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UNITED STATES
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-KSB
ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended June 30, 1999
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Commission file number 000-21881
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CENTURY BANCORP, INC.
(Name of small business issuer in its charter)
North Carolina 56-1981518
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
22 Winston Street
Thomasville, North Carolina 27360
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(Address of principal executive offices) (Zip Code)
(336) 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
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(Title of class) (Name of each exchange on which registered)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act of 1934 during the past 12 months (or
for such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days. Yes
X No _____
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Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [X]
State issuer's revenues for its most recent fiscal year $6,777,240
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State the aggregate market value of the voting stock held by non-affiliates
computed by reference to the price at which the stock was sold, or the average
bid and asked prices of such stock, as of a specified date within the past 60
days.
Common Stock, no par value -- $13,142,401 (based on the price at which the stock
was sold on September 17, 1999).
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 1,115,669
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(Class) (Outstanding at September 17, 1999)
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Annual Report to Stockholders for the year ended June 30, 1999
(the "1999 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 16, 1999 (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 ("Home Savings")
operated as a mutual North Carolina-chartered savings bank. On December 20,
1996, Home Savings 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 Home Savings was acquired by Century Bancorp, Inc., a North Carolina
corporation ("Century Bancorp") which was organized to become the Home Savings'
holding company. At that time, Century Bancorp had an initial public offering of
its common stock, no par value (the "Common Stock").
Century Bancorp 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. Century Bancorp's and Home Savings'
principal office is located at 22 Winston Street, Thomasville, North Carolina.
Century Bancorp's primary activities consist holding certain indebtedness
outstanding from Home Savings' Employee Stock Ownership Plan (the "ESOP") and
owning Home Savings. Century Bancorp's principal sources of income are interest
payments received on the indebtedness from the ESOP, and dividends paid by Home
Savings to Century Bancorp, if any.
Home Savings 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. Home Savings' deposits 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.
Home Savings conducts business through its full service office in
Thomasville, North Carolina. Home Savings' 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, 1999,
Century Bancorp had total assets of $93.7 million, net loans of $75.6 million,
deposits of $74.3 million, investment securities of $13.5 million and
stockholders' equity of $17.7 million.
At June 30, 1999, Century Bancorp and Home Savings had a total of 11 full-
time employees.
Century Bancorp has no operations and conducts no significant business of
its own other than owning Home Savings and lending funds to the ESOP.
Accordingly, the discussion of the business which follows in this Form 10-KSB
concerns the business conducted by Home Savings, unless indicated otherwise.
Lending Activities
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Home Savings is engaged primarily in the business of attracting deposits
from the general public and using those deposits to make mortgage loans secured
by real estate. Home Savings' 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. Home Savings 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
Home Savings' loan portfolio, before net items, is not secured by real estate.
On June 30, 1999, Home Savings' largest single outstanding loan had a balance of
approximately $775,000. In addition to interest earned on loans, Home Savings
receives fees in connection with loan originations, loan servicing, loan
modifications, late payments, loan assumptions and other miscellaneous services.
Home Savings generally does not sell its loans; both fixed and adjustable rate
loans are originated with the intention that they will be held in Home Savings'
loan portfolio.
Home Savings' net loan portfolio totaled approximately $75.6 million at
June 30, 1999 representing approximately 80.1% of Home Savings' total assets at
such date. At June 30, 1999, 77.7% of Home Savings' loan portfolio, before net
items, was composed of one-to four-family residential mortgage loans. Multi-
family residential and commercial real estate loans represented 9.9% of Home
Savings' loan portfolio, before net items, on such date. Construction loans and
home equity loans represented 8.6% and 1.5%, respectively, of Home Savings' loan
portfolio, before net items, on such date. As of June 30, 1999, 16.2% of the
loans in Home Savings' loan portfolio had adjustable interest rates. Loans
maturing or repricing on or after June 30, 2000, consist of fixed rate real
estate loans of $54.0 million, adjustable rate real estate loans of $4.2 million
and other loans of $712,000; Home Savings has no other adjustable rate loans.
See Note C to the Financial Statements Contained in the 1999 Annual Report.
Investment Securities
Interest and dividend income from investment securities generally provides
Home Savings' second largest source of income after interest on loans. In
addition, Home Savings receives interest income from deposits in other financial
institutions. At June 30, 1999, Century Bancorp's and Home Savings' investment
portfolio totaled approximately $13.5 million and consisted primarily 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 1999 Annual Report.
As a member of the FHLB of Atlanta, Home Savings is required to maintain an
investment in stock of the FHLB of Atlanta equal to the greater of 1% of Home
Savings' 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, 1999, Home Savings' investment in stock of the FHLB of Atlanta was
$673,500.
North Carolina regulations require Home Savings to maintain a minimum
amount of liquid assets which may be invested in specified short-term
securities. See "-- Regulation of Home Savings - Liquidity."
Deposits and Borrowings
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Deposits. Deposits are the primary source of Home Savings' funds for
lending and other investment purposes. Home Savings attracts both short-term and
long-term deposits from the general public by offering a variety of accounts and
rates. Home Savings 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, 1999, 71.6% of Home Savings' deposits consisted of
certificate accounts, 7.2% consisted of passbook and statement savings accounts,
20.7% consisted of interest-bearing transaction accounts and 0.4% 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. Home Savings'
savings deposits traditionally have been obtained primarily from its primary
market area. Home Savings utilizes traditional marketing methods to attract new
customers and savings deposits, including television advertising, print media
advertising and direct mailings. Home Savings does not advertise for deposits
outside of its local market area or use the services of deposit brokers. See
Note G to the Financial Statements Contained in the 1999 Annual Report.
In addition to deposits, Home Savings 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. Home Savings may use borrowings on a short-term basis to
compensate for reductions in the availability of funds from other sources.
Borrowings may also be used on a longer term basis for general business
purposes. Home Savings has a line of credit which it may use to 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,
Home Savings 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, 1999,
Home Savings had $1.0 million in outstanding borrowings.
Results of Operations
Home Savings' 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. Home Savings'
operations are affected to a much lesser degree by non-interest income, such as
transaction and other service fee income. Home Savings' net income is also
affected by, among other things, provisions for loan losses and operating
expenses. Home Savings' principal operating expenses, aside from interest
expense, are compensation and employee benefits, office occupancy costs, data
processing expenses and federal deposit insurance premiums. Home Savings'
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
Home Savings' 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 Home Savings' 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 Home Savings'
primary market area is greatly
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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.
Subsidiaries
Home Savings is the only subsidiary of Century Bancorp. As a North Carolina
chartered savings bank, Home Savings 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 Home Savings to exceed an investment of 3% of
assets must receive prior approval of the FDIC. Home Savings does not have any
active subsidiary.
Competition
Home Savings 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, 1999, there were 8 depository institutions with 15 offices in
Thomasville, North Carolina. Based upon 1998 comparative data, Home Savings had
17.9% of the deposits in Thomasville, and 5.6% of the deposits in Davidson
County. Home Savings has also faced significant competition for investors' funds
from short-term money market securities and other corporate and government
securities. The ability of Home Savings 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.
Home Savings 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 Century Bancorp
and Home Savings. 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 Century Bancorp and Home Savings. Supervision,
regulation and examination of Century Bancorp and Home Savings by the regulatory
agencies are intended primarily for the protection of depositors rather than
shareholders of Century Bancorp.
Regulation of Century Bancorp
General. Century Bancorp was organized for the purpose of acquiring and
holding all of the capital stock of Home Savings. As a savings bank holding
company subject to the BHCA, Century Bancorp is subject to certain regulations
of the Federal Reserve. Under the BHCA, Century Bancorp'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 Century Bancorp 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 Century Bancorp 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 Century Bancorp.
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 depositors 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 the 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, 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 that 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 Home
Savings 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.
As a result of Century Bancorp's ownership of Home Savings, Century Bancorp
is registered under the savings bank holding company laws of North Carolina.
Accordingly, Century Bancorp 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 Century Bancorp and other 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 subject to the capital adequacy of guidelines 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
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preferred stock, and a limited amount of cumulative perpetual preferred stock,
less certain goodwill items. The remainder ("Tier II capital") may consist of a
limited amount of subordinated debt, certain hybrid capital instruments and
other debt securities, perpetual preferred stock, and a limited amount of the
general loan loss allowance. In addition to the risk-based capital guidelines,
the 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.
Repurchase Limitations. Century Bancorp must obtain Federal Reserve
approval in order to use more than 10% of its net worth to make stock
repurchases during any 12 month period unless Century Bancorp (i) both before
and after the redemption satisfies capital requirements for "well capitalized"
state member banks; (ii) received a one or two rating in its last examination;
and (iii) is not the subject of any unresolved supervisory issues.
Capital Maintenance Agreement. In connection with the Administrator's
approval of Century Bancorp's application to acquire control of Home Savings,
Century Bancorp was required to execute a capital maintenance agreement whereby
it has agreed to maintain Home Savings' capital in an amount sufficient to
enable Home Savings to satisfy all regulatory capital requirements.
Federal Securities Law. Century Bancorp has registered its Common Stock
with the SEC pursuant to Section 12(g) of the Securities Exchange Act of 1934
(the "Exchange Act"). 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 Home Savings
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 Home Savings, are subject to changes in applicable
statutes and regulations from time to time. Such changes may or may not be
favorable to Home Savings.
Home Savings 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. This
examination and regulation is intended primarily for the protection of
depositors and the federal deposit insurance funds.
Home Savings 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 Home Savings, 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 Home Savings. This enforcement authority includes,
among other things, the ability to assess civil money penalties, to issue
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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.
Transactions with Affiliates. Under current federal law, transactions
between Home Savings and any affiliate are governed by Sections 23A and 23B of
the Federal Reserve Act. An affiliate of Home Savings is any company or entity
that controls, is controlled by or is under common control with the savings
bank. Century Bancorp is an affiliate of Home Savings. Subsidiaries of a bank,
other than a bank subsidiary, and certain other types of companies are generally
not considered to be affiliates. Generally, Sections 23A and 23B (i) limit the
extent to which Home Savings or its subsidiaries may engage in "covered
transactions" with any one affiliate to an amount equal to 10% of such Home
Savings' 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 Home Savings 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
Century Bancorp. 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.
Insurance of Deposit Accounts. The FDIC administers two separate deposit
insurance funds. The SAIF maintains a fund to insure the deposits of most
savings institutions and the Bank Insurance Fund ("BIF") maintains a fund to
insure the deposits of most commercial banks. Home Savings is a member of the
SAIF of the FDIC.
Home Savings is required to pay assessments to the FDIC based on a
percentage of its insured deposits. 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 the
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three capital groups- well capitalized, adequately capitalized or
undercapitalized - using the same percentage criteria as in the prompt
corrective action regulations. See "-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. However, recently
enacted legislation provided for a one-time assessment equal to 65.7 basis
points times insured deposits as of March 31, 1995. This assessment fully
capitalized the SAIF. Accordingly, although the special assessment resulted in a
substantial one-time charge of Home Savings during its fiscal year ended June
30, 1997, the recapitalization of the SAIF had the effect of reducing Home
Savings' future deposit insurance premiums to the SAIF. Under the recently
enacted legislation, most BIF members will be assessed approximately 1.3 basis
points while the rate for most SAIF members 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. Home Savings, like other financial
institutions, is subject to the Community Reinvestment Act ("CRA"). A purpose of
the CRA is to encourage financial institutions to help meet the credit needs of
its entire community, including the needs of low-and moderate-income
neighborhoods. Financial institutions' compliance with the CRA is regularly
evaluated by their regulatory agencies.
Under recently adopted regulations, institutions are first evaluated and
rated under three categories: a lending test, an investment test and a service
test. For each of these three tests, the institution is 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 the that the quantitative measures do not accurately
present its actual performance, or that demographics, competitive conditions or
economic or legal limitations peculiar to its service area should be considered.
The ratings received under the three tests are used to determine the overall
composite CRA rating. The composite ratings are "outstanding," "satisfactory,"
"needs to improve" or "substantial non-compliance."
During Home Savings' last compliance examination, Home Savings received a
"satisfactory" rating with respect to CRA compliance. Home Savings' rating with
respect to CRA compliance would be a factor to be considered by the Federal
Reserve and FDIC in considering applications submitted by Home Savings to
acquire branches or to acquire or combine with other financial institutions and
take other actions and, if such rating was less than "satisfactory," could
result in the denial of such applications.
Capital Requirements Applicable To Home Savings. The FDIC requires Home
Savings 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 Home Savings 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
<PAGE>
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
institution 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, 1999, Home Savings had a leverage ratio of 17.2%.
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, 1999, Home Savings 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.
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.
Loans to One Borrower. Home Savings 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. Notwithstanding the limits just
described, savings institutions may make loans to one borrower, for any purpose,
in an amount of up to $500,000. A savings institution 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 institution's net worth,
provided that
. the purchase price of each single-family dwelling in the development
does not exceed $500,000;
. the savings institution is in compliance with its fully phased-in
capital requirements;
. the loans comply with applicable loan-to-value requirements;
. the aggregate amount of loans made under this authority does not
exceed 150% of net worth; and
. the institution's regulator issues an order permitting the savings
institution to use this higher limit.
9
<PAGE>
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, 1999, the largest aggregate amount of loans which Home
Savings had to any one borrower was $1.6 million; these loans were performing in
accordance with their original terms on that date. Home Savings had no loans
outstanding which management believes violate applicable loans-to-one borrower
limits.
Federal Home Loan Bank System. The FHLB system provides a central credit
facility for member institutions. As a member of the FHLB of Atlanta, Home
Savings 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, 1999, Home Savings was in compliance with
this requirement with an investment in FHLB of Atlanta stock of $673,500.
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, 1999, Home Savings 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 an insured institution, such as Home Savings, 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, among other things, upon the acquisition of more
than 25% of any class of voting stock. In addition, control is generally
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
. the acquisition would substantially lessen competition;
. the financial condition of the acquiring person might jeopardize the
financial stability of the savings bank or prejudice the interests of
its depositors; or
. 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 acquisition of
control by such person.
For three years following completion of the Conversion, North Carolina
conversion regulations require the prior written approval of the Administrator
before any person may directly or indirectly offer to acquire or acquire the
beneficial ownership of more than 10% of any class of an equity security of Home
Savings. If any person were to so acquire the beneficial ownership of more than
10% of any class of any equity security without prior written approval, the
securities beneficially owned in excess of 10% would not be counted as shares
entitled to vote and would not be voted or counted as voting shares in
connection with any matter submitted to stockholders for a vote. Approval is not
required for (i) any offer with a view toward public resale made exclusively to
Home Savings or its underwriters or the selling group acting on its behalf or
(ii) any offer to acquire or acquisition of beneficial ownership of more than
10% of the common stock of Home Savings by a corporation whose ownership is or
will be substantially the same as the ownership of Home Savings. The
Administrator may approve such an acquisition upon a finding that (i) the
acquisition is necessary to protect the safety and soundness of Century Bancorp
and Home Savings or the Boards of Directors of Century Bancorp and Home Savings
support the acquisition and (ii) the acquiror is of good character and integrity
and possesses satisfactory managerial skills, the acquiror will be a source of
financial strength to Century Bancorp and Home Savings and the public interests
will not be adversely affected.
10
<PAGE>
Liquidity. Home Savings 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, 1999, Home Savings' liquidity ratio, calculated in
accordance with North Carolina regulations, was approximately 11.9%.
Additional Limitations on Activities. Recent FDIC law and regulations
generally provide that Home Savings 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 Home
Savings 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. The Federal Deposit Insurance
Corporation Improvement Act of 1991 provided 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 Community Savings,
an institution is considered "well capitalized" if it has
. a total risk-based capital ratio of 10% or greater,
. a Tier I risk-based capital ratio of 6% or greater,
. a leverage ratio of 5% or greater, and
. 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
. a total risk-based capital ratio of 8% or greater,
. a Tier I risk-based capital ratio of 4% or greater, and
. a leverage ratio of 4% or greater (or 3% or greater in the case of an
institution with the highest examination rating that is not
experiencing or anticipating significant growth).
An institution is considered "undercapitalized" if it has
. a total risk-based capital ratio of less than 8%,
11
<PAGE>
. a Tier I risk-based capital ratio of less than 4%, or
. a leverage ratio of less than 4% (or 3% in the case of an institution
with the highest examination rating that is not experiencing or
anticipating significant growth).
An institution is considered "significantly undercapitalized" if the institution
has
. a total risk-based capital ratio of less than 6%, or
. a Tier I risk-based capital ratio of less than 3% or
. a leverage ratio of less than 3%.
An institution is considered "critically undercapitalized" if the institution
has a ratio of tangible equity to total assets equal to or less than 2%. Home
Savings is considered to be "well capitalized" under the rules set forth above.
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.
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.
12
<PAGE>
In addition, Home Savings 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 Home Savings' conversion from
mutual to stock ownership.
Other North Carolina Regulations. As a North Carolina-chartered savings
bank, Home Savings 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 Home Savings maintain federal deposit insurance as a condition of
doing business.
The Administrator conducts regular examinations of North Carolina-chartered
savings banks. The purpose of such examinations is to assure that institutions
are being operated in compliance with applicable North Carolina law and
regulations and in a safe and sound manner. These examinations are usually
conducted on a joint basis with the FDIC. In addition, the Administrator is
required to conduct an examination of any institution when he has good reason to
believe that the standing and responsibility of the institution is of doubtful
character or when he otherwise deems it prudent. The Administrator is empowered
to order the revocation of the license of an institution if he finds that it has
violated or is in violation of any North Carolina law or regulation and that
revocation is necessary in order to preserve the assets of the institution and
protect the interests of its depositors. The Administrator has the power to
issue cease and desist orders if any person or institution is engaging in, or
has engaged in, any unsafe or unsound practice or unfair and discriminatory
practice in the conduct of its business or in violation of any other law, rule
or regulation.
A North Carolina-chartered savings bank must maintain net worth, computed
in accordance with the Administrator's requirements, of 5% of total assets and
liquidity of 10% of total assets, as discussed above. Additionally, a North
Carolina-chartered savings bank is required to maintain general valuation
allowances and specific loss reserves in the same amounts as required by the
FDIC.
Subject to limitation by the Administrator, North Carolina-chartered
savings banks may make any loan or investment or engage in any activity which is
permitted to federally chartered institutions. However, a North Carolina-
chartered savings bank cannot invest more than 15% of its total assets in
business, commercial, corporate and agricultural loans. In addition to such
lending authority, North Carolina-chartered savings banks are authorized to
invest funds, in excess of loan demand, in certain statutorily permitted
investments, including but not limited to (i) obligations of the United States,
or those guaranteed by it; (ii) obligations of the State of North Carolina;
(iii) bank demand or time deposits; (iv) stock or obligations of the federal
deposit insurance fund or a FHLB; (v) savings accounts of any savings
institution as approved by the board of directors; and (vi) stock or obligations
of any agency of the State of North Carolina or of the United States or of any
corporation doing business in North Carolina whose principal business is to make
education loans.
North Carolina law provides a procedure by which savings institutions may
consolidate or merge, subject to approval of the Administrator. The approval is
conditioned upon findings by the Administrator that, among other things, such
merger or consolidation will promote the best interests of the members or
stockholders of the merging institutions. North Carolina law also provides for
simultaneous mergers and conversions and for supervisory mergers conducted by
the Administrator.
Future Requirements. Statutes and regulations are regularly introduced
which contain wide-ranging proposals for altering the structures, regulations
and competitive relationships of financial institutions. It cannot be
13
<PAGE>
predicted whether or what form any proposed statute or regulation will be
adopted or the extent to which the business of Century Bancorp and Home Savings
may be affected by such statute or regulation.
ITEM 2. DESCRIPTION OF PROPERTY
The following table sets forth the location of Home Savings' headquarters
office in Thomasville, North Carolina, as well as certain other information
relating to this office as of June 30, 1999:
<TABLE>
<CAPTION>
Net Book
Value of
Property and Owned or
Improvements Leased
------------ --------
<S> <C> <C>
22 Winston Street
Thomasville, North Carolina 27360 $573,876 Owned
</TABLE>
Home Savings' headquarters is the only real property owned by Century
Bancorp that is used in its operations. Century Bancorp'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 Home Savings' furniture,
fixtures and equipment at June 30, 1999 was $73,678. 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 Home
Savings in an effort to recover its investment. On June 30, 1999 Home Savings
recorded no real estate acquired in settlement of loans.
ITEM 3. LEGAL PROCEEDINGS
In the opinion of management, neither Century Bancorp nor Home Savings is
involved in any pending legal proceedings other than routine litigation that is
incidental to their business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of Century Bancorp's stockholders during
the quarter ended June 30, 1999.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
See the information under the section captioned "Common Stock Information"
on pages 41 and 42 of Century Bancorp's 1999 Annual Report, which section is
incorporated herein by reference. See "ITEM 1. DESCRIPTION OF BUSINESS --
Regulation of Home Savings -- Restrictions on Dividends and Other Capital
Distributions" above for regulatory restrictions which limit the ability of Home
Savings to pay dividends to Century Bancorp.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS
14
<PAGE>
See the information set forth under ITEM 1 above and the information set
forth under the section captioned "Management's Discussion and Analysis" on
pages 3 through 11 in Century Bancorp's 1999 Annual Report, which section is
incorporated herein by reference.
ITEM 7. FINANCIAL STATEMENTS
The consolidated financial statements of Century Bancorp set forth on pages
12 through 40 in Century Bancorp's 1999 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 Century Bancorp is set forth under the sections captioned "Proposal
1 - Election of Directors" on page 6 of the Proxy Statement and "Executive
Officers" on pages 7 and 8 of the Proxy Statement, which sections are
incorporated herein by reference.
The information required by this Item regarding compliance with Section
16(a) of the Securities Exchange Act of 1934 is set forth under the section
captioned "Section 16(a) Beneficial Ownership Reporting Compliance" set forth on
page 5 of the Proxy Statement, which is incorporated herein by reference.
ITEM 10. EXECUTIVE COMPENSATION
The information required by this Item is set forth under the sections
captioned "Proposal 1 - Election of Directors - Director Compensation" on page 7
and "- Management Compensation" on pages 8 through 14 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 14 of the Proxy Statement, which section is incorporated
herein by reference.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
Exhibits
15
<PAGE>
(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 Century Bancorp'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
Century Bancorp'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 Century
Bancorp's Annual Report on From 10-KSB for the fiscal year ended
June 30, 1997 filed September 25, 1997.
10(d) Century Bancorp, Inc. Stock Option Plan incorporated herein by
reference to Appendix A to Century Bancorp'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
Century Bancorp'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 1999 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
Century Bancorp filed a report on Form 8-K on June 18, 1999 to announce an
amendment to its stock repurchase plan.
16
<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, 1999 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, 1999
- --------------------------
James G. Hudson, Jr. Officer, Treasurer and Director
/s/ John E. Todd Vice-President September 21, 1999
- --------------------------
John E. Todd
/s/ Drema A. Michael Assistant Treasurer and September 21, 1999
- --------------------------
Drema A. Michael Secretary
/s/ Henry H. Darr Director September 21, 1999
- --------------------------
Henry H. Darr
/s/ John R. Hunnicutt Director September 21, 1999
- --------------------------
John R. Hunnicutt
/s/ F. Stuart Kennedy Director September 21, 1999
- --------------------------
F. Stuart Kennedy
/s/ Milton T. Riley, Jr. Director September 21, 1999
- --------------------------
Milton T. Riley, Jr.
</TABLE>
17
<PAGE>
Exhibit 11
STATEMENT REGARDING COMPUTATION OF PER SHARE EARNINGS
Net income per common share of $0.90 for the year ended June 30, 1999 was
calculated by dividing net income of $956,287 for the year ended June 30, 1999
by the weighted average number of common shares outstanding of 1,068,192. 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. 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 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.
1999 Annual Report
<PAGE>
Century Bancorp, Inc. and Subsidiary
- --------------------------------------------------------------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page No.
--------
<S> <C>
Selected Financial and Other Data............................ 1
Report to Stockholders....................................... 2
Management's Discussion and Analysis......................... 3
Independent Auditors' Report................................. 12
Consolidated Financial Statements
Consolidated Statements of Financial Condition.............. 13
Consolidated Statements of Operations....................... 14
Consolidated Statements of Stockholders' Equity............. 15
Consolidated Statements of Cash Flows....................... 16
Notes to Consolidated Financial Statements.................. 18
Corporate Information........................................ 41
</TABLE>
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, an adverse
interest rate environment, computer system failures related to the year 2000 and
other factors.
<PAGE>
Century Bancorp, Inc. and Subsidiary
Selected Financial and Other Data
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
At or for the Year Ended June 30,
-------------------------------------------------------
1999 1998 1997 1996 1995
--------- --------- ------------ --------- --------
(Dollars in thousands, except per share amounts)
<S> <C> <C> <C> <C> <C>
Financial Condition Data:
Total assets $93,709 $96,866 $100,640 $81,304 $75,508
Investments/(1)/ 13,499 23,935 35,180 22,823 18,852
Loans receivable, net 75,649 69,997 62,333 55,193 54,020
Deposits 74,300 73,023 69,699 69,669 64,448
Stockholders' equity 17,650 18,732 30,303 11,245 10,640
Operating Data:
Interest income $ 6,740 $ 7,225 $ 6,663 $ 5,869 $ 5,371
Interest expense 3,652 3,709 3,512 3,541 2,788
------- ------- -------- ------- -------
Net interest income 3,088 3,516 3,151 2,328 2,583
Provision for loan losses 18 18 17 165 105
------- ------- -------- ------- -------
Net interest income after provision for
loan losses 3,070 3,498 3,134 2,163 2,478
Noninterest income 37 42 47 35 15
Noninterest expense 1,663 1,731 1,507 1,169 979
------- ------- -------- ------- -------
Income before income taxes 1,444 1,809 1,674 1,029 1,514
Income tax expense 488 605 558 352 593
------- ------- -------- ------- -------
Net income $ 956 $ 1,204 $ 1,116 $ 677 $ 921
======= ======= ======== ======= =======
Per Common Share Data:
Net income, basis/(2)(4)/ $ 0.90 $ 1.06 $ 0.82/(3)/ $ - $ -
Net income, diluted/(2)(4)/ 0.90 1.06 0.82/(3)/ - -
Regular cash dividends/(4)/ 0.68 0.67 0.17 - -
Dividend payment ratio/(5)/ 75.56% 63.27% 20.73% - -
Special return of capital dividend/(4)/ $ - $ 10.00 $ - - -
Book value per common share/(4)/ $ 15.57 $ 14.74 $ 24.80 - -
Selected Other Data:
Return on average assets 1.02% 1.19% 1.22% 0.86% 1.25%
Return on average equity 5.16% 4.51% 5.43% 6.19% 9.15%
Average equity to average assets 19.83% 26.40% 22.44% 13.94% 13.68%
Interest rate spread 2.58% 2.26% 2.54% 2.41% 3.10%
Net yield on average interest-earning assets 3.45% 3.59% 3.56% 3.05% 3.61%
Average interest-earning assets to average
interest-bearing liabilities 121.26% 135.21% 125.89% 113.86% 113.08%
Ratio of noninterest expense to average total
assets 1.78% 1.71% 1.64% 1.49% 1.33%
Nonperforming assets to total assets 0.25% 0.35% 0.13% 0.76% 1.21%
Nonperforming loans to total loans 0.31% 0.47% 0.12% 0.52% 1.56%
Allowance for loan losses to total loans 0.75% 0.78% 0.88% 0.97% 0.74%
Allowance for loan losses to nonperforming loans 246.10% 166.82% 423.08% 187.02% 47.68%
</TABLE>
/(1)/ Includes interest-earning balances in other banks, FHLB stock and
investment securities.
/(2)/ On December 20, 1996, Home Savings, Inc., SSB converted from a state-
chartered mutual savings bank to a state-chartered stock savings bank and
became a wholly-owned subsidiary of Century Bancorp, Inc.
/(3)/ 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 $20.4 million in the Offering and received proceeds of $19.5 million,
net of Conversion costs. Century transferred $9.0 million of the net proceeds to
Home Savings for the purchase of all of the outstanding common stock of the
Bank. On April 6, 1998, Century paid a special $10.00 per share return of
capital dividend, returning to shareholders approximately $12.7 million.
Century has no operations and conducts no business of its own other than owning
Home Savings, 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, 1999, approximately 98%
of the Bank's net loan portfolio was composed of real estate loans.
Century's principal sources of income are 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
- --------------------------------------------------------------------------------
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, 1999 was a negative 53.78%. At June 30,
1999, the Company's three-year and five-year cumulative interest sensitivity
gaps as a percentage of total interest-earning assets were a negative 43.15% and
a negative 27.66%, respectively.
The following table sets forth the amounts of interest-earning assets and
interest-bearing liabilities outstanding at June 30, 1999 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
-4-
<PAGE>
Century Bancorp, Inc. and Subsidiary
Management's Discussion and Analysis
- --------------------------------------------------------------------------------
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, 1999
--------------------------------------------------------
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 $ 4,793 $ - $ - $ - $ 4,793
Fixed rate residential 1-4 family 7,592 12,881 10,352 27,763 58,588
Other secured - real estate - fixed 207 470 555 2,027 3,259
Other secured - real estate - adjustable 3,876 12 8 4,225 8,121
Other loans 744 712 - - 1,456
-------- -------- -------- ------- -------
Total loans receivable 17,212 14,075 10,915 34,015 76,217
Interest-earnings balances in other banks 265 - - - 265
Investments 2,017 3,015 2,990 4,538 12,560
FHLB common stock/(1)/ - - - 674 674
-------- -------- -------- ------- -------
Total interest-earning assets $ 19,494 $ 17,090 $ 13,905 $39,227 $89,716
======== ======== ======== ======= =======
INTEREST-BEARING LIABILITIES
Deposits:
Passbook and statement accounts $ 5,367 $ - $ - $ - $ 5,367
NOW and money market checking accounts 15,403 - - - 15,403
Noninterest-bearing accounts 319 - - - 319
Certificate accounts 45,651 7,560 - - 53,211
-------- -------- -------- ------- -------
66,740 7,560 - - 74,300
Note payable 1,000 - - - 1,000
-------- -------- -------- ------- -------
Total interest-bearing liabilities $ 67,740 $ 7,560 $ - $ - $75,300
======== ======== ======== ======= =======
INTEREST SENSITIVITY GAP PER PERIOD $(48,246) $ 9,530 $ 13,905 $39,227 $14,416
CUMULATIVE INTEREST SENSITIVITY GAP $(48,246) $(38,716) $(24,811) $14,416 $14,416
CUMULATIVE GAP AS A PERCENTAGE OF TOTAL
INTEREST-EARNING ASSETS (53.78)% (43.15)% (27.66)% 16.07% 16.07%
CUMULATIVE INTEREST-EARNING ASSETS AS A
PERCENTAGE OF TOTAL INTEREST-BEARING
LIABILITIES 28.78% 48.58% 67.05% 119.14% 119.14%
</TABLE>
/(1)/ Nonmarketable equity security; substantially all required to be
maintained and assumed to mature in periods greater than 5 years.
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.
-5-
<PAGE>
Century Bancorp, Inc. and Subsidiary
Management's Discussion and Analysis
- --------------------------------------------------------------------------------
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, 1999 and 1998. 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, 1999 Year Ended June 30, 1998
---------------------------- -----------------------------
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 $ 1,444 $ 85 5.89% $ 3,125 $ 182 5.82%
Investments 15,685 996 6.35% 28,493 1,730 6.07%
Loans 72,429 5,659 7.81% 66,213 5,313 8.02%
------- ------ ---- -------- ------ ----
Total interest-earning assets 89,558 6,740 7.53% 97,831 7,225 7.39%
Other assets 3,791 3,192
------- --------
Total assets $93,349 $101,023
======= ========
Interest-bearing liabilities:
Deposits $73,275 3,626 4.95% $ 71,316 3,643 5.11%
Borrowings 583 26 4.46% 1,038 66 6.36%
------- ------ ---- -------- ------ ----
Total interest-bearing liabilities 73,858 3,652 4.94% 72,354 3,709 5.13%
------ ------
Other liabilities 981 1,994
Stockholders' equity 18,510 26,675
------- --------
Total liabilities and stockholders' equity $93,349 $101,023
======= ========
Net interest income and interest rate spread $3,088 2.58% $3,516 2.26%
====== ==== ====== ====
Net yield on average interest-earning assets 3.45% 3.59%
==== ====
Ratio of average interest-earning assets to
average interest-bearing liabilities 121.26% 135.21%
======= ========
</TABLE>
-6-
<PAGE>
Century Bancorp, Inc. and Subsidiary
Management's Discussion and Analysis
- --------------------------------------------------------------------------------
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, 1999 vs. 1998
------------------------------------
Increase (Decrease) Due To
------------------------------------
Volume Rate Total
------------ ---------- ----------
(Dollars in Thousands)
<S> <C> <C> <C>
Interest income:
Interest-bearing balances $ (99) $ 2 $ (97)
Investments (817) 83 (734)
Loans 481 (135) 346
----- ----- -----
Total interest income (435) (50) (485)
----- ----- -----
Interest expense:
Deposits 123 (140) (17)
Borrowings (24) (16) (40)
----- ----- -----
Total interest expense 99 (156) (57)
----- ----- -----
Net interest income $(336) $(206) $(542)
===== ===== =====
</TABLE>
Comparison of Financial Condition at June 30, 1999 and 1998
Consolidated total assets decreased by $3.2 million during the year ended June
30, 1999, from $96.9 million at June 30, 1998 to $93.7 million at June 30, 1999.
This decrease resulted principally from the use of liquid assets to repay on
July 2, 1998 borrowings of $4.2 million that had been outstanding as of the
beginning of the current year. The borrowings had been obtained during the
second calendar quarter of 1998 to provide funding for payment on April 6, 1998
of a special $10.00 per share return of capital dividend which aggregated $12.7
million. In addition, during the current year the Company implemented a stock
repurchase plan under which 137,400 shares of common stock were reacquired for
an aggregate cost of $1.9 million.
During the year, reductions of $5.1 million and $4.6 million, respectively, in
interest-bearing balances in other banks and investment securities held to
maturity, together with proceeds from FHLB advances of $1.0 million and an
increase of $1.3 million in customer deposits, were the principal sources of
funding for the repayment of borrowings and stock repurchases discussed above,
and for an increase of $5.6 million in loans receivable, which grew from $70.0
million at June 30, 1998 to $75.6 million at June 30, 1999.
-7-
<PAGE>
Century Bancorp, Inc. and Subsidiary
Management's Discussion and Analysis
- --------------------------------------------------------------------------------
Total stockholders' equity was $17.7 million at June 30, 1999 as compared with
$18.7 million at June 30, 1998, a decrease of $1.1 million that resulted from
net income of $957,000 for the year, an increase of $62,000 in unrealized
holding gains on available for sale investment securities, amortization of
unearned ESOP and MRP compensation of $530,000, and the repurchase of common
shares described above, while the regular quarterly dividends aggregated
$742,000 or $.68 per share. At June 30, 1999, both the Holding Company 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, foreclosed 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 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. However, 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.
<TABLE>
<CAPTION>
At June 30,
------------
1999 1998
----- -----
<S> <C> <C>
Non-performing assets
Non-accrual loans $ 231 330
Loans past due 90 days or more and still accruing - -
Other real estate - 8
Renegotiated troubled debt - -
----- -----
Total non-performing assets $ 231 $ 338
===== =====
</TABLE>
Comparison of Results of Operations for the Years Ended June 30, 1999 and 1998
Net Income. Net income for the year ended June 30, 1999 was $956,000 or $.90 per
share, as compared with net income of $1.2 million, or $.1.06 per share, for the
year ended June 30, 1998, a decrease of $247,000 or $.16 per share. This
decrease in net income and earnings per share resulted primarily from a decrease
in net interest income that was partially offset by a decrease in general and
administrative expenses.
Net Interest Income. Net interest income was $3.1 million for the year ended
June 30, 1999 as compared with $3.5 million for the year ended June 30, 1998, a
decrease of $429,000. This reduction occurred as a result of the payment in
April of 1998 of a special dividend aggregating $12.7 million. Principally as a
result of this special dividend, average interest-earning assets net of average
interest-bearing liabilities for the year ended June 30, 1999 were approximately
$9.8 lower than during the year ended June 30, 1998.
-8-
<PAGE>
Century Bancorp, Inc. and Subsidiary
Management's Discussion and Analysis
- --------------------------------------------------------------------------------
Provision for Loan Losses. The provision for loan losses was $18,000 for each
of the years ended June 30, 1999 and 1998. There were no loan charge-offs during
year ended June 30, 1999, as compared with net charge-offs of $18,000 for the
year ended June 30, 1998. Non-accrual loans aggregated $231,000 at June 30,
1999, while the allowance for loan losses totaled $568,000 at that date.
General and Administrative Expenses. General and administrative expenses
decreased by $69,000 for the year ended June 30, 1999 as decreases of $113,000
and $18,000, respectively in personnel costs and provision for loss on
foreclosed real estate, respectively, were only partially offset by increases of
$37,000 and $33,000, respectively, in data processing expenses and other
expenses. The decrease in personnel costs relates principally to a reduction of
$109,000 in costs associated with the Company's Management Recognition Plan,
while the increase in data processing expenses represents additional costs
associated with the Company's Year 2000 compliance program.
Provision for Income Taxes. The provision for income taxes, as a percentage of
income before income taxes, was 33.8% and 33.4% for the years ended June 30,
1999 and 1998, respectively.
Liquidity and Capital Resources
Century paid regular cash dividends of $.68 a share during the year ended June
30, 1999. 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.
As of June 30, 1999, liquid assets (cash and marketable investment securities)
were approximately $16.1 million, which represents 21.7% 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, 1999, this liquidity ratio, based on North Carolina
regulations, was 11.9%. Management considers current liquidity levels to be
adequate to meet Home Savings' foreseeable needs.
At June 30, 1999, outstanding mortgage loan commitments were $2.9 million,
available line-of-credit balances were $1.1 million, and the undisbursed portion
of construction loans was $3.1 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.
-9-
<PAGE>
Century Bancorp, Inc. and Subsidiary
Management's Discussion and Analysis
- --------------------------------------------------------------------------------
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, 1999, Home
Savings exceeded all such requirements.
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 in this report have been
prepared in accordance with generally accepted accounting principles, which
require the measurement of financial position and operating results in terms of
historical dollars without considering the change in the relative purchasing
power of money over time and due to inflation. The impact of inflation is
reflected in the increased cost of operations. Unlike most industrial companies,
nearly all the assets and liabilities of the Company are monetary in nature. As
a result, interest rates have a greater impact on the Company's performance than
do the effects of general levels of inflation. Interest rates do not necessarily
move in the same direction or to the same extent as the price of goods and
services.
Impact of New Accounting Standards
FASB Statement on Accounting for Derivative Instruments and Hedging Activities.
In June 1998, the FASB issued Statement No. 133, Accounting for Derivative
Instruments and Hedging Activities. In June 1999, this Statement was amended by
SFAS No. 137 to defer the effective date to fiscal years beginning after June
15, 2000. This Statement establishes accounting and reporting standards for
derivative instruments and hedging activities, including certain derivative
instruments embedded in other contracts, and requires that an entity recognize
all derivatives as assets or liabilities in the statement of financial condition
and measure them at fair value. If certain conditions are met, an entity may
elect to designate a derivative as follows: (a) a hedge of exposure to changes
in the fair value of a recognized asset or liability or an unrecognized firm
commitment, (b) a hedge of the exposure to variable cash flows of a forecasted
transaction, or (c) a hedge of the foreign currency exposure of an unrecognized
firm commitment, an available-for-sale security, a foreign currency denominated
forecasted transaction, or a net investment in a foreign operation. The
Statement generally provides for matching the timing of the recognition of the
gain or loss on derivatives designated as hedging instruments with the
recognition of the changes in the fair value of the item being hedged.
Depending on the type of hedge, such recognition will be in either net income or
other comprehensive income. For a derivative not designated as a hedging
instrument, changes in fair value will be recognized in net income in the period
of change. Management anticipates that the statement will have no material
effect on the Company's consolidated financial statements.
-10-
<PAGE>
Century Bancorp, Inc. and Subsidiary
Management's Discussion and Analysis
- --------------------------------------------------------------------------------
Year 2000 Compliance Issues
All levels of the Company's management and its Board of Directors are aware of
the issues presented by the Year 2000 century change and the serious effects it
may have on the Company and its customers. In May 1998, the Federal Financial
Institutions Examination Council ("FFIEC") issued an Interagency Statement,
"Year 2000 Project Management Awareness", to emphasize the critical issues that
need to be addressed to implement an effective Year 2000 project management
plan. The FFIEC Statement identifies five phases of the Year 2000 project
management process. The Company has formed a Year 2000 project team, consisting
of senior officers within the Company's operations, information systems,
financial and management areas, to ensure that the Company will be Year 2000
compliant. Although the Company relies entirely upon outside vendors and service
providers for its computer hardware and software and its security and
communications equipment, all date sensitive systems are being evaluated for
Year 2000 compliance. During 1998, the Company completed upgrading and testing
of systems that have been identified as critical to conducting its banking
business. Testing of systems with lower priorities was completed in early 1999.
The Company has also developed contingency plans for its computer processes,
including the use of alternative systems and the manual processing of certain
critical operations. In addition, the Company is undertaking efforts to ensure
that significant vendor and customer relationships are or will be Year 2000
compliant. There can be no guarantee that the systems of other entities on which
the Company either directly or indirectly relies will be timely converted, or
otherwise function properly, or that a conversion or systems failure by another
entity, or a conversion that is incompatible with the Company's systems, would
not have a material adverse effect on the Company in future periods. However,
the Company's management believes that all of its systems will be verified Year
2000 compliant and that the Company will be able to process without any material
interruption into the next millennium. The Company estimates that its total Year
2000 compliance costs will aggregate approximately $28,000, including capital
expenditures of approximately $5,000 and other expenses of approximately $23,000
that have been or will be charged to operations. In addition to the estimated
costs of its Year 2000 compliance, the Company routinely makes annual
investments in technology in its efforts to improve customer service and to
efficiently manage its product and service delivery systems.
-11-
<PAGE>
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, 1999 and 1998 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, 1999 and 1998, and the results of their
operations and their cash flows for the years then ended in conformity with
generally accepted accounting principles.
Dixon Odom PLLC
Sanford, North Carolina
July 29, 1999
-12-
<PAGE>
CENTURY BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
June 30, 1999 and 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ASSETS 1999 1998
---------------- -----------------
<S> <C> <C>
Cash on hand and in banks $ 3,273,308 $ 1,449,725
Interest-earning balances in other banks 264,846 5,355,957
Investment securities available for sale, at fair value
(amortized cost of $6,151,157 and $6,971,897 at June 30,
1999 and 1998, respectively) (Note B) 6,989,327 7,708,723
Investment securities held to maturity, at amortized cost (fair
value of $5,590,565 and $10,325,595 at June 30, 1999
and 1998, respectively) (Note B) 5,571,204 10,216,633
Loans receivable, net (Note C) 75,649,487 69,997,493
Accrued interest receivable 479,881 545,189
Premises and equipment, net (Note D) 647,554 687,295
Stock in the Federal Home Loan Bank of Atlanta, at cost 673,500 652,600
Foreclosed real estate - 7,500
Other assets 159,956 244,601
---------------- -----------------
$ 93,709,063 $ 96,865,716
================ =================
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Deposit accounts (Note G) $ 74,300,223 $ 73,022,971
Note payable (Note F) - 4,200,000
Advances from Federal Home Loan Bank (Note F) 1,000,000 -
Accrued interest payable 98,321 151,578
Advance payment by borrowers for property taxes and insurance 204,606 171,140
Deferred income taxes (Note J) 159,607 184,995
Accrued expenses and other liabilities 296,257 403,359
---------------- -----------------
TOTAL LIABILITIES 76,059,014 78,134,043
---------------- -----------------
Commitments and contingencies (Notes C and K)
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: 1,133,469 and 1,270,869 issued and
outstanding at June 30, 1999 and 1998, respectively 8,373,418 9,223,975
Deferred management recognition plan (Note H) (689,656) (1,016,392)
ESOP note receivable (1,352,494) (1,525,938)
Unearned ESOP compensation (Note H) (910,763) (977,580)
Retained earnings, substantially restricted 11,719,396 12,579,161
Accumulated other comprehensive income 510,148 448,447
---------------- -----------------
TOTAL STOCKHOLDERS' EQUITY 17,650,049 18,731,673
---------------- -----------------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 93,709,063 $ 96,865,716
================ =================
</TABLE>
See accompanying notes.
-13-
<PAGE>
CENTURY BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended June 30, 1999 and 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1999 1998
----------- ------------
<S> <C> <C>
INTEREST INCOME
Loans $ 5,658,916 $ 5,312,884
Investments and deposits in other banks 1,080,754 1,912,550
----------- ------------
TOTAL INTEREST INCOME 6,739,670 7,225,434
----------- ------------
INTEREST EXPENSE
Deposit accounts (Note G) 3,625,547 3,642,529
Borrowings 26,159 66,167
----------- ------------
TOTAL INTEREST EXPENSE 3,651,706 3,708,696
----------- ------------
NET INTEREST INCOME 3,087,964 3,516,738
PROVISION FOR LOAN LOSSES (Note C) 18,000 18,000
----------- ------------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 3,069,964 3,498,738
----------- ------------
OTHER INCOME (EXPENSES)
Service charges and other fees 38,838 29,420
Gain on sale of investments - 11,628
Loss on sale of foreclosed real estate (412) (1,077)
Other (856) 1,826
----------- ------------
37,570 41,797
----------- ------------
GENERAL AND ADMINISTRATIVE
EXPENSES
Compensation and benefits 1,068,082 1,180,645
Occupancy 85,178 89,517
Data processing expenses 150,420 113,348
Federal deposit
insurance premiums 39,766 43,860
Provision for loss on
foreclosed real estate - 17,500
Other expenses 319,750 286,958
----------- ------------
TOTAL GENERAL AND
ADMINISTRATIVE EXPENSES 1,663,196 1,731,828
----------- ------------
INCOME BEFORE INCOME TAXES 1,444,338 1,808,707
INCOME TAXES (Note J) 488,051 605,000
----------- ------------
NET INCOME $ 956,287 $ 1,203,707
=========== ============
EARNINGS PER COMMON SHARE (Note A)
Basic and diluted $ .90 $ 1.06
=========== ============
Weighted average shares outstanding 1,068,192 1,136,778
=========== ============
DIVIDENDS PER COMMON SHARE
(Note A)
Regular dividends per common share $ .68 $ .67
=========== ============
Special return of capital dividend per common share $ - $ 10.00
=========== ============
</TABLE>
See accompanying notes.
-14-
<PAGE>
CENTURY BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years Ended June 30, 1999 and 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Deferred Accumulated
management ESOP Unearned other
Common stock recognition note ESOP Retained comprehensive
------------
Shares Amount plan receivable compensation earnings income
--------- ----------- ----------- ----------- ------------ ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at June 30, 1997 407,330 $ 19,467,082 $ - $(1,585,150) $ - $12,136,999 $ 283,836
Comprehensive income:
Net income - - - - - 1,203,707 -
Change in net unrealized
gain (loss) on
securities available
for sale, net of
reclassification
adjustment and
income
taxes of $105,753 - - - - - - 164,611
Total comprehensive
income
Cash dividends paid - - - - - (761,545) -
Return of capital dividend - (11,731,110) - - (977,580) - -
Adoption of deferred
management
recognition plan 16,293 1,452,114 (1,452,114) - - - -
Vesting of deferred
management recognition
plan - - 435,722 - - - -
Release of ESOP shares - 35,889 - 59,212 - - -
Three-for-one stock
dividend 847,246 - - - - - -
--------- ------------ ----------- ----------- ------------ ----------- -------------
Balance at June 30, 1998 1,270,869 9,223,975 (1,016,392) (1,525,938) (977,580) 12,579,161 448,447
Comprehensive income:
Net income - - - - - 956,287 -
Change in net unrealized
gain (loss) on
securities available
for sale, net of
reclassification
adjustment and
income
taxes of $39,643 - - - - - - 61,701
Total comprehensive
income - - - - - - -
Cash dividends paid - - - - - (742,133) -
Vesting of deferred
management recognition
plan - - 326,736 - - - -
Release of ESOP shares - (37,177) - 173,444 66,817 - -
Repurchase of common shares (137,400) (813,380) - - - (1,073,919) -
--------- ------------ ----------- ----------- ------------ ----------- -------------
Balance at June 30, 1999 1,133,469 $ 8,373,418 $ (689,656) $(1,352,494) $ (910,763) $11,719,396 $510,148
========= ============ =========== =========== ============ =========== =============
<CAPTION>
Total
stockholders'
equity
-------------
<S> <C>
Balance at June 30, 1997 $ 30,302,767
Comprehensive income:
Net income 1,203,707
Change in net unrealized
gain (loss) on
securities available
for sale, net of
reclassification
adjustment and
income
taxes of $105,753 164,611
-------------
Total comprehensive
income 1,368,318
-------------
Cash dividends paid (761,545)
Return of capital dividend (12,708,690)
Adoption of deferred
management
recognition plan -
Vesting of deferred
management recognition
plan 435,722
Release of ESOP shares 95,101
Three-for-one stock
dividend -
-------------
Balance at June 30, 1998 18,731,673
Comprehensive income:
Net income 956,287
Change in net unrealized
gain (loss) on
securities available
for sale, net of
reclassification
adjustment and
income
taxes of $39,643 61,701
-------------
Total comprehensive
income 1,017,988
-------------
Cash dividends paid (742,133)
Vesting of deferred
management recognition
plan 326,736
Release of ESOP shares 203,084
Repurchase of common shares (1,887,299)
-------------
Balance at June 30, 1999 $ 17,650,049
=============
</TABLE>
See accompanying notes.
-15-
<PAGE>
CENTURY BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended June 30, 1999 and 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 956,287 $ 1,203,707
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation 48,432 48,526
Deferred income taxes (65,031) (49,000)
Deferred compensation 22,000 22,000
Amortization of discounts and premiums on securities 5,005 (88,650)
Provision for loan losses 18,000 18,000
Provision for loss on foreclosed real estate - 17,500
ESOP contribution expense 203,084 95,101
Vesting of deferred management recognition plan 326,736 435,722
Gain on sale of investment securities - (11,628)
Loss on sale of real estate acquired in foreclosure 412 1,077
Change in assets and liabilities
Decrease in accrued interest receivable 65,308 295,314
(Increase) decrease in other assets 84,645 (88,260)
Increase (decrease) in accrued interest payable (53,257) 43,891
Increase (decrease) in accrued expense and other liabilities (129,101) 104,769
----------- -----------
NET CASH PROVIDED BY
OPERATING ACTIVITIES 1,482,520 2,048,069
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of:
Available for sale investment securities (505,150) (8,846,351)
Held to maturity investment securities (500,000) (3,095,650)
Proceeds from maturities and calls of:
Available for sale investment securities 1,303,652 20,730,818
Held to maturity investment securities 5,162,662 3,950,000
Proceeds from sales of available for sale investment securities - 1,511,628
Purchases of FHLB stock (20,900) (66,100)
Net increase in loans (5,669,994) (7,682,692)
Purchases of property and equipment (8,691) (26,700)
Proceeds from sale of real estate acquired in settlement of loans 7,088 26,925
----------- -----------
NET CASH PROVIDED (USED)
BY INVESTING ACTIVITIES (231,333) 6,501,878
----------- -----------
</TABLE>
See accompanying notes.
-16-
<PAGE>
CENTURY BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended June 30, 1999 and 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1999 1998
------------ ------------
<S> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in demand deposits $ 310,193 $ 1,540,839
Net increase in certificate accounts 967,059 1,783,459
Increase in advances from borrowers for property
taxes and insurance 33,466 45,277
Proceeds from note payable (4,200,000) 4,200,000
Net increase in advances from FHLB 1,000,000 -
Repurchase of common stock (1,887,300) -
Regular cash dividends paid (742,133) (761,545)
Special return of capital dividend - (12,708,690)
------------ ------------
NET CASH USED BY
FINANCING ACTIVITIES (4,518,715) (5,900,660)
------------ ------------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS (3,267,528) 2,649,287
CASH AND CASH EQUIVALENTS, BEGINNING 6,805,682 4,156,395
------------ ------------
CASH AND CASH
EQUIVALENTS, ENDING $ 3,538,154 $ 6,805,682
============ ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the year for:
Interest $ 3,704,963 $ 3,664,805
============ ============
Income taxes $ 458,300 $ 580,418
============ ============
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING ACTIVITIES
Unrealized gain on investment securities available
for sale, net of deferred income taxes $ 61,701 $ 164,611
============ ============
Adoption of deferred management recognition plan $ - $ 1,452,114
============ ============
</TABLE>
See accompanying notes.
-17-
<PAGE>
CENTURY BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended June 30, 1999 and 1998
- --------------------------------------------------------------------------------
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.
-18-
<PAGE>
CENTURY BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended June 30, 1999 and 1998
- --------------------------------------------------------------------------------
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.
Cash and Cash Equivalents
- -------------------------
For purposes of the consolidated statements of cash flows, cash and cash
equivalents include cash on hand and in banks and interest-earning balances in
other banks.
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, 1999 or 1998. 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 in other comprehensive income 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.
-19-
<PAGE>
CENTURY BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended June 30, 1999 and 1998
- --------------------------------------------------------------------------------
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.
-20-
<PAGE>
CENTURY BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended June 30, 1999 and 1998
- --------------------------------------------------------------------------------
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.
-21-
<PAGE>
CENTURY BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended June 30, 1999 and 1998
- --------------------------------------------------------------------------------
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.
Stock Compensation Plans
- ------------------------
Statement of Financial Accounting Standards (SFAS) No. 123, Accounting for
Stock-Based Compensation, encourages all entities to adopt a fair value based
method of accounting for employee stock compensation plans, whereby compensation
cost is measured at the grant date based on the value of the award and is
recognized over the service period, which is usually the vesting period.
However, it also allows an entity to continue to measure compensation cost for
those plans using the intrinsic value based method of accounting prescribed by
Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to
Employees, whereby compensation cost is the excess, if any, of the quoted market
price of the stock at the grant date (or other measurement date) over the amount
an employee must pay to acquire the stock. Stock options issued under the
Company's stock option plan have no intrinsic value at the grant date, and,
under Opinion No. 25, no compensation cost is recognized for them. The Company
has elected to continue with the accounting methodology in Opinion No. 25 and,
as a result, has provided pro forma disclosures of net income and earnings per
share and other disclosures, as if the fair value based method of accounting had
been applied.
Earnings Per Common Share
- -------------------------
Basic earnings per share represent income available to common shareholders
divided by the weighted-average number of common shares outstanding during the
period. Diluted earnings per share reflect additional common shares that would
have been outstanding if dilutive potential common shares had been issued, as
well as any adjustment to income that would result from the assumed issuance.
Potential common shares that may be issued by the Company relate to outstanding
stock options and unvested shares in the Management Recognition Plan and are
determined using the treasury stock method. All potential common shares were
anti-dilutive for the years ended June 30, 1999 and 1998, therefore, basic and
diluted earnings per share were the same number in each year.
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.
-22-
<PAGE>
CENTURY BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended June 30, 1999 and 1998
- --------------------------------------------------------------------------------
NOTE A - SIGNIFICANT ACCOUNTING POLICIES (Continued)
Comprehensive Income
- --------------------
The Company adopted SFAS 130, Reporting Comprehensive Income, as of July 1,
1998. Accounting principles generally require that recognized revenue, expenses,
gains and losses be included in net income. Although certain changes in assets
and liabilities, such as unrealized gains and losses on available-for-sale
securities, are reported as a separate component of the equity section of the
balance sheet, such items, along with net income, are components of
comprehensive income. The Adoption of SFAS 130 had no effect on the Company's
net income or shareholders' equity.
Recent Accounting Pronouncement
- -------------------------------
FASB Statement on Accounting for Derivative Instruments and Hedging Activities.
In June 1998, the FASB issued Statement No. 133, Accounting for Derivative
Instruments and Hedging Activities. In June 1999, this Statement was amended by
SFAS No. 137 to defer the effective date to fiscal years beginning after June
15, 2000. This Statement establishes accounting and reporting standards for
derivative instruments and hedging activities, including certain derivative
instruments embedded in other contracts, and requires that an entity recognize
all derivatives as assets or liabilities in the statement of financial condition
and measure them at fair value. If certain conditions are met, an entity may
elect to designate a derivative as follows: (a) a hedge of exposure to changes
in the fair value of a recognized asset or liability or an unrecognized firm
commitment, (b) a hedge of the exposure to variable cash flows of a forecasted
transaction, or (c) a hedge of the foreign currency exposure of an unrecognized
firm commitment, an available-for-sale security, a foreign currency denominated
forecasted transaction, or a net investment in a foreign operation. The
Statement generally provides for matching the timing of the recognition of the
gain or loss on derivatives designated as hedging instruments with the
recognition of the changes in the fair value of the item being hedged.
Depending on the type of hedge, such recognition will be in either net income or
other comprehensive income. For a derivative not designated as a hedging
instrument, changes in fair value will be recognized in net income in the period
of change. Management anticipates that the statement will have no material
effect on the Company's consolidated financial statements.
-23-
<PAGE>
CENTURY BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1999 and 1998
- --------------------------------------------------------------------------------
NOTE B - INVESTMENT SECURITIES
The following is a summary of the securities portfolios by major classification:
<TABLE>
<CAPTION>
June 30, 1999
---------------------------------------------------
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 $ 2,504,146 $ 13,042 $ 1,523 $ 2,515,665
Mortgage-backed securities 1,642,148 1,773 19,720 1,624,201
Municipal bonds 1,985,261 12,596 9,776 1,988,081
Equity securities 19,602 841,778 - 861,380
----------- -------- ---------- -----------
$ 6,151,157 $869,189 $31,019 $ 6,989,327
=========== ======== ========== ===========
Securities held to maturity:
U. S. government securities and obligations
of U. S. government agencies $ 5,079,584 $ 9,691 $31,028 $ 5,058,247
Municipal bonds 491,620 40,698 - 532,318
----------- -------- ---------- -----------
$ 5,571,204 $ 50,389 $31,028 $ 5,590,565
=========== ======== ========== ===========
<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
=========== ======== ========== ===========
</TABLE>
There were no realized gains or losses on sales of available for sale securities
during the year ended June 30, 1999. The 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.
-24-
<PAGE>
CENTURY BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1999 and 1998
- --------------------------------------------------------------------------------
NOTE B - INVESTMENT SECURITIES (Continued)
The amortized cost and fair values of securities at June 30, 1999 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 $ 2,004,146 $ 2,017,188 $ - $ -
Due after one year through five years 1,615,502 1,612,895 4,391,989 4,376,339
Due after five years through ten years 2,364,873 2,344,513 1,179,215 1,214,226
Due after ten years 166,636 1,014,731 - -
------------ ------------- ------------ -------------
$ 6,151,157 $ 6,989,327 $ 5,571,204 $ 5,590,565
============ ============= ============ =============
</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 $2,800,000 and $4,297,213 and a fair value
of $2,790,689 and $4,310,846 at June 30, 1999 and 1998, 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, 1999. 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 $ 2,017 $ - $ 499 $ - $ 2,516
Mortgage-backed securities - 329 1,295 - 1,624
Municipal bonds - 1,284 551 153 1,988
FHLMC stock and equity securities - - - 861 861
Securities held to maturity:
U. S. government and agency securities - 4,292 787 - 5,079
Municipal bonds - 100 392 - 492
Other investments:
Interest-earning balances in other banks 265 - - - 265
Federal Home Loan Bank stock - - - 674 674
-------------- ------------ ------------- --------- -------
$ 2,282 $ 6,005 $ 3,524 $ 1,688 $13,499
============== ============ ============= ========= =======
</TABLE>
-25-
<PAGE>
CENTURY BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1999 and 1998
- --------------------------------------------------------------------------------
NOTE B - INVESTMENT SECURITIES (Continued)
<TABLE>
<CAPTION>
Average 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 6.46% -% 5.93% -% 6.36%
Mortgage-backed securities -% 5.74% 6.57% -% 6.40%
Municipal bonds -% 4.85% 4.37% 5.60% 4.77%
FHLMC stock and equity securities -% -% -% .88% .88%
Securities held to maturity:
U. S. government and agency securities -% 6.37% 6.11% -% 6.33%
Municipal bonds -% 4.30% 6.20% -% 5.84%
Other investments:
Interest-earning balances in other banks 5.75% -% -% -% 5.75%
Federal Home Loan Bank stock -% -% -% 7.50% 7.50%
Weighted average 6.38% 5.98% 5.99% 3.95% 5.79%
</TABLE>
NOTE C - LOANS RECEIVABLE
Loans receivable consist of the following:
<TABLE>
<CAPTION>
1999 1998
-------------------------- ----------------------------
Percentage Percentage
Amount of Total Amount of Total
----------- -------------- ------------ --------------
<S> <C> <C> <C> <C>
Type of loan:
Real estate loans:
One-to-four family residential $ 62,045,292 82.02% $ 56,753,361 81.08%
Multi-family residential and
commercial 7,936,702 10.49 9,026,127 12.89
Construction 6,846,845 9.05 4,709,350 6.73
Home equity lines of credit 1,171,779 1.55 1,230,152 1.76
------------ -------- ------------ ---------
Total real estate loans 78,000,618 103.11 71,718,990 102.46
------------ -------- ------------ ---------
Other loans:
Consumer loans 1,582,414 2.09 1,412,902 2.01
Loans secured by deposits 227,937 0.30 220,934 0.32
------------ -------- ------------ ---------
Total other loans 1,810,351 2.39 1,633,836 2.33
------------ -------- ------------ ---------
Total loans 79,810,969 105.50 73,352,826 104.79
Less:
Construction loans in process 3,149,073 4.16 2,412,740 3.45
Net deferred loan fees 443,911 0.59 392,095 0.56
Allowance for loan losses 568,498 0.75 550,498 0.78
------------ -------- ------------ ---------
$ 75,649,487 100.00% $ 69,997,493 100.00%
============ ======== ============ =========
</TABLE>
-26-
<PAGE>
CENTURY BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1999 and 1998
- --------------------------------------------------------------------------------
NOTE C - LOANS RECEIVABLE (Continued)
The allowance for loan losses is summarized as follows:
1999 1998
---------- ----------
Balance at beginning of year $ 550,498 $ 549,998
---------- ----------
Loans charged off:
Real estate - (17,500)
Other - -
---------- ----------
Total loans charged off - (17,500)
---------- ----------
Recoveries:
Real estate - -
Other - -
---------- ----------
Total recoveries - -
---------- ----------
Provision for loan losses 18,000 18,000
---------- ----------
Balance at end of year $ 568,498 $ 550,498
========== ==========
The allocation of the allowance for loan losses applicable to each category of
loans at June 30, 1999 and 1998 is as follows:
<TABLE>
<CAPTION>
1999 1998
--------------------------------- ---------------------------------
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 $ 295,708 52.02% 77.74% $ 258,210 46.91% 77.37%
Multi-family residential and commercial 94,484 16.62 9.94 109,383 19.87 12.30
Construction 36,978 6.50 8.58 22,966 4.17 6.42
Home equity lines of credit 11,718 2.06 1.47 12,302 2.23 1.68
Other loans:
Consumer loans 47,472 8.35 1.98 42,387 7.70 1.93
Loans secured by deposits - - 0.29 - - 0.30
Unallocated 82,138 14.45 - 105,250 19.12 -
--------- ------ ------ --------- ------ ------
$ 568,498 100.00% 100.00% $ 550,498 100.00% 100.00%
========= ====== ====== ========= ====== ======
</TABLE>
Nonaccrual loans, which consisted of loans on which principal or interest was
delinquent for 90 days or more, totaled approximately $231,000 and $330,000 at
June 30, 1999 and 1998, respectively. Such loans had the effect of reducing
interest income by approximately $6,000 and $6,000 during the years ended June
30, 1999 and 1998, respectively.
-27-
<PAGE>
CENTURY BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1999 and 1998
- --------------------------------------------------------------------------------
NOTE C - LOANS RECEIVABLE (Continued)
At June 30, 1999, the Bank had mortgage loan commitments outstanding of
$2,949,000 and pre-approved but unused lines of credit totaling $1,108,000. 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:
1999 1998
----------- ----------
Balance at beginning of year $ 638,740 $ 401,756
Additional borrowings 1,063,449 261,700
Loan repayments (277,581) (24,716)
----------- ----------
Balance at end of year $ 1,424,608 $ 638,740
=========== ==========
NOTE D - PREMISES AND EQUIPMENT
Premises and equipment consist of the following:
1999 1998
----------- ----------
Land $ 61,203 $ 61,203
Building and improvements 737,557 737,557
Office furniture, fixtures and equipment 242,080 233,389
Automotive equipment 44,805 44,805
----------- ----------
1,085,645 1,076,954
Accumulated depreciation (438,091) (389,659)
----------- ----------
$ 647,554 $ 687,295
=========== ==========
NOTE E - FEDERAL INSURANCE OF DEPOSITS
Eligible deposit accounts are insured up to $100,000 by the Federal Deposit
Insurance Corporation.
NOTE F - BORROWINGS
At June 30, 1999, Home Savings had $10,000,000 available on a line of credit
from the Federal Home Loan Bank of which $1,000,000 had been advanced as of that
date. All advances are secured by a blanket floating lien on the Bank's one-to-
four family residential mortgage loans.
-28-
<PAGE>
CENTURY BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1999 and 1998
- --------------------------------------------------------------------------------
NOTE F - BORROWINGS (Continued)
Borrowings consist of the following:
<TABLE>
<CAPTION>
June 30
------------------------
1999 1998
----------- -----------
<S> <C> <C>
Advance from the Federal Home Loan Bank of Atlanta;
due October 5, 1999; bearing interest at 6.00% $ 1,000,000 $ -
=========== ===========
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>
NOTE G - DEPOSIT ACCOUNTS
A comparative summary of deposit accounts at June 30, 1999 and 1998 follows:
<TABLE>
<CAPTION>
1999 1998
----------------------- --------------------------
Weighted Weighted
Balance Avg. Rate Balance Avg. Rate
----------- ----------- ------------ ------------
<S> <C> <C> <C> <C>
Demand deposits:
Negotiable orders of withdrawal $ 3,972,670 2.25% $ 3,516,274 2.75%
Passbook and statement accounts 5,366,722 3.00% 5,343,812 3.00%
Money market checking 11,431,327 4.18% 11,550,528 4.51%
Non-interest-bearing checking 318,924 - 78,028 -
----------- ------------
21,089,643 3.49% 20,488,642 3.80%
Certificates of deposit 53,210,580 5.30% 52,534,329 5.65%
----------- ------------
Total deposit accounts $74,300,223 4.92% $ 73,022,971 5.13%
=========== ============
</TABLE>
A summary of certificate accounts by maturity as of June 30, 1999 follows:
<TABLE>
<CAPTION>
Less than $100,000
$100,000 or More Total
----------- ----------- ---------
(In Thousands)
<S> <C> <C> <C>
Three months or less $ 10,148 $ 3,672 $ 13,820
Over three months through six months 9,123 5,494 14,617
Over six months through twelve months 11,398 5,816 17,214
Over twelve months through twenty-four months 5,258 685 5,943
Over twenty-four months 1,617 - 1,617
----------- ----------- ---------
$ 37,544 $ 15,667 $ 53,211
=========== =========== =========
</TABLE>
-29-
<PAGE>
CENTURY BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1999 and 1998
- --------------------------------------------------------------------------------
NOTE G - DEPOSIT ACCOUNTS (Continued)
Interest expense on deposits for the years ended June 30 is summarized as
follows:
1999 1998
---------- ----------
Passbook and statement accounts $ 157,980 $ 158,605
NOW accounts 114,260 79,488
Money market accounts 449,145 441,520
Certificates of deposit 2,906,229 2,968,113
---------- ----------
3,627,614 3,647,726
Penalties for early withdrawal 2,067 5,197
---------- ----------
$3,625,547 $3,642,529
========== ==========
NOTE H - EMPLOYEE AND DIRECTOR BENEFIT PLANS
Management Recognition Plan
- ---------------------------
At a special meeting of the Company's stockholders held on February 17, 1998,
the stockholders approved the Home Savings Bank, Inc., SSB Management
Recognition Plan ("MRP"). The MRP provides for the award of up to 48,879 shares
of the Company's common stock to directors, officers and employees of the Bank
with shares vesting over a three-year period. The Company may elect to fund the
plan through the issuance of authorized but unissued shares, or may elect to
purchase the shares in the open market.
During March of 1998, 43,995 shares of newly issued common stock were awarded
under the MRP at a value of $29.71 per share. 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 additional shares had not been granted as of June 30,
1999. Personnel costs for the years ended June 30, 1999 and 1998 include
$326,736 and $435,722, respectively, which represents the value of MRP shares
earned through those dates.
-30-
<PAGE>
CENTURY BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1999 and 1998
- --------------------------------------------------------------------------------
NOTE H - EMPLOYEE AND DIRECTOR BENEFIT PLANS (Continued)
Stock Option Plan
- -----------------
At a special meeting of the Company's stockholders, held on February 17, 1998,
the stockholders approved the Century Bancorp, Inc. Stock Option Plan (the
"SOP"). The SOP provides for the issuance to directors, officers, and employees
of the Bank options to purchase up to 122,199 shares of the Company's common
stock. On March 10, 1998, the Company granted options to purchase 109,983 shares
of the Company's 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. The exercise price
equals the market price of the Company's stock on the date of grant. 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. As of June 30, 1999 and 1998, options to purchase
67,214 and 45,299 shares, respectively, 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 years ended June 30, 1999 and 1998 would have been
affected as set forth below:
As Reported Pro Forma
------------- -----------
1999 net income $ 956,287 $ 861,932
1999 net income per share, basic and diluted $ 0.90 $ 0.81
1998 net income $ 1,203,707 $ 977,909
1998 net income per share, basic and diluted $ 1.06 $ 0.86
In determining the pro forma disclosures above, the fair value of options
granted was estimated to be $4.41 per option as of the grant date under 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.
Employee Stock Ownership Plan
- -----------------------------
The Bank established an ESOP to benefit all qualified employees. The ESOP
purchased 97,758 shares of common stock in a prior year 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, 1999 and 1998, the
outstanding balance of the loan is $1,352,494 and $1,525,938, respectively, and
is presented as a reduction of stockholders' equity.
-31-
<PAGE>
CENTURY BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1999 and 1998
- --------------------------------------------------------------------------------
NOTE H - EMPLOYEE AND DIRECTOR BENEFIT PLANS (Continued)
Employee Stock Ownership Plan (Continued)
- -----------------------------
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 $203,084 and $95,101 during the years ended June 30, 1999 and 1998,
respectively, has been incurred in connection with the ESOP. The expense for the
years ended June 30, 1999 and 1998 includes, in addition to the cash
contributions necessary to fund the ESOP, $29,641 and $35,889, 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, 1999, 20,514 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 $1.1
million at June 30, 1999.
Executive 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 or after 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, 1999 and 1998.
-32-
<PAGE>
CENTURY BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1999 and 1998
- --------------------------------------------------------------------------------
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 - STOCK REPURCHASE PLAN
On August 14, 1998, the Company's Board of Directors adopted a stock repurchase
plan under which the Company is authorized to repurchase shares of its
outstanding common stock in the open market or in privately negotiated
transactions at times deemed appropriate. During the year ended June 30, 1999,
the Company repurchased 137,400 shares of its common stock at an aggregate cost
of $1.9 million.
NOTE J - INCOME TAXES
The components of income tax expense are as follows for the years ended June 30,
1999 and 1998:
1999 1998
--------- ---------
Current tax expense $ 553,082 $ 654,000
Net deferred tax benefit included in operations (65,031) (49,000)
--------- ---------
$ 488,051 $ 605,000
========= =========
-33-
<PAGE>
CENTURY BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1999 and 1998
- --------------------------------------------------------------------------------
NOTE J - INCOME TAXES (Continued)
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, 1999 and 1998:
<TABLE>
<CAPTION>
1999 1998
--------- ---------
<S> <C> <C>
Income tax at federal statutory rate $ 491,075 $ 615,000
State income tax, net of federal tax benefit 17,470 4,000
Tax exempt interest income (28,638) (19,000)
Other 8,144 5,000
--------- ---------
$ 488,051 $ 605,000
========= =========
</TABLE>
Deferred tax assets and liabilities arising from temporary differences at June
30, 1999 and 1998 are summarized as follows:
<TABLE>
<CAPTION>
1999 1998
---------- ----------
<S> <C> <C>
Deferred tax assets relating to:
Loan fees and costs $ - $ 464
Deferred compensation 132,042 123,669
Bad debt reserves 219,554 125,100
--------- ---------
Gross deferred tax assets 351,596 249,233
Valuation allowance - -
--------- ---------
Net deferred tax assets 351,596 249,233
--------- ---------
Deferred tax liabilities relating to:
Loan fees and costs (38,746) -
Property and equipment (40,794) (41,186)
FHLB stock dividends (103,811) (104,832)
Net unrealized gain on securities available for sale (327,852) (288,210)
--------- ---------
Total deferred tax liabilities (511,203) (434,228)
--------- ---------
Net deferred tax liability $(159,607) $(184,995)
========= =========
</TABLE>
-34-
<PAGE>
CENTURY BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1999 and 1998
- --------------------------------------------------------------------------------
NOTE J - INCOME TAXES (Continued)
Retained earnings at June 30, 1999 include approximately $1.5 million 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 is
recapturing over a six year period $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.
-35-
<PAGE>
CENTURY BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 39, 1999 and 1998
- --------------------------------------------------------------------------------
NOTE K - REGULATORY RESTRICTIONS (Continued)
At June 30, 1999, 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 $17,650,049 $17,650,049 $17,650,049 $17,650,049
Separate equity of Century Bancorp, Inc. (732,481) (732,481) (732,481) (732,481)
Unrealized gain on securities (510,057) (510,057) (510,057) (510,057)
Loan loss allowance - - 568,498 568,498
----------- ----------- ----------- -----------
Regulatory capital 16,407,511 16,407,511 16,976,009 16,976,009
Minimum capital requirement 2,867,000 1,894,000 3,789,000 4,683,000
----------- ----------- ----------- -----------
Excess regulatory capital $13,540,511 $14,513,511 $13,187,009 $12,293,009
=========== =========== =========== ===========
</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, 1999, the Bank paid dividends of $6.4 million to
the Parent. During the year ended June 30, 1998, the Bank did not pay any
dividends to Century.
-36-
<PAGE>
CENTURY BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 39, 1999 and 1998
- --------------------------------------------------------------------------------
NOTE K - REGULATORY RESTRICTIONS (Continued)
Century Bancorp, Inc. paid, after giving effect to the 3 for 1 stock dividend,
regular cash dividends totaling $.68 and $.67 per share during the years ended
June 30, 1999 and 1998, 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, 1999 is as follows:
Financial instruments whose contract amounts represent
credit risk:
Commitments to extend credit, mortgage loans $2,949,000
Undisbursed construction loans 3,149,000
Undisbursed lines of credit 1,108,000
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.
-37-
<PAGE>
CENTURY BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 39, 1999 and 1998
- --------------------------------------------------------------------------------
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.
Borrowings
The fair value of borrowings 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.
-38-
<PAGE>
CENTURY BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 39, 1999 and 1998
- --------------------------------------------------------------------------------
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, 1999 and 1998:
<TABLE>
<CAPTION>
1999 1998
------------------------ ------------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Financial assets:
Cash and interest-bearing balances $ 3,538,154 $ 3,538,154 $ 6,805,682 $ 6,805,682
Investment securities:
Available for sale 6,989,327 6,989,327 7,708,723 7,708,723
Held to maturity 5,571,204 5,590,565 10,216,633 10,325,595
Loans 75,649,487 74,178,000 69,997,493 70,818,000
Stock in Federal Home Loan Bank
of Atlanta 673,500 673,500 652,600 652,600
Financial liabilities:
Deposits 74,300,223 73,586,000 73,022,971 72,603,000
Borrowings 1,000,000 1,010,000 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, 1999 and 1998:
Condensed Statements of Operations
Years Ended June 30, 1999 and 1998
<TABLE>
<CAPTION>
1999 1998
-------- ----------
<S> <C> <C>
Interest income $133,811 $ 520,743
Equity in earnings of Home Savings, Inc., SSB 906,536 910,455
Interest expense (2,427) (66,167)
Other expenses (30,983) (1,324)
Income taxes (50,650) (160,000)
-------- ----------
Net income $956,287 $1,203,707
======== ==========
</TABLE>
-39-
<PAGE>
CENTURY BANCORP, INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1999 and 1998
- --------------------------------------------------------------------------------
NOTE N - PARENT COMPANY FINANCIAL DATA (Continued)
Condensed Statements of Financial Condition
June 30, 1999 and 1998
<TABLE>
<CAPTION>
1999 1998
------------ -----------
<S> <C> <C>
Assets:
Cash $ 194,181 $ 539,904
Investment securities available for sale 5,300 -
Investment in Home Savings, Inc., SSB 17,427,625 22,488,508
Accrued interest receivable - -
Other assets - -
----------- -----------
$17,627,106 $23,028,412
=========== ===========
Liabilities and Stockholders' Equity:
Liabilities:
Note payable $ - $ 4,200,000
Payable to Home Savings, Inc., SSB - -
Accounts payable - -
Accrued interest payable - 66,167
Income taxes payable (22,943) 30,572
----------- -----------
(22,943) 4,296,739
----------- -----------
Stockholders' equity:
Common stock 8,373,418 9,223,975
Deferred management recognition plan (689,656) (1,016,392)
ESOP note receivable (1,352,494) (1,525,938)
Unearned ESOP compensation (910,763) (977,580)
Retained earnings 11,719,396 12,579,161
Unrealized holding gains 510,148 448,447
----------- -----------
17,650,049 18,731,673
----------- -----------
$17,627,106 $23,028,412
=========== ===========
</TABLE>
-40-
<PAGE>
CENTURY BANCORP, INC.
CORPORATE INFORMATION
- --------------------------------------------------------------------------------
Executive Officers
James G. Hudson, Jr.
President, CEO and Treasurer
Drema A. Michael John E. Todd
Secretary and Assistant Treasurer Vice President
Directors
<TABLE>
<S> <C> <C>
Henry H. Darr James G. Hudson, Jr. John R. Hunnicutt
President, President, CEO and Treasurer of President, McThom, Inc.
J. L. Darr & Son, Inc. Home Savings and Century Bancorp 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
</TABLE>
<TABLE>
<CAPTION>
Stock Transfer Agent Annual Meeting
<S> <C>
Registrar and Transfer Company The 1999 annual meeting of stockholders of Century Bancorp, Inc. will be
10 Commerce Street held at 5:00 p.m. on November 16, 1999 at the Company's corporate office
Cranford, NJ 07016 at 22 Winston Street, Thomasville, NC.
Special Legal Counsel Form 10-KSB
Brooks, Pierce, McLendon,
Humphrey & Leonard, L.L.P. A copy of Form 10-KSB, including financial statements and financial
2000 Renaissance Plaza statement schedules, as filed with the Securities and Exchange
230 North Elm Street Commission for the Company's most recent fiscal year will be furnished
Greensboro, NC 27420 without charge to the Company's stockholders upon written request to
James G. Hudson, Jr., Century Bancorp, Inc., P. O. Box 989, Thomasville,
Independent Auditors NC 27361.
Dixon Odom PLLC Corporate Office
408 Summit Drive
Sanford, NC 27330 22 Winston Street
Thomasville, NC 27360
</TABLE>
Common Stock Information
The Company's stock began trading on December 23, 1996. As of June 30, 1999,
there were 1,133,469 shares of common stock outstanding which were held by
approximately 295 stockholders of record (excluding shares held in street name).
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, 1999 and 1998.
-41-
<PAGE>
CENTURY BANCORP, INC.
CORPORATE INFORMATION
- --------------------------------------------------------------------------------
Common Stock Information (Continued)
<TABLE>
<CAPTION>
Stock price/(1)/ Dividends, per share/(2)/
--------------------------- ------------------------------
High Low Regular Special
------------ ----------- ------------- -------------
For the year ended June 30, 1999:
<S> <C> <C> <C> <C>
First quarter ending September 30 $ 16.88 $ 12.00 $ 0.170 $ -
Second quarter ending December 31 $ 14.50 $ 12.75 $ 0.170 $ -
Third quarter ending March 31 $ 14.00 $ 13.50 $ 0.170 $ -
Fourth quarter ending June 30 $ 14.00 $ 13.00 $ 0.170 $ -
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 $ 10.00
</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, 1999.
/(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.
-42-
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-START> JUL-01-1998
<PERIOD-END> JUN-30-1999
<CASH> 3,273
<INT-BEARING-DEPOSITS> 265
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 6,989
<INVESTMENTS-CARRYING> 5,571
<INVESTMENTS-MARKET> 5,591
<LOANS> 76,217
<ALLOWANCE> 568
<TOTAL-ASSETS> 93,709
<DEPOSITS> 74,300
<SHORT-TERM> 1,000
<LIABILITIES-OTHER> 759
<LONG-TERM> 0
0
0
<COMMON> 8,373
<OTHER-SE> 9,277
<TOTAL-LIABILITIES-AND-EQUITY> 93,709
<INTEREST-LOAN> 5,659
<INTEREST-INVEST> 1,081
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 6,740
<INTEREST-DEPOSIT> 3,626
<INTEREST-EXPENSE> 3,652
<INTEREST-INCOME-NET> 3,088
<LOAN-LOSSES> 18
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 1,663
<INCOME-PRETAX> 1,444
<INCOME-PRE-EXTRAORDINARY> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 956
<EPS-BASIC> .90
<EPS-DILUTED> .90
<YIELD-ACTUAL> 3.45
<LOANS-NON> 231
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 550
<CHARGE-OFFS> 0
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 568
<ALLOWANCE-DOMESTIC> 486
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 82
</TABLE>
