal Home Loan Bank. Any advances would be secured by a
blanket floating lien on the Bank's one-to-four family residential mortgage
loans. There were no advances made during the years ended June 30, 1998 or 1997.
-29-
<PAGE>
CENTURY BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1998 and 1997
- --------------------------------------------------------------------------------
NOTE G - DEPOSIT ACCOUNTS
A comparative summary of deposit accounts at June 30, 1998 and 1997 follows:
<TABLE>
<CAPTION>
1998 1997
--------------------------------- --------------------------------
Weighted Weighted
Balance Avg. Rate Balance Avg. Rate
--------------- ----------- -------------- ------------
<S> <C> <C> <C> <C>
Demand deposits:
Negotiable orders of withdrawal $ 3,516,274 2.75% $ 3,477,858 2.75%
Passbook and statement accounts 5,343,812 3.00% 5,410,379 3.00%
Money market checking 11,550,528 4.51% 10,007,355 4.16%
Non-interest-bearing checking 78,028 - 52,211 -
--------------- --------------
20,488,642 3.80% 18,947,803 3.56%
Certificates of deposit 52,534,329 5.65% 50,750,870 5.58%
--------------- --------------
Total deposit accounts $ 73,022,971 5.13% $ 69,698,673 5.03%
=============== ==============
<CAPTION>
A summary of certificate accounts by maturity as of June 30, 1998 follows:
Less than $100,000
$100,000 or More Total
-------------- --------------- --------------
(In Thousands)
<S> <C> <C> <C>
Three months or less $ 13,489 $ 7,043 $ 20,532
Over three months through six months 6,950 3,736 10,686
Over six months through twelve months 9,991 5,175 15,166
Over twelve months through twenty-four months 5,423 314 5,737
Over twenty-four months 413 - 413
-------------- --------------- --------------
$ 36,266 $ 16,268 $ 52,534
============== =============== ==============
<CAPTION>
Interest expense on deposits for the years ended June 30 is summarized as
follows:
1998 1997
-------------- ---------------
<S> <C> <C>
Passbook and statement accounts $ 158,605 $ 182,892
NOW accounts 79,488 62,902
Money market accounts 441,520 436,637
Certificates of deposit 2,968,113 2,837,261
-------------- ---------------
3,647,726 3,519,692
Penalties for early withdrawal 5,197 7,444
-------------- ---------------
$ 3,642,529 $ 3,512,248
============== ===============
</TABLE>
-30-
<PAGE>
CENTURY BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1998 and 1997
- --------------------------------------------------------------------------------
NOTE H - 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. This plan was terminated, with IRS approval, during the year ended June
30, 1998. The following is a summary of the plan's funded status as of June 30,
1997:
<TABLE>
<S> <C>
Actuarial present value of benefit obligations:
Vested benefits $ 369,644
===============
Accumulated benefits $ 369,644
===============
Projected benefits $ 369,644
Plan assets, at fair value 390,956
---------------
Plan assets in excess of projected benefit obligation 21,312
Unrecognized transition account -
Unrecognized prior service cost -
Unrecognized net loss -
---------------
Net pension asset $ 21,312
===============
Assumptions used in determining the funded status of the pension plan are as follows at June 30, 1997:
Discount rate 7.0%
Rates of increase in compensation levels 6.0%
Expected long-term rate of return on plan assets 7.0%
Net pension cost includes the following components for the year ended June 30, 1997:
Service cost $ 28,101
Interest cost on projected benefit obligation 40,040
Actual return on assets (35,757)
Other - net 21,587
---------------
Net periodic pension cost $ 53,971
===============
</TABLE>
-31-
<PAGE>
CENTURY BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1998 and 1997
- --------------------------------------------------------------------------------
NOTE H - EMPLOYEE AND DIRECTOR BENEFIT PLANS (Continued)
Management Recognition and Stock Option Plans
- ---------------------------------------------
At a special meeting of the Company's stockholders held on February 17, 1998,
the stockholders approved the Century Bancorp, Inc. Stock Option Plan ("SOP")
and the Home Savings Bank, Inc., SSB Management Recognition Plan ("MRP"). The
SOP provides for the issuance to directors, officers and employees of the Bank
options to purchase up to 122,199 shares (40,733 shares prior to the stock
split) of the Company's common stock. The MRP provides for the award of up to
48,879 shares (16,293 shares prior to the stock split) of the Company's common
stock to directors, officers and employees of the Bank with shares awarded
vesting over a three year period. The Company may elect to fund the plans
through the issuance of authorized but unissued shares, or may elect to purchase
the shares to fund the plans in the open market.
During March of 1998, 43,995 shares (14,665 shares prior to the stock split) of
newly issued common stock were awarded under the MRP at a value of $29.71 per
share ($89.13 prior to the effect of the stock split). In addition, 4,884 of
newly issued shares, which had a total value at issuance of $145,096, were
issued to the MRP for future grants. These shares had not been granted as of
June 30, 1998. Personnel costs for the year ended June 30, 1998 include
$435,722, which represents the value of MRP shares earned through that date.
On March 10, 1998, the Company granted options to purchase 109,983 shares of
common stock at an exercise price of $20.45 per share, including 24,444 options
granted to the Company's directors and 85,539 options granted to the Company's
executive officers and employees. Options granted to directors were fully vested
on the date of grant. Options granted to executive officers and employees vested
25% on the date of grant and will vest 25% annually thereafter. All options will
expire if not exercised within ten years from the date of grant. None of the
options were exercised during the year ended June 30, 1998. At such date,
options to purchase 45,829 shares at $20.45 per share were exercisable. As
permitted by SFAS No. 123, the Company has applied APB Opinion No. 25 for
measurement of stock-based compensation in the accompanying financial
statements. If the Company had used the fair value based method of accounting
for stock-based compensations, operating results for the year ended June 30,
1998 would have been affected as set forth below:
<TABLE>
<CAPTION>
As Reported Pro Forma
---------------- ---------------
<S> <C> <C>
Net income $ 1,203,707 $ 977,909
Net income per share, basic and diluted $ 1.06 $ 0.86
</TABLE>
In determining the pro forma disclosures above, the fair value of options
granted was estimated as of the grant date using the Black-Scholes Option
Pricing Model using the following assumptions: a risk-free interest rate of
5.5%, a dividend yield of 3.33%, an expected life of 7 years, and a volatility
ratio of 20%. The effects of applying SFAS No. 123 in the above pro forma
disclosure are not indicative of future amounts.
-32-
<PAGE>
CENTURY BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1998 and 1997
- --------------------------------------------------------------------------------
NOTE H - EMPLOYEE AND DIRECTOR BENEFIT PLANS (Continued)
Employee Stock Ownership Plan
- -----------------------------
The Bank has established an ESOP to benefit all qualified employees. The ESOP
purchased 97,758 shares (32,586 shares prior to the stock split) 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. 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, 1998 and 1997, the outstanding balance of the loan is
$1,525,938 and $1,585,150, respectively, 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 seven years of
credited service. Forfeitures of nonvested benefits will be reallocated among
remaining participating employees in the same proportion as contributions.
Dividends on unallocated shares may be used by the ESOP to repay the loan to the
Company and are not reported as dividends in the financial statements. Dividends
on allocated or committed to be allocated shares are credited to the accounts of
the participants and reported as dividends in the financial statements. Special
return of capital dividends on unallocated ESOP shares totaling $977,580 are
recorded as unearned ESOP compensation and reported as a separate component of
stockholders' equity. These funds will be used by the ESOP to purchase
additional shares of the Company's common stock, which may result in the ESOP
owning a larger percentage of the outstanding common stock than was originally
anticipated at the time of the Conversion.
Expense of $95,101 and $57,395 during the years ended June 30, 1998 and 1997,
respectively, has been incurred in connection with the ESOP. The expense for the
years ended June 30, 1998 and 1997 includes, in addition to the cash
contributions necessary to fund the ESOP, $35,889 and $13,245, respectively,
which represents the differences between the fair 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 these amounts to common stock.
At June 30, 1998, 7,119 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
$1,541,000 at June 30, 1998.
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, 1998 and 1997.
-33-
<PAGE>
CENTURY BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1998 and 1997
- --------------------------------------------------------------------------------
NOTE H - 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 employees 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 agreements are 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.
NOTE I - SPECIAL SAIF ASSESSMENT
On September 30, 1997, the Deposit Insurance Funds Act of 1997 was signed into
law. The legislation included a special assessment to recapitalize the Savings
Association Insurance Fund ("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.
-34-
<PAGE>
CENTURY BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1998 and 1997
- --------------------------------------------------------------------------------
NOTE J - INCOME TAXES
The components of income tax expense are as follows for the years ended June 30,
1998 and 1997:
<TABLE>
<CAPTION>
1998 1997
-------------- ---------------
<S> <C> <C>
Current tax expense $ 654,000 $ 492,108
Net deferred tax expense (benefit) included in operations (49,000) 65,592
-------------- ---------------
$ 605,000 $ 557,700
============== ===============
</TABLE>
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, 1998 and 1997:
<TABLE>
<CAPTION>
1998 1997
-------------- ---------------
<S> <C> <C>
Income tax at federal statutory rate $ 615,000 $ 569,100
State income tax, net of federal tax benefit 4,000 7,300
Tax exempt interest income (19,000) (16,000)
Other 5,000 (2,700)
-------------- ---------------
$ 605,000 $ 557,700
============== ===============
</TABLE>
Deferred tax assets and liabilities arising from temporary differences at June
30, 1998 and 1997 are summarized as follows:
<TABLE>
<CAPTION>
1998 1997
-------------- ---------------
<S> <C> <C>
Deferred tax assets relating to:
Loan fees and costs $ 464 $ 2,922
Deferred compensation 123,669 73,927
Bad debt reserves 125,100 124,898
-------------- ---------------
Gross deferred tax assets 249,233 201,747
Valuation allowance - -
-------------- ---------------
Net deferred tax assets 249,233 201,747
-------------- ---------------
Deferred tax liabilities relating to:
Property and equipment (41,186) (42,531)
FHLB stock dividends (104,832) (104,832)
Net unrealized gain on securities available for sale (288,210) (182,626)
-------------- ---------------
Total deferred tax liabilities (434,228) (329,989)
-------------- ---------------
Net deferred tax liability $ (184,995) $ (128,242)
============== ===============
</TABLE>
-35-
<PAGE>
CENTURY BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1998 and 1997
- --------------------------------------------------------------------------------
NOTE J - INCOME TAXES (Continued)
Retained earnings at June 30, 1998 include 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 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
therefore the ultimate payment of the taxes will not result in a charge to
earnings.
NOTE K - REGULATORY RESTRICTIONS
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").
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.
-36-
<PAGE>
CENTURY BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1998 and 1997
- --------------------------------------------------------------------------------
NOTE K - REGULATORY RESTRICTIONS (Continued)
At June 30, 1998, 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 $ 18,731,673 $ 18,731,673 $ 18,731,673 $ 18,731,673
Additional equity of the Bank 3,308,388 3,308,388 3,308,388 3,308,388
Unrealized gain on securities (448,447) (448,447) (448,447) (448,447)
Loan loss allowance - - 550,498 550,498
--------------- --------------- --------------- ---------------
Regulatory capital 21,591,614 21,591,614 22,142,112 22,142,112
Minimum capital requirement 2,990,000 3,631,000 7,262,000 4,839,000
--------------- --------------- --------------- ---------------
Excess regulatory capital $ 18,601,614 $ 17,960,614 $ 14,880,112 $ 17,303,112
=============== =============== =============== ===============
</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.
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.
During the year ended June 30, 1997, the Bank paid dividends of $500,000 to the
Parent. During the year ended June 30, 1998, the Bank did not pay any dividends
to Century. However, subsequent to June 30, 1998, with the permission of the
Administrator, the Bank paid $4,268,593 in dividends to the Parent.
-37-
<PAGE>
CENTURY BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1998 and 1997
- --------------------------------------------------------------------------------
NOTE K - REGULATORY RESTRICTIONS (Continued)
Century Bancorp, Inc. paid, after giving effect to the 3 for 1 stock dividend,
regular cash dividends totaling $.67 and $.17 per share during the years ended
June 30, 1998 and 1997, respectively, and a special nonrecurring return of
capital dividend of $10.00 per share during the year ended June 30, 1998.
NOTE L - CONCENTRATION OF CREDIT RISK AND OFF-BALANCE SHEET RISK
The Bank generally originates single-family residential loans within its primary
lending area within ten miles of Thomasville, North Carolina. 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, 1998 is as follows:
Financial instruments whose contract amounts represent credit risk:
Commitments to extend credit, mortgage loans $2,544,000
Undisbursed construction loans 2,413,000
Undisbursed lines of credit 825,000
NOTE M - 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
interest-earning balances in other banks, investment securities, loans
receivable, accrued interest receivable, stock in the Federal Home Loan Bank of
Atlanta, deposit accounts, note payable 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.
-38-
<PAGE>
CENTURY BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1998 and 1997
- --------------------------------------------------------------------------------
NOTE M - DISCLOSURES ABOUT FAIR VALUES OF FINANCIAL INSTRUMENTS (Continued)
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 Interest-Earning Balances in Other Banks
The carrying amounts for cash and interest-earning balances in other
banks 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 Receivable
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.
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.
Note Payable
The fair value of the note payable is based upon the discounted
value using current rates at which borrowings of similar maturity
could be obtained.
Financial Instruments with Off-Balance Sheet Risk
With regard to financial instruments with off-balance sheet risk
discussed in Note L, it is not practicable to estimate the fair
value of future financing commitments.
-39-
<PAGE>
CENTURY BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1998 and 1997
- --------------------------------------------------------------------------------
NOTE M - DISCLOSURES ABOUT FAIR VALUES OF FINANCIAL INSTRUMENTS (Continued)
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, 1998 and 1997:
<TABLE>
<CAPTION>
1998 1997
--------------------------------- --------------------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Financial assets:
Cash and interest-bearing balances $ 6,805,682 $ 6,805,682 $ 4,156,395 $ 4,156,395
Investment securities:
Available for sale 7,708,723 7,708,723 20,744,701 20,744,701
Held to maturity 10,216,633 10,325,595 11,060,458 11,101,018
Loans 69,997,493 70,818,000 62,332,801 62,051,000
Stock in Federal Home Loan Bank of Atlanta 652,600 652,600 586,500 586,500
Financial liabilities:
Deposits 73,022,971 72,603,000 69,698,673 68,820,000
Notes payable 4,200,000 4,192,000 - -
</TABLE>
NOTE N - PARENT COMPANY FINANCIAL DATA
The following is a summary of the condensed financial statements of Century
Bancorp, Inc. as of and for the periods ended June 30, 1998 and 1997:
Condensed Statements of Operations
Year Ended June 30, 1998 and Period from December 20, 1996 to June 30, 1997
<TABLE>
<CAPTION>
1998 1997
--------------- ---------------
<S> <C> <C>
Interest income $ 520,743 $ 313,117
Equity in earnings of Home Savings, Inc., SSB 910,455 727,797
Interest expense (66,167) -
Other expenses (1,324) -
Income taxes (160,000) (114,000)
--------------- ---------------
Net income $ 1,203,707 $ 926,914
=============== ===============
</TABLE>
-40-
<PAGE>
CENTURY BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1998 and 1997
- --------------------------------------------------------------------------------
NOTE N - PARENT COMPANY FINANCIAL DATA (Continued)
Condensed Statements of Financial Condition
June 30, 1998 and 1997
<TABLE>
<CAPTION>
1998 1997
---------------- ----------------
<S> <C> <C>
Assets:
Cash $ 539,904 $ 595,908
Investment securities available for sale - 8,819,705
Investment in Home Savings, Inc., SSB 22,488,508 20,864,250
Accrued interest receivable - 241,778
Other assets - 2,705
---------------- ----------------
$ 23,028,412 $ 30,524,346
================ ================
Liabilities and Stockholders' Equity:
Liabilities:
Note payable $ 4,200,000 $ -
Payable to Home Savings, Inc., SSB - 160,000
Accounts payable - 34,579
Accrued interest payable 66,167 -
Income taxes payable 30,572 27,000
---------------- ----------------
4,296,739 221,579
---------------- ----------------
Stockholders' equity:
Common stock 9,223,975 19,467,082
Deferred management recognition plan (1,016,392) -
ESOP note receivable (1,525,938) (1,585,150)
Unearned ESOP compensation (977,580) -
Retained earnings 12,579,161 12,136,999
Unrealized holding gains 448,447 283,836
---------------- ----------------
18,731,673 30,302,767
---------------- ----------------
$ 23,028,412 $ 30,524,346
================ ================
</TABLE>
-41-
<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 President, McThom, Inc.
J.L. Darr & Son, Inc. of 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 PLLC
Certified Public Accountants
Stock Transfer Agent Annual Meeting
Registrar and Transfer Company The 1998 annual meeting of stockholders
10 Commerce Street of Century Bancorp, Inc. will be held
Cranford, NJ 07016 at 5:00 p.m. on November 17, 1998 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, including
Humphrey & Leonard, L.L.P. financial statements and financial
2000 Renaissance Plaza statement schedules, as filed with
230 North Elm Street the Securities and Exchange Commission
Greensboro, NC 27420 for the Company's most recent fiscal
year will be furnished without charge
to the Company's stockholders
upon written request to James G.
Hudson, Jr., Century Bancorp,
Inc., P. O. Box 989, Thomasville,
NC 27361.
Independent Auditors
Dixon Odom PLLC Corporate Office
6 Turnberry Wood
Southern Pines, NC 28387 22 Winston Street
Thomasville, NC 27360
Common Stock Information
The Company's stock began trading on December 23, 1996. There are 1,270,869
shares of common stock outstanding which were held by approximately 295
stockholders of record (excluding shares held in street name) on June 30, 1998.
The Company's common stock is quoted on the NASDAQ SmallCap Market under the
symbol "CENB." The following table reflects the stock trading and dividend
payment frequency of the Company for the years ended June 30, 1998 and 1997.
-42-
<PAGE>
CENTURY BANCORP, INC.
CORPORATE INFORMATION
- --------------------------------------------------------------------------------
Common Stock Information (Continued)
<TABLE>
<CAPTION>
Stock price/(1)/ Dividends, per share/(2)/
-------------------------------- ---------------------------------
High Low Regular Special
------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
For the year ended June 30, 1998:
First quarter ending September 30 $ 80.25 $ 69.75 $ 0.167 $ -
Second quarter ending December 31 $ 85.00 $ 80.00 $ 0.167 $ -
Third quarter ending March 31 $ 117.00 $ 84.75 $ 0.167 $ -
Fourth quarter ending June 30/(2)/ $ 110.25 $ 15.25 $ 0.170 $ 30.00
For the year ended June 30, 1997:
First quarter ending September 30 $ - $ - $ - $ -
Second quarter ending December 31 $ 66.00 $ 61.00 $ - $ -
Third quarter ending March 31 $ 71.00 $ 62.00 $ - $ -
Fourth quarter ending June 30 $ 70.25 $ 68.00 $ 0.167 $ -
</TABLE>
/(1)/ This represents the high and low bid quotations on the NASDAQ SmallCap
Market for the dates indicated. Such quotations reflect inter-dealer
prices, without retail mark-up, mark-down or commissions and may not
reflect actual sales transactions. Stock prices have not been adjusted for
the effect of the three-for-one stock split effected in the form of a
stock dividend during the quarter ended June 30, 1998.
/(2)/ Adjusted for the effects of the three-for-one stock dividend.
Disclaimer
This annual report has not been reviewed or confirmed for accuracy or relevance
by the Federal Deposit Insurance Corporation.
-43-
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-START> JUL-01-1997
<PERIOD-END> JUN-30-1998
<CASH> 1,450
<INT-BEARING-DEPOSITS> 5,356
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 7,709
<INVESTMENTS-CARRYING> 10,217
<INVESTMENTS-MARKET> 10,326
<LOANS> 70,547
<ALLOWANCE> 550
<TOTAL-ASSETS> 96,866
<DEPOSITS> 73,023
<SHORT-TERM> 4,200
<LIABILITIES-OTHER> 911
<LONG-TERM> 0
0
0
<COMMON> 9,224
<OTHER-SE> 9,508
<TOTAL-LIABILITIES-AND-EQUITY> 96,866
<INTEREST-LOAN> 5,313
<INTEREST-INVEST> 1,912
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 7,225
<INTEREST-DEPOSIT> 3,642
<INTEREST-EXPENSE> 3,709
<INTEREST-INCOME-NET> 3,517
<LOAN-LOSSES> 18
<SECURITIES-GAINS> 12
<EXPENSE-OTHER> 1,732
<INCOME-PRETAX> 1,809
<INCOME-PRE-EXTRAORDINARY> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,204
<EPS-PRIMARY> 1.06
<EPS-DILUTED> 1.06
<YIELD-ACTUAL> 3.59
<LOANS-NON> 330
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 210
<ALLOWANCE-OPEN> 550
<CHARGE-OFFS> 18
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 550
<ALLOWANCE-DOMESTIC> 445
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 105
</TABLE>
