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Filed Pursuant to Rule 424(b)(1)
File No. 333-50843 and
File No. 333-50843-01
PROSPECTUS
[CENTURY BANCORP LOGO]
2,500,000 PREFERRED SECURITIES
CENTURY BANCORP CAPITAL TRUST
8.30% CUMULATIVE TRUST PREFERRED SECURITIES
(LIQUIDATION AMOUNT $10 PER PREFERRED SECURITY)
GUARANTEED, AS DESCRIBED HEREIN, BY
CENTURY BANCORP, INC.
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$25,000,000 8.30% JUNIOR SUBORDINATED DEBENTURES OF
CENTURY BANCORP, INC.
--------------------
The 8.30% Cumulative Trust Preferred Securities (the "Preferred
Securities") offered hereby represent preferred undivided beneficial interests
in the assets of Century Bancorp Capital Trust, a statutory business trust
created under the laws of the State of Delaware (the "Trust"). Century Bancorp,
Inc., a Massachusetts corporation (the "Company"), will own all the common
securities (the "Common Securities" and, together with the Preferred Securities,
the "Trust Securities") representing undivided beneficial interests in the
assets of the Trust.
(Continued on next page)
The Preferred Securities have been approved for quotation on the Nasdaq
National Market under the Symbol "CNBKP."
------------------------
SEE "RISK FACTORS" BEGINNING ON PAGE 12 FOR A DISCUSSION OF CERTAIN
FACTORS THAT SHOULD BE CONSIDERED BY PROSPECTIVE INVESTORS.
------------------------
THE SECURITIES OFFERED HEREBY ARE NOT DEPOSITS OR OTHER OBLIGATIONS OF A BANK
AND ARE NOT INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION
OR ANY OTHER GOVERNMENTAL AGENCY AND INVOLVE INVESTMENT
RISKS, INCLUDING POSSIBLE LOSS OF PRINCIPAL.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION PASSED UPON THE ACCURACY
OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
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PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC COMMISSION(1) TRUST(2)
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<S> <C> <C> <C>
Per Preferred Security....... $ 10.00 (2) $ 10.00
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Total(3)..................... $25,000,000 (2) $25,000,000
==============================================================================
</TABLE>
(1) The Company and the Trust have agreed to indemnify the Underwriters against
certain liabilities, including certain liabilities under the Securities Act
of 1933, as amended. See "Underwriting."
(2) In view of the fact that the proceeds of the sale of the Preferred
Securities will be invested in the Junior Subordinated Debentures, the
Company, as issuer of the Junior Subordinated Debentures, has agreed to pay
the Underwriters, as compensation, $0.3625 per Preferred Security or
$906,250 in the aggregate. See "Underwriting." The Company has also agreed
to pay the expenses of the offering estimated to be $355,913.
(3) The Trust has granted the Underwriters a 30-day option to purchase up to a
maximum of 375,000 additional Preferred Securities to cover over-allotments,
if any. If such option is exercised in full the total Price to Public,
Underwriting Commission and Proceeds to Trust will be $28,750,000,
$1,042,187 and $28,750,000, respectively. See "Underwriting."
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The Preferred Securities are being offered by the Underwriters, subject to
prior sale, when, as and if delivered to and accepted by the Underwriters and
subject to their right to reject orders in whole or in part. It is expected that
delivery of the Preferred Securities will be made on or about May 18, 1998.
TUCKER ANTHONY
INCORPORATED
THE DATE OF THIS PROSPECTUS IS MAY 13, 1998.
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State Street Bank and Trust Company is the Property Trustee (as defined
herein) of the Trust. The Trust exists for the purpose of issuing the Preferred
Securities and investing the proceeds thereof in an equivalent amount of 8.30%
Junior Subordinated Debentures (the "Junior Subordinated Debentures") of the
Company. The Junior Subordinated Debentures will mature on June 30, 2029, which
date may be shortened to a date not earlier than June 30, 2003, if certain
conditions are met (including, in the case of shortening the Stated Maturity (as
defined herein), the Company having received prior approval of the Board of
Governors of the Federal Reserve System ("Federal Reserve") to do so if then
required under applicable capital guidelines or policies of the Federal
Reserve). The Preferred Securities will have a preference over the Common
Securities under certain circumstances with respect to cash distributions and
amounts payable on liquidation, redemption or otherwise. See "Description of the
Preferred Securities -- Subordination of the Common Securities."
Holders of Preferred Securities are entitled to receive preferential
cumulative cash distributions, at the annual rate of 8.30% of the liquidation
amount of $10 per Preferred Security (the "Liquidation Amount"), accumulating
from May 18, 1998, the date of original issuance, and payable quarterly in
arrears on the last day of March, June, September and December of each year,
commencing September 30, 1998 (the "Distributions"). The Company has the right,
so long as no Debenture Event of Default (as defined herein) has occurred and is
continuing, to defer payment of interest on the Junior Subordinated Debentures
at any time or from time to time for a period not to exceed 20 consecutive
quarters with respect to each deferral period (each, an "Extension Period");
provided that no Extension Period may extend beyond the Stated Maturity of the
Junior Subordinated Debentures. Upon the termination of any such Extension
Period and the payment of all amounts then due, the Company may elect to begin a
new Extension Period subject to the requirements set forth herein. If interest
payments on the Junior Subordinated Debentures are so deferred, Distributions on
the Preferred Securities will also be deferred, and the Company will not be
permitted, subject to certain exceptions described herein, to declare or pay any
cash distributions with respect to its capital stock or debt securities that
rank pari passu with or junior to the Junior Subordinated Debentures. DURING AN
EXTENSION PERIOD, INTEREST ON THE JUNIOR SUBORDINATED DEBENTURES WILL CONTINUE
TO ACCRUE (AND THE AMOUNT OF DISTRIBUTIONS TO WHICH HOLDERS OF THE PREFERRED
SECURITIES ARE ENTITLED WILL ACCUMULATE) AT THE RATE OF 8.30% PER ANNUM,
COMPOUNDED QUARTERLY, AND HOLDERS OF THE PREFERRED SECURITIES WILL BE REQUIRED
TO INCLUDE INTEREST INCOME IN THEIR GROSS INCOME FOR UNITED STATES FEDERAL
INCOME TAX PURPOSES IN ADVANCE OF RECEIPT OF THE CASH DISTRIBUTIONS WITH RESPECT
TO SUCH DEFERRED INTEREST PAYMENTS. UPON THE OCCURRENCE OF AN EXTENSION PERIOD,
A HOLDER OF PREFERRED SECURITIES THAT DISPOSES OF ITS PREFERRED SECURITIES
BETWEEN RECORD DATES FOR PAYMENTS OF DISTRIBUTIONS (AND CONSEQUENTLY DOES NOT
RECEIVE A DISTRIBUTION FROM THE TRUST FOR THE PERIOD PRIOR TO SUCH DISPOSITION)
WILL NEVERTHELESS BE REQUIRED TO INCLUDE ACCRUED BUT UNPAID INTEREST ON THE
JUNIOR SUBORDINATED DEBENTURES THROUGH THE DATE OF DISPOSITION IN INCOME AS
ORDINARY INCOME AND TO ADD SUCH AMOUNT TO ITS ADJUSTED TAX BASIS IN ITS PRO RATA
SHARE OF THE UNDERLYING JUNIOR SUBORDINATED DEBENTURES DEEMED DISPOSED OF. See
"Description of the Junior Subordinated Debentures -- Option to Extend Interest
Payment Period," "Certain Federal Income Tax Consequences -- Potential Extension
of Interest Payment Period and Original Issue Discount" and "-- Disposition of
Preferred Securities."
The Company and the Trust believe that, taken together, the obligations of
the Company under the Guarantee, the Trust Agreement, the Junior Subordinated
Debentures, the Indenture and the Expense Agreement (each as defined herein)
provide, in the aggregate, a full, irrevocable and unconditional guarantee, on a
subordinated basis, of all of the obligations of the Trust under the Preferred
Securities. See "Relationship Among the Preferred Securities, the Junior
Subordinated Debentures and the Guarantee -- Full and Unconditional Guarantee."
The Guarantee of the Company guarantees the payment of Distributions and
payments on liquidation or redemption of the Preferred Securities, but only in
each case to the extent of funds held by the Trust, as described herein. See
"Description of the Guarantee -- General." If the Company does not make interest
payments on the Junior Subordinated Debentures held by the Trust, the Trust will
have insufficient funds to pay Distributions on the Preferred Securities. The
Guarantee does not cover payments of Distributions when the Trust does not have
sufficient funds to pay such Distributions. In such event, a holder of Preferred
Securities may institute a legal proceeding directly against the Company
pursuant to the terms of the Indenture to enforce payments of amounts equal to
such Distributions to such holder. See "Description of the Junior Subordinated
Debentures -- Enforcement of Certain Rights by Holders of the Preferred
Securities." The obligations of the Company under the Guarantee and the
Preferred Securities are subordinate and
2
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junior in right of payment to all Senior Debt, Subordinated Debt and Additional
Senior Obligations (each as defined herein) of the Company. The Junior
Subordinated Debentures are unsecured obligations of the Company and are
subordinated to all Senior Debt, Subordinated Debt and Additional Senior
Obligations of the Company.
The Preferred Securities are subject to mandatory redemption, in whole or
in part, upon repayment of the Junior Subordinated Debentures at maturity or
their earlier redemption. Subject to Federal Reserve approval, if then required
under applicable capital guidelines or policies of the Federal Reserve, the
Junior Subordinated Debentures are redeemable prior to maturity at the option of
the Company (i) on or after June 30, 2003, in whole at any time or in part from
time to time, or (ii) at any time, in whole (but not in part), within 180 days
following the occurrence of a Tax Event, a Capital Treatment Event or an
Investment Company Event (each as defined herein), in each case at a redemption
price equal to the accrued and unpaid interest on the Junior Subordinated
Debentures so redeemed to the date fixed for redemption, plus 100% of the
principal amount thereof. See "Description of the Preferred
Securities -- Redemption or Exchange."
The Company intends to take the position that the Junior Subordinated
Debentures will be classified under current law as indebtedness of the Company
for United States federal income tax purposes and accordingly, the Company
intends to treat the interest payable by the Company on the Junior Subordinated
Debentures as deductible for United States federal income tax purposes. There is
no assurance that such position of the Company will not be challenged by the
Internal Revenue Service or, if challenged, that such a challenge will not be
successful. See "Risk Factors -- Proposed Tax Legislation."
The Company has the right at any time to dissolve the Trust, subject to the
Company having received prior approval of the Federal Reserve to do so if then
required under applicable capital guidelines or policies of the Federal Reserve.
In the event of the voluntary or involuntary dissolution of the Trust, after
satisfaction of liabilities to creditors of the Trust as required by applicable
law, the holders of Preferred Securities will be entitled to receive the
Liquidation Amount per Preferred Security, plus accumulated and unpaid
Distributions thereon to the date of payment, which may be in the form of a
Junior Subordinated Debenture having an aggregate principal amount equal to the
aggregate Liquidation Amount of such Preferred Securities (and carrying with it
accrued interest in an amount equal to the accumulated and unpaid Distributions
then due on such Preferred Securities), subject to certain exceptions. See
"Description of the Preferred Securities -- Redemption or Exchange" and
"-- Liquidation Distribution Upon Dissolution."
The Company will provide to the holders of the Preferred Securities
quarterly reports containing unaudited financial statements and annual reports
containing financial statements audited by the Company's independent auditors.
The Company will also furnish annual reports on Form 10-K and quarterly reports
on Form 10-Q free of charge to holders of the Preferred Securities who so
request in writing addressed to the Clerk of the Company.
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE PREFERRED
SECURITIES OFFERED HEREBY, INCLUDING OVER-ALLOTMENTS, STABILIZING TRANSACTIONS,
SYNDICATE SHORT COVERING TRANSACTIONS AND PENALTY BIDS. SUCH TRANSACTIONS, IF
COMMENCED, MAY BE DISCONTINUED AT ANY TIME. FOR A DESCRIPTION OF THESE
ACTIVITIES, SEE "UNDERWRITING."
IN CONNECTION WITH THIS OFFERING, CERTAIN UNDERWRITERS (AND SELLING GROUP
MEMBERS) MAY ENGAGE IN PASSIVE MARKET MAKING TRANSACTIONS IN THE PREFERRED
SECURITIES OFFERED HEREBY ON THE NASDAQ NATIONAL MARKET IN ACCORDANCE WITH RULE
103 OF REGULATION M. SEE "UNDERWRITING."
3
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CENTURY BANCORP, INC.
MAP OF OPERATIONS
[Century Bancorp Location map]
4
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SUMMARY
The following summary is qualified in its entirety by the more detailed
information, including "Risk Factors" and the Consolidated Financial Statements
and Notes thereto, appearing elsewhere in this Prospectus or incorporated herein
by reference. The discussion in this Prospectus contains forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933, as
amended (the "Securities Act") and Section 21E of the Securities Exchange Act of
1934, as amended (the "Exchange Act") that involve risks and uncertainties. The
Company's actual results and the timing of certain events may differ materially
from the results discussed in the forward-looking statements. Factors that could
cause or contribute to such differences include, but are not limited to, those
discussed in "Risk Factors." As used herein, (i) the "Indenture" means the
Indenture, to be dated as of May 18, 1998, as amended and supplemented from time
to time, between the Company and State Street Bank and Trust Company, as
Debenture Trustee (the "Debenture Trustee"), relating to the Junior Subordinated
Debentures, (ii) the "Trust Agreement" means the Amended and Restated
Declaration of Trust relating to the Trust among the Company, as Depositor,
State Street Bank and Trust Company, as Property Trustee (the "Property
Trustee"), Wilmington Trust Company, as Delaware Trustee (the "Delaware
Trustee"), and the Administrative Trustees named therein (collectively, with the
Property Trustee and Delaware Trustee, the "Issuer Trustees") and (iii) the
"Guarantee" means the Guarantee Agreement relating to the Preferred Securities
between the Company and State Street Bank and Trust Company, as Guarantee
Trustee (the "Guarantee Trustee").
CENTURY BANCORP, INC.
Century Bancorp, Inc., a Massachusetts corporation (together with its
subsidiary, unless the context otherwise requires, the "Company"), formed in
1972 and headquartered in Medford, Massachusetts, is a one bank holding company
operating primarily through Century Bank and Trust Company, a Massachusetts bank
formed in 1969 (the "Bank"). The Company had total assets of $631.1 million and
stockholders' equity of $53.9 million on December 31, 1997. The Bank is a
community bank, with 15 banking offices in 14 cities and towns in eastern
Massachusetts ranging from Braintree to Peabody. The Bank's customers consist
primarily of small and medium-sized businesses and retail customers in these
communities and surrounding areas, as well as local governments throughout
eastern Massachusetts.
The Bank offers a wide range of services to commercial enterprises, state
and local governments and agencies, and individuals with an emphasis on service
to small and medium-sized businesses and retail customers in its market area. It
makes commercial loans, real estate and construction loans, and consumer loans,
and accepts savings, time, and demand deposits. In addition, the Bank offers to
its corporate customers automated lock box collection services, cash management
services and account reconciliation services, and actively promotes the
marketing of these services to the municipal market.
The Bank provides full service securities brokerage through Century
Financial Services in conjunction with Commonwealth Equities. In addition, the
Bank is a provider of financial services including cash management, transaction
processing and short term financing to municipalities in Massachusetts. The Bank
has deposit relationships with approximately 30% of the 351 cities and towns in
the state.
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FINANCIAL SUMMARY
<TABLE>
<CAPTION>
AT OR FOR THE YEAR ENDED DECEMBER 31,
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1997 1996 1995 1994 1993
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(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
Assets.............................. $631,125 $560,857 $531,928 $465,419 $469,823
Deposits............................ 515,449 476,135 458,615 409,542 421,395
Stockholders' equity................ 53,857 47,489 42,935 37,553 35,505
Pre-tax income...................... 11,028 8,839 6,240 4,072 1,828
Net income.......................... 6,823 5,434 4,574 3,304 1,223
Net yield on average earning assets,
taxable equivalent................ 4.99% 4.79% 4.86% 4.70% 4.16%
Return on average equity............ 13.56% 12.13% 11.33% 9.11% 3.48%
Return on average assets............ 1.20% 1.01% 0.92% 0.70% 0.25%
</TABLE>
STRATEGY
The Company has sought to consistently increase earnings per share and to
maximize return on equity through a combination of strategies, including:
- Personalized Service. The Company seeks to offer a full range of
products and services to its customers while maintaining the high level
of personalized service associated with a community bank. Strong,
long-term relationships are a cornerstone of this strategy. The Company
strives to respond quickly to customer needs and provides customers with
direct access to senior lending officers with approval authority. The
Company intends to use its community-based position to build its
portfolio of commercial loans to small and medium-sized businesses.
- Growth through Strategic Acquisitions. The Company is in the process of
completing the acquisition of Haymarket Cooperative Bank. See "Recent
Developments" below. The Company continues to seek suitable strategic
opportunities for consolidation and expansion of its market position
through selective acquisitions.
RECENT DEVELOPMENTS
On December 10, 1997, the Company announced an agreement to acquire
Haymarket Cooperative Bank. Haymarket, located in Boston, Massachusetts, has
approximately $142 million of assets and will be acquired for approximately $20
million in cash. The Haymarket acquisition will add two branch locations in
Boston's financial district, allowing the Company to provide commercial banking
services to a greater number of Boston's small and medium-sized businesses. The
acquisition will also connect the Bank geographically, giving it a market
presence from Beverly on the North Shore of Massachusetts to Quincy and
Braintree on the South Shore. The transaction is subject to federal and state
regulatory approvals.
On April 14, 1998, the Company announced net income of $1,802,000 or $0.31
per share for the first quarter of 1998, compared to net income of $1,376,000,
or $0.24 per share for the first quarter of 1997.
Total stockholders' equity was $55.3 million at March 31, 1998, compared to
$48.4 million at March 31, 1997. The Company's leverage ratio at March 31, 1998,
stood at 9.05%, compared to a leverage ratio of 8.62% on March 31, 1997. Book
value at March 31, 1998 was $9.55 per share.
The Company's allowance for loan losses was $4.7 million, or 1.46% of loans
outstanding at the end of the first quarter, compared to $4.3 million, or 1.46%
of loans outstanding at March 31, 1997. Non-accruing loans totaled $1.5 million
at March 31, 1998, compared to $1.7 million at the end of the previous quarter.
The Company's Board of Directors voted a regular quarterly dividend of 5
cents ($0.05) per share on the Company's Class A common stock, and 0.70 cents
($0.0070) per share on the Company's Class B common stock. The dividends were
declared payable May 15, 1998 to stockholders of record on May 1, 1998.
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The principal executive office of the Company is located at 400 Mystic
Avenue, Medford, Massachusetts 02155 and its telephone number is (781) 391-4000.
CENTURY BANCORP CAPITAL TRUST
The Trust is a statutory business trust formed under Delaware law pursuant
to (i) a trust agreement, dated as of April 21, 1998, executed by the Company,
as depositor, and the trustees of the Trust (together with the Property Trustee,
the "Trustees"), and (ii) a certificate of trust filed with the Secretary of
State of the State of Delaware on April 21, 1998. The initial trust agreement
will be amended and restated in its entirety (as so amended and restated, the
"Trust Agreement") substantially in the form filed as an exhibit to the
Registration Statement of which this Prospectus forms a part. The Trust
Agreement will be qualified as an indenture under the Trust Indenture Act of
1939, as amended (the "Trust Indenture Act"). Upon issuance of the Preferred
Securities, the purchasers thereof will own all of the Preferred Securities. The
Company will acquire all of the Common Securities, which will represent an
aggregate liquidation amount equal to at least 3% of the total capital of the
Trust. The Common Securities will rank pari passu, and payments will be made
thereon pro rata, with the Preferred Securities, except that upon the occurrence
and during the continuance of an Event of Default (as defined herein) under the
Trust Agreement resulting from a Debenture Event of Default, the rights of the
Company as holder of the Common Securities to payment in respect of
Distributions and payments upon liquidation, redemption or otherwise will be
subordinated to the rights of the holders of the Preferred Securities. See
"Description of the Preferred Securities -- Subordination of Common Securities."
The Trust exists for the exclusive purposes of (i) issuing the Trust Securities
representing undivided beneficial interests in the assets of the Trust, (ii)
investing the gross proceeds of the Trust Securities in the Junior Subordinated
Debentures issued by the Company, and (iii) engaging in only those other
activities necessary, advisable, or incidental thereto. The Junior Subordinated
Debentures will be the only assets of the Trust and payments under the Junior
Subordinated Debentures will be the only revenue of the Trust. The Trust has a
term of 55 years, but may dissolve earlier as provided in the Trust Agreement.
The principal executive office of the Trust is c/o Century Bancorp, Inc., 400
Mystic Avenue, Medford, Massachusetts 02155, and its telephone number is (781)
391-4000.
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THE OFFERING
Securities Offered........... 2,500,000 Preferred Securities having a
Liquidation Amount of $10 per Preferred Security.
The Preferred Securities represent preferred
undivided beneficial interests in the assets of
the Trust, which will consist solely of the
Junior Subordinated Debentures and payments
thereunder. The Trust has granted the
Underwriters an option, exercisable within 30
days after the date of the Offering, to purchase
up to an additional 375,000 Preferred Securities
at the initial offering price, solely to cover
over-allotments, if any.
Offering Price............... $10 per Preferred Security (Liquidation Amount
$10).
Distributions................ The Distributions payable on each Preferred
Security will be fixed at a rate per annum of
8.30% of the Liquidation Amount of $10 per
Preferred Security, will be cumulative, will
accumulate from May 18, 1998, the date of
original issuance of the Preferred Securities,
and will be payable quarterly in arrears, on
March 31, June 30, September 30 and December 31
of each year, commencing September 30, 1998. See
"Description of the Preferred
Securities -- Distributions -- Payment of
Distributions."
Junior Subordinated
Debentures................... The Trust will invest the proceeds from the
issuance of the Preferred Securities and Common
Securities in an equivalent amount of 8.30%
Junior Subordinated Debentures of the Company.
The Junior Subordinated Debentures will mature on
June 30, 2029. The Junior Subordinated Debentures
will rank subordinate and junior in right of
payment to all Senior Debt and Subordinated Debt
of the Company. In addition, the Company's
obligations under the Junior Subordinated
Debentures will be structurally subordinated to
all existing and future liabilities and
obligations of its subsidiaries.
Option to Extend Interest
Payment Period............... The Company has the right, at any time, so long
as no Debenture Event of Default has occurred and
is continuing, to defer payments of interest on
the Junior Subordinated Debentures for a period
not exceeding 20 consecutive quarters; provided,
that no Extension Period may extend beyond the
Stated Maturity of the Junior Subordinated
Debentures. As a consequence of the extension by
the Company of the interest payment period,
quarterly Distributions on the Preferred
Securities will be deferred (though such
Distributions will continue to accumulate with
interest thereon compounded quarterly, since
interest will continue to accrue and compound on
the Junior Subordinated Debentures) during any
such Extension Period. During an Extension
Period, the Company will be prohibited, subject
to certain exceptions described herein, from
declaring or paying any cash distributions with
respect to its capital stock or debt securities
that rank pari passu with or junior to the Junior
Subordinated Debentures. Upon the termination of
any Extension Period and the payment of all
amounts then due, the Company may commence a new
Extension Period, subject to the foregoing
requirements. See "Description of the Preferred
Securities -- Distributions -- Extension Period"
and "Description of the Junior Subordinated
Debentures -- Option to Extend Interest Payment
Period." Should an Extension Period occur,
holders of Preferred Securities will be required
to include deferred interest income in their
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gross income for United States federal income tax
purposes in advance of receipt of the cash
distributions with respect to such deferred
interest payments. See "Certain Federal Income
Tax Consequences -- Potential Extension of
Interest Payment Period and Original Issue
Discount."
Redemption................... The Preferred Securities are subject to mandatory
redemption, in whole or in part, upon repayment
of the Junior Subordinated Debentures at maturity
or their earlier redemption. Subject to Federal
Reserve approval, if then required under
applicable capital guidelines or policies of the
Federal Reserve, the Junior Subordinated
Debentures are redeemable prior to maturity at
the option of the Company (i) on or after June
30, 2003, in whole at any time or in part from
time to time, or (ii) at any time, in whole (but
not in part), within 180 days following the
occurrence of a Tax Event, a Capital Treatment
Event or an Investment Company Event, in each
case at a redemption price equal to 100% of the
principal amount of the Junior Subordinated
Debentures, together with any accrued but unpaid
interest on the Junior Subordinated Debentures to
the date fixed for redemption. See "Description
of the Junior Subordinated Debentures --
Redemption or Exchange."
Ranking...................... The Preferred Securities will rank pari passu,
and payments thereon will be made pro rata, with
the Common Securities except as described under
"Description of the Preferred
Securities -- Subordination of the Common
Securities." The Junior Subordinated Debentures
will rank pari passu with all other Junior
Subordinated Debentures (if any) issued by the
Company (the "Other Debentures"), which are
issued and sold (if at all) to other trusts
established by the Company (if any), in each case
similar to the Trust ("Other Trusts"), and will
constitute unsecured obligations of the Company
and will rank subordinate and junior in right of
payment to all Senior Indebtedness to the extent
and in the manner set forth in the Indenture. See
"Description of the Junior Subordinated
Debentures." The Guarantee will rank pari passu
with all other guarantees (if any) issued by the
Company with respect to Preferred Securities (if
any) issued by Other Trusts ("Other Guarantees")
and will constitute an unsecured obligation of
the Company and will rank subordinate and junior
in right of payment to all Senior Indebtedness to
the extent and in the manner set forth in the
Guarantee Agreement. See "Description of the
Guarantee." In addition, because the Company is a
holding company, the Junior Subordinated
Debentures and the Guarantee will be effectively
subordinated to all existing and future
liabilities of the Company's subsidiaries,
including the Bank's deposit liabilities. See
"Description of the Junior Subordinated
Debentures -- Subordination."
Distribution of Junior
Subordinated
Debentures................. The Company has the right at any time to dissolve
the Trust and cause the Junior Subordinated
Debentures, after satisfaction of liabilities to
creditors of the Trust as required by applicable
law, to be distributed to holders of Preferred
Securities in liquidation of the Trust, subject
to the Company having received prior approval of
the Federal Reserve to do so if then required
under applicable capital
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guidelines or policies of the Federal Reserve.
See "Description of the Preferred
Securities -- Redemption or Exchange" and
"Description of the Preferred
Securities -- Liquidation Distribution Upon
Dissolution."
Guarantee.................... The Company has guaranteed the payment of
Distributions and payments on liquidation or
redemption of the Preferred Securities, but only
in each case to the extent of funds held by the
Trust, as described herein. The Company and the
Trust believe that, taken together, the
obligations of the Company under the Guarantee,
the Trust Agreement, the Junior Subordinated
Debentures, the Indenture and the Expense
Agreement provide, in the aggregate, a full,
irrevocable and unconditional guarantee, on a
subordinated basis, of all of the obligations of
the Trust under the Preferred Securities. The
obligations of the Company under the Guarantee
and the Preferred Securities are subordinate and
junior in right of payment to all Senior Debt,
Subordinated Debt and Additional Senior
Obligations of the Company. If the Company does
not make principal or interest payments on the
Junior Subordinated Debentures, the Trust will
not have sufficient funds to make distributions
on the Preferred Securities. In such event, the
Guarantee will not apply to such Distributions
until the Trust has sufficient funds available
therefor. See "Description of the Guarantee."
Voting Rights................ The holders of the Preferred Securities will have
no voting rights except in limited circumstances.
See "Description of the Preferred Securities --
Voting Rights; Amendment of Trust Agreement."
Use of Proceeds.............. All of the proceeds from the sale of the Trust
Securities will be invested by the Trust in the
Junior Subordinated Debentures. The Company
intends to use the net proceeds from the sale of
the Junior Subordinated Debentures for general
corporate purposes, including contributions to
the Bank to fund its operations, the financing of
one or more future acquisitions by the Company if
and when suitable opportunities arise, and the
repurchase of outstanding equity securities of
the Company. Initially, the net proceeds may be
used to make investments in short-term investment
securities. See "Use of Proceeds."
Nasdaq National Market
Symbol....................... The Preferred Securities have been approved for
quotation on the Nasdaq National Market under the
symbol "CNBKP."
- --------------------------------------------------------------------------------
10
<PAGE> 11
- --------------------------------------------------------------------------------
SELECTED CONSOLIDATED FINANCIAL DATA
OF CENTURY BANCORP, INC.
<TABLE>
<CAPTION>
AT OR FOR THE YEAR ENDED DECEMBER 31,
--------------------------------------------------------
1997 1996 1995 1994 1993
-------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C> <C> <C>
OPERATING RESULTS:
Net interest income................. $ 25,294 $ 22,972 $ 21,302 $ 19,537 $ 17,449
Provision for loan losses........... 660 1,020 1,560 1,620 1,800
-------- -------- -------- -------- --------
Net interest income after
provision for loan losses.... 24,634 21,952 19,742 17,917 15,649
-------- -------- -------- -------- --------
Other operating income.............. 4,994 4,761 4,722 5,420 6,833
-------- -------- -------- -------- --------
Operating expenses.................. 18,600 17,874 18,224 19,265 20,654
-------- -------- -------- -------- --------
Income before income taxes.......... 11,028 8,839 6,240 4,072 1,828
Provision for income taxes.......... 4,205 3,405 1,666 768 605
-------- -------- -------- -------- --------
Net income.......................... $ 6,823 $ 5,434 $ 4,574 $ 3,304 $ 1,223
======== ======== ======== ======== ========
Net income per share, basic......... $ 1.18 $ 0.95 $ 0.80 $ 0.58 $ 0.21
======== ======== ======== ======== ========
Net income per share, diluted....... $ 1.17 $ 0.93 $ 0.78 $ 0.57 $ 0.21
======== ======== ======== ======== ========
Book value per common share......... $ 9.30 $ 8.25 $ 7.50 $ 6.56 $ 6.20
======== ======== ======== ======== ========
Tangible book value per share....... $ 9.12 $ 8.03 $ 7.25 $ 6.55 $ 6.19
======== ======== ======== ======== ========
BALANCE SHEET DATA:
Total assets........................ $631,125 $560,857 $531,928 $465,419 $469,823
Loans, net.......................... 316,390 288,280 285,438 272,721 272,040
Securities available-for-sale....... 89,190 81,015 100,754 69,698 24,494
Securities held-to-maturity......... 109,239 107,715 77,987 48,050 93,544
Core deposit intangibles............ 1,045 1,252 1,458 95 101
Deposits............................ 515,449 476,135 458,615 409,542 421,395
Total stockholders' equity.......... 53,857 47,489 42,935 37,553 35,505
PERFORMANCE RATIOS:
Net yield on average earning assets,
taxable equivalent................ 4.99% 4.79% 4.86% 4.70% 4.16%
Average equity to average assets.... 8.88 8.29 8.17 7.67 7.30
Return on average stockholders'
equity............................ 13.56 12.13 11.33 9.11 3.48
Return on average assets............ 1.20 1.01 0.92 0.70 0.25
Efficiency ratio(1)................. 61.0 64.2 68.7 69.4 71.8
NON-PERFORMING ASSETS AS A
PERCENTAGE OF:
Total loans and real estate owned... 0.86 1.21 2.11 3.36 7.26
Total assets........................ 0.43 0.62 1.13 1.99 4.36
ALLOWANCES FOR LOAN LOSSES AS A
PERCENTAGE OF NON-PERFORMING
ASSETS............................ 162.80 119.88 69.27 45.78 25.03
NET LOAN CHARGE-OFFS AS A PERCENTAGE
OF AVERAGE OUTSTANDING LOANS...... 0.13 0.37 0.57 0.94 1.32
RATIO OF EARNINGS TO FIXED CHARGES
Including interest on deposits...... 1.69 1.56 1.42 1.37 1.15
Excluding interest on deposits...... 7.84 10.40 9.58 12.94 8.20
</TABLE>
- ---------------
(1) The efficiency ratio is calculated using operating expenses, adjusted for
real estate owned expenses, divided by net interest income on a fully
tax-equivalent basis plus other operating income.
- --------------------------------------------------------------------------------
11
<PAGE> 12
RISK FACTORS
Prospective investors should carefully consider, together with the other
information contained and incorporated by reference in this Prospectus, the
following risk factors in evaluating the Company and its business and the Trust
before purchasing the Preferred Securities offered hereby. Prospective investors
should note, in particular, that certain statements contained or incorporated by
reference in this Prospectus, including, without limitation, statements
containing the words "believes", "anticipates", "intends", "expects" and words
of similar import, constitute "forward-looking statements" within the meaning of
Section 27A of the Securities Act and Section 21E of the Exchange Act. Such
forward-looking statements involve known and unknown risks, uncertainties and
other factors that may cause the actual results, performance or achievements of
the Company to be materially different from any future results, performance or
achievements expressed or implied by such forward-looking statements. Such
factors include, among others, the following: general economic and business
conditions in those areas in which the Company operates; demographic changes;
competition; fluctuations in interest rates; changes in business strategy or
development plans; changes in governmental regulation; credit quality; the
availability of capital to fund the expansion of the Company's business; and
other factors referenced in this Prospectus or incorporated by reference herein.
Given these uncertainties, prospective investors are cautioned not to place
undue reliance on such forward-looking statements. The Company disclaims any
obligation to update any such factors or to publicly announce the results of any
revisions to any of the forward-looking statements contained or incorporated by
reference herein to reflect future events or developments. The considerations
listed below represent certain important factors the Company believes could
cause such results to differ. These considerations are not intended to represent
a complete list of the general or specific risks that may affect the Company and
the Trust. It should be recognized that other risks may be significant,
presently or in the future, and the risks set forth below may affect the Company
and the Trust to a greater extent than indicated.
RISK FACTORS RELATING TO THE PREFERRED SECURITIES
ABILITY TO MAKE PAYMENTS ON THE PREFERRED SECURITIES AND JUNIOR SUBORDINATED
DEBENTURES
The Company is a legal entity separate and distinct from its subsidiaries,
including the Bank. The ability of the Trust to pay amounts due on the Preferred
Securities is solely dependent upon the Company making payments on the Junior
Subordinated Debentures as and when required. As a holding company without
significant assets other than its equity interest in the Bank, the Company's
ability to pay interest on the Junior Subordinated Debentures to the Trust (and
consequently, the Trust's ability to pay distributions on the Preferred
Securities and the Company's ability to pay its obligations under the Guarantee)
depends primarily on cash and liquid investments of the Company and upon cash
dividends the Company may receive in the future from the Bank. The Bank's
ability to pay dividends to the Company is restricted by Massachusetts law,
which requires that retained earnings are available to pay such dividends. The
Bank had retained earnings of $37.2 million at December 31, 1997, which amount
of retained earnings is unrestricted and available for dividend payments to the
Company. At December 31, 1997, the Company had cash, cash equivalents and
securities available-for-sale of approximately $187.1 million. See "Use of
Proceeds."
RANKING OF SUBORDINATED OBLIGATIONS UNDER THE GUARANTEE AND THE JUNIOR
SUBORDINATED DEBENTURES
The obligations of the Company under the Guarantee issued for the benefit
of the holders of Preferred Securities and under the Junior Subordinated
Debentures are unsecured and rank subordinate and junior in right of payment to
all Senior Debt, Subordinated Debt and Additional Senior Obligations of the
Company, whether now existing or hereafter incurred. At December 31, 1997, the
Company had no outstanding Senior Debt, Subordinated Debt or Additional Senior
Obligations. Because the Company is a holding company, the right of the Company
to participate in any distribution of assets of the Bank upon the Bank's
liquidation or reorganization or otherwise (and thus the ability of holders of
the Preferred Securities to benefit indirectly from such distribution) is
subject to the prior claims of creditors of the Bank, except to the extent that
the Company may itself be recognized as a creditor of the Bank. The Junior
Subordinated Debentures, therefore, will be effectively subordinated to all
existing and future liabilities of the Bank and holders of Junior
12
<PAGE> 13
Subordinated Debentures and Preferred Securities should look only to the assets
of the Company for payments on the Junior Subordinated Debentures. Neither the
Indenture, the Guarantee nor the Trust Agreement places any limitation on the
amount of secured or unsecured debt, including Senior Debt, Subordinated Debt
and Additional Senior Obligations, that may be incurred by the Company. See
"Description of the Guarantee -- Status of the Guarantee" and "Description of
the Junior Subordinated Debentures -- Subordination."
The ability of the Trust to pay amounts due on the Preferred Securities is
solely dependent upon the Company making payments on the Junior Subordinated
Debentures as and when required.
OPTION TO EXTEND INTEREST PAYMENT PERIOD; TAX CONSEQUENCES; MARKET PRICE
CONSEQUENCES
The Company has the right under the Indenture, so long as no Debenture
Event of Default has occurred and is continuing, to defer the payment of
interest on the Junior Subordinated Debentures at any time or from time to time
for a period not exceeding 20 consecutive quarters with respect to each
Extension Period; provided that no Extension Period may extend beyond the Stated
Maturity of the Junior Subordinated Debentures. As a consequence of any such
deferral, quarterly Distributions on the Preferred Securities by the Trust will
be deferred (and the amount of Distributions to which holders of the Preferred
Securities are entitled will accumulate additional Distributions thereon at the
rate of 8.30% per annum, compounded quarterly from the relevant payment date for
such Distributions) during any such Extension Period. During any such Extension
Period, the Company may not (i) declare or pay any dividends or distributions
on, or redeem, purchase, acquire, or make a liquidation payment with respect to,
any of the Company's capital stock, (ii) make any payment of principal, interest
or premium, if any, on or repay, repurchase or redeem any debt securities of the
Company that rank pari passu with or junior in interest to the Junior
Subordinated Debentures or make any guarantee payments with respect to any
guarantee by the Company of the debt securities of any subsidiary of the Company
if such guarantee ranks pari passu with or junior in interest to the Junior
Subordinated Debentures (other than payments under the Guarantee), or (iii)
redeem, purchase or acquire less than all of the Junior Subordinated Debentures
or any of the Preferred Securities. Prior to the termination of any such
Extension Period, the Company may further defer the payment of interest;
provided, that no Extension Period may exceed 20 consecutive quarters or extend
beyond the Stated Maturity of the Junior Subordinated Debentures. Upon the
termination of any Extension Period and the payment of all interest then accrued
and unpaid (together with interest thereon at the annual rate of 8.30%
compounded quarterly, to the extent permitted by applicable law), the Company
may elect to begin a new Extension Period, subject to the above requirements.
Subject to the foregoing, there is no limitation on the number of times that the
Company may elect to begin an Extension Period. See "Description of the
Preferred Securities -- Distributions -- Extension Period" and "Description of
the Junior Subordinated Debentures -- Option to Extend Interest Payment Period."
Should an Extension Period occur, each holder of Preferred Securities will
be required to accrue and recognize income (in the form of original issue
discount ("OID")) in respect of its pro rata share of the interest accruing on
the Junior Subordinated Debentures held by the Trust for United States federal
income tax purposes. A holder of Preferred Securities must, as a result, include
such income in gross income for United States federal income tax purposes in
advance of the receipt of cash, and will not receive the cash related to such
income from the Trust if the holder disposes of the Preferred Securities prior
to the record date for the payment of the related Distributions. See "Certain
Federal Income Tax Consequences -- Potential Extension of Interest Payment
Period and Original Issue Discount."
The Company has no current intention of exercising its right to defer
payments of interest by extending the interest payment period on the Junior
Subordinated Debentures. Should the Company elect, however, to exercise such
right in the future, the market price of the Preferred Securities is likely to
be adversely affected. A holder that disposes of its Preferred Securities during
an Extension Period, therefore, might not receive the same return on its
investment as a holder that continues to hold its Preferred Securities. As a
result of the existence of the Company's right to defer interest payments, the
market price of the Preferred Securities may be more volatile than the market
prices of other securities on which original issue discount accrues that are not
subject to such optional deferrals.
13
<PAGE> 14
REDEMPTION DUE TO TAX EVENT, CAPITAL TREATMENT EVENT OR INVESTMENT COMPANY EVENT
The Company has the right to redeem the Junior Subordinated Debentures in
whole (but not in part) within 180 days following the occurrence of a Tax Event,
a Capital Treatment Event or an Investment Company Event (whether occurring
before or after June 30, 2003), and, therefore, cause a mandatory redemption of
the Preferred Securities. The exercise of such right is subject to the Company
having received prior approval of the Federal Reserve to do so if then required
under applicable capital guidelines or policies of the Federal Reserve.
"Tax Event" means the receipt by the Trust of an opinion of counsel
experienced in such matters to the effect that, as a result of any amendment to,
or change (including any announced prospective change) in the laws (or any
regulations thereunder) of the United States or any political subdivision or
taxing authority thereof or therein, or as a result of any official
administrative pronouncement or judicial decision interpreting or applying such
laws or regulations, which amendment or change is effective or which
pronouncement or decision is announced on or after the date of issuance of the
Preferred Securities under the Trust Agreement, there is more than an
insubstantial risk that (i) the Trust is, or will be within 90 days of the date
of such opinion, subject to United States federal income tax with respect to
income received or accrued on the Junior Subordinated Debentures, (ii) interest
payable by the Company on the Junior Subordinated Debentures is not, or, within
90 days of such opinion, will not be, deductible by the Company, in whole or in
part, for United States federal income tax purposes, or (iii) the Trust is, or
will be within 90 days of the date of the opinion, subject to more than a de
minimis amount of other taxes, duties or other governmental charges. The Company
must request and receive an opinion with regard to such matters within a
reasonable period of time after it becomes aware of the possible occurrence of
any of the events described in clauses (i) through (iii) above. See "-- Risk
Factors Relating to the Preferred Securities -- Proposed Tax Legislation" for a
discussion of certain legislative proposals that, if adopted, could give rise to
a Tax Event, which may permit the Company to cause a redemption of the Preferred
Securities prior to June 30, 2003.
"Capital Treatment Event" means the receipt by the Trust of an opinion of
counsel experienced in such matters to the effect that, as a result of any
amendment to or any change (including any announced prospective change) in the
laws (or any regulations thereunder) of the United States or any political
subdivision thereof or therein, or as a result of any official administrative
pronouncement or judicial decision interpreting or applying such laws or
regulations, which amendment or change is effective or which proposed change,
pronouncement or decision is announced on or after the date of issuance of the
Preferred Securities under the Trust Agreement, there is more than an
insubstantial risk of impairment of the Company's ability to treat the aggregate
Liquidation Amount of the Preferred Securities (or any substantial portion
thereof) as "Tier 1 Capital" (or the then equivalent thereof) for purposes of
the capital adequacy guidelines of the Federal Reserve, as then applicable to
the Company; provided, however, that the inability of the Company to treat all
or any portion of the Liquidation Amount of the Preferred Securities as Tier 1
Capital shall not constitute the basis for a Capital Treatment Event if such
inability results from the Company having cumulative preferred capital in excess
of the amount which may qualify for treatment as Tier 1 Capital under applicable
capital adequacy guidelines of the Federal Reserve.
"Investment Company Event" means the receipt by the Trust of an opinion of
counsel experienced in such matters to the effect that, as a result of the
occurrence of a change in law or regulation or a change in interpretation or
application of law or regulation by any legislative body, court, governmental
agency or regulatory authority, the Trust is or will be considered an
"investment company" that is required to be registered under the Investment
Company Act of 1940, as amended (the "Investment Company Act"), which change
becomes effective on or after the date of original issuance of the Preferred
Securities.
SHORTENING OF STATED MATURITY OF JUNIOR SUBORDINATED DEBENTURES
The Company has the right, at any time, to shorten the maturity of the
Junior Subordinated Debentures to a date not earlier than June 30, 2003. The
exercise of such right is subject to the Company having received prior approval
of the Federal Reserve if then required under applicable capital guidelines or
policies of the Federal Reserve. See "Description of the Junior Subordinated
Debentures -- General."
14
<PAGE> 15
RIGHTS UNDER THE GUARANTEE
The Guarantee guarantees to the holders of the Preferred Securities, to the
extent not paid by the Trust, (i) any accrued and unpaid Distributions required
to be paid on the Preferred Securities, to the extent that the Trust has funds
available therefor at such time, (ii) the Redemption Price (as defined herein)
with respect to any Preferred Securities called for redemption, to the extent
that the Trust has funds available therefor at such time, and (iii) upon a
voluntary or involuntary dissolution, winding-up or liquidation of the Trust
(other than in connection with the distribution of Junior Subordinated
Debentures to the holders of Preferred Securities or a redemption of all of the
Preferred Securities), the lesser of (a) the amount of the Liquidation
Distribution (as defined herein), to the extent the Trust has funds available
therefor at such time, and (b) the amount of assets of the Trust remaining
available for distribution to holders of the Preferred Securities in liquidation
of the Trust. The holders of not less than a majority in Liquidation Amount of
the Preferred Securities have the right to direct the time, method and place of
conducting any proceeding for any remedy available to the Guarantee Trustee in
respect of the Guarantee or to direct the exercise of any trust power conferred
upon the Guarantee Trustee under the Guarantee. Any holder of the Preferred
Securities may institute a legal proceeding directly against the Company to
enforce its rights under the Guarantee without first instituting a legal
proceeding against the Trust, the Guarantee Trustee or any other Person (as
defined in the Guarantee). If the Company were to default on its obligation to
pay amounts payable under the Junior Subordinated Debentures, the Trust would
lack funds for the payment of Distributions or amounts payable on redemption of
the Preferred Securities or otherwise, and, in such event, holders of Preferred
Securities would not be able to rely upon the Guarantee for such amounts. In the
event, however, that a Debenture Event of Default has occurred and is continuing
and such event is attributable to the failure of the Company to pay interest on
or principal of the Junior Subordinated Debentures on the payment date on which
such payment is due and payable, then a holder of Preferred Securities may
institute a legal proceeding directly against the Company for enforcement of
payment to such holder of the principal of or interest on such Junior
Subordinated Debentures having a principal amount equal to the aggregate
Liquidation Amount of the Preferred Securities of such holder (a "Direct
Action"). The exercise by the Company of its right, as described herein, to
defer the payment of interest on the Junior Subordinated Debentures does not
constitute a Debenture Event of Default. In connection with such Direct Action,
the Company will have a right of set-off under the Indenture to the extent of
any payment made by the Company to such holder of Preferred Securities in the
Direct Action. Except as described herein, holders of Preferred Securities will
not be able to exercise directly any other remedy available to the holders of
the Junior Subordinated Debentures or assert directly any other rights in
respect of the Junior Subordinated Debentures. See "Description of the Junior
Subordinated Debentures -- Enforcement of Certain Rights by Holders of Preferred
Securities," "Description of the Junior Subordinated Debentures -- Debenture
Events of Default" and "Description of the Guarantee." The Trust Agreement
provides that each holder of Preferred Securities by acceptance thereof agrees
to the provisions of the Guarantee and the Indenture.
NO VOTING RIGHTS EXCEPT IN LIMITED CIRCUMSTANCES
Holders of Preferred Securities will have no voting rights except in
limited circumstances relating only to the modification of the Preferred
Securities and the exercise of the rights of the Trust as holder of the Junior
Subordinated Debentures and the Guarantee. Holders of Preferred Securities will
not be entitled to vote to appoint, remove or replace the Property Trustee or
the Delaware Trustee, as such voting rights are vested exclusively in the holder
of the Common Securities (except upon the occurrence of certain events described
herein). The Property Trustee, the Administrative Trustees and the Company may
amend the Trust Agreement without the consent of holders of Preferred Securities
to ensure that the Trust will be classified for United States federal income tax
purposes as a grantor trust even if such action adversely affects the interests
of such holders. See "Description of the Preferred Securities -- Voting Rights;
Amendment of Trust Agreement" and "Description of the Preferred
Securities -- Removal of the Trust Trustees."
15
<PAGE> 16
PROPOSED TAX LEGISLATION
In both 1996 and 1997 legislation was proposed that would, if enacted, have
adversely affected the tax treatment of the Preferred Securities. On March 19,
1996, President Clinton proposed certain tax law changes (the "1996 Proposed
Legislation") that would, among other things, generally deny corporate issuers a
deduction for interest in respect of certain debt obligations having a maximum
term in excess of 20 years and not shown as indebtedness on the issuer's
applicable consolidated balance sheet. Neither the 1996 Proposed Legislation or
similar legislation was enacted during the 104th Congress. On February 6, 1997,
President Clinton proposed in the administration's fiscal year 1998 budget
certain tax law changes (the "Administration's 1997 Tax Proposals") that would
be among other things, generally deny corporate issuers a deduction for interest
or OID in respect of certain debt obligations having a maximum term in excess of
15 years and not shown as indebtedness on the issuer's applicable consolidated
balance sheet. Neither the Administration's 1997 Tax Proposals nor similar
legislation was enacted by the 105th Congress. There can be no assurance,
however, that legislation enacted after the date hereof will not adversely
affect the ability of the Company to deduct the interest payable on the Junior
Subordinated Debentures or otherwise give rise to a Tax Event.
REDEMPTION; EXCHANGE OF PREFERRED SECURITIES FOR JUNIOR SUBORDINATED DEBENTURES
The Company has the right at any time to dissolve the Trust and cause the
Junior Subordinated Debentures, after satisfaction of liabilities to creditors
of the Trust, to be distributed to the holders of the Preferred Securities in
exchange therefor in liquidation of the Trust. The exercise of such right is
subject to the Company having received prior approval of the Federal Reserve if
then required under applicable capital guidelines or policies of the Federal
Reserve. The Company will have the right, in certain circumstances, to redeem
the Junior Subordinated Debentures in whole or in part, in lieu of a
distribution of the Junior Subordinated Debentures by the Trust, in which event
the Trust will redeem the Trust Securities on a pro rata basis to the same
extent as the Junior Subordinated Debentures are redeemed by the Company. Any
such distribution or redemption prior to the Stated Maturity will be subject to
prior approval of the Federal Reserve if then required under applicable capital
guidelines or policies of the Federal Reserve. See "Description of the Preferred
Securities -- Redemption or Exchange -- Tax Event Redemption, Capital Treatment
Event Redemption or Investment Company Event Redemption."
Under current United States federal income tax law, a distribution of
Junior Subordinated Debentures upon the dissolution of the Trust would not be a
taxable event to holders of the Preferred Securities. If, however, the Trust is
characterized as an association taxable as a corporation at the time of the
dissolution of the Trust, the distribution of the Junior Subordinated Debentures
may constitute a taxable event to holders of Preferred Securities. Moreover,
upon occurrence of a Tax Event, a dissolution of the Trust in which holders of
the Preferred Securities receive cash may be a taxable event to such holders.
See "Certain Federal Income Tax Consequences -- Receipt of Junior Subordinated
Debentures or Cash Upon Liquidation of the Trust."
There can be no assurance as to the market prices for the Preferred
Securities or the Junior Subordinated Debentures that may be distributed in
exchange for Preferred Securities upon a dissolution or liquidation of the
Trust. The Preferred Securities or the Junior Subordinated Debentures may trade
at a discount to the price that the investor paid to purchase the Preferred
Securities offered hereby. Because holders of Preferred Securities may receive
Junior Subordinated Debentures, prospective purchasers of Preferred Securities
are also making an investment decision with regard to the Junior Subordinated
Debentures and should carefully review all the information regarding the Junior
Subordinated Debentures contained herein.
If the Junior Subordinated Debentures are distributed to the holders of
Preferred Securities upon the liquidation of the Trust, the Company will use its
best efforts to list the Junior Subordinated Debentures on the Nasdaq National
Market or such stock exchanges, if any, on which the Preferred Securities are
then listed.
LIMITED COVENANTS
The covenants in the Indenture are limited, and there are no covenants
relating to the Company in the Trust Agreement. As a result, neither the
Indenture nor the Trust Agreement protects holders of Junior
16
<PAGE> 17
Subordinated Debentures, or Preferred Securities, respectively, in the event of
a material adverse change in the Company's financial condition or results of
operations or limits the ability of the Company or any subsidiary to incur
additional indebtedness. Therefore, the provisions of these governing
instruments should not be considered a significant factor in evaluating whether
the Company will be able to comply with its obligations under the Junior
Subordinated Debentures or the Guarantee.
TRADING PRICE; ABSENCE OF PRIOR PUBLIC MARKET FOR THE PREFERRED SECURITIES
The Preferred Securities may trade at a price that does not accurately
reflect the value of accrued but unpaid interest (or OID if the Junior
Subordinated Debentures are treated as having been issued, or reissued, with
OID) with respect to the underlying Junior Subordinated Debentures. A holder who
disposes of his Preferred Securities will be required to include in ordinary
income (i) any portion of the amount realized that is attributable to such
accrued but unpaid interest to the extent not previously included in income, or
(ii) any amount of OID, in either case, that has accrued on his pro rata share
of the underlying Junior Subordinated Debentures during the taxable year of sale
through the date of disposition. Any such income inclusion will increase the
holder's adjusted tax basis in his Preferred Securities disposed of. To the
extent that the amount realized in the sale is less than the holder's adjusted
tax basis, a holder will recognize a capital loss. Subject to certain limited
exceptions, capital losses cannot be applied to offset ordinary income for
United States federal income tax purposes. See "Certain Federal Income Tax
Consequences -- Disposition of Preferred Securities."
There is no current public market for the Preferred Securities. Although
the Preferred Securities have been approved for quotation on the Nasdaq National
Market, there can be no assurance that an active public market will develop for
the Preferred Securities or that, if such market develops, the market price will
equal or exceed the public offering price set forth on the cover page of this
Prospectus. The public offering price for the Preferred Securities has been
determined through negotiations between the Company and the Underwriters. Prices
for the Preferred Securities will be determined in the marketplace and may be
influenced by many factors, including prevailing interest rates, the liquidity
of the market for the Preferred Securities, investor perceptions of the Company
and general industry and economic conditions.
POSSIBLE ADVERSE EFFECT ON MARKET PRICES
There can be no assurance as to the market prices for the Preferred
Securities or the Junior Subordinated Debentures that may be distributed in
exchange for Preferred Securities if a termination of the Trust were to occur.
Accordingly, the Preferred Securities or the Junior Subordinated Debentures may
trade at a discount from the price that investors paid to purchase the Preferred
Securities offered hereby. Because holders of Preferred Securities may receive
Junior Subordinated Debentures in liquidation of the Trust and because
Distributions are otherwise limited to payments on the Junior Subordinated
Debentures, prospective purchasers of the Preferred Securities are also making
an investment decision with regard to the Junior Subordinated Debentures and
should carefully review all the information regarding the Junior Subordinated
Debentures contained herein. See "Description of the Junior Subordinated
Debentures."
PREFERRED SECURITIES ARE NOT INSURED
The Preferred Securities are not insured by the Bank Insurance Fund (the
"BIF") or the Savings Association Insurance Fund (the "SAIF") of the Federal
Deposit Insurance Corporation (the "FDIC") or by any other governmental agency.
17
<PAGE> 18
RISK FACTORS RELATING TO THE COMPANY AND ITS INDUSTRY
LENDING RISKS -- CREDIT QUALITY
A central focus of the Company's and the Bank's strategy is the continued
development and growth of a diversified loan portfolio, with emphasis on
commercial real estate, residential real estate and commercial and industrial
loans. Certain risks are inherent in the lending function, including a
borrower's inability to pay, insufficient collateral coverage and changes in
interest rates. Repayment risk on commercial loans is significantly affected by
changing economic conditions in a particular geographical area, business or
industry which could impair future operating performance. Risks associated with
real estate loans and general business loans include changes in general economic
conditions which may affect the borrower's ability to repay as well as
underlying collateral values. Installment and other consumer loans are subject
to repayment risk.
Multi-family residential and commercial real estate loans are generally
viewed in the banking community as exposing the lender to greater credit risk
than 1-4 family residential real estate loans and typically involve higher loan
principal amounts. At December 31, 1997, the Bank's multi-family residential and
commercial real estate portfolios totaled $140.3 million, or 44.3% of total
loans and loans held for sale. Of this amount, $29.6 million, or 21.1% consisted
of multi-family residential real estate loans and $110.7 million, or 78.9%,
consisted of commercial real estate loans.
The Bank currently originates loans secured by commercial real estate
properties. The Bank attempts to offset the risks associated with commercial
real estate lending by primarily lending to individuals who have proven
management experience and who will be actively involved in the management of the
property, and by making such loans with lower loan-to-value ratios than 1-4
family residential real estate loans. Economic events and government
regulations, which are outside the control of the borrower or lender, could
affect the value of the security for such loans or the future cash flow of the
affected properties.
At December 31, 1997, the Bank had $1,831,000 in non-performing commercial
real estate loans and $19,000 in non-performing multi-family residential real
estate loans. For the year ended December 31, 1997, the Bank experienced
charge-offs of $48,000 and $0 on commercial real estate loans and multi-family
residential real estate loans, respectively.
At December 31, 1997, 24.1% of the Bank's total loans and loans held for
sale were secured by 1-4 family residential mortgages, of which 74% were
adjustable rate mortgages ("ARMs"). Generally, ARMs pose credit risks different
from the risks inherent in fixed-rate loans because when interest rates rise the
borrower's payments rise, thereby increasing the potential for default. However,
long-term fixed-rate loans expose the Bank to higher interest-rate risk.
At December 31, 1997, 16.0% of the Bank's total loans were commercial and
industrial. Commercial and industrial loans are typically lines of credit
against which the borrowers may draw from time to time to meet cash needs. The
amount available to any customer may be fixed by agreement or may be determined
by a formula based on the borrower's current inventory or accounts receivable or
similar criteria. Interest rates typically float with reference to a prime or
base rate establish by the Bank from time to time. Therefore, in addition to the
risk of the borrower's credit, some commercial or industrial loans may become
unprofitable or less profitable if the reference interest rates decline.
COMPETITION
The Bank faces significant competition both in generating loans and in
attracting deposits. The eastern Massachusetts area is a highly competitive
market. The Bank faces direct competition from a significant number of financial
institutions operating in its market area, many with a state-wide or regional
presence and, in some cases, a national presence. Many of these financial
institutions are significantly larger and have greater financial resources than
the Bank. The Bank's competition for loans comes principally from commercial
banks, savings banks, mortgage banking companies, credit unions and insurance
companies. The Bank faces competition for deposits from savings and commercial
banks and credit unions. In addition, the Bank faces increasing competition for
deposits from non-bank institutions such as brokerage firms and insurance
18
<PAGE> 19
companies in such instruments as short-term money market funds, corporate and
government securities funds, mutual funds and annuities. Competition may also
increase as a result of the lifting of restrictions on the interstate operations
of financial institutions.
SENSITIVITY TO LOCAL ECONOMY
Prevailing economic conditions, as well as government policies and
regulations concerning, among other things, monetary and fiscal affairs,
significantly affect the operations of financial institutions such as the Bank.
The New England region of the United States, including eastern Massachusetts
(the Bank's primary market area), experienced a significant economic decline
which began in 1988 and outlasted the national recession. This decline adversely
affected employment, the real estate markets and the banking industry in the
Bank's market area. Any deterioration of economic conditions or real estate
markets in the Bank's market area could adversely affect the financial condition
and results of operations of the Bank in the future.
ECONOMIC CONDITIONS AND MONETARY POLICIES
Conditions beyond the Company's control may have a significant impact on
changes in net interest income from one period to another. Examples of such
conditions could include: (i) the strength of credit demands by customers; (ii)
fiscal and debt management policies of the federal government, including changes
in tax laws; (iii) the Federal Reserve's monetary policy, including the
percentage of deposits that must be held in the form of non-earning cash
reserves; (iv) the introduction and growth of new investment instruments and
transaction accounts by non-bank financial competitors; and (v) changes in rules
and regulations governing the payment of interest on deposit accounts.
SENSITIVITY TO FLUCTUATIONS IN INTEREST RATES
The Company's profitability, like that of most similarly situated financial
institutions, is dependent to a large extent upon the Bank's net interest
income, which is the difference between its interest income on interest-earning
assets, such as loans and investments, and its interest expense on
interest-bearing liabilities, such as deposits and borrowings. Accordingly, the
Company's results of operations and financial condition are largely dependent on
movements in market interest rates and its ability to manage its assets in
response to such movements. The difference between the amount of the total
interest-earning assets and interest-bearing liabilities which reprice within a
given time period could have a negative effect on the Bank's net interest income
depending on whether such difference was positive or negative and the direction
of movement of interest rates.
Increases in interest rates may reduce demand for loans and, thus, the
amount of loan and commitment fees. In addition, fluctuations in interest rates
may also result in disintermediation, which is the flow of funds away from
depository institutions into direct investments which pay a higher rate of
return, and may affect the value of the Company's investment securities and
other interest earning assets. Given that the Bank's assets consist of a
substantial number of loans with interest rates which change in accordance with
changes in prevailing market rates, if interest rates rise sharply, many of the
Bank's borrowers would be required to make higher interest payments on their
loans. Thus, increases in interest rates may cause the Bank to experience an
increase in delinquent loans and defaults to the extent that borrowers are
unable to meet their increased debt servicing obligations.
ALLOWANCE FOR LOAN LOSSES
The Bank has established an allowance for loan losses in accordance with
generally accepted accounting principles. The Company believes that the
allowance is adequate. Nevertheless, future additions to the allowance in the
form of the provision for loan losses may be necessary due to changes in
economic conditions and growth of the Bank's loan portfolio. In addition,
various regulatory agencies, as an integral part of their examination process,
periodically review the Bank's allowance for loan losses. An increase in the
Bank's provision for loan losses would negatively affect the Company's earnings.
19
<PAGE> 20
LEGISLATIVE AND REGULATORY DEVELOPMENTS
The financial institutions industry is subject to significant regulation
which has materially affected the financial institutions industry in the past
and will do so in the future. Such regulations, which affect the Company on a
daily basis, may be changed at any time, and the interpretation of the relevant
law and regulations are also subject to change by the authorities who examine
the Company and the Bank and interpret those laws and regulations. There can be
no assurance that any present or future changes in the laws or regulations or in
their interpretation will not adversely and materially affect the Company.
POTENTIAL LIABILITY FOR UNDERCAPITALIZED SUBSIDIARY BANK
Under federal law, a bank holding company may be required to guarantee a
capital plan filed by an undercapitalized bank or thrift subsidiary with its
primary regulator. If the subsidiary defaults under the plan, the holding
company may be required to contribute to the capital of the subsidiary bank an
amount equal to the lesser of 5% of the bank's assets at the time it became
undercapitalized or the amount necessary to bring the bank into compliance with
applicable capital standards. It is, therefore, possible that the Company would
be required to contribute capital to the Bank or any other bank it may acquire
in the event that the Bank or such other bank becomes undercapitalized.
YEAR 2000 COMPLIANCE
During 1997 the Company conducted a comprehensive review of its computer
systems to identify the systems that could be affected by the "Year 2000" issue
and has developed an implementation plan to resolve the issue. The Year 2000
problem is the result of computer programs being written using two digits rather
than four to define the applicable year. Any of the Company's programs that have
time-sensitive software may recognize a date ending in "00" as the year 1900
rather than the year 2000. The result might be miscalculations or a major system
failure. The Company plans to convert to a new core processing software and
implement modifications to existing software beginning mid-1998. The Company's
audit committee is also the Year 2000 compliance committee and reports to the
board of directors of the Company. The Company believes that the Year 2000
problem will not pose significant operational problems for the Company's
computer systems as so modified and converted. The new core processing software
is designed to be Year 2000 compliant and the modifications currently planned
for the Company's other systems do not involve material cost to the Company.
However, if such modifications and conversions are not completed in a timely
manner, the Year 2000 problem may have a material adverse impact on the
operations of the Company.
20
<PAGE> 21
CENTURY BANCORP, INC.
Century Bancorp, Inc., a Massachusetts corporation (together with its
subsidiary, unless the context otherwise requires, the "Company"), formed in
1972 and headquartered in Medford, Massachusetts, is a one bank holding company
operating primarily through Century Bank and Trust Company, a Massachusetts bank
formed in 1969 (the "Bank"). The Company had total assets of $631.1 million and
stockholders' equity of $53.9 million on December 31, 1997. The Bank is a
community bank, with 15 banking offices in 14 cities and towns in eastern
Massachusetts ranging from Braintree to Peabody. The Bank's customers consist
primarily of small and medium-sized businesses and retail customers in these
communities and surrounding areas, as well as local governments throughout
eastern Massachusetts.
The Bank offers a wide range of services to commercial enterprises, state
and local governments and agencies, and individuals with an emphasis on service
to small and medium-size businesses and retail customers in its market area. It
makes commercial loans, real estate and construction loans, and consumer loans,
and accepts savings, time, and demand deposits. In addition, the Bank offers to
its corporate customers automated lock box collection services, cash management
services and account reconciliation services, and actively promotes the
marketing of these services to the municipal market.
The Bank provides full service securities brokerage through Century
Financial Services in conjunction with Commonwealth Equities. In addition, the
Bank is a provider of financial services including cash management, transaction
processing and short term financing to municipalities in Massachusetts. The Bank
has deposit relationships with approximately 30% of the 351 cities and towns in
the state.
FINANCIAL SUMMARY
<TABLE>
<CAPTION>
AT OR FOR THE YEAR ENDED DECEMBER 31,
--------------------------------------------------------
1997 1996 1995 1994 1993
-------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
Assets.............................. $631,125 $560,857 $531,928 $465,419 $469,823
Deposits............................ 515,449 476,135 458,615 409,542 421,395
Stockholders' equity................ 53,857 47,489 42,935 37,553 35,505
Pre-tax income...................... 11,028 8,839 6,240 4,072 1,828
Net income.......................... 6,823 5,434 4,574 3,304 1,223
Net yield on average earning assets,
taxable equivalent................ 4.99% 4.79% 4.86% 4.70% 4.16%
Return on average equity............ 13.56% 12.13% 11.33% 9.11% 3.48%
Return on average assets............ 1.20% 1.01% 0.92% 0.70% 0.25%
</TABLE>
STRATEGY
The Company has sought to consistently increase earnings per share and to
maximize return on equity through a combination of strategies, including:
- Personalized Service. The Company seeks to offer a full range of
products and services to its customers while maintaining the high level
of personalized service associated with a community bank. Strong,
long-term relationships are a cornerstone of this strategy. The Company
strives to respond quickly to customer needs and provides customers with
direct access to senior lending officers with approval authority. The
Company intends to use its community-based position to build its
portfolio of commercial loans to small and medium-sized businesses.
- Growth through Strategic Acquisitions. The Company is in the process of
completing the acquisition of Haymarket Cooperative Bank. See "Recent
Developments" below. The Company continues to seek suitable strategic
opportunities for consolidation and expansion of its market position
through selective acquisitions.
21
<PAGE> 22
RECENT DEVELOPMENTS
On December 10, 1997, the Company announced an agreement to acquire
Haymarket Cooperative Bank. Haymarket, located in Boston, Massachusetts, has
approximately $142 million of assets and will be acquired for approximately $20
million in cash. The Haymarket acquisition will add two branch locations in
Boston's financial district, allowing the Company to provide commercial banking
services to a greater number of Boston's small and medium-sized businesses. The
acquisition will also connect the Bank geographically, giving it a market
presence from Beverly on the North Shore of Massachusetts to Quincy and
Braintree on the South Shore. The transaction is subject to federal and state
regulatory approvals.
On April 14, 1998, the Company announced net income of $1,802,000 or $0.31
per share for the first quarter of 1998, compared to net income of $1,376,000,
or $0.24 per share for the first quarter of 1997.
Total stockholders' equity was $55.3 million at March 31, 1998, compared to
$48.4 million at March 31, 1997. The Company's leverage ratio at March 31, 1998,
stood at 9.05%, compared to a leverage ratio of 8.62% on March 31, 1997. Book
value at March 31, 1998 was $9.55 per share.
The Company's allowance for loan losses was $4.7 million, or 1.46% of loans
outstanding at the end of the first quarter, compared to $4.3 million, or 1.46%
of loans outstanding at March 31, 1997. Non-accruing loans totaled $1.5 million
at March 31, 1998, compared to $1.7 million at the end of the previous quarter.
The Company's Board of Directors voted a regular quarterly dividend of 5
cents ($0.05) per share on the Company's Class A common stock, and 0.70 cents
($0.0070) per share on the Company's Class B common stock. The dividends were
declared payable May 15, 1998 to stockholders of record on May 1, 1998.
The principal executive office of the Company is located at 400 Mystic
Avenue, Medford, Massachusetts 02155 and its telephone number is (781) 391-4000.
CENTURY BANCORP CAPITAL TRUST
The Trust is a statutory business trust formed under Delaware law pursuant
to (i) a trust agreement, dated as of April 21, 1998, executed by the Company,
as depositor, and the trustees of the Trust and (ii) a certificate of trust
filed with the Secretary of State of the State of Delaware on April 21, 1998.
The initial trust agreement will be amended and restated in its entirety (as so
amended and restated, the "Trust Agreement") substantially in the form filed as
an exhibit to the Registration Statement of which this Prospectus forms a part.
The Trust Agreement will be qualified as an indenture under the Trust Indenture
Act. Upon issuance of the Preferred Securities, the purchasers thereof will own
all of the Preferred Securities. The Company will acquire all of the Common
Securities, which will represent an aggregate liquidation amount equal to at
least 3% of the total capital of the Trust. The Common Securities will rank pari
passu, and payments will be made thereon pro rata, with the Preferred
Securities, except that upon the occurrence and during the continuance of an
Event of Default (as defined herein) under the Trust Agreement resulting from a
Debenture Event of Default, the rights of the Company as holder of the Common
Securities to payment in respect of Distributions and payments upon liquidation,
redemption or otherwise will be subordinated to the rights of the holders of the
Preferred Securities. See "Description of the Preferred
Securities -- Subordination of Common Securities." The Trust exists for the
exclusive purposes of (i) issuing the Trust Securities representing undivided
beneficial interests in the assets of the Trust, (ii) investing the gross
proceeds of the Trust Securities in the Junior Subordinated Debentures issued by
the Company, and (iii) engaging in only those other activities necessary,
advisable, or incidental thereto. The Junior Subordinated Debentures and
payments thereunder will be the only assets of the Trust and payments under the
Junior Subordinated Debentures will be the only revenue of the Trust. The Trust
has a term of 55 years, but may dissolve earlier as provided in the Trust
Agreement. The principal executive office of the Trust is c/o Century Bancorp,
Inc., 400 Mystic Avenue, Medford, Massachusetts 02155, and its telephone number
is (781) 391-4000.
The number of Trustees will, pursuant to the Trust Agreement, initially be
five. Three of the Trustees (the "Administrative Trustees") will be persons who
are employees or officers of, or who are affiliated with, the Company. The
fourth trustee will be a financial institution that is unaffiliated with the
Company, which
22
<PAGE> 23
trustee will serve as institutional trustee under the Trust Agreement and as
indenture trustee for the purposes of compliance with the provisions of the
Trust Indenture Act (the "Property Trustee"). State Street Bank and Trust
Company, a state chartered trust company organized under the laws of The
Commonwealth of Massachusetts, will be the Property Trustee until removed or
replaced by the holder of the Common Securities. For purposes of compliance with
the provisions of the Trust Indenture Act, State Street Bank and Trust Company,
a state chartered trust company organized under the laws of The Commonwealth of
Massachusetts, will also act as trustee (the "Guarantee Trustee") under the
Guarantee and as Debenture Trustee (as defined herein) under the Indenture. The
fifth trustee will be an entity that maintains its principal place of business
in the State of Delaware (the "Delaware Trustee"). Wilmington Trust Company, a
Delaware banking corporation, will act as Delaware Trustee.
The Property Trustee will hold title to the Junior Subordinated Debentures
for the benefit of the holders of the Trust Securities and in such capacity will
have the power to exercise all rights, powers and privileges under the
Indenture. The Property Trustee will also maintain exclusive control of a
segregated non-interest-bearing bank account (the "Property Account") to hold
all payments made in respect of the Junior Subordinated Debentures for the
benefit of the holders of the Trust Securities. The Property Trustee will make
payments of Distributions and payments on liquidation, redemption and otherwise
to the holders of the Trust Securities out of funds from the Property Account.
The Guarantee Trustee will hold the Guarantee for the benefit of the holders of
the Preferred Securities. The Company, as the holder of all the Common
Securities, will have the right to appoint, remove or replace any Trustee and to
increase or decrease the number of Trustees. The Company will pay all fees and
expenses related to the Trust and the offering of the Trust Securities.
The rights of the holders of the Preferred Securities, including economic
rights, rights to information and voting rights, are set forth in the Trust
Agreement, the Delaware Business Trust Act (the "Trust Act") and the Trust
Indenture Act. See "Description of the Preferred Securities."
23
<PAGE> 24
USE OF PROCEEDS
The Trust will use the gross proceeds from the sale of the Preferred
Securities to purchase Junior Subordinated Debentures of the Company. The
Company intends to use the net proceeds of the sale of the Junior Subordinated
Debentures for general corporate purposes, including contributions to the Bank
to fund its operations, the financing of one or more future acquisitions by the
Company if and when suitable opportunities arise and the repurchase of
outstanding equity securities of the Company. Initially, the net proceeds may be
used to make investments in short-term investment securities pending its use for
the purposes described above.
The Federal Reserve has approved, subject to certain limitations as to
amount, the use of certain cumulative preferred stock instruments such as the
Preferred Securities as Tier 1 capital for bank holding companies such as the
Company. The Company has elected to issue the Preferred Securities because the
Company expects the Preferred Securities to qualify as Tier 1 capital and the
Distributions payable on the Preferred Securities to be a tax deductible expense
of the Company. The Company expects that, upon completion of the sale of the
Preferred Securities offered hereby, Preferred Securities having an aggregate
Liquidation Amount of approximately $17.6 million at December 31, 1997 will be
eligible to qualify as Tier 1 capital under the capital guidelines of the
Federal Reserve. Preferred Securities representing an aggregate Liquidation
Amount in excess of that amount are expected to be treated as Tier 2 capital
until all or some of that excess is eligible to qualify as Tier 1 capital under
the capital guidelines of the Federal Reserve.
MARKET FOR THE PREFERRED SECURITIES
The Preferred Securities have been approved for quotation on the Nasdaq
National Market under the symbol "CNBKP." Although the Underwriters have
informed the Company that they currently intend to make a market in the
Preferred Securities, there can be no assurance that an active and liquid
trading market will develop, or, if developed, that such a market will continue.
The offering price and distribution rate have been determined by negotiations
among representatives of the Company and the Underwriters, and the offering
price of the Preferred Securities may not be indicative of the market price
following the offering. See "Underwriting."
ACCOUNTING TREATMENT
The Trust will be treated, for financial reporting purposes, as a
subsidiary of the Company and, accordingly, the accounts of the Trust will be
included in the consolidated financial statements of the Company. The Preferred
Securities will be presented as a separate category of long-term debt in the
consolidated balance sheet of the Company under the caption "Guaranteed
Preferred Beneficial Interests in the Company's Junior Subordinated Debentures,"
and appropriate disclosures about the Preferred Securities, the Guarantee and
the Junior Subordinated Debentures will be included in the notes to consolidated
financial statements. The Company will record Distributions payable on the
Preferred Securities as interest expense in the consolidated statements of
income for financial reporting purposes.
All future reports of the Company filed under the Exchange Act will (a)
present the Trust Securities issued by the Trust on the balance sheet as a
separate category of long-term debt item entitled "Guaranteed preferred
beneficial interests in the Company's junior subordinated debentures," (b)
include in a footnote to the financial statements disclosure that the sole
assets of the Trust are the Junior Subordinated Debentures (including the
outstanding principal amount, interest rate and maturity date of such Junior
Subordinated Debentures), and (c) include in an audited footnote to the
financial statements disclosure that the Company owns all the Common Securities
of the Trust, and that the back-up obligations, in the aggregate, constitute a
full and unconditional guarantee by the Company of the obligations of the Trust
under the Preferred Securities.
24
<PAGE> 25
CAPITALIZATION
The following table sets forth (i) the consolidated capitalization of the
Company at December 31, 1997 and (ii) the consolidated capitalization of the
Company giving effect to the issuance of the Preferred Securities hereby offered
by the Trust and receipt by the Company of the net proceeds from the
corresponding sale of the Junior Subordinated Debentures to the Trust, as if the
sale of the Preferred Securities had been consummated on December 31, 1997 and
assuming the Underwriters' over-allotment option was not exercised.
<TABLE>
<CAPTION>
DECEMBER 31, 1997
----------------------
ACTUAL AS ADJUSTED
------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
LONG-TERM DEBT:
Guaranteed preferred beneficial interests in the Company's
junior subordinated debentures......................... $ 0 $25,000(1)
STOCKHOLDERS' EQUITY:
Class A common stock, par value $1.00 per share;
10,000,000 shares authorized; 3,541,447 shares issued
and outstanding, actual and as adjusted................ 3,541 $ 3,541
Class B common stock, par value $1.00 per share; 5,000,000
shares authorized; 2,326,520 shares issued and
outstanding, actual and as adjusted.................... 2,327 2,327
Additional paid-in capital................................ 10,877 10,877
Retained earnings......................................... 37,180 37,180
Treasury stock, Class A, 30,000 shares in 1997 at cost.... (136) (136)
Treasury stock, Class B, 47,550 shares in 1997 at cost.... (41) (41)
Unrealized gain on securities available for sale, net
of taxes.............................................. 109 109
Total stockholders' equity........................ 53,857 53,857
------- -------
Total capitalization.............................. $53,857 $78,857
======= =======
CAPITAL RATIOS:
Stockholders' equity to total assets...................... 8.53% 12.02%
Leverage-based capital ratio(2)(3)(4)..................... 9.09% 11.61%
Risk-based capital ratios(3)(4):
Tier 1 capital to risk-weighted assets................. 15.51% 20.37%
Total risk-based capital to risk-weighted
assets.......................................... 16.76% 21.61%
</TABLE>
- ---------------
(1) In connection with the issuance of the guaranteed preferred beneficial
interests in the Company's Junior Subordinated Debentures, the Company
estimates it will incur expenses of $1,262,163 (including Underwriters'
compensation of $906,250). The Junior Subordinated Debentures will mature on
June 30, 2029, which date may be shortened to a date not earlier than June
30, 2003 if certain conditions are met.
(2) The leverage ratio is Tier 1 capital divided by average quarterly assets,
after deducting intangible assets and deferred tax assets in excess of
regulatory maximum limits.
(3) The capital ratios, as adjusted, are computed including the total estimated
net proceeds from the sale of the Preferred Securities, in a manner
consistent with Federal Reserve guidelines.
(4) Federal Reserve guidelines for calculation of Tier 1 capital to
risk-weighted assets limit the amount of cumulative preferred stock and
securities similar to the Preferred Securities which can be included in Tier
1 capital to 25% of other Tier 1 capital. The risk-based capital ratio
assumes net proceeds are invested in assets that carry a 20% risk-weighting.
25
<PAGE> 26
DESCRIPTION OF THE PREFERRED SECURITIES
The Preferred Securities will be issued pursuant to the terms of the Trust
Agreement. The Trust Agreement will be qualified as an indenture under the Trust
Indenture Act. The Property Trustee, State Street Bank and Trust Company, will
act as indenture trustee for the Preferred Securities under the Trust Agreement
for purposes of complying with the provisions of the Trust Indenture Act. The
terms of the Preferred Securities will include those stated in the Trust
Agreement and those made part of the Trust Agreement by the Trust Indenture Act.
The following summary of the material terms and provisions of the Preferred
Securities and the Trust Agreement does not purport to be complete and is
subject to, and is qualified in its entirety by reference to, the Trust
Agreement, the Trust Act and the Trust Indenture Act. Wherever particular
defined terms of the Trust Agreement are referred to, but not defined herein,
such defined terms are incorporated herein by reference. The form of the Trust
Agreement has been filed as an exhibit to the Registration Statement of which
this Prospectus forms a part.
GENERAL
Pursuant to the terms of the Trust Agreement, the Trustees, on behalf of
the Trust, will issue the Trust Securities. All of the Common Securities will be
owned by the Company. The Preferred Securities will represent preferred
undivided beneficial interests in the assets of the Trust and the holders
thereof will be entitled to a preference over the Common Securities in certain
circumstances with respect to Distributions and amounts payable on redemption or
liquidation, as well as other benefits as described in the Trust Agreement. The
Trust Agreement does not permit the issuance by the Trust of any securities
other than the Trust Securities or the incurrence of any indebtedness by the
Trust.
The Preferred Securities will rank pari passu, and payments will be made
thereon pro rata with the Common Securities, except as described under
"-- Subordination of Common Securities." Legal title to the Junior Subordinated
Debentures will be held by the Property Trustee in trust for the benefit of the
holders of the Trust Securities. The Guarantee executed by the Company for the
benefit of the holders of the Preferred Securities will be a guarantee on a
subordinated basis with respect to the Preferred Securities, but will not
guarantee payment of Distributions or amounts payable on redemption or
liquidation of such Preferred Securities when the Trust does not have funds on
hand available to make such payments. State Street Bank and Trust Company, as
Guarantee Trustee, will hold the Guarantee for the benefit of the holders of the
Preferred Securities. See "Description of the Guarantee."
DISTRIBUTIONS
Payment of Distributions. Distributions on each Preferred Security will be
payable at the annual rate of 8.30% of the stated Liquidation Amount of $10,
payable quarterly in arrears on March 31, June 30, September 30 and December 31
of each year, to the holders of the Preferred Securities on the relevant record
dates (each date on which Distributions are payable in accordance with the
foregoing, a "Distribution Date"). The record date will be the fifteenth day of
the month in which the relevant Distribution Date occurs. Distributions will
accumulate from May 18, 1998, the date of original issuance. The first
Distribution Date for the Preferred Securities will be September 30, 1998. The
amount of Distributions payable for any period will be computed on the basis of
a 360-day year of twelve 30-day months. In the event that any date on which
Distributions are payable on the Preferred Securities is not a Business Day,
then payment of the Distributions payable on such date will be made on the next
succeeding day that is a Business Day (and without any additional Distributions,
interest or other payment in respect of any such delay) with the same force and
effect as if made on the date such payment was originally due and payable.
"Business Day" means any day other than a Saturday or a Sunday, a day on which
banking institutions in the City of Boston are authorized or required by law or
executive order to remain closed or a day on which the corporate trust office of
the Property Trustee or the Debenture Trustee is closed for business.
Extension Period. The Company has the right under the Indenture, so long
as no Debenture Event of Default has occurred and is continuing, to defer the
payment of interest on the Junior Subordinated Debentures at any time, or from
time to time (each, an "Extension Period"), which, if exercised, would defer
26
<PAGE> 27
quarterly Distributions on the Preferred Securities during any such Extension
Period. Distributions to which holders of the Preferred Securities are entitled
will accumulate additional Distributions thereon at the rate per annum of 8.30%
thereof, compounded quarterly from the relevant Distribution Date.
"Distributions," as used herein, includes any such additional Distributions. The
right to defer the payment of interest on the Junior Subordinated Debentures is
limited, however, to a period, in each instance, not exceeding 20 consecutive
quarters and no Extension Period may extend beyond the Stated Maturity of the
Junior Subordinated Debentures. During any such Extension Period, the Company
may not (i) declare or pay any dividends or distributions on, or redeem,
purchase, acquire or make a liquidation payment with respect to, any of the
Company's capital stock, (ii) make any payment of principal, interest or
premium, if any, on or repay, repurchase or redeem any debt securities of the
Company that rank pari passu with or junior in interest to the Junior
Subordinated Debentures or make any guarantee payments with respect to any
guarantee by the Company of the debt securities of any subsidiary of the Company
if such guarantee ranks pari passu with or junior in interest to the Junior
Subordinated Debentures (other than payments under the Guarantee), or (iii)
redeem, purchase or acquire less than all of the Junior Subordinated Debentures
or any of the Preferred Securities. Prior to the termination of any such
Extension Period, the Company may further defer the payment of interest;
provided, that such Extension Period may not exceed 20 consecutive quarters or
extend beyond the Stated Maturity of the Junior Subordinated Debentures. Upon
the termination of any such Extension Period and the payment of all amounts then
due, the Company may elect to begin a new Extension Period, subject to the above
requirements. Subject to the foregoing, there is no limitation on the number of
times that the Company may elect to begin an Extension Period.
The Company has no current intention of exercising its right to defer
payments of interest by extending the interest payment period on the Junior
Subordinated Debentures.
Source of Distributions. The funds of the Trust available for distribution
to holders of its Preferred Securities will be limited to payments under the
Junior Subordinated Debentures in which the Trust will invest the proceeds from
the issuance and sale of its Trust Securities. See "Description of the Junior
Subordinated Debentures." Distributions will be paid through the Property
Trustee who will hold amounts received in respect of the Junior Subordinated
Debentures in the Property Account for the benefit of the holders of the Trust
Securities. If the Company does not make interest payments on the Junior
Subordinated Debentures, the Property Trustee will not have funds available to
pay Distributions on the Preferred Securities. The payment of Distributions (if
and to the extent the Trust has funds legally available for the payment of such
Distributions and cash sufficient to make such payments) is guaranteed by the
Company. See "Description of the Guarantee."
REDEMPTION OR EXCHANGE
General. The Junior Subordinated Debentures will mature on June 30, 2029.
The Company will have the right to redeem the Junior Subordinated Debentures (i)
on or after June 30, 2003, in whole at any time or in part from time to time, or
(ii) at any time, in whole (but not in part), within 180 days following the
occurrence of a Tax Event, a Capital Treatment Event or an Investment Company
Event, in each case subject to receipt of prior approval by the Federal Reserve
if then required under applicable capital guidelines or policies of the Federal
Reserve. The Company will not have the right to purchase the Junior Subordinated
Debentures, in whole or in part, from the Trust until after June 30, 2003. See
"Description of the Junior Subordinated Debentures -- General."
Mandatory Redemption. Upon the repayment or redemption, in whole or in
part, of any Junior Subordinated Debentures, whether at Stated Maturity or upon
earlier redemption as provided in the Indenture, the proceeds from such
repayment or redemption will be applied by the Property Trustee to redeem a Like
Amount (as defined herein) of the Trust Securities, upon not less than 30 nor
more than 60 days notice, at a redemption price (the "Redemption Price") equal
to the aggregate Liquidation Amount of such Trust Securities plus accumulated
but unpaid Distributions thereon to the date of redemption (the "Redemption
Date"). See "Description of the Junior Subordinated Debentures -- Redemption or
Exchange." If less than all of the Junior Subordinated Debentures are to be
repaid or redeemed on a Redemption
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Date, then the proceeds from such repayment or redemption will be allocated to
the redemption of the Trust Securities pro rata.
Distribution of Junior Subordinated Debentures. Subject to the Company
having received prior approval of the Federal Reserve if so required under
applicable capital guidelines or policies of the Federal Reserve, the Company
will have the right at any time to dissolve the Trust and, after satisfaction of
the liabilities of creditors of the Trust as provided by applicable law, cause
the Junior Subordinated Debentures to be distributed to the holders of Trust
Securities in liquidation of the Trust. See "-- Liquidation Distribution Upon
Dissolution."
Tax Event Redemption, Capital Treatment Event Redemption or Investment
Company Event Redemption. If a Tax Event, a Capital Treatment Event or an
Investment Company Event in respect of the Trust Securities occurs and is
continuing, the Company has the right to redeem the Junior Subordinated
Debentures in whole (but not in part) and thereby cause a mandatory redemption
of such Trust Securities in whole (but not in part) at the Redemption Price
within 180 days following the occurrence of such Tax Event, Capital Treatment
Event or Investment Company Event. In the event a Tax Event, a Capital Treatment
Event or an Investment Company Event has occurred with respect to the Trust
Securities and the Company does not elect to redeem the Junior Subordinated
Debentures and thereby cause a mandatory redemption of such Trust Securities or
to liquidate the Trust and cause the Junior Subordinated Debentures to be
distributed to holders of such Trust Securities in liquidation of the Trust as
described below under "-- Liquidation Distribution Upon Dissolution," such
Preferred Securities will remain outstanding and Additional Interest (as defined
herein) may be payable on the Junior Subordinated Debentures. "Additional
Interest" means the additional amounts as may be necessary in order that the
amount of Distributions then due and payable by the Trust on the outstanding
Trust Securities will not be reduced as a result of any additional taxes, duties
and other governmental charges to which the Trust has become subject as a result
of a Tax Event.
"Like Amount" means (i) with respect to a redemption of Trust Securities,
Trust Securities having a Liquidation Amount equal to that portion of the
principal amount of Junior Subordinated Debentures to be contemporaneously
redeemed in accordance with the Indenture, which will be used to pay the
Redemption Price of such Trust Securities, and (ii) with respect to a
distribution of Junior Subordinated Debentures to holders of Trust Securities in
connection with a dissolution or liquidation of the Trust, Junior Subordinated
Debentures having a principal amount equal to the Liquidation Amount of the
Trust Securities of the holder to whom such Junior Subordinated Debentures are
distributed. Each Junior Subordinated Debenture distributed pursuant to clause
(ii) above will carry with it accumulated interest in an amount equal to the
accumulated and unpaid interest then due on such Junior Subordinated Debenture.
"Liquidation Amount" means the stated amount of $10 per Trust Security.
After the liquidation date fixed for any distribution of Junior
Subordinated Debentures for Preferred Securities (i) such Preferred Securities
will no longer be deemed to be outstanding, and (ii) any certificates
representing Preferred Securities will be deemed to represent the Junior
Subordinated Debentures having a principal amount equal to the Liquidation
Amount of such Preferred Securities, and bearing accrued and unpaid interest in
an amount equal to the accumulated and unpaid Distributions on the Preferred
Securities until such certificates are presented to the Administrative Trustees
or their agent for transfer or reissuance.
There can be no assurance as to the market prices for the Preferred
Securities or the Junior Subordinated Debentures that may be distributed in
exchange for Preferred Securities if a dissolution and liquidation of the Trust
were to occur. The Preferred Securities that an investor may purchase, or the
Junior Subordinated Debentures that an investor may receive on dissolution and
liquidation of the Trust, may, therefore, trade at a discount to the price that
the investor paid to purchase the Preferred Securities offered hereby.
REDEMPTION PROCEDURES
Preferred Securities redeemed on each Redemption Date will be redeemed at
the Redemption Price with the applicable proceeds from the contemporaneous
redemption of the Junior Subordinated Debentures. Redemptions of the Preferred
Securities will be made and the Redemption Price will be payable on each
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Redemption Date only to the extent that the Trust has funds on hand available
for the payment of such Redemption Price. See "-- Subordination of the Common
Securities."
If the Trust gives a notice of redemption in respect of its Preferred
Securities, then, by 12:00 noon, New York time, on the Redemption Date, to the
extent funds are available, the Property Trustee will irrevocably deposit with
the paying agent for the Preferred Securities funds sufficient to pay the
aggregate Redemption Price and will give the paying agent for the Preferred
Securities irrevocable instructions and authority to pay the Redemption Price to
the holders thereof upon surrender of their certificates evidencing such
Preferred Securities. Notwithstanding the foregoing, Distributions payable on or
prior to the Redemption Date for any Preferred Securities called for redemption
will be payable to the holders of such Preferred Securities on the relevant
record dates for the related Distribution Dates. If notice of redemption will
have been given and funds deposited as required, then upon the date of such
deposit, all rights of the holders of such Preferred Securities so called for
redemption will cease, except the right of the holders of such Preferred
Securities to receive the Redemption Price and any Distribution payable on or
before the Redemption Date, but without interest on such Redemption Price or
Distribution, and such Preferred Securities will cease to be outstanding. In the
event that any date fixed for redemption of Preferred Securities is not a
Business Day, then payment of the Redemption Price payable on such date will be
made on the next succeeding day which is a Business Day (and without any
additional Distribution, interest or other payment in respect of any such delay)
with the same force and effect as if made on such date. In the event that
payment of the Redemption Price in respect of Preferred Securities called for
redemption is improperly withheld or refused and not paid either by the Trust,
or by the Company pursuant to the Guarantee, Distributions on such Preferred
Securities will continue to accrue at the then applicable rate, from the
Redemption Date originally established by the Trust for such Preferred
Securities to the date such Redemption Price is actually paid, in which case the
actual payment date will be considered the date fixed for redemption for
purposes of calculating the Redemption Price. See "Description of the
Guarantee."
Subject to applicable law (including, without limitation, United States
federal securities law), and further provided that the Company does not and is
not continuing to exercise its right to defer interest payments on the Junior
Subordinated Debentures, the Company or its subsidiaries may at any time and
from time to time purchase outstanding Preferred Securities by tender, in the
open market or by private agreement.
Payment of the Redemption Price on the Preferred Securities and any
distribution of Junior Subordinated Debentures to holders of Preferred
Securities will be made to the applicable holders thereof as they appear on the
register for the Preferred Securities on the relevant record date, which date
will be the date 15 days prior to the Redemption Date or liquidation date, as
applicable.
If less than all of the Trust Securities are to be redeemed on a Redemption
Date, then the aggregate Liquidation Amount of such Trust Securities to be
redeemed will be allocated pro rata to the Trust Securities based upon the
relative Liquidation Amounts of such classes. The particular Preferred
Securities to be redeemed will be selected by the Property Trustee from the
outstanding Preferred Securities not previously called for redemption, by such
method as the Property Trustee deems fair and appropriate and which may provide
for the selection for redemption of portions (equal to $10 or an integral
multiple of $10 in excess thereof) of the Liquidation Amount of Preferred
Securities of a denomination larger than $10. The Property Trustee will promptly
notify the registrar for the Preferred Securities in writing of the Preferred
Securities selected for redemption and, in the case of any Preferred Securities
selected for partial redemption, the Liquidation Amount thereof to be redeemed.
For all purposes of the Trust Agreement, unless the context otherwise requires,
all provisions relating to the redemption of Preferred Securities will relate to
the portion of the aggregate Liquidation Amount of Preferred Securities which
has been or is to be redeemed.
Notice of any redemption will be mailed at least 30 days but not more than
60 days before the Redemption Date to each holder of Trust Securities to be
redeemed at its registered address. Unless the Company defaults in payment of
the redemption price on the Junior Subordinated Debentures, on and after the
Redemption Date interest will cease to accrue on such Junior Subordinated
Debentures or portions thereof (and Distributions will cease to accumulate on
the related Preferred Securities or portions thereof) called for redemption.
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SUBORDINATION OF THE COMMON SECURITIES
Payment of Distributions on, and the Redemption Price of, the Preferred
Securities and Common Securities, as applicable, will be made pro rata based on
the Liquidation Amount of the Preferred Securities and Common Securities;
provided, however, that if on any Distribution Date or Redemption Date a
Debenture Event of Default has occurred and is continuing, no payment of any
Distribution on, or Redemption Price of, any of the Common Securities, and no
other payment on account of the redemption, liquidation or other acquisition of
such Common Securities, will be made unless payment in full in cash of all
accumulated and unpaid Distributions on all of the outstanding Preferred
Securities for all Distribution periods terminating on or prior thereto, or in
the case of payment of the Redemption Price the full amount of such Redemption
Price on all of the outstanding Preferred Securities then called for redemption,
will have been made or provided for, and all funds available to the Property
Trustee will first be applied to the payment in full in cash of all
Distributions on, or Redemption Price of, the Preferred Securities then due and
payable.
In the case of any Event of Default resulting from a Debenture Event of
Default, the Company as holder of the Common Securities will be deemed to have
waived any right to act with respect to any such Event of Default under the
Trust Agreement until the effect of such Events of Default with respect to the
Preferred Securities have been cured, waived or otherwise eliminated. Until any
such Event of Default under the Trust Agreement with respect to the Preferred
Securities has been so cured, waived or otherwise eliminated, the Property
Trustee will act solely on behalf of the holders of the Preferred Securities and
not on behalf of the Company, as holder of the Common Securities, and only the
holders of the Preferred Securities will have the right to direct the Property
Trustee to act on their behalf.
LIQUIDATION DISTRIBUTION UPON DISSOLUTION
The Company will have the right at any time to dissolve the Trust and cause
the Junior Subordinated Debentures, after satisfaction of liabilities to
creditors of the Trust, to be distributed to the holders of the Preferred
Securities. Such right is subject, however, to the Company having received prior
approval of the Federal Reserve if then required under applicable capital
guidelines or policies of the Federal Reserve.
Pursuant to the Trust Agreement, the Trust will automatically dissolve upon
expiration of its term and will dissolve earlier on the first to occur of (i)
certain events of bankruptcy, dissolution or liquidation of the Company, (ii)
the Company, as depositor, giving written direction to the Property Trustee to
dissolve the Trust (which direction is optional and wholly within the discretion
of the Company, as depositor), (iii) redemption of all of the Preferred
Securities as described under "Redemption or Exchange -- Mandatory Redemption,"
or (iv) the entry of an order for the dissolution of the Trust by a court of
competent jurisdiction.
If an early dissolution occurs as described in clause (i), (ii) or (iv) of
the preceding paragraph, the Trust will be liquidated by the Trustees as
expeditiously as the Trustees determine to be possible by distributing, after
satisfaction of liabilities to creditors of the Trust as provided by applicable
law, to the holders of such Trust Securities a Like Amount of the Junior
Subordinated Debentures, unless such distribution is determined by the Property
Trustee not to be practical, in which event such holders will be entitled to
receive out of the assets of the Trust available for distribution to holders,
after satisfaction of liabilities to creditors of the Trust as provided by
applicable law, an amount equal to, in the case of holders of Preferred
Securities, the aggregate of the Liquidation Amount plus accumulated but unpaid
Distributions thereon to the date of payment (such amount being the "Liquidation
Distribution"). If such Liquidation Distribution can be paid only in part
because the Trust has insufficient assets available to pay in full the aggregate
Liquidation Distribution, then the amounts payable directly by the Trust on the
Preferred Securities will be paid on a pro rata basis. The Company, as the
holder of the Common Securities, will be entitled to receive distributions upon
any such liquidation pro rata with the holders of the Preferred Securities,
except that, if a Debenture Event of Default has occurred and is continuing, the
Preferred Securities will have a priority over the Common Securities. See
"-- Subordination of Common Securities."
Under current United States federal income tax law and interpretations and
assuming, as expected, that the Trust is treated as a grantor trust, a
distribution of the Junior Subordinated Debentures should not be a taxable event
to holders of the Preferred Securities. Should there be a change in law, a
change in legal
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interpretation, a Tax Event or other circumstances, however, the distribution
could be a taxable event to holders of the Preferred Securities. See "Certain
Federal Income Tax Consequences -- Receipt of Junior Subordinated Debentures or
Cash Upon Liquidation of the Trust." If the Company elects neither to redeem the
Junior Subordinated Debentures prior to maturity nor to liquidate the Trust and
distribute the Junior Subordinated Debentures to holders of the Preferred
Securities, the Preferred Securities will remain outstanding until the repayment
of the Junior Subordinated Debentures.
If the Company elects to dissolve the Trust and thereby causes the Junior
Subordinated Debentures to be distributed to holders of the Preferred Securities
in liquidation of the Trust, the Company will continue to have the right to
shorten or extend the maturity of such Junior Subordinated Debentures, subject
to certain conditions. See "Description of the Junior Subordinated
Debentures -- General."
LIQUIDATION VALUE
The amount of the Liquidation Distribution payable on the Preferred
Securities in the event of any liquidation of the Trust is $10 per Preferred
Security plus accumulated but unpaid Distributions thereon to the date of
payment, which may be in the form of a distribution of such amount in Junior
Subordinated Debentures, subject to certain exceptions. See "-- Liquidation
Distribution Upon Dissolution."
EVENTS OF DEFAULT; NOTICE
Any one of the following events constitutes an event of default under the
Trust Agreement (an "Event of Default") with respect to the Preferred Securities
(whatever the reason for such Event of Default and whether voluntary or
involuntary or effected by operation of law or pursuant to any judgment, decree
or order of any court or any order, rule or regulation of any administrative or
governmental body):
(i) the occurrence of a Debenture Event of Default (see "Description
of the Junior Subordinated Debentures -- Debenture Events of Default"); or
(ii) default by the Trust or the Property Trustee in the payment of
any Distribution when it becomes due and payable, and continuation of such
default for a period of 30 days; or
(iii) default by the Trust or the Property Trustee in the payment of
any Redemption Price of any Trust Security when it becomes due and payable;
or
(iv) default in the performance, or breach, in any material respect,
of any covenant or warranty of the Trustees in the Trust Agreement (other
than a covenant or warranty a default in the performance of which or the
breach of which is dealt with in clauses (ii) or (iii) above), and
continuation of such default or breach for a period of 60 days after there
has been given, by registered or certified mail, to the Trustee(s) by the
holders of at least 25% in aggregate Liquidation Amount of the outstanding
Preferred Securities, a written notice specifying such default or breach
and requiring it to be remedied and stating that such notice is a "Notice
of Default" under the Trust Agreement; or
(v) the occurrence of certain events of bankruptcy or insolvency with
respect to the Property Trustee and the failure by the Company to appoint a
successor Property Trustee within 60 days thereof.
Within five Business Days after the occurrence of any Event of Default
actually known to the Property Trustee, the Property Trustee will transmit
notice of such Event of Default to the holders of the Preferred Securities, the
Administrative Trustees and the Company, as depositor, unless such Event of
Default has been cured or waived. The Company, as depositor, and the
Administrative Trustees are required to file annually with the Property Trustee
a certificate as to whether or not they are in compliance with all the
conditions and covenants applicable to them under the Trust Agreement.
If a Debenture Event of Default has occurred and is continuing, the
Preferred Securities will have a preference over the Common Securities upon
dissolution of the Trust. See "-- Liquidation Distribution Upon Dissolution."
The existence of an Event of Default does not entitle the holders of Preferred
Securities to accelerate the maturity thereof.
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REMOVAL OF THE TRUST TRUSTEES
Unless a Debenture Event of Default has occurred and is continuing, any
Trustee may be removed at any time by the holder of the Common Securities. If a
Debenture Event of Default has occurred and is continuing, the Property Trustee
and the Delaware Trustee may be removed at such time by the holders of a
majority in Liquidation Amount of the outstanding Preferred Securities. In no
event, however, will the holders of the Preferred Securities have the right to
vote to appoint, remove or replace the Administrative Trustees, which voting
rights are vested exclusively in the Company as the holder of the Common
Securities. No resignation or removal of a Trustee and no appointment of a
successor trustee will be effective until the acceptance of appointment by the
successor trustee in accordance with the provisions of the Trust Agreement.
CO-TRUSTEES AND SEPARATE PROPERTY TRUSTEE
Unless an Event of Default has occurred and is continuing, at any time or
times, for the purpose of meeting the legal requirements of the Trust Indenture
Act or of any jurisdiction in which any part of the Trust Property (as defined
in the Trust Agreement) may at the time be located, the Company, as the holder
of the Common Securities, will have power to appoint one or more Persons (as
defined in the Trust Agreement) either to act as a co-trustee, jointly with the
Property Trustee, of all or any part of such Trust Property, or to act as
separate trustee of any such Trust Property, in either case with such powers as
may be provided in the instrument of appointment, and to vest in such Person or
Persons in such capacity any property, title, right or power deemed necessary or
desirable, subject to the provisions of the Trust Agreement. In case a Debenture
Event of Default has occurred and is continuing, the Property Trustee alone will
have power to make such appointment.
MERGER OR CONSOLIDATION OF TRUSTEES
Any Person into which the Property Trustee, the Delaware Trustee or any
Administrative Trustee that is not a natural person may be merged or converted
or with which it may be consolidated, or any Person resulting from any merger,
conversion or consolidation to which such Trustee is a party, or any Person
succeeding to all or substantially all the corporate trust business of such
Trustee, will be the successor of such Trustee under the Trust Agreement,
provided such Person is otherwise qualified and eligible.
MERGERS, CONSOLIDATIONS, AMALGAMATIONS OR REPLACEMENTS OF THE TRUST
The Trust may not merge with or into, consolidate, amalgamate, or be
replaced by, or convey, transfer or lease its properties and assets
substantially as an entirety to any Person, except as described below. The Trust
may, at the request of the Company, with the consent of the Administrative
Trustees and without the consent of the holders of the Preferred Securities, the
Property Trustee or the Delaware Trustee, merge with or into, consolidate,
amalgamate, or be replaced by or convey, transfer or lease its properties and
assets substantially as an entirety to a trust organized as such under the laws
of any State; provided, that (i) such successor entity either (a) expressly
assumes all of the obligations of the Trust with respect to the Preferred
Securities, or (b) substitutes for the Preferred Securities other securities
having substantially the same terms as the Preferred Securities (the "Successor
Securities") so long as the Successor Securities rank the same as the Preferred
Securities rank in priority with respect to distributions and payments upon
liquidation, redemption and otherwise, (ii) the Company expressly appoints a
trustee of such successor entity possessing the same powers and duties as the
Property Trustee in its capacity as the holder of the Junior Subordinated
Debentures, (iii) the Successor Securities are listed, or any Successor
Securities will be listed upon notification of issuance, on any national
securities exchange or other organization on which the Preferred Securities are
then listed (including, if applicable, the Nasdaq National Market), if any, (iv)
such merger, consolidation, amalgamation, replacement, conveyance, transfer or
lease does not adversely affect the rights, preferences and privileges of the
holders of the Preferred Securities (including any Successor Securities) in any
material respect, (v) prior to such merger, consolidation, amalgamation,
replacement, conveyance, transfer or lease, the Company has received an opinion
from independent counsel to the effect that (a) such merger, consolidation,
amalgamation, replacement, conveyance, transfer or lease does not adversely
affect the rights, preferences and privileges of the holders of the Preferred
Securities (including any Successor Securities) in any material
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respect, and (b) following such merger, consolidation, amalgamation,
replacement, conveyance, transfer or lease, neither the Trust nor such successor
entity will be required to register as an "investment company" under the
Investment Company Act, and (vi) the Company owns all of the common securities
of such successor entity and guarantees the obligations of such successor entity
under the Successor Securities at least to the extent provided by the Guarantee,
the Indenture, the Junior Subordinated Debentures, the Trust Agreement and the
Expense Agreement. Notwithstanding the foregoing, the Trust will not, except
with the consent of holders of 100% in Liquidation Amount of the Preferred
Securities, consolidate, amalgamate, merge with or into, or be replaced by or
convey, transfer or lease its properties and assets substantially as an entirety
to any other Person or permit any other Person to consolidate, amalgamate, merge
with or into, or replace it if such consolidation, amalgamation, merger,
replacement, conveyance, transfer or lease would cause the Trust or the
successor entity to be classified as other than a grantor trust for United
States federal income tax purposes.
VOTING RIGHTS; AMENDMENT OF TRUST AGREEMENT
Except as provided below and under "Description of the
Guarantee -- Amendments and Assignment" and as otherwise required by the Trust
Act and the Trust Agreement, the holders of the Preferred Securities will have
no voting rights.
The Trust Agreement may be amended from time to time by the Company, the
Property Trustee and the Administrative Trustees, without the consent of the
holders of the Preferred Securities (i) with respect to acceptance of
appointment by a successor trustee, (ii) to cure any ambiguity, correct or
supplement any provisions in such Trust Agreement that may be inconsistent with
any other provision, or to make any other provisions with respect to matters or
questions arising under the Trust Agreement (provided such amendment is not
inconsistent with the other provisions of the Trust Agreement), (iii) to modify,
eliminate or add to any provisions of the Trust Agreement to such extent as is
necessary to ensure that the Trust will be classified for United States federal
income tax purposes as a grantor trust at all times that any Trust Securities
are outstanding or to ensure that the Trust will not be required to register as
an "investment company" under the Investment Company Act, or (iv) to reduce or
increase the Liquidation Amount per Trust Security and simultaneously to
increase or reduce the number of Trust Securities issued and outstanding solely
for the purpose of maintaining the eligibility of the Preferred Securities for
listing or quotation on any national securities exchange or other organization
on which the Preferred Securities are then listed or quoted (including, if
applicable, the Nasdaq National Market); provided, however, that in the case of
clause (ii), such action may not adversely affect in any material respect the
interests of any holder of Trust Securities, and that, in the case of clause
(iv), the aggregate Liquidation Amount of the Trust Securities outstanding, upon
completion of any such reduction or increase must be the same as the aggregate
Liquidation Amount of the Trust Securities outstanding immediately prior to any
such reduction or increase, and any amendments of such Trust Agreement will
become effective when notice thereof is given to the holders of Trust Securities
(or, in the case of an amendment pursuant to clause (iv), as of the date
specified in the notice). The Trust Agreement may be amended by the Trustees and
the Company with (i) the consent of holders representing not less than a
majority in the aggregate Liquidation Amount of the outstanding Trust
Securities, and (ii) receipt by the Trustees of an opinion of counsel to the
effect that such amendment or the exercise of any power granted to the Trustees
in accordance with such amendment will not affect the Trust's status as a
grantor trust for United States federal income tax purposes or the Trust's
exemption from status as an "investment company" under the Investment Company
Act. Notwithstanding anything in this paragraph to the contrary, without the
consent of each holder of Trust Securities, the Trust Agreement may not be
amended to (a) change the amount or timing of any Distribution on the Trust
Securities or otherwise adversely affect the amount of any Distribution required
to be made in respect of the Trust Securities as of a specified date, or (b)
restrict the right of a holder of Trust Securities to institute suit for the
enforcement of any such payment on or after such date.
The Trustees will not, so long as any Junior Subordinated Debentures are
held by the Property Trustee, (i) direct the time, method and place of
conducting any proceeding for any remedy available to the Debenture Trustee, or
executing any trust or power conferred on the Property Trustee with respect to
the Junior
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Subordinated Debentures, (ii) waive any past default that is waivable under the
Indenture, (iii) exercise any right to rescind or annul a declaration that the
principal of all the Junior Subordinated Debentures will be due and payable, or
(iv) consent to any amendment, modification or termination of the Indenture or
the Junior Subordinated Debentures, where such consent is required, without, in
each case, obtaining the prior approval of the holders of a majority in
aggregate Liquidation Amount of all outstanding Preferred Securities; provided,
however, that where a consent under the Indenture requires the consent of each
holder of Junior Subordinated Debentures affected thereby, no such consent will
be given by the Property Trustee without the prior consent of each holder of the
Preferred Securities. The Trustees may not revoke any action previously
authorized or approved by a vote of the holders of the Preferred Securities
except by subsequent vote of the holders of the Preferred Securities. The
Property Trustee will notify each holder of Preferred Securities of any notice
of default with respect to the Junior Subordinated Debentures. In addition to
obtaining the foregoing approvals of the holders of the Preferred Securities,
prior to taking any of the foregoing actions, the Trustees must obtain an
opinion of counsel experienced in such matters to the effect that the Trust will
not be classified as an association taxable as a corporation for United States
federal income tax purposes on account of such action.
Any required approval of holders of Preferred Securities may be given at a
meeting of holders of Preferred Securities convened for such purpose or pursuant
to written consent. The Property Trustee will cause a notice of any meeting at
which holders of Preferred Securities are entitled to vote, or of any matter
upon which action by written consent of such holders is to be taken, to be given
to each holder of record of Preferred Securities in the manner set forth in the
Trust Agreement.
No vote or consent of the holders of Preferred Securities will be required
for the Trust to redeem and cancel its Preferred Securities in accordance with
the Trust Agreement.
Notwithstanding the fact that holders of Preferred Securities are entitled
to vote or consent under any of the circumstances described above, any of the
Preferred Securities that are owned by the Company, the Trustees or any
affiliate of the Company or any Trustee, will, for purposes of such vote or
consent, be treated as if they were not outstanding.
PAYMENT AND PAYING AGENCY
Payments in respect of the Preferred Securities will be made by check
mailed to the address of the holder entitled thereto as such address will appear
on the register of holders of the Preferred Securities. The paying agent for the
Preferred Securities will initially be the Property Trustee and any co-paying
agent chosen by the Property Trustee and acceptable to the Administrative
Trustees and the Company. The paying agent for the Preferred Securities may
resign as paying agent upon 30 days' written notice to the Property Trustee and
the Company. In the event that the Property Trustee no longer is the paying
agent for the Preferred Securities, the Administrative Trustees will appoint a
successor (which must be a bank or trust company acceptable to the
Administrative Trustees and the Company) to act as paying agent.
REGISTRAR AND TRANSFER AGENT
The Property Trustee will act as the registrar and the transfer agent for
the Preferred Securities. Registration of transfers of Preferred Securities will
be effected without charge by or on behalf of the Trust, but upon payment of any
tax or other governmental charges that may be imposed in connection with any
transfer or exchange. The Trust will not be required to register or cause to be
registered the transfer of Preferred Securities after such Preferred Securities
have been called for redemption.
INFORMATION CONCERNING THE PROPERTY TRUSTEE
The Property Trustee, other than upon the occurrence and during the
continuance of an Event of Default, undertakes to perform only such duties as
are specifically set forth in the Trust Agreement and, upon the occurrence and
during the continuance of an Event of Default, must exercise the same degree of
care and skill as a prudent person would exercise or use in the conduct of his
or her own affairs. Subject to this provision, the Property Trustee is under no
obligation to exercise any of the powers vested in it by the Trust Agreement at
the request of any holder of Preferred Securities unless it is offered
reasonable indemnity against the costs,
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expenses and liabilities that might be incurred thereby. If no Event of Default
has occurred and is continuing and the Property Trustee is required to decide
between alternative causes of action, construe ambiguous provisions in the Trust
Agreement or is unsure of the application of any provision of the Trust
Agreement, and the matter is not one on which holders of Preferred Securities
are entitled under the Trust Agreement to vote, then the Property Trustee will
take such action as is directed by the Company and if not so directed, will take
such action as it deems advisable and in the best interests of the holders of
the Trust Securities and will have no liability except for its own bad faith,
negligence or willful misconduct.
MISCELLANEOUS
The Administrative Trustees are authorized and directed to conduct the
affairs of and to operate the Trust in such a way that the Trust will not be
deemed to be an "investment company" required to be registered under the
Investment Company Act or classified as an association taxable as a corporation
for United States federal income tax purposes and so that the Junior
Subordinated Debentures will be treated as indebtedness of the Company for
United States federal income tax purposes. The Company and the Administrative
Trustees are authorized, in this connection, to take any action, not
inconsistent with applicable law, the certificate of trust of the Trust or the
Trust Agreement, that the Company and the Administrative Trustees determine in
their discretion to be necessary or desirable for such purposes.
Holders of the Preferred Securities have no preemptive or similar rights.
The Trust Agreement and the Preferred Securities will be governed by, and
construed in accordance with, the internal laws of the State of Delaware.
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DESCRIPTION OF THE JUNIOR SUBORDINATED DEBENTURES
Concurrently with the issuance of the Preferred Securities, the Trust will
invest the proceeds thereof, together with the consideration paid by the Company
for the Common Securities, in the Junior Subordinated Debentures issued by the
Company. The Junior Subordinated Debentures will be issued as unsecured debt
under the Indenture, to be dated as of May 18, 1998 (the "Indenture"), between
the Company and State Street Bank and Trust Company, as trustee (the "Debenture
Trustee"). The Indenture will be qualified as an indenture under the Trust
Indenture Act. The following summary of the material terms and provisions of the
Junior Subordinated Debentures and the Indenture does not purport to be complete
and is subject to, and is qualified in its entirety by reference to, the
Indenture and to the Trust Indenture Act. Wherever particular defined terms of
the Indenture are referred to, but not defined herein, such defined terms are
incorporated herein by reference. The form of the Indenture has been filed as an
exhibit to the Registration Statement of which this Prospectus forms a part.
GENERAL
The Junior Subordinated Debentures will be limited in aggregate principal
amount to approximately $25,773,200 (or $29,639,180 if the Underwriters'
over-allotment option is exercised), the sum of the aggregate stated Liquidation
Amount of the Trust Securities. The Junior Subordinated Debentures will bear
interest at the annual rate of 8.30% of the principal amount thereof, payable
quarterly in arrears on March 31, June 30, September 30, and December 31 of each
year (each, an "Interest Payment Date") beginning September 30, 1998, to the
Person (as defined in the Indenture) in whose name each Subordinated Debenture
is registered, subject to certain exceptions, at the close of business on the
fifteenth day of the last month of the calendar quarter. It is anticipated that,
until the liquidation of the Trust, the Junior Subordinated Debentures will be
held in the name of the Property Trustee in trust for the benefit of the holders
of the Preferred Securities. The amount of interest payable for any period will
be computed on the basis of a 360-day year of twelve 30-day months. In the event
that any date on which interest is payable on the Junior Subordinated Debentures
is not a Business Day, then payment of the interest payable on such date will be
made on the next succeeding day that is a Business Day (and without any interest
or other payment in respect of any such delay), with the same force and effect
as if made on the date such payment was originally payable. Accrued interest
that is not paid on the applicable Interest Payment Date will bear additional
interest on the amount thereof (to the extent permitted by law) at the rate per
annum of 8.30% thereof, compounded quarterly. The term "interest," as used
herein, includes quarterly interest payments, interest on quarterly interest
payments not paid on the applicable Interest Payment Date and Additional
Interest, as applicable.
The Junior Subordinated Debentures will mature on June 30, 2029 (such date,
as it may be shortened or extended as hereinafter described, the "Stated
Maturity"). Such date may be shortened at any time by the Company to any date
not earlier than June 30, 2003, subject to the Company having received prior
approval of the Federal Reserve if then required under applicable capital
guidelines or policies of the Federal Reserve. In the event that the Company
elects to shorten or extend the Stated Maturity of the Junior Subordinated
Debentures, it will give notice thereof to the Debenture Trustee, the Trust and
to the holders of the Junior Subordinated Debentures no more than 180 days and
no less than 90 days prior to the effectiveness thereof. The Company will not
have the right to purchase the Junior Subordinated Debentures, in whole or in
part, from the Trust until on or after June 30, 2003, except if a Tax Event, a
Capital Treatment Event or an Investment Company Event has occurred and is
continuing.
The Junior Subordinated Debentures will be unsecured and will rank junior
and be subordinate in right of payment to all Senior Debt, Subordinated Debt and
Additional Senior Obligations of the Company. Because the Company is a holding
company, the right of the Company to participate in any distribution of assets
of the Bank, upon the Bank's liquidation or reorganization or otherwise (and
thus the ability of holders of the Junior Subordinated Debentures to benefit
indirectly from such distribution), is subject to the prior claim of creditors
of the Bank, except to the extent that the Company may itself be recognized as a
creditor of the Bank. The Junior Subordinated Debentures will, therefore, be
effectively subordinated to all existing and future liabilities of the Bank, and
holders of Junior Subordinated Debentures should look only to the assets of the
Company for payments on the Junior Subordinated Debentures. The Indenture does
not limit the incurrence or issuance of
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other secured or unsecured debt of the Company, including Senior Debt,
Subordinated Debt and Additional Senior Obligations, whether under the Indenture
or any existing indenture or other indenture that the Company may enter into in
the future or otherwise. See "-- Subordination."
The Indenture does not contain provisions that afford holders of the Junior
Subordinated Debentures protection in the event of a highly leveraged
transaction or other similar transaction involving the Company that may
adversely affect such holders.
OPTION TO EXTEND INTEREST PAYMENT PERIOD
The Company has the right under the Indenture at any time during the term
of the Junior Subordinated Debentures, so long as no Debenture Event of Default
has occurred and is continuing, to defer the payment of interest at any time, or
from time to time (each, an "Extension Period"). The right to defer the payment
of interest on the Junior Subordinated Debentures is limited, however, to a
period, in each instance, not exceeding 20 consecutive quarters and no Extension
Period may extend beyond the Stated Maturity of the Junior Subordinated
Debentures. At the end of each Extension Period, the Company must pay all
interest then accrued and unpaid (together with interest thereon at the annual
rate of 8.30%, compounded quarterly, to the extent permitted by applicable law).
During an Extension Period, interest will continue to accrue and holders of
Junior Subordinated Debentures (or the holders of Preferred Securities if such
securities are then outstanding) will be required to accrue and recognize income
for United States federal income tax purposes. See "Certain Federal Income Tax
Consequences -- Potential Extension of Interest Payment Period and Original
Issue Discount."
During any such Extension Period, the Company may not (i) declare or pay
any dividends or distributions on, or redeem, purchase, acquire or make a
liquidation payment with respect to, any of the Company's capital stock, (ii)
make any payment of principal, interest or premium, if any, on or repay,
repurchase or redeem any debt securities of the Company that rank pari passu
with or junior in interest to the Junior Subordinated Debentures or make any
guarantee payments with respect to any guarantee by the Company of the debt
securities of any subsidiary of the Company if such guarantee ranks pari passu
or junior in interest to the Junior Subordinated Debentures (other than payments
under the Guarantee), or (iii) redeem, purchase or acquire less than all of the
Junior Subordinated Debentures or any of the Preferred Securities. Prior to the
termination of any such Extension Period, the Company may further defer the
payment of interest; provided, that no Extension Period may exceed 20
consecutive quarters or extend beyond the Stated Maturity of the Junior
Subordinated Debentures. Upon the termination of any such Extension Period and
the payment of all amounts then due on any Interest Payment Date, the Company
may elect to begin a new Extension Period subject to the above requirements. No
interest will be due and payable during an Extension Period, except at the end
thereof. The Company has no present intention of exercising its rights to defer
payments of interest on the Junior Subordinated Debentures. The Company must
give the Property Trustee, the Administrative Trustees and the Debenture Trustee
notice of its election of such Extension Period at least two Business Days prior
to the earlier of (i) the next succeeding date on which Distributions on the
Trust Securities would have been payable except for the election to begin such
Extension Period, or (ii) the date the Trust is required to give notice of the
record date, or the date such Distributions are payable, to the Nasdaq National
Market (or other applicable self-regulatory organization) or to holders of the
Preferred Securities, but in any event at least one Business Day before such
record date. Subject to the foregoing, there is no limitation on the number of
times that the Company may elect to begin an Extension Period.
ADDITIONAL SUMS
If the Trust or the Property Trustee is required to pay any additional
taxes, duties or other governmental charges as a result of the occurrence of a
Tax Event, the Company will pay to the holders of the Junior Subordinated
Debentures as additional amounts (referred to herein as "Additional Interest")
on the Junior Subordinated Debentures such additional amounts as may be required
so that the net amounts received and retained by the Trust after paying any such
additional taxes, duties or other governmental charges will not be
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less than the amounts the Trust would have received had such additional taxes,
duties or other governmental charges not been imposed.
REDEMPTION OR EXCHANGE
The Company will have the right to redeem the Junior Subordinated
Debentures prior to maturity (i) on or after June 30, 2003, in whole at any time
or in part from time to time, or (ii) at any time in whole (but not in part),
within 180 days following the occurrence of a Tax Event, a Capital Treatment
Event or an Investment Company Event, in each case at a redemption price equal
to the accrued and unpaid interest on the Junior Subordinated Debentures so
redeemed to the date fixed for redemption, plus 100% of the principal amount
thereof. Any such redemption prior to the Stated Maturity will be subject to
prior approval of the Federal Reserve if then required under applicable capital
guidelines or policies of the Federal Reserve.
"Tax Event" means the receipt by the Trust of an opinion of counsel
experienced in such matters to the effect that, as a result of any amendment to,
or change (including any announced prospective change) in, the laws (or any
regulations thereunder) of the United States or any political subdivision or
taxing authority thereof or therein, or as a result of any official
administrative pronouncement or judicial decision interpreting or applying such
laws or regulations, which amendment or change is effective or which
pronouncement or decision is announced on or after the date of issuance of the
Preferred Securities under the Trust Agreement, there is more than an
insubstantial risk that (i) the Trust is, or will be within 90 days after the
date of such opinion of counsel, subject to United States federal income tax
with respect to income received or accrued on the Junior Subordinated
Debentures, (ii) interest payable by the Company on the Junior Subordinated
Debentures is not, or within 90 days of the date of such opinion will not be,
deductible by the Company, in whole or in part, for United States federal income
tax purposes, or (iii) the Trust is, or will be within 90 days after the date of
such opinion of counsel, subject to more than a de minimis amount of other
taxes, duties, assessments or other governmental charges. The Company must
request and receive an opinion with regard to such matters within a reasonable
period of time after it becomes aware of the possible occurrence of any of the
events described in clauses (i) through (iii) above.
"Capital Treatment Event" means the receipt by the Trust of an opinion of
counsel experienced in such matters to the effect that, as a result of any
amendment to or any change (including any announced prospective change) in the
laws (or any regulations thereunder) of the United States or any political
subdivision thereof or therein, or as a result of any official administrative
pronouncement or judicial decision interpreting or applying such laws or
regulations, which amendment or change is effective or which proposed change,
pronouncement or decision is announced on or after the date of issuance of the
Preferred Securities under the Trust Agreement, there is more than an
insubstantial risk of impairment of the Company's ability to treat the aggregate
Liquidation Amount of the Preferred Securities (or any substantial portion
thereof) as "Tier 1 Capital" (or the then equivalent thereof) for purposes of
the capital adequacy guidelines of the Federal Reserve, as then applicable to
the Company; provided, however, that the inability of the Company to treat all
or any portion of the Liquidation Amount of the Preferred Securities as Tier 1
Capital shall not constitute the basis for a Capital Treatment Event if such
inability results from the Company having cumulative preferred capital in excess
of the amount which may qualify for treatment as Tier 1 Capital under applicable
capital adequacy guidelines of the Federal Reserve.
"Investment Company Event" means the receipt by the Trust of an opinion of
counsel experienced in such matters to the effect that, as a result of the
occurrence of a change in law or regulation or a change in interpretation or
application of law or regulation by any legislative body, court, governmental
agency or regulatory authority, the Trust is or will be considered an
"investment company" that is required to be registered under the Investment
Company Act, which change becomes effective on or after the date of original
issuance of the Preferred Securities.
Notice of any redemption will be mailed at least 30 days but not more than
60 days before the redemption date to each holder of Junior Subordinated
Debentures to be redeemed at its registered address. Unless the Company defaults
in payment of the redemption price for the Junior Subordinated Debentures, on
and after
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the redemption date interest ceases to accrue on such Junior Subordinated
Debentures or portions thereof called for redemption.
The Junior Subordinated Debentures will not be subject to any sinking fund.
DISTRIBUTION UPON LIQUIDATION
As described under "Description of the Preferred Securities -- Liquidation
Distribution Upon Dissolution," under certain circumstances involving the
dissolution of the Trust, the Junior Subordinated Debentures may be distributed
to the holders of the Preferred Securities in liquidation of the Trust after
satisfaction of liabilities to creditors of the Trust as provided by applicable
law. Any such distribution will be subject to receipt of prior approval by the
Federal Reserve if then required under applicable policies or guidelines of the
Federal Reserve. If the Junior Subordinated Debentures are distributed to the
holders of Preferred Securities upon the dissolution of the Trust, the Company
will use its best efforts to list the Junior Subordinated Debentures on the
Nasdaq National Market or such stock exchanges, if any, on which the Preferred
Securities are then listed. There can be no assurance as to the market price of
any Junior Subordinated Debentures that may be distributed to the holders of
Preferred Securities.
RESTRICTIONS ON CERTAIN PAYMENTS
If at any time (i) there has occurred a Debenture Event of Default, (ii)
the Company is in default with respect to its obligations under the Guarantee or
(iii) the Company has given notice of its election of an Extension Period as
provided in the Indenture with respect to the Junior Subordinated Debentures and
has not rescinded such notice, or such Extension Period, or any extension
thereof, is continuing, the Company will not (1) declare or pay any dividends or
distributions on, or redeem, purchase, acquire, or make a liquidation payment
with respect to, any of the Company's capital stock, (2) make any payment of
principal, interest or premium, if any, on or repay or repurchase or redeem any
debt securities of the Company that rank pari passu with or junior in interest
to the Junior Subordinated Debentures or make any guarantee payments with
respect to any guarantee by the Company of the debt securities of any subsidiary
of the Company if such guarantee ranks pari passu or junior in interest to the
Junior Subordinated Debentures (other than payments under the Guarantee), or (3)
redeem, purchase or acquire less than all of the Junior Subordinated Debentures
or any of the Preferred Securities.
SUBORDINATION
The Indenture provides that the Junior Subordinated Debentures are
subordinated and junior in right of payment to all Senior Debt, Subordinated
Debt and Additional Senior Obligations of the Company. Upon any payment or
distribution of assets to creditors upon any liquidation, dissolution, winding
up, reorganization, assignment for the benefit of creditors, marshaling of
assets or any bankruptcy, insolvency, debt restructuring or similar proceedings
in connection with any insolvency or bankruptcy proceedings of the Company, the
holders of Senior Debt, Subordinated Debt and Additional Senior Obligations of
the Company will first be entitled to receive payment in full of principal of
(and premium on, if any) and interest on, if any, such Senior Debt, Subordinated
Debt and Additional Senior Obligations of the Company before the holders of
Junior Subordinated Debentures will be entitled to receive or retain any payment
in respect of the principal of or interest on the Junior Subordinated
Debentures.
In the event of the acceleration of the maturity of any Junior Subordinated
Debentures, the holders of all Senior Debt, Subordinated Debt and Additional
Senior Obligations of the Company outstanding at the time of such acceleration
will first be entitled to receive payment in full of all amounts due thereon
(including any amounts due upon acceleration) before the holders of the Junior
Subordinated Debentures will be entitled to receive or retain any payment in
respect of the principal of or interest on the Junior Subordinated Debentures.
No payments on account of principal or interest in respect of the Junior
Subordinated Debentures may be made if there has occurred and is continuing a
default in any payment with respect to Senior Debt, Subordinated Debt or
Additional Senior Obligations of the Company or an event of default with respect
to any
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Senior Debt, Subordinated Debt or Additional Senior Obligations of the Company
resulting in the acceleration of the maturity thereof, or if any judicial
proceeding is pending with respect to any such default.
"Debt" means, with respect to any Person, whether recourse is to all or a
portion of the assets of such Person and whether or not contingent, (i) every
obligation of such Person for money borrowed, (ii) every obligation of such
Person evidenced by bonds, debentures, notes or other similar instruments,
including obligations incurred in connection with the acquisition of property,
assets or businesses, (iii) every reimbursement obligation of such Person with
respect to letters of credit, bankers' acceptances or similar facilities issued
for the account of such Person, (iv) every obligation of such Person issued or
assumed as the deferred purchase price of property or services (but excluding
trade accounts payable or accrued liabilities arising in the ordinary course of
business), (v) every capital lease obligation of such Person, and (vi) every
obligation of the type referred to in clauses (i) through (v) of another Person
and all dividends of another Person the payment of which, in either case, such
Person has guaranteed or is responsible or liable, directly or indirectly, as
obligor or otherwise.
"Senior Debt" means, with respect to the Company, the principal of (and
premium, if any) and interest, if any (including interest accruing on or after
the filing of any petition in bankruptcy or for reorganization relating to the
Company whether or not such claim for post-petition interest is allowed in such
proceeding), on Debt, whether incurred on or prior to the date of the Indenture
or thereafter incurred, unless, in the instrument creating or evidencing the
same or pursuant to which the same is outstanding, it is provided that such
obligations are not superior in right of payment to the Junior Subordinated
Debentures or to other Debt which is pari passu with, or subordinated to, the
Junior Subordinated Debentures; provided, however, that Senior Debt will not be
deemed to include (i) any Debt of the Company which when incurred and without
respect to any election under section 1111(b) of the United States Bankruptcy
Code of 1978, as amended, was without recourse to the Company, (ii) any Debt of
the Company to any of its subsidiaries, (iii) any Debt to any employee of the
Company, (iv) any Debt which by its terms is subordinated to trade accounts
payable or accrued liabilities arising in the ordinary course of business to the
extent that payments made to the holders of such Debt by the holders of the
Junior Subordinated Debentures as a result of the subordination provisions of
the Indenture would be greater than they otherwise would have been as a result
of any obligation of such holders to pay amounts over to the obligees on such
trade accounts payable or accrued liabilities arising in the ordinary course of
business as a result of subordination provisions to which such Debt is subject,
and (v) Debt which constitutes Subordinated Debt.
"Subordinated Debt" means, with respect to the Company, the principal of
(and premium, if any) and interest, if any (including interest accruing on or
after the filing of any petition in bankruptcy or for reorganization relating to
the Company whether or not such claim for post-petition interest is allowed in
such proceeding), on Debt, whether incurred on or prior to the date of the
Indenture or thereafter incurred, which is by its terms expressly provided to be
junior and subordinate to other Debt of the Company (other than the Junior
Subordinated Debentures).
"Additional Senior Obligations" means, with respect to the Company, all
indebtedness, whether incurred on or prior to the date of the Indenture or
thereafter incurred, for claims in respect of derivative products such as
interest and foreign exchange rate contracts, commodity contracts and similar
arrangements; provided, however, that Additional Senior Obligations do not
include claims in respect of Senior Debt or Subordinated Debt or obligations
which, by their terms, are expressly stated to be not superior in right of
payment to the Junior Subordinated Debentures or to rank pari passu in right of
payment with the Junior Subordinated Debentures. "Claim," as used herein, has
the meaning assigned thereto in Section 101(4) of the United States Bankruptcy
Code of 1978, as amended.
The Indenture places no limitation on the amount of additional Senior Debt,
Subordinated Debt or Additional Senior Obligations that may be incurred by the
Company. The Company expects from time to time to incur additional indebtedness
constituting Senior Debt, Subordinated Debt and Additional Senior Obligations.
As of December 31, 1997, the Company had no outstanding Senior Debt,
Subordinated Debt or Additional Senior Obligations. Because the Company is a
holding company, the Junior Subordinated
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Debentures are effectively subordinated to all existing and future liabilities
of the Company's subsidiaries, including obligations to depositors of the Bank.
PAYMENT AND PAYING AGENTS
Payment of principal of and any interest on the Junior Subordinated
Debentures will be made at the office of the Debenture Trustee in Boston,
Massachusetts, except that, at the option of the Company, payment of any
interest may be made (i) by check mailed to the address of the Person entitled
thereto as such address appears in the register of holders of the Junior
Subordinated Debentures, or (ii) by transfer to an account maintained by the
Person entitled thereto as specified in the register of holders of the Junior
Subordinated Debentures, provided that proper transfer instructions have been
received by the regular record date. Payment of any interest on Junior
Subordinated Debentures will be made to the Person in whose name such
Subordinated Debenture is registered at the close of business on the regular
record date for such interest, except in the case of defaulted interest. The
Company may at any time designate additional paying agents for the Junior
Subordinated Debentures or rescind the designation of any paying agent for the
Junior Subordinated Debentures; however, the Company will at all times be
required to maintain a paying agent in Boston, Massachusetts and each place of
payment for the Junior Subordinated Debentures.
Any moneys deposited with the Debenture Trustee or any paying agent for the
Junior Subordinated Debentures, or then held by the Company in trust, for the
payment of the principal of or interest on the Junior Subordinated Debentures
and remaining unclaimed for two years after such principal or interest has
become due and payable will be repaid to the Company on May 31 of each year or
(if then held in trust by the Company) will be discharged from such trust and
the holder of such Junior Subordinated Debenture will thereafter look, as a
general unsecured creditor, only to the Company for payment thereof.
REGISTRAR AND TRANSFER AGENT
The Debenture Trustee will act as the registrar and the transfer agent for
the Junior Subordinated Debentures. Junior Subordinated Debentures may be
presented for registration of transfer (with the form of transfer endorsed
thereon, or a satisfactory written instrument of transfer, duly executed), in
Boston, Massachusetts or at the office of the registrar in Boston,
Massachusetts. The Company may at any time rescind the designation of any such
transfer agent or approve a change in the location through which any such
transfer agent acts. The Company may at any time designate additional transfer
agents with respect to the Junior Subordinated Debentures. In the event of any
redemption, neither the Company nor the Debenture Trustee will be required to
(i) issue, register the transfer of or exchange Junior Subordinated Debentures
during a period beginning at the opening of business 15 days before the day of
selection for redemption of Junior Subordinated Debentures and ending at the
close of business on the day of mailing of the relevant notice of redemption, or
(ii) transfer or exchange any Junior Subordinated Debentures so selected for
redemption, except, in the case of any Junior Subordinated Debentures being
redeemed in part, any portion thereof not to be redeemed.
MODIFICATION OF INDENTURE
The Company and the Debenture Trustee may, from time to time without the
consent of the holders of the Junior Subordinated Debentures, amend, waive or
supplement the Indenture for specified purposes, including, among other things,
curing ambiguities, defects or inconsistencies and qualifying, or maintaining
the qualification of, the Indenture under the Trust Indenture Act. The Indenture
contains provisions permitting the Company and the Debenture Trustee, with the
consent of the holders of not less than a majority in principal amount of the
outstanding Junior Subordinated Debentures, to modify the Indenture; provided,
that no such modification may, without the consent of the holder of each
outstanding Subordinated Debenture affected by such proposed modification, (i)
extend the fixed maturity of the Junior Subordinated Debentures, or reduce the
principal amount thereof, or reduce the rate or extend the time of payment of
interest thereon, or (ii) reduce the percentage of principal amount of Junior
Subordinated Debentures, the holders of which are required to consent to any
such modification of the Indenture; provided that so long as any of the
Preferred Securities remain outstanding, no such modification may be made that
requires the consent of the holders of
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the Junior Subordinated Debentures, and no termination of the Indenture may
occur, and no waiver of any Debenture Event of Default may be effective, without
the prior consent of the holders of at least a majority of the aggregate
Liquidation Amount of the Preferred Securities and that if the consent of the
holder of each Subordinated Debenture is required, such modification will not be
effective until each holder of Trust Securities has consented thereto.
DEBENTURE EVENTS OF DEFAULT
The Indenture provides that any one or more of the following described
events with respect to the Junior Subordinated Debentures that has occurred and
is continuing constitutes an event of default (each, a "Debenture Event of
Default") with respect to the Junior Subordinated Debentures:
(i) failure for 30 days to pay any interest on the Junior Subordinated
Debentures, when due (subject to the deferral of any due date in the case
of an Extension Period); or
(ii) failure to pay any principal on the Junior Subordinated
Debentures when due whether at maturity, upon redemption by declaration or
otherwise; or
(iii) failure to observe or perform in any material respect certain
other covenants contained in the Indenture for 90 days after written notice
to the Company from the Debenture Trustee or the holders of at least 25% in
aggregate outstanding principal amount of the Junior Subordinated
Debentures; or
(iv) certain events in bankruptcy, insolvency or reorganization of the
Company.
The holders of a majority in aggregate outstanding principal amount of the
Junior Subordinated Debentures have the right to direct the time, method and
place of conducting any proceeding for any remedy available to the Debenture
Trustee. The Debenture Trustee, or the holders of not less than 25% in aggregate
outstanding principal amount of the Junior Subordinated Debentures, may declare
the principal due and payable immediately upon a Debenture Event of Default. The
holders of a majority in aggregate outstanding principal amount of the Junior
Subordinated Debentures may annul such declaration and waive the default if the
default (other than the non-payment of the principal of the Junior Subordinated
Debentures which has become due solely by such acceleration) has been cured and
a sum sufficient to pay all matured installments of interest and principal due
otherwise than by acceleration has been deposited with the Debenture Trustee.
Should the holders of the Junior Subordinated Debentures fail to annul such
declaration and waive such default, the holders of a majority in aggregate
Liquidation Amount of the Preferred Securities will have such right.
The Company is required to file annually with the Debenture Trustee a
certificate as to whether or not the Company is in compliance with all the
conditions and covenants applicable to it under the Indenture.
If a Debenture Event of Default has occurred and is continuing, the
Property Trustee will have the right to declare the principal of and the
interest on such Junior Subordinated Debentures, and any other amounts payable
under the Indenture, to be forthwith due and payable and to enforce its other
rights as a creditor with respect to such Junior Subordinated Debentures.
ENFORCEMENT OF CERTAIN RIGHTS BY HOLDERS OF THE PREFERRED SECURITIES
If a Debenture Event of Default has occurred and is continuing and such
event is attributable to the failure of the Company to pay interest on or
principal of the Junior Subordinated Debentures on the payment date on which
such payment is due and payable, then a holder of Preferred Securities may
institute a legal proceeding directly against the Company for enforcement of
payment to such holder of the principal of or interest on such Junior
Subordinated Debentures having a principal amount equal to the aggregate
Liquidation Amount of the Preferred Securities of such holder (a "Direct
Action"). In connection with such Direct Action, the Company will have a right
of set-off under the Indenture to the extent of any payment made by the Company
to such holder of Preferred Securities in the Direct Action. The Company may not
amend the Indenture to remove the foregoing right to bring a Direct Action
without the prior written consent of the holders of all of the Preferred
Securities. If the right to bring a Direct Action is removed, the Trust may
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become subject to the reporting obligations under the Exchange Act. The Company
has the right under the Indenture to set-off any payment made to such holder of
Preferred Securities by the Company in connection with a Direct Action.
The holders of the Preferred Securities will not be able to exercise
directly any remedies, other than those set forth in the preceding paragraph,
available to the holders of the Junior Subordinated Debentures unless there has
been an Event of Default under the Trust Agreement. See "Description of the
Preferred Securities -- Events of Default; Notice."
CONSOLIDATION, MERGER, SALE OF ASSETS AND OTHER TRANSACTIONS
The Company may not consolidate with or merge into any other Person or
convey or transfer its properties and assets substantially as an entirety to any
Person, and no Person may consolidate with or merge into the Company or sell,
convey, transfer or otherwise dispose of its properties and assets substantially
as an entirety to the Company, unless (i) in the event the Company consolidates
with or merges into another Person or conveys or transfers its properties and
assets substantially as an entirety to any Person, the successor Person is
organized under the laws of the United States or any State or the District of
Columbia, and such successor Person expressly assumes by supplemental indenture
the Company obligations on the Junior Subordinated Debentures, (ii) immediately
after giving effect thereto, no Debenture Event of Default, and no event which,
after notice or lapse of time or both, would become a Debenture Event of
Default, has occurred and is continuing, and (iii) certain other conditions
prescribed in the Indenture are met.
SATISFACTION AND DISCHARGE
The Indenture will cease to be of further effect (except as to the
Company's obligations to pay certain sums due pursuant to the Indenture and to
provide certain officers' certificates and opinions of counsel described
therein) and the Company will be deemed to have satisfied and discharged the
Indenture when, among other things, all Junior Subordinated Debentures not
previously delivered to the Debenture Trustee for cancellation (i) have become
due and payable, or (ii) will become due and payable at their Stated Maturity
within one year or are to be called for redemption within one year, and the
Company deposits or causes to be deposited with the Debenture Trustee funds, in
trust, for the purpose and in an amount sufficient to pay and discharge the
entire indebtedness on the Junior Subordinated Debentures not previously
delivered to the Debenture Trustee for cancellation, for the principal and
interest to the date of the deposit or to the Stated Maturity or redemption
date, as the case may be.
GOVERNING LAW
The Indenture and the Junior Subordinated Debentures will be governed by
and construed in accordance with the laws of The Commonwealth of Massachusetts.
INFORMATION CONCERNING THE DEBENTURE TRUSTEE
The Debenture Trustee has and is subject to all the duties and
responsibilities specified with respect to an indenture trustee under the Trust
Indenture Act. Subject to such provisions, the Debenture Trustee is under no
obligation to exercise any of the powers vested in it by the Indenture at the
request of any holder of Junior Subordinated Debentures, unless offered
reasonable indemnity by such holder against the costs, expenses and liabilities
which might be incurred thereby. The Debenture Trustee is not required to expend
or risk its own funds or otherwise incur personal financial liability in the
performance of its duties if the Debenture Trustee reasonably believes that
repayment or adequate indemnity is not reasonably assured to it.
MISCELLANEOUS
The Company has agreed, pursuant to the Indenture, for so long as Trust
Securities remain outstanding, (i) to maintain directly or indirectly 100%
ownership of the Common Securities of the Trust (provided that certain
successors which are permitted pursuant to the Indenture may succeed to the
Company's ownership of the Common Securities), (ii) not to voluntarily dissolve
the Trust, except upon prior approval of the Federal
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Reserve if then so required under applicable capital guidelines or policies of
the Federal Reserve, and (a) in connection with a distribution of Junior
Subordinated Debentures to the holders of the Preferred Securities in
liquidation of the Trust, or (b) in connection with certain mergers,
consolidations or amalgamations permitted by the Trust Agreement, and (iii) to
use its reasonable efforts, consistent with the terms and provisions of the
Trust Agreement, to cause the Trust to remain classified as a grantor trust and
not as an association taxable as a corporation for United States federal income
tax purposes.
DESCRIPTION OF THE GUARANTEE
The Preferred Securities Guarantee Agreement (the "Guarantee") will be
executed and delivered by the Company concurrently with the issuance of the
Preferred Securities for the benefit of the holders of the Preferred Securities.
The Guarantee will be qualified as an indenture under the Trust Indenture Act.
The Guarantee Trustee will act as indenture trustee under the Guarantee for
purposes of complying with the provisions of the Trust Indenture Act. The
Guarantee Trustee, State Street Bank and Trust Company, will hold the Guarantee
for the benefit of the holders of the Preferred Securities. The following
summary of the material terms and provisions of the Guarantee does not purport
to be complete and is subject to, and qualified in its entirety by reference to,
all of the provisions of the Guarantee and the Trust Indenture Act. Wherever
particular defined terms of the Guarantee are referred to, but not defined
herein, such defined terms are incorporated herein by reference. The form of the
Guarantee has been filed as an exhibit to the Registration Statement of which
this Prospectus forms a part.
GENERAL
The Company will, pursuant to the Guarantee, irrevocably agree to pay in
full on a subordinated basis, to the extent set forth therein, the Guarantee
Payments (as defined below) to the holders of the Preferred Securities, as and
when due, regardless of any defense, right of set-off or counterclaim that the
Trust may have or assert other than the defense of payment. The following
payments with respect to the Preferred Securities, to the extent not paid by or
on behalf of the Trust (the "Guarantee Payments"), will be subject to the
Guarantee: (i) any accumulated and unpaid Distributions required to be paid on
the Preferred Securities, to the extent that the Trust has funds available
therefor at such time, (ii) the Redemption Price with respect to any Preferred
Securities called for redemption, to the extent that the Trust has funds
available therefor at such time, and (iii) upon a voluntary or involuntary
dissolution, winding up or liquidation of the Trust (other than in connection
with the distribution of Junior Subordinated Debentures to the holders of
Preferred Securities or a redemption of all of the Preferred Securities), the
lesser of (a) the amount of the Liquidation Distribution, to the extent the
Trust has funds available therefor at such time, and (b) the amount of assets of
the Trust remaining available for distribution to holders of Preferred
Securities in liquidation of the Trust. The obligation of the Company to make a
Guarantee Payment may be satisfied by direct payment of the required amounts by
the Company to the holders of the Preferred Securities or by causing the Trust
to pay such amounts to such holders.
The Guarantee will not apply to any payment of Distributions except to the
extent the Trust has funds available therefor. If the Company does not make
interest payments on the Junior Subordinated Debentures held by the Trust, the
Trust will not pay Distributions on the Preferred Securities and will not have
funds legally available therefor.
STATUS OF THE GUARANTEE
The Guarantee will constitute an unsecured obligation of the Company and
will rank subordinate and junior in right of payment to all Senior Debt,
Subordinated Debt and Additional Senior Obligations of the Company in the same
manner as the Junior Subordinated Debentures. The Guarantee does not place a
limitation on the amount of additional Senior Debt, Subordinated Debt or
Additional Senior Obligations that may be incurred by the Company. The Company
expects from time to time to incur additional indebtedness constituting Senior
Debt, Subordinated Debt and Additional Senior Obligations.
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The Guarantee will constitute a guarantee of payment and not of collection
(that is, the guaranteed party may institute a legal proceeding directly against
the Company to enforce its rights under the Guarantee without first instituting
a legal proceeding against any other Person). The Guarantee will not be
discharged except by payment of the Guarantee Payments in full to the extent not
paid by the Trust or upon distribution of the Junior Subordinated Debentures to
the holders of the Preferred Securities. Because the Company is a holding
company, the right of the Company to participate in any distribution of assets
of the Bank upon the Bank's liquidation or reorganization or otherwise is
subject to the prior claims of creditors of the Bank, except to the extent the
Company may itself be recognized as a creditor of the Bank. The Company's
obligations under the Guarantee, therefore, will be effectively subordinated to
all existing and future liabilities of the Company's subsidiaries, and claimants
should look only to the assets of the Company for payments thereunder.
AMENDMENTS AND ASSIGNMENT
Except with respect to any changes which do not materially adversely affect
the rights of holders of the Preferred Securities (in which case no vote will be
required), the Guarantee may not be amended without the prior approval of the
holders of not less than a majority of the aggregate Liquidation Amount of the
outstanding Preferred Securities. See "Description of the Preferred
Securities -- Voting Rights; Amendment of Trust Agreement." All guarantees and
agreements contained in the Guarantee will bind the successors, assigns,
receivers, trustees and representatives of the Company and will inure to the
benefit of the holders of the Preferred Securities then outstanding.
EVENTS OF DEFAULT
An event of default under the Guarantee will occur upon the failure of the
Company to perform any of its payment or other obligations thereunder. The
holders of not less than a majority in aggregate Liquidation Amount of the
Preferred Securities have the right to direct the time, method and place of
conducting any proceeding for any remedy available to the Guarantee Trustee in
respect of the Guarantee or to direct the exercise of any trust or power
conferred upon the Guarantee Trustee under the Guarantee.
Any holder of Preferred Securities may institute a legal proceeding
directly against the Company to enforce its rights under the Guarantee without
first instituting a legal proceeding against the Trust, the Guarantee Trustee or
any other Person.
The Company, as guarantor, is required to file annually with the Guarantee
Trustee a certificate as to whether or not the Company is in compliance with all
the conditions and covenants applicable to it under the Guarantee.
INFORMATION CONCERNING THE GUARANTEE TRUSTEE
The Guarantee Trustee, other than during the occurrence and continuance of
a default by the Company in performance of the Guarantee, undertakes to perform
only such duties as are specifically set forth in the Guarantee and, after
default with respect to the Guarantee, must exercise the same degree of care and
skill as a prudent person would exercise or use in the conduct of his or her own
affairs. Subject to such provisions, the Guarantee Trustee is under no
obligation to exercise any of the powers vested in it by the Guarantee at the
request of any holder of any Preferred Securities, unless it is offered
reasonable indemnity against the costs, expenses and liabilities that might be
incurred thereby.
TERMINATION OF THE GUARANTEE
The Guarantee will terminate and be of no further force and effect upon (a)
full payment of the Redemption Price of the Preferred Securities, (b) full
payment of the amounts payable upon liquidation of the Trust, or (c)
distribution of the Junior Subordinated Debentures to the holders of the
Preferred Securities. The Guarantee will continue to be effective or will be
reinstated, as the case may be, if at any time any holder of the Preferred
Securities must restore payment of any sums paid under such Preferred Securities
or the Guarantee.
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GOVERNING LAW
The Guarantee will be governed by and construed in accordance with the laws
of The Commonwealth of Massachusetts.
EXPENSE AGREEMENT
The Company will, pursuant to the Agreement as to Expenses and Liabilities
entered into by it under the Trust Agreement (the "Expense Agreement"),
irrevocably and unconditionally guarantee to each person or entity to whom the
Trust becomes indebted or liable, the full payment of any costs, expenses or
liabilities of the Trust, other than obligations of the Trust to pay to the
holders of the Preferred Securities or other similar interests in the Trust of
the amounts due such holders pursuant to the terms of the Preferred Securities
or such other similar interests, as the case may be. Third party creditors of
the Trust may proceed directly against the Company under the Expense Agreement,
regardless of whether such creditors had notice of the Expense Agreement.
RELATIONSHIP AMONG THE PREFERRED SECURITIES,
THE JUNIOR SUBORDINATED DEBENTURES AND THE GUARANTEE
FULL AND UNCONDITIONAL GUARANTEE
Payments of Distributions and other amounts due on the Preferred Securities
(to the extent the Trust has funds available for the payment of such
Distributions) are irrevocably guaranteed by the Company as and to the extent
set forth under "Description of the Guarantee." The Company and the Trust
believe that, taken together, the obligations of the Company under the Junior
Subordinated Debentures, the Indenture, the Trust Agreement, the Expense
Agreement, and the Guarantee provide, in the aggregate, a full, irrevocable and
unconditional guarantee, on a subordinated basis, of payment of Distributions
and other amounts due on the Preferred Securities. No single document standing
alone or operating in conjunction with fewer than all of the other documents
constitutes such guarantee. It is only the combined operation of these documents
that has the effect of providing a full, irrevocable and unconditional guarantee
of the obligations of the Trust under the Preferred Securities. If and to the
extent that the Company does not make payments on the Junior Subordinated
Debentures, the Trust will not pay Distributions or other amounts due on the
Preferred Securities. The Guarantee does not cover payment of Distributions when
the Trust does not have sufficient funds to pay such Distributions. In such
event, the remedy of a holder of Preferred Securities is to institute a legal
proceeding directly against the Company for enforcement of payment of such
Distributions to such holder. The obligations of the Company under the Guarantee
are subordinate and junior in right of payment to all Senior Debt, Subordinated
Debt and Additional Senior Obligations of the Company.
SUFFICIENCY OF PAYMENTS
As long as payments of interest and other payments are made when due on the
Junior Subordinated Debentures, such payments will be sufficient to cover
Distributions and other payments due on the Preferred Securities, primarily
because (i) the aggregate principal amount of the Junior Subordinated Debentures
will be equal to the sum of the aggregate stated Liquidation Amount of the Trust
Securities, (ii) the interest rate and interest and other payment dates on the
Junior Subordinated Debentures will match the Distribution rate and Distribution
and other payment dates for the Preferred Securities, (iii) the Company will pay
for all and any costs, expenses and liabilities of the Trust (except the
obligations of the Trust to holders of the Preferred Securities), and (iv) the
Trust Agreement further provides that the Trust will not engage in any activity
that is not consistent with the limited purposes of the Trust.
ENFORCEMENT RIGHTS OF HOLDERS OF PREFERRED SECURITIES
A holder of any Preferred Security may institute a legal proceeding
directly against the Company to enforce its rights under the Guarantee without
first instituting a legal proceeding against the Guarantee
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Trustee, the Trust or any other Person. A default or event of default under any
Senior Debt, Subordinated Debt or Additional Senior Obligations of the Company
would not constitute a default or Event of Default. In the event, however, of
payment defaults under, or acceleration of, Senior Debt, Subordinated Debt or
Additional Senior Obligations of the Company, the subordination provisions of
the Indenture provide that no payments may be made in respect of the Junior
Subordinated Debentures until such Senior Debt, Subordinated Debt or Additional
Senior Obligations has been paid in full or any payment default thereunder has
been cured or waived. Failure to make required payments on the Junior
Subordinated Debentures would constitute an Event of Default.
LIMITED PURPOSE OF THE TRUST
The Preferred Securities evidence a preferred undivided beneficial interest
in the assets of the Trust. The Trust exists for the exclusive purposes of (i)
issuing the Trust Securities representing undivided beneficial interests in the
assets of the Trust, (ii) investing the gross proceeds of the Trust Securities
in the Junior Subordinated Debentures issued by the Company, and (iii) engaging
in only those other activities necessary, advisable, or incidental thereto. A
principal difference between the rights of a holder of a Preferred Security and
the rights of a holder of a Subordinated Debenture is that a holder of a
Subordinated Debenture is entitled to receive from the Company the principal
amount of and interest accrued on Junior Subordinated Debentures held, while a
holder of Preferred Securities is entitled to receive Distributions from the
Trust (or from the Company under the Guarantee) if and to the extent the Trust
has funds available for the payment of such Distributions.
RIGHTS UPON DISSOLUTION
Upon any voluntary or involuntary dissolution of the Trust involving the
liquidation of the Junior Subordinated Debentures, the holders of the Preferred
Securities will be entitled to receive, out of assets held by the Trust, the
Liquidation Distribution in cash. See "Description of the Preferred
Securities -- Liquidation Distribution Upon Dissolution." Upon any voluntary or
involuntary liquidation or bankruptcy of the Company, the Property Trustee, as
holder of the Junior Subordinated Debentures, would be a subordinated creditor
of the Company, subordinated in right of payment to all Senior Debt,
Subordinated Debt and Additional Senior Obligations of the Company (as set forth
in the Indenture), but entitled to receive payment in full of principal and
interest before any shareholders of the Company receive payments or
distributions. Since the Company is the guarantor under the Guarantee and has
agreed to pay for all costs, expenses and liabilities of the Trust (other than
the obligations of the Trust to the holders of its Preferred Securities), the
positions of a holder of the Preferred Securities and a holder of the Junior
Subordinated Debentures relative to other creditors and to shareholders of the
Company in the event of liquidation or bankruptcy of the Company are expected to
be substantially the same.
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CERTAIN FEDERAL INCOME TAX CONSEQUENCES
GENERAL
The following is a summary of the principal United States federal income
tax consequences of the purchase, ownership and disposition of Preferred
Securities which has been passed upon by Foley, Hoag & Eliot LLP, counsel to the
Company and the Trust insofar as it relates to matters of law and legal
conclusions. The discussion only addresses the tax consequences to a person that
acquires Preferred Securities on their original issue at their original offering
price and that is (i) an individual citizen or resident of the United States,
(ii) a corporation or partnership organized in or under the laws of the United
States or any state thereof or the District of Columbia or (iii) an estate or
trust the income of which is subject to United States federal income tax
regardless of source. This discussion does not attempt to discuss all tax
consequences that may be applicable to a holder of Preferred Securities, nor
does it address the tax consequences to (i) persons who are not United States
Persons, (ii) persons that may be subject to special tax treatment under United
States federal income tax law, such as banks, insurance companies, thrift
institutions, real estate investment trusts, regulated investment companies,
tax-exempt organizations, and dealers in securities or currencies, (iii) persons
that will hold the Preferred Securities as part of a position in a "straddle,"
as part of a "hedge or "synthetic security," as part of a "conversion
transaction" or other integrated investment transaction for federal income tax
purposes, or as other than a capital asset, or (iv) persons whose functional
currency is not the United States dollar. Further, it does not include any
description of any alternative minimum tax consequences or the tax laws of any
state or local government or of any foreign government that may be applicable to
the Preferred Securities.
The summary is based on current provisions of the Internal Revenue Code of
1986, as amended (the "Code"), Treasury regulations thereunder and
administrative and judicial interpretations thereof, all of which are subject to
change, with possible retroactive effect. Subsequent changes may cause tax
consequences to vary substantially from the consequences described below.
Furthermore, the authorities on which this summary is based are subject to
various interpretations, and it is therefore possible that the federal income
tax treatment of the purchase, ownership and disposition of Preferred Securities
may differ from the treatment described below.
CLASSIFICATION OF THE TRUST
Under current law and assuming full compliance with the terms of the Trust
Agreement and Indenture (and certain other documents described herein), the
Trust will be classified for United States federal income tax purposes as a
grantor trust and not as an association taxable as a corporation. As a result,
each holder of Preferred Securities generally will be considered the owner of an
undivided beneficial interest in the Junior Subordinated Debentures.
Accordingly, for United States federal income tax purposes, each holder of
Preferred Securities will be required to include in its gross income any
interest, including original issue discount, paid or accrued with respect to its
allocable share of the Junior Subordinated Debentures whether or not cash is
actually distributed to such holder.
CLASSIFICATION OF THE JUNIOR SUBORDINATED DEBENTURES
The Company intends to take the position that the Junior Subordinated
Debentures will be classified for United States federal income tax purposes as
indebtedness of the Company under current law and each holder of Preferred
Securities will be treated as owning an indirect beneficial interest in the
Junior Subordinated Debentures. No ruling is being requested from the Internal
Revenue Service and there is no direct authority addressing the characterization
of the Junior Subordinated Debentures. No assurance can be given that such
position of the Company will not be challenged by the Internal Revenue Service
or, if challenged that such a challenge will not be successful. The remainder of
this discussion assumes that the Junior Subordinated Debentures will be
classified for United States federal income tax purposes as indebtedness of the
Company.
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POTENTIAL EXTENSION OF INTEREST PAYMENT PERIOD AND ORIGINAL ISSUE DISCOUNT
Under recently issued Treasury regulations (the "Regulations"), a debt
instrument will be deemed to be issued with original issue discount ("OID") if
there is more than a "remote" contingency that periodic stated interest payments
due on the instrument will not be timely paid. Because the exercise by the
Company of its option to defer the payment of stated interest on the Junior
Subordinated Debentures would prevent the Company from declaring dividends on
any class of equity, the Company believes that the likelihood of its exercising
the option is "remote" within the meaning of the Regulations. As a result, the
Company intends to take the position that the Junior Subordinated Debentures
will not be considered to be issued with OID. Accordingly, based on this
position, stated interest on the Junior Subordinated Debentures will be
includible in the ordinary income of a holder at the time that such payments are
paid or accrued in accordance with such holder's regular method of tax
accounting. Because the Regulations have not yet been addressed in any published
rulings or other published interpretations issued by the Internal Revenue
Service, it is possible that the Internal Revenue Service could take a position
contrary to the position taken by the Company.
Under the Regulations, if the Company were to exercise its option to defer
the payment of stated interest on the Junior Subordinated Debentures, the Junior
Subordinated Debentures would at that time be treated as issued with OID and all
stated interest on the Junior Subordinated Debentures would thereafter be
treated as OID as long as the Junior Subordinated Debentures remain outstanding.
In such event, a holder of the Junior Subordinated Debentures would be required
to include OID in ordinary income, on a current basis, over the period that the
instrument is held even though the Company would not be making any actual cash
payments during the extended interest payment period. The amount of interest
income includible in the taxable income of a holder of the Junior Subordinated
Debentures would be determined on the basis of a constant yield method over the
remaining term of the instrument and the actual receipt of future payments of
stated interest on the Junior Subordinated Debentures would no longer be
separately reported as taxable income. The amount of OID that would accrue, in
the aggregate, during the extended interest payment period would be
approximately equal to the amount of the cash payment due at the end of such
period. Any OID included in income would increase the holder's adjusted tax
basis in the Junior Subordinated Debentures and the holder's actual receipt of
interest payments would reduce such basis.
Because income on the Preferred Securities will constitute interest or OID,
corporate holders of Preferred Securities will not be entitled to a
dividends-received deduction with respect to any income recognized with respect
to the Preferred Securities.
MARKET DISCOUNT AND ACQUISITION PREMIUM
Holders of Preferred Securities other than a holder who purchased the
Preferred Securities upon original issuance may be considered to have acquired
their undivided interest in the Junior Subordinated Debentures with "market
discount' or acquisition premium" as such phrases are defined for United States
federal income tax purposes. Such holders are advised to consult their tax
advisors as to the income tax consequences of the acquisition, ownership and
disposition of the Preferred Securities.
RECEIPT OF JUNIOR SUBORDINATED DEBENTURES OR CASH UPON LIQUIDATION OF THE TRUST
Under certain circumstances, as described herein (see "Description of the
Preferred Securities -- Redemption or Exchange" and "Description of the
Preferred Securities -- Liquidation Distribution Upon Dissolution"), the Junior
Subordinated Debentures may be distributed to holders of Preferred Securities
upon a liquidation of the Trust. Under current United States federal income tax
law, such a distribution would be treated as a nontaxable event to each such
holder and would result in such holder having an adjusted tax basis in the
Junior Subordinated Debentures received in the liquidation equal to such
holder's adjusted tax basis in the Preferred Securities immediately before the
distribution. A holder's holding period in the Junior Subordinated Debentures so
received in liquidation of the Trust would include the period for which such
holder held the Preferred Securities. If, however, the Trust is characterized
for United States federal income tax purposes as an association taxable as a
corporation at the time of its dissolution, the distribution of the Junior
Subordinated Debentures may constitute a taxable event to holders of Preferred
Securities.
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Under certain circumstances described herein, the Junior Subordinated
Debentures may be redeemed for cash and the proceeds of such redemption
distributed to holders in redemption of their Preferred Securities. Under
current law, such a redemption would, for United States federal income tax
purposes, constitute a taxable disposition of the redeemed Preferred Securities,
and a holder would recognize gain or loss as if the holder sold such Preferred
Securities for cash. See "Description of the Preferred Securities -- Redemption
or Exchange" and "Description of the Preferred Securities -- Liquidation
Distribution Upon Dissolution."
DISPOSITION OF PREFERRED SECURITIES
Upon the sale of the Preferred Securities, a holder will recognize gain or
loss in an amount equal to the difference between its adjusted tax basis in the
Preferred Securities and the amount realized in the sale (except to the extent
of any amount received in respect of accrued but unpaid interest not previously
included in income). A holder's adjusted tax basis in the Preferred Securities
generally will be its initial purchase price increased by the amount of OID
accrued and decreased by payments (if any) received on the Preferred Securities
in respect of OID (if any) to the date of disposition. Such gain or loss
generally will be a capital gain or loss and generally will be long-term capital
gain or loss if the Preferred Securities have been held for more than one year
at the time of sale. Amounts attributable to accrued interest with respect to a
holder's share of the Junior Subordinated Debentures not previously included in
income will be taxable as ordinary income.
Should the Corporation exercise its option to defer any payment of interest
on the Junior Subordinated Debentures, the Preferred Securities may trade at a
price that does not accurately reflect the value of accrued but unpaid interest
with respect to the underlying Junior Subordinated Debentures (or OID if the
Junior Subordinated Debentures are treated as having been issued with OID). In
the event of such a deferral, a holder who disposes of its Preferred Securities
will be required to include in ordinary income (i) any portion of the amount
realized that is attributable to such accrued but unpaid interest to the extent
not previously included in income, or (ii) any amount of OID, in either case,
that has accrued on its pro rata share of the underlying Junior Subordinated
Debentures during the taxable year of sale through the date of disposition. Any
such income inclusion will increase the holder's adjusted tax basis in the
Preferred Securities disposed of. To the extent that the amount realized in the
sale is less than the holder's adjusted tax basis, a holder will recognize a
capital loss. Subject to certain limited exceptions, capital losses cannot be
applied to offset ordinary income for United States federal income tax purposes.
BACKUP WITHHOLDING AND INFORMATION REPORTING
The amount of interest paid and any OID accrued on the Preferred Securities
held of record by individual citizens or residents of the United States, or
certain trusts, estates, and partnerships, will be reported to the Internal
Revenue Service on Forms 1099, which forms should be mailed to such holders of
Preferred Securities by January 31 following each calendar year. Payments of
interest may be subject to a "backup" withholding tax at a rate of 31% unless
the holder complies with certain identification and other requirements. Payment
of the proceeds from the sale of Preferred Securities may also be subject to
information reporting and backup withholding. Any amounts withheld under the
backup withholding rules will be allowed as a credit against the holder's United
States federal income tax liability, provided the required information is
furnished to the Internal Revenue Service.
EFFECT OF PROPOSED CHANGES IN TAX LAWS
In both 1996 and 1997 legislation was proposed that would, if enacted, have
adversely affected the tax treatment of the Preferred Securities. On March 19,
1996, President Clinton proposed certain tax law changes (the "1996 Proposed
Legislation") that would, among other things, generally deny corporate issuers a
deduction for interest in respect of certain debt obligations having a maximum
term in excess of 20 years and not shown as indebtedness on the issuer's
applicable consolidated balance sheet. Neither the 1996 Proposed Legislation or
similar legislation was enacted during the 104th Congress. On February 6, 1997,
President Clinton proposed in the administration's fiscal year 1998 budget
certain tax law changes (the "Administration's 1997 Tax Proposals") that would,
among other things, generally deny corporate issuers a deduction for
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interest or OID in respect of certain debt obligations having a maximum term in
excess of 15 years and not shown as indebtedness on the issuer's applicable
consolidated balance sheet. Neither the Administration's 1997 Tax Proposals nor
similar legislation was enacted by the 105th Congress. There can be no
assurance, however, that legislation enacted after the date hereof will not
adversely affect the ability of the Company to deduct the interest payable on
the Junior Subordinated Debentures or otherwise give rise to a Tax Event.
THE UNITED STATES FEDERAL INCOME TAX DISCUSSION SET FORTH ABOVE MAY NOT BE
APPLICABLE DEPENDING UPON A HOLDER'S PARTICULAR SITUATION. HOLDERS SHOULD
CONSULT THEIR TAX ADVISOR WITH RESPECT TO THE TAX CONSEQUENCES TO THEM OF THE
PURCHASE, OWNERSHIP AND DISPOSITION OF THE PREFERRED SECURITIES, INCLUDING THE
TAX CONSEQUENCES UNDER STATE, LOCAL, FOREIGN AND OTHER TAX LAWS AND THE POSSIBLE
EFFECTS OF CHANGES IN THE UNITED STATES FEDERAL OR OTHER TAX LAWS.
ERISA CONSIDERATIONS
Employee benefit plans that are subject to the Employee Retirement Income
Security Act of 1974, as amended ("ERISA"), or Section 4975 of the Code
("Plans"), generally may purchase Preferred Securities, subject to the investing
fiduciary's determination that the investment in Preferred Securities satisfies
ERISA's fiduciary standards and other requirements applicable to investments by
the Plan.
In any case, the Company and/or any of its affiliates may be considered a
"party in interest" (within the meaning of ERISA) or a "disqualified person"
(within the meaning of Section 4975 of the Code) with respect to certain plans
(generally, Plans maintained or sponsored by, or contributed to by, any such
persons with respect to which the Company or an affiliate is a fiduciary or
Plans for which the Company or an affiliate provides services). The acquisition
and ownership of Preferred Securities by a Plan (or by an individual retirement
arrangement or other Plans described in Section 4975(e)(1) of the Code) with
respect to which the Company or any of its affiliates is considered a party in
interest or a disqualified person may constitute or result in a prohibited
transaction under ERISA or Section 4975 of the Code, unless such Preferred
Securities are acquired pursuant to and in accordance with an applicable
exemption.
As a result, Plans with respect to which the Company or any of its
affiliates is a party in interest or a disqualified person should not acquire
Preferred Securities unless such Preferred Securities are acquired pursuant to
and in accordance with an applicable exemption. Any other Plans or other
entities whose assets include Plan assets subject to ERISA or Section 4975 of
the code proposing to acquire Preferred Securities should consult with their own
counsel.
51
<PAGE> 52
UNDERWRITING
The Underwriters named below, represented by Tucker Anthony Incorporated
(the "Representative"), have severally agreed, subject to the terms and
conditions set forth in the Underwriting Agreement, the form of which is filed
as an exhibit to the Registration Statement of which this Prospectus forms a
part, to purchase from the Trust the number of Preferred Securities set forth
opposite their respective names below. The several Underwriters have agreed in
the Underwriting Agreement, subject to the terms and conditions set forth
therein, to purchase all the Preferred Securities offered hereby if any of the
Preferred Securities are purchased. In the event of default by an Underwriter,
the Underwriting Agreement provides that, in certain circumstances, purchase
commitments of the nondefaulting Underwriters may be increased or the
Underwriting Agreement may be terminated.
<TABLE>
<CAPTION>
NUMBER OF PREFERRED
UNDERWRITERS SECURITIES
- ------------ -------------------
<S> <C>
Tucker Anthony Incorporated...................... 2,500,000
---------
Total.................................. 2,500,000
=========
</TABLE>
The Representative has advised the Trust that it proposes initially to
offer the Preferred Securities to the public at the public offering price set
forth on the cover page of this Prospectus, and to certain dealers at such price
less a concession not in excess of $0.20 per Preferred Security. The
Underwriters may allow, and such dealers may reallow, a discount not in excess
of $0.10 per Preferred Security to certain other dealers. After the initial
public offering, the public offering price, concession and discount may be
changed.
In view of the fact that the proceeds of the sale of the Preferred
Securities will be used to purchase the Junior Subordinated Debentures of the
Company, the Underwriting Agreement provides that the Company will pay as
compensation to the Underwriters arranging the investment therein of such
proceeds, an amount in immediately available funds of $0.3625 per Preferred
Security (or $906,250 in the aggregate) for the accounts of the several
Underwriters.
The Trust has granted the Underwriters an option to purchase up to an
additional 375,000 Preferred Securities at the public offering price. Such
option, which expires 30 days from the date of this Prospectus, may be exercised
solely to cover over-allotments. To the extent that the Underwriters exercise
such option, each of the Underwriters will have a firm commitment, subject to
certain conditions, to purchase approximately the same percentage of the
additional Preferred Securities that the number of Preferred Securities to be
purchased initially by the Underwriter is of the 2,500,000 Preferred Securities
initially purchased by the Underwriters.
To the extent that the Underwriters exercise their option to purchase
additional Preferred Securities, the Trust will issue and sell to the Company
additional Common Securities in such aggregate Liquidation Amount as is required
for the Company to continue to hold Common Securities in an aggregate
Liquidation Amount equal to at least 3% of the total capital of the Trust and
the Company will issue and sell to the Trust Junior Subordinated Debentures in
an aggregate principal amount equal to the total aggregate Liquidation Amount of
the additional Preferred Securities being purchased pursuant to the option and
such additional Common Securities.
In connection with the offering of the Preferred Securities, the
Underwriters and any selling group members and their respective affiliates may
engage in transactions effected in accordance with Rule 104 of the Securities
and Exchange Commission's Regulation M that are intended to stabilize, maintain
or otherwise affect the market price of the Preferred Securities. Such
transactions may include over-allotment transactions in which the Underwriters
create a short position for their own account by selling more Preferred
Securities than they are committed to purchase from the Trust. In such case, to
cover all or part of the short position, the Underwriters may exercise the
over-allotment option described above or may purchase Preferred Securities in
52
<PAGE> 53
the open market following completion of the initial offering of the Preferred
Securities. The Underwriters also may engage in stabilizing transactions in
which they bid for, and purchase, Preferred Securities at a level above that
which might otherwise prevail in the open market for the purpose of preventing
or retarding a decline in the market price of the Preferred Securities. The
Underwriters also may reclaim any selling concessions allowed to an Underwriter
or dealer if the Underwriters repurchase shares distributed by that Underwriter
or dealer. Any of the foregoing transactions may result in the maintenance of a
price for the Preferred Securities at a level above that which might otherwise
prevail in the open market. Neither the Company nor any of the Underwriters
makes any representation or prediction as to the direction or magnitude of any
effect that the transactions described above may have on the price of the
Preferred Securities. The Underwriters are not required to engage in any of the
foregoing transactions and, if commenced, such transactions may be discontinued
at any time without notice.
During a period of 180 days from the date of this Prospectus, neither the
Trust nor the Company will, subject to certain exceptions, without the prior
written consent of the Representative, directly or indirectly, sell, offer to
sell, grant any option for sale of, or otherwise dispose of, any Preferred
Securities, any security convertible into or exchangeable into or exercisable
for Preferred Securities or Junior Subordinated Debentures or any debt
securities substantially similar to the Junior Subordinated Debentures or equity
securities substantially similar to the Preferred Securities (except for Junior
Subordinated Debentures and the Preferred Securities offered hereby).
Because the National Association of Securities Dealers, Inc. ("NASD") is
expected to view the Preferred Securities as interests in a direct participation
program, the offering of the Preferred Securities is being made in compliance
with the applicable provisions of Rule 2810 of the NASD's Conduct Rules.
The Preferred Securities have been approved for quotation on the Nasdaq
National Market. The Representative has advised the Trust that it presently
intends to make a market in the Preferred Securities after the commencement of
trading on the Nasdaq National Market, but no assurances can be made as to the
liquidity of such Preferred Securities or that an active and liquid trading
market will develop or, if developed, that it will continue. The offering price
and distribution rate have been determined by negotiations among representatives
of the Company and the Underwriters, and the offering price of the Preferred
Securities may not be indicative of the market price following the Offering. The
Representative will have no obligation to make a market in the Preferred
Securities, however, and may cease market-making activities, if commenced, at
any time.
The Trust and the Company have agreed to indemnify the Underwriters
against, or contribute to payments that the Underwriters may be required to make
in respect of, certain liabilities, including liabilities under the Securities
Act.
LEGAL MATTERS
Certain matters of Delaware law relating to the validity of the Preferred
Securities, the enforceability of the Trust Agreement and the formation of the
Trust will be passed upon by Morris, Nichols, Arsht & Tunnell, Wilmington,
Delaware, special Delaware counsel to the Company and the Trust. Certain legal
matters for the Company and the Trust, including matters relating to United
States federal income tax considerations and the validity of the Guarantee and
the Junior Subordinated Debentures, will be passed upon for the Company and the
Trust by Foley, Hoag & Eliot LLP, Boston, Massachusetts, counsel to the Company
and the Trust. Certain legal matters will be passed upon for the Underwriters by
Goodwin, Procter & Hoar LLP, Boston, Massachusetts. Foley, Hoag & Eliot LLP will
rely on the opinion of Morris, Nichols, Arsht & Tunnell as to matters of
Delaware law.
EXPERTS
The consolidated financial statements of the Company as of December 31,
1997 and 1996, and for each of the years in the three-year period ended December
31, 1997, appearing in the 1997 Annual Report of the Company to its shareholders
and incorporated by reference in the Annual Report on Form 10-K for the year
53
<PAGE> 54
ended December 31, 1997, have been incorporated by reference in this Prospectus
and in the Registration Statement of which this Prospectus forms a part, in
reliance upon the report of KPMG Peat Marwick LLP, independent certified public
accountants, incorporated by reference herein, whose report thereon appears
therein, and upon the authority of said firm as experts in accounting and
auditing.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following document filed by the Company with the Commission is
incorporated into this Prospectus by reference:
The Company's Annual Report on Form 10-K for the year ended December
31, 1997 (attached hereto as Appendix A).
Any statement contained herein or in a document incorporated or deemed to
be incorporated by reference herein shall be deemed to be modified or superseded
for purposes of this Prospectus to the extent that a statement contained herein
or in any other subsequently filed document which also is or is deemed to be
incorporated by reference herein modifies or supersedes such statement. Any
statement so modified or superseded shall not be deemed, except as so modified
or superseded, to constitute a part of this Prospectus.
THE COMPANY WILL PROVIDE WITHOUT CHARGE TO ANY PERSON TO WHOM THIS
PROSPECTUS IS DELIVERED, ON THE WRITTEN OR ORAL REQUEST OF SUCH PERSON, A COPY
OF ANY OR ALL OF THE FOREGOING DOCUMENTS INCORPORATED BY REFERENCE HEREIN (OTHER
THAN EXHIBITS, UNLESS SUCH EXHIBITS ARE SPECIFICALLY INCORPORATED BY REFERENCE
IN SUCH DOCUMENTS). REQUESTS FOR SUCH DOCUMENTS SHOULD BE DIRECTED TO: CENTURY
BANCORP, INC., 400 MYSTIC AVENUE, MEDFORD, MASSACHUSETTS 02155, ATTN: CHIEF
FINANCIAL OFFICER (TELEPHONE (781-391-4000)).
As used herein, the terms "Prospectus" and "herein" mean this Prospectus,
including the documents incorporated or deemed to be incorporated herein by
reference, as the same may be amended, supplemented or otherwise modified from
time to time. Statements contained in this Prospectus as to the contents of any
contract or other document referred to herein do not purport to be complete, and
where reference is made to the particular provisions of such contract or other
document, such provisions are qualified in all respects by reference to all of
the provisions of such contract or other document.
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith, files reports, proxy statements and other information with the
Commission. Such reports, proxy statements and other information may be
inspected and copied at the public reference facilities maintained by the
Commission at Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549 and at
the Commission's regional offices at 7 World Trade Center, 13th Floor, Suite
1300, New York, New York 10048 and Suite 1400, Citicorp Center, 500 West Madison
Street, Chicago, Illinois 60661. Copies of such material may also be obtained by
mail from the Public Reference Section of the Commission at 450 Fifth Street,
N.W., Washington, D.C. 20549 at prescribed rates. If available, such information
also may be accessed through the Commission's electronic data gathering,
analysis and retrieval system ("EDGAR") via electronic means, including the
Commission's home page on the Internet (http://www.sec.gov). The Company's Class
A common stock is traded on the Nasdaq National Market. Such reports, proxy
statements and other information concerning the Company also may be inspected at
the offices of the National Association of Securities Dealers, Inc., 1735 K
Street, N.W., Washington D.C. 20006.
The Company has filed with the Commission a Registration Statement on Form
S-2 (the "Registration Statement") pursuant to the Securities Act of 1933, as
amended (the "Securities Act"), with respect to the securities offered hereby.
This Prospectus does not contain all of the information set forth in the
Registration Statement and the exhibits and schedules relating thereto as
permitted by the rules and regulations of the Commission. For further
information pertaining to the Company and the securities offered hereby,
reference is made to the Registration Statement and the exhibits thereto. Items
of information omitted from this Prospectus, but contained in the Registration
Statement, may be obtained at prescribed rates or inspected
54
<PAGE> 55
without charge at the offices of the Commission set forth above. Any statements
contained herein concerning the provisions of any document are not necessarily
complete, and, in each instance, reference is made to the copy of such document
filed as an exhibit to the Registration Statement or otherwise filed with the
Commission. Each such statement is qualified in its entirety by such reference.
No separate financial statements of the Trust have been included herein.
The Company does not consider that such financial statements would be material
to holders of the Preferred Securities because (i) all of the voting securities
of the Trust will be owned by the Company, a reporting company under the
Exchange Act, (ii) the Trust has no independent operations but exists for the
sole purpose of issuing securities representing undivided beneficial interest in
the assets of the Trust and investing the proceeds thereof in the Junior
Subordinated Debentures issued by the Company, and (iii) the obligations of the
Company described herein to provide certain indemnities in respect of and be
responsible for certain costs, expenses, debts and liabilities of the Trust
under the Indenture and pursuant to the Trust Agreement, the guarantee issued by
the Company with respect to the Preferred Securities, and the Junior
Subordinated Debentures purchased by the Trust and the related Indenture, taken
together, constitute, in the belief of the Company and the Trust, a full and
unconditional guarantee of payments due on the Preferred Securities. See
"Description of the Junior Subordinated Debentures" and "Description of the
Guarantee."
The Trust is not currently subject to the information reporting
requirements of the Exchange Act. The Trust will become subject to such
requirements upon the effectiveness of the Registration Statement, although it
intends to seek and expects to receive an exemption therefrom.
55
<PAGE> 56
[THIS PAGE INTENTIONALLY LEFT BLANK]
<PAGE> 57
APPENDIX A -- ANNUAL REPORT ON
FORM 10-K FOR THE YEAR ENDED
DECEMBER 31, 1997
<PAGE> 58
[THIS PAGE INTENTIONALLY LEFT BLANK]
<PAGE> 59
================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
------------------------
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 (FEE REQUIRED)
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
COMMISSION FILE NUMBER 0-15752
CENTURY BANCORP, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
------------------------
COMMONWEALTH OF MASSACHUSETTS 04-2498617
(STATE OF OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
400 MYSTIC AVENUE 02155
MEDFORD, MA (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (781) 391-4000
------------------------
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
CLASS A COMMON STOCK, $1.00 PAR VALUE
(TITLE OF CLASS)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by section 13 or 15(d) of the Securities and Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
form 10-K. [ ]
State the aggregate market value of the voting stock held by nonaffiliates
of the registrant as of February 28, 1998:
$7,848,270
Indicate the number of shares outstanding of each of the registrant's
classes of common stock as of February 28,1998:
CLASS A COMMON STOCK, $1.00 PAR VALUE 3,523,647 SHARES
CLASS B COMMON STOCK, $1.00 PAR VALUE 2,268,770 SHARES
================================================================================
<PAGE> 60
[THIS PAGE INTENTIONALLY LEFT BLANK]
<PAGE> 61
CENTURY BANCORP INC.
FORM 10-K
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
PART I
<S> <C> <C>
Item 1 Business.................................................... 2
Item 2 Properties.................................................. 14
Item 3 Legal Proceedings........................................... 14
Item 4 Submission of Matters to a Vote of Security Holders......... 14
PART II
Item 5 Market for Registrant's Common Equity and Related
Stockholder Matters......................................... 15
Item 6 Selected Financial Data..................................... 16
Item 7 Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 16
Item 7a Quantitative and Qualitative Disclosures about Market
Risk........................................................ 16
Item 8 Financial Statements and Supplementary Data................. 16
Item 9 Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................... 16
PART III
Item 10 Directors and Executive Officers of the Registrant.......... 49-50
Item 11 Executive Compensation and Other Information................ 51
Item 12 Security Ownership of Certain Beneficial Owners and
Management.................................................. 55
Item 13 Certain Relationships and Related Transactions.............. 57
PART IV
Item 14 Exhibits, Financial Statement Schedules and Reports
on Form 8-K................................................. 57
Signatures.................................................. 58
</TABLE>
1
<PAGE> 62
PART I
ITEM 1. BUSINESS
THE COMPANY
Century Bancorp, Inc. (together with its subsidiary, unless the context
otherwise requires, the "Company"), is a Massachusetts state chartered bank
holding company headquartered in Medford, Massachusetts. The Company is a
Massachusetts corporation formed in 1972 and has one banking subsidiary (the
"Bank"): Century Bank and Trust Company formed in 1969. The Company had total
assets of $631.1 million on December 31, 1997. The Company presently operates 15
banking offices in 14 cities and towns ranging from Braintree to Peabody. The
Banks' customers consist primarily of small and medium-sized businesses and
retail customers in these communities and surrounding areas, as well as local
governments throughout Massachusetts.
On December 10, 1997, the Company announced an agreement to merge Haymarket
Cooperative Bank, based in Boston, Massachusetts, into Century Bank and Trust
Company. The agreement called for the Bank to acquire assets of approximately
$142 million and two banking offices located in Boston. Century Bank and Trust
Company will pay approximately $20 million in cash for Haymarket Cooperative
Bank and is subject to federal and state regulatory approval. The transaction
will be accounted for using the purchase method of accounting.
The Company offers a wide range of services to commercial enterprises,
state and local governments and agencies, and individuals. It makes commercial
loans, real estate and construction loans, and consumer loans, and accepts
savings, time, and demand deposits. In addition, the Company offers to its
corporate customers automated lock box collection services, cash management
services and account reconciliation services, and actively promotes the
marketing of these services to the municipal market.
The Company emphasizes service to small and medium-sized businesses and
retail customers in its market area. It provides business and consumer deposit
services and makes commercial loans, real estate and construction loans and
consumer loans. The Company provides full service brokerage through Century
Financial Services in conjunction with Commonwealth Equities.
The Company is a provider of financial services including cash management,
transaction processing, short term financing and intermediate term leasing to
municipalities in Massachusetts. The Company has deposit relationships with
approximately 30% of the 351 cities and towns in the state.
The following table sets forth the distribution of the Company's average
assets, liabilities and stockholders' equity, and average rates earned or paid
on a fully taxable equivalent basis for each of the years indicated.
2
<PAGE> 63
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------------
1997 1996
-------------------------------- --------------------------------
AVERAGE INTEREST RATE AVERAGE INTEREST RATE
BALANCE INCOME(1) EARNED(1) BALANCE INCOME(1) EARNED(1)
-------- --------- --------- -------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Assets
Interest-earning assets:
Loans(2)......................... $304,147 $28,479 9.36% $281,943 $26,429 9.37%
Securities available-for-sale:
Taxable......................... 82,163 5,054 6.15% 90,652 5,627 6.21%
Tax-exempt...................... 1,327 80 6.03% 872 52 5.96%
Securities held-to-maturity:
Taxable......................... 109,458 7,047 6.44% 94,335 6,007 6.37%
Tax-exempt...................... 33 3 9.09% 170 13 7.65%
Federal funds sold.............. 12,864 706 5.49% 15,090 807 5.35%
Interest bearing deposits in
other banks................... 36 1 2.78% 47 2 4.26%
-------- ------- -------- -------
Total interest-earning
assets................... 510,028 41,370 8.11% 483,109 38,937 8.06%
------- ---- ------- ----
Non interest-earning assets..... 61,211 61,450
Allowance for loan losses....... (4,412) (4,163)
-------- --------
Total assets.............. $566,827 $540,396
======== ========
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------
1995
--------------------------------
AVERAGE INTEREST RATE
BALANCE INCOME(1) EARNED(1)
-------- --------- ---------
<S> <C> <C> <C>
Assets
Interest-earning assets:
Loans(2)......................... $279,555 $26,490 9.48%
Securities available-for-sale:
Taxable......................... 70,467 4,218 5.99%
Tax-exempt...................... 1,372 91 6.63%
Securities held-to-maturity:
Taxable......................... 62,158 3,650 5.87%
Tax-exempt...................... 180 15 8.33%
Federal funds sold.............. 29,076 1,723 5.93%
Interest bearing deposits in
other banks................... 29 1 3.45%
-------- -------
Total interest-earning
assets................... 442,837 36,188 8.17%
------- ----
Non interest-earning assets..... 56,127
Allowance for loan losses....... (4,479)
--------
Total assets.............. $494,485
========
</TABLE>
- ---------------
(1) On a fully taxable equivalent basis calculated using a federal tax rate of
34%.
(2) Nonaccrual loans are included in average amounts outstanding.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------------------------------------------
1997 1996 1995
------------------------------- ------------------------------- -------------------------------
INTEREST RATE INTEREST RATE INTEREST RATE
AVERAGE INCOME/ EARNED/ AVERAGE INCOME/ EARNED/ AVERAGE INCOME/ EARNED/
BALANCE EXPENSE(1) PAID(1) BALANCE EXPENSE(1) PAID(1) BALANCE EXPENSE(1) PAID(1)
-------- ---------- ------- -------- ---------- ------- -------- ---------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Liabilities and
Stockholders' Equity
Interest-bearing deposits:
NOW accounts............. $ 91,938 $ 2,561 2.79% $ 84,620 $ 2,367 2.80% $ 82,628 $ 2,568 3.11%
Savings accounts......... 55,911 1,433 2.56% 55,905 1,439 2.57% 50,916 1,335 2.62%
Money market accounts.... 66,936 1,888 2.82% 70,735 2,084 2.95% 78,029 2,487 3.19%
Time deposits............ 155,607 8,474 5.45% 158,037 9,020 5.71% 134,769 7,612 5.65%
-------- ------- -------- ------- -------- -------
Total
interest-bearing
deposits............ 370,392 14,356 3.88% 369,297 14,910 4.04% 346,342 14,002 4.04%
Securities sold under
agreements to
repurchase............... 24,994 1,075 4.30% 16,654 713 4.28% 14,390 632 4.39%
Other borrowed funds....... 7,908 491 6.21% 3,135 182 5.81% 960 52 5.42%
-------- ------- ---- -------- ------- ---- -------- ------- ----
Total
interest-bearing
liabilities......... 403,294 15,922 3.95% 389,086 15,805 4.06% 361,692 14,686 4.06%
-------- ------- ---- -------- ------- ---- -------- ------- ----
Non interest-bearing
liabilities
Demand deposits.......... 105,417 99,179 86,328
Other liabilities........ 7,787 7,340 6,084
-------- -------- --------
Total liabilities.... 516,498 495,605 454,104
Stockholders' equity........ 50,329 44,791 40,381
-------- -------- --------
Total liabilities &
stockholders' equity... $566,827 $540,396 $494,485
======== ======== ========
Net interest income(1)...... $25,448 $23,132 $21,502
======= ======= =======
Net interest spread......... 4.16% 4.00% 4.11%
---- ---- ----
Net yield on earnings
assets..................... 4.99% 4.79% 4.86%
---- ---- ----
</TABLE>
- ---------------
(1) On a fully taxable equivalent basis calculated using a federal tax rate of
34%.
The following table summarizes the year-to-year changes in the Company's
net interest income resulting from fluctuations in interest rates and volume
changes in earning assets and interest bearing liabilities.
3
<PAGE> 64
Changes due to rate are the change in rate multiplied by the prior year's
volume. Changes due to volume are the change in volume multiplied by the prior
year's rate. Changes in volume and rate that cannot be separately identified
have been allocated in proportion to the relationship of the absolute dollar
amounts of each change.
Net interest income improved in 1997. Interest income was affected
positively by higher loan volume and by improvements in the interest earned in
most categories of earning assets. Much of the Company's earning assets were
repriced to improve their respective returns. Interest expense rose primarily
because of a higher level of borrowed funds. Interest income on securities
increased primarily because of volume.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------------------------------
1997 COMPARED WITH 1996 1996 COMPARED WITH 1995
---------------------------------- ----------------------------------
INCREASE/(DECREASE) INCREASE/(DECREASE)
DUE TO CHANGE IN DUE TO CHANGE IN
-------------------- TOTAL -------------------- TOTAL
AVERAGE AVERAGE INCREASE AVERAGE AVERAGE INCREASE
BALANCE RATE (DECREASE) BALANCE RATE (DECREASE)
-------- -------- ---------- -------- -------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Interest income:
Loans......................... $ 2,079 $ (29) $ 2,050 $ 225 $(286) $ (61)
Securities available-for-sale:
Taxable.................... (523) (50) (573) 1,248 161 1,409
Tax-exempt................. 27 1 28 (31) (8) (39)
Securities held-to-maturity:
Taxable.................... 973 66 1,039 2,027 330 2,357
Tax-exempt................. (12) 2 (10) (1) (1) (2)
Federal funds sold............ (122) 21 (101) (762) (154) (916)
Interest-bearing deposits in
other banks................ (1) 1 0 1 0 1
------- ----- ------- ------- ----- ------
Total interest
income.............. 2,422 11 2,433 2,707 42 2,749
------- ----- ------- ------- ----- ------
Interest expense:
Deposits:
NOW accounts............... 204 (10) 194 61 (262) (201)
Savings accounts........... 0 (6) (6) 129 (25) 104
Money market accounts...... (109) (87) (196) (223) 180 403
Time deposits.............. (137) (409) (546) 1,327 81 1,408
------- ----- ------- ------- ----- ------
Total interest-bearing
deposits............ (42) (512) (554) 1,294 (386) 908
Securities sold under
agreements to repurchase... 359 3 362 97 (16) 81
Other borrowed funds............ 262 13 309 126 4 130
------- ----- ------- ------- ----- ------
Total interest
expense............. 612 (495) 117 1,517 (398) 1,119
------- ----- ------- ------- ----- ------
Change in net interest income... $ 1,811 $ 505 $ 2,316 $ 1,190 $ 440 $1,630
------- ----- ------- ------- ----- ------
</TABLE>
ASSET/LIABILITY MANAGEMENT
The Company's asset/liability management objective is to attempt to
insulate the balance sheet, and therefore the income statement, from excessive
risk due to changes in market interest rates. It is the responsibility of the
Company's ALCO committee to establish long-term strategies with respect to
interest rate exposure, and to monitor that exposure in relation to present and
prospective market interest rates, economic conditions, and balance sheet
composition on an on-going basis. Monitoring techniques include gap management
and simulation analysis.
The Company attempts to manage its exposure to interest rate risk by
closely monitoring the maturities and interest rate sensitivities of its assets
and liabilities. The following table measures the extent to which
4
<PAGE> 65
interest-sensitive assets exceed interest-sensitive liabilities (or vice versa)
within certain time periods. This "Gap" analysis is one measure of the Company's
sensitivity to interest rate fluctuations. A Gap is considered positive when the
amount of interest-sensitive assets maturing or repricing within a period
exceeds the amount of interest-sensitive liabilities maturing or repricing
within that period; a Gap is considered negative when the converse occurs.
During a decreasing interest rate environment, a negative Gap would tend to
result in an increase in net interest income while a positive Gap would tend to
adversely affect net interest income. In a rising interest rate environment, an
institution with a positive Gap would generally expect an increase in net
interest income, whereas an institution with a negative Gap would generally be
expected to experience the opposite result.
The Company's targeted Gap range is +/- 10% within 3 months or less and +/-
10% within 4 to 12 months with a cumulative 1 year Gap at +/- 10%. The table
presents categorical balances based on contractual maturities and repricing
opportunities. The resulting amounts have been modified to reflect a management
adjustment that pertains to NOW and savings accounts. While these core deposit
accounts are subject to immediate withdrawal, the management adjustment is based
on the fact that interest changes on such accounts have been infrequent and have
not coincided with changes in market interest rates. In addition, a management
adjustment has been made in the first maturity interval for the uncollected
portion of cash and due from banks.
<TABLE>
<CAPTION>
REPRICING/MATURITY INTERVAL WITHIN
-------------------------------------------------------------------------
3 MONTHS 4 MONTHS ONE YEAR OVER NON-
DECEMBER 31, 1997 OR LESS TO 12 MONTHS TO 5 YEARS 5 YEARS MATURING(1) TOTAL
----------------- --------- ------------ ---------- -------- ----------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans.................................. $ 118,184 $ 49,270 $131,471 $ 15,760 $ 1,705 $316,390
Securities available-for-sale:
Taxable.............................. 8,926 24,004 54,251 1,259 0 88,440
Tax exempt........................... 0 750 0 0 0 750
Securities held-to-maturity:
Taxable.............................. 2,524 9,494 79,217 17,981 0 109,216
Tax exempt........................... 0 12 11 0 0 23
Federal funds sold..................... 51,000 0 0 0 0 51,000
Interest-bearing deposits in other
banks................................ 24 0 0 0 0 24
--------- -------- -------- -------- -------- --------
Total interest-earning
assets...................... 180,658 83,530 264,950 35,000 1,705 565,843
--------- -------- -------- -------- -------- --------
Interest-bearing liabilities:
Deposits:
NOW accounts......................... 93,825 0 0 0 0 93,825
Savings accounts..................... 55,983 0 0 0 0 55,983
Money market deposits................ 50,110 20,951 0 0 0 71,061
Time deposits........................ 101,719 55,263 14,297 0 0 171,279
--------- -------- -------- -------- -------- --------
Total interest-bearing
deposits.................... 301,637 76,214 14,297 0 0 392,148
Securities sold under agreements to
repurchase........................... 32,850 0 0 0 0 32,850
Other borrowed funds................... 10,972 1,048 0 1,454 0 13,474
--------- -------- -------- -------- -------- --------
Total interest-bearing
liabilities................. 345,459 77,262 14,297 1,454 0 438,472
--------- -------- -------- -------- -------- --------
Interest-earning assets minus
interest-bearing liabilities (Gap)... $(164,801) $ 6,268 $250,653 $ 33,546 $ 1,705 $127,371
Management adjustment.................. 126,189 (30,489) (60,978) 0 0 34,722
--------- -------- -------- -------- -------- --------
Management-adjusted Gap................ $ (38,612) $(24,221) $189,675 $ 33,546 $ 1,705 $162,093
========= ======== ======== ======== ======== ========
Management-adjusted Cumulative Gap..... (62,833) 126,842 160,388 162,093 --
Management-adjusted Gap/Total Assets... (6.08)% (3.81)% 29.84% 5.28% 0.27% 25.50
Management-adjusted Cumulative
Gap/Total Assets..................... (9.89)% 19.96% 25.24% 25.50% --
</TABLE>
- ---------------
(1) Represents loans placed on nonaccrual status.
5
<PAGE> 66
LENDING ACTIVITIES
The following summary shows the composition of the loan portfolio at the
dates indicated.
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------------------------------------------------
1997 1996 1995 1994
------------------- ------------------- ------------------- --------
PERCENT PERCENT PERCENT
AMOUNT OF TOTAL AMOUNT OF TOTAL AMOUNT OF TOTAL AMOUNT
-------- -------- -------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Construction and land
development............. $ 7,549 2.4% $ 3,576 1.2% $ 1,444 0.5% $ 1,924
Commercial and
industrial.............. 50,560 16.0 41,006 14.2 37,811 13.2 33,283
Industrial revenue
bonds................... 2,693 0.9 3,030 1.1 3,362 1.2 3,873
Commercial real estate.... 140,270 44.3 133,757 46.4 130,173 45.6 122,538
Residential real estate... 76,385 24.1 76,638 26.6 82,132 28.8 82,028
Consumer.................. 19,254 6.1 12,749 4.4 9,243 3.2 12,017
Home equity............... 19,031 6.0 17,330 6.0 21,130 7.4 16,826
Overdrafts................ 648 0.2 194 0.1 143 0.1 232
-------- ----- -------- ----- -------- ----- --------
Loans (net of unearned
discount)............... $316,390 100.0% $288,280 100.0% $285,438 100.0% $272,721
======== ===== ======== ===== ======== ===== ========
<CAPTION>
DECEMBER 31,
------------------------------
1994 1993
-------- -------------------
PERCENT PERCENT
OF TOTAL AMOUNT OF TOTAL
-------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Construction and land
development............. 0.7% $ 1,228 0.5%
Commercial and
industrial.............. 12.2 29,664 10.9
Industrial revenue
bonds................... 1.4 4,186 1.5
Commercial real estate.... 44.9 120,064 44.2
Residential real estate... 30.1 85,260 31.3
Consumer.................. 4.4 15,208 5.6
Home equity............... 6.2 16,180 5.9
Overdrafts................ 0.1 250 0.1
----- -------- -----
Loans (net of unearned
discount)............... 100.0% $272,040 100.0%
===== ======== =====
</TABLE>
The following table summarizes the remaining maturity distribution of
certain components of the Company's loan portfolio at December 31, 1997. The
table excludes loans secured by one-to-four family residential real estate and
loans for household family and other personal expenditures. Maturities are
presented as if scheduled principal amortization payments are due on the last
contractual payment date.
REMAINING MATURITIES OF SELECTED LOANS AT DECEMBER 31, 1997
<TABLE>
<CAPTION>
ONE YEAR ONE TO OVER
OR LESS FIVE YEARS FIVE YEARS TOTAL
-------- ---------- ---------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Construction and land development............... $ 4,927 $ 2,622 $ 0 $ 7,549
Commercial and industrial....................... 36,499 13,964 97 50,560
Industrial revenue bonds........................ 50 1,902 741 2,693
Commercial real estate.......................... 64,668 72,437 3,165 140,270
-------- ------- ------ --------
Total................................. $106,144 $90,925 $4,003 $201,072
======== ======= ====== ========
</TABLE>
The following table indicates the rate variability of the above loans due
after one year.
<TABLE>
<CAPTION>
DECEMBER 31, 1997
-----------------------------------
ONE TO OVER
FIVE YEARS FIVE YEARS TOTAL
---------- ---------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Predetermined interest rates................................ $75,535 $3,919 $79,454
Floating or adjustable interest rates....................... 15,390 83 15,473
------- ------ -------
Total............................................. $90,925 $4,002 $94,927
======= ====== =======
</TABLE>
Individual loan officers have designated lending authorities established by
the Board of Directors, with larger loans requiring a second approval. The Bank
has an Executive Committee of the Board of Directors which meets monthly and
ratifies or approves all credits above a specified size. In addition, the
Company has an Executive Management Committee which meets monthly and monitors
the Company's lending policies and practices. The members of the Executive
Management Committee are: Marshall M. Sloane, Chairman, President and CEO;
George F. Swansburg, Executive Vice President; Jonathan G. Sloane, Senior Vice
President; Paul V. Cusick, Jr., Vice President and Treasurer; all of the
Company, and Donald H. Lang and William J. Sloboda, both Executive Vice
Presidents of the Bank.
The Company's commercial and industrial (C&I) loan customers represent
various small and middle market established businesses involved in
manufacturing, distribution, retailing and services. Most clients are
6
<PAGE> 67
privately owned with markets that range from local to national in scope. Many of
the loans to this segment are secured by liens on corporate assets and the
personal guarantees of the principals. The Bank has placed greater emphasis on
building its C&I base over the future. The regional economic strength or
weakness impacts on the relative risks in this loan category. There is little
concentration to any one business sector and loan risks are generally
diversified among many borrowers.
Commercial real estate loans are extended to finance various manufacturing,
warehouse, light industrial, office, retail and residential properties in the
Banks's market area to generally include Eastern Massachusetts and Southern New
Hampshire. Loans are normally extended in amounts up to a maximum of 80% of
appraised value and normally for terms up to three to five years. Amortization
schedules are long term and thus a balloon payment is due at maturity. Under
most circumstances, the Bank will offer to re-write or otherwise extend the loan
at prevailing interest rates. During recent years, the Bank has emphasized non-
residential type owner-occupied properties. This complements the above C&I
emphasis placed on the operating business entities and will be continued. The
regional economic environment impacts on the risk to both non-residential and
residential mortgages. This environment has improved over the recent period.
Together the above factors have stabilized many sections of the regional market.
Residential real estate (1-4 family) includes two categories of loans.
Approximately $14 million of loans are classified as "Commercial and Industrial"
type loans secured by 1-4 family real estate. Primarily, these are small
businesses with modest capital or shorter operating histories wherein the
collateral mitigates some risk. The collateral position notwithstanding, this
category of loans shares similar risk characteristics as the C&I loans. The
balance of loans in this category are mostly 1-4 family residential properties
located in the Bank's market area. General underwriting criteria are largely the
same as FNMA but normally only one or three year adjustable interest rates are
used. The Bank does utilize mortgage insurance in order to provide lower down
payment products and has provided a "First Time Homebuyer" product to encourage
new home ownership. Residential real estate loan volume has declined but
nonetheless remains a core consumer product. The regional environment impacts on
the risks to this category. In the recent period, the environment has improved,
and the market has generally been stable. Declining interest rates could
negatively impact the risk on adjustable interest rate loans as they are
repriced in the future.
Home equity loans are extended as both first and second mortgages on owner
occupied residential properties in the Bank's market area. Loans are
underwritten to a maximum loan to value of 75%.
The Bank does intend to maintain a market for construction loans,
principally for smaller local residential projects or an owner occupied
commercial project. Independent appraisals of the project and the costs are
obtained and funds are advanced over the life of the project as inspections of
completed work warrant. Individual consumer residential home construction loans
are also extended on a similar basis.
Bank officers evaluate the feasibility of construction projects, based on
independent appraisals of the project, architects or engineers evaluations of
the cost of construction, and other relevant data. At December 31, 1997, the
Company was obligated to advance a total of $321 thousand to complete projects
under construction.
At December 31, 1997 approximately 44% of the Company's loan portfolio
consisted of commercial real estate loans. Construction loans had increased to
2.4 % of the Company's outstanding loans.
At December 31, 1997, the Company's residential mortgage loans amounted to
$76.4 million. The Company's consumer loan portfolio amounted to $38.3 million
at December 31, 1997, primarily consisting of home equity loans amounting to
$19.0 million and personal lines of credit, motor vehicle loans and other
installment loans amounting to $19.3 million.
NONPERFORMING ASSETS AND ALLOWANCE FOR POSSIBLE LOAN LOSSES
Loans are placed on nonaccrual status when any payment of principal and/or
interest is 90 days or more past due, unless the collateral is sufficient to
cover both principal and interest and the loan is in the process of collection.
The Company monitors closely the performance of its loan portfolio. In addition
to internal loan review, the Company has contracted with an independent
organization to review the Company's commercial
7
<PAGE> 68
and commercial real estate loan portfolios. This independent review was
performed in each of the past five years. The status of delinquent loans, as
well as situations identified as potential problems, are reviewed on a regular
basis by senior management and monthly by the Board of Directors of the Bank.
The following table summarizes the Company's nonperforming assets at the
dates indicated.
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------------------------
1997 1996 1995 1994 1993
------ ------ ------ ------ -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Loans on nonaccrual.......................... $1,705 $2,140 $3,751 $2,954 $ 4,676
Loans not included above which are
nonperforming troubled debt
restructurings............................. 1,026 1,164 1,457 3,113 5,427
Other real estate owned, net................. 0 182 845 3,192 10,388
------ ------ ------ ------ -------
Total nonperforming assets......... $2,731 $3,486 $6,053 $9,259 $20,491
====== ====== ====== ====== =======
Percentage of nonperforming assets to total
loans and other related assets............. 0.86% 1.21% 2.11% 3.36% 7.26%
====== ====== ====== ====== =======
</TABLE>
The lower level of nonperforming assets in 1997 resulted from a reduction
in new additions to nonperforming assets during the year combined with an
improvement in the resolution of nonperforming assets including payments on
nonperforming loans and sales of other real estate owned (OREO).
The Company identifies loans renegotiated prior to January 1, 1995 at then
below market rates as troubled debt restructurings. Interest income associated
with the $3,306,000 of troubled debt restructurings and performing impaired
loans at December 31, 1997 amounted to $230,000 for the year then ended.
Interest income for the same period would have amounted to $277,000 under the
original terms and agreements of the notes. As a result of placing loans on
non-accrual status, the Company has foregone $118,000 of interest income during
1997 compared to $172,000 during 1996.
In addition to the above, the Company is monitoring closely $7.7 million of
loans on which management is concerned with the ability of the borrowers to
perform. The majority of the loans are secured by real estate properties
experiencing higher than expected vacancies and lower than expected rental
revenue. While the properties are considered to have adequate value to cover the
loan balances at December 31, 1997, such values can fluctuate with changes in
the economy and the real estate market.
There were no impaired loans with specific reserves at December 31, 1997
and 1996 because, in the opinion of management, none required a specific
reserve. All impaired loans have been measured using the fair value of the
collateral method.
The following table summarizes the Company's loans past due 90 days or more
and still accruing and impaired loans at the dates indicated.
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------------
1997 1996 1995 1994 1993
------ ------ ------ ---- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Loans past due 90 days or more and still
accruing....................................... $ 7 $ 192 $ 87 $114 $502
Impaired loans................................... $3,515 $3,055 $3,356 n/a n/a
</TABLE>
The Company maintains an allowance for loan losses in an amount determined
by management on the basis of the character of the loans, loan performance, the
financial condition of borrowers, the value of collateral securing loans and
other relevant factors. The following table summarizes the changes in the
Company's allowance for loan losses for the years indicated.
8
<PAGE> 69
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------------
1997 1996 1995 1994 1993
-------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Year end loans outstanding (net of
unearned discount)................ $316,390 $288,280 $285,438 $272,721 $272,040
======== ======== ======== ======== ========
Average loans outstanding (net of
unearned discount)................ $304,147 $281,943 $279,555 $267,123 $289,007
======== ======== ======== ======== ========
Balance of allowance for loan losses
at beginning of year.............. $ 4,179 $ 4,193 $ 4,239 $ 5,129 $ 5,644
-------- -------- -------- -------- --------
Loans charged-off:
Commercial........................ 25 2 2 781 657
Construction and land
development.................... 0 0 0 292 23
Commercial real estate............ 48 380 1,144 433 2,024
Residential real estate........... 363 801 551 1,016 1,075
Consumer.......................... 253 120 131 242 408
-------- -------- -------- -------- --------
Total loans charged-off... 689 1303 1,828 2,764 4,187
-------- -------- -------- -------- --------
Recoveries of loans previously
charged-off:
Commercial........................ 76 78 39 23 32
Real estate....................... 162 163 134 204 297
Consumer.......................... 58 28 49 27 43
-------- -------- -------- -------- --------
Total recoveries of loans
previously
charged-off............. 296 269 222 254 372
-------- -------- -------- -------- --------
Net loans charged-off.......... 393 1,034 1,606 2,510 3,815
-------- -------- -------- -------- --------
Additions to allowance charged to
operating expense.............. 660 1,020 1,560 1,620 1,800
Acquired allowance................ -- -- -- -- 1,500
-------- -------- -------- -------- --------
Balance at end of year............ $ 4,446 $ 4,179 $ 4,193 $ 4,239 $ 5,129
======== ======== ======== ======== ========
Ratio of net charge-offs during
the year to average loans
outstanding.................... 0.13% 0.37% .57% .94% 1.32%
======== ======== ======== ======== ========
Ratio of allowance for loan losses
to loans outstanding........... 1.41% 1.45% 1.47% 1.55% 1.89%
======== ======== ======== ======== ========
</TABLE>
The provision for 1997, while below the prior four year average, remains
above historical levels and reflects significant improvements in the loan
portfolio. At December 31, 1997 nonperforming assets were $2.7 million or .86%
of loans and related assets. Such figures are significantly lower than those at
the end of the last four years.
While the Company expects a similar level of charge-offs in future periods,
the pace of the charge-offs depends on many factors including the national and
regional economy. Cyclical lagging factors may result in charge-offs being
higher than historical levels.
The allowance for loan losses is an estimate of the amount needed for an
adequate reserve to absorb losses in the existing loan portfolio. This amount is
determined by an evaluation of the loan portfolio including input from an
independent organization engaged to review selected larger loans, a review of
loan loss experience and current economic conditions. At December 31, the
allowance was comprised of the following components.
9
<PAGE> 70
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
----------------- ----------------- ----------------- ----------------- -----------------
PERCENT PERCENT PERCENT PERCENT PERCENT
OF LOANS OF LOANS OF LOANS OF LOANS OF LOANS
IN EACH IN EACH IN EACH IN EACH IN EACH
CATEGORY CATEGORY CATEGORY CATEGORY CATEGORY
BALANCE AT END OF TO TOTAL TO TOTAL TO TOTAL TO TOTAL TO TOTAL
PERIOD APPLICABLE TO AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS
-------------------- ------ -------- ------ -------- ------ -------- ------ -------- ------ --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Construction and land
development.................. $ 104 2.4% $ 48 1.2% $ 21 0.5% $ 49 0.7% $ 102 0.5%
Commercial and industrial..... 716 16.0 660 14.2 595 13.2 530 12.2 958 10.9
Industrial revenue bonds...... 17 0.9 17 1.1 23 1.2 26 1.4 23 1.5
Commercial real estate........ 2,138 44.3 2,201 46.4 2,095 45.6 2,158 44.9 2,422 44.1
Residential real estate....... 846 24.1 830 26.6 1,031 28.8 1,025 30.1 1,023 31.3
Consumer...................... 402 6.1 233 4.4 228 3.2 293 4.4 462 5.6
Home equity................... 214 6.0 187 6.0 198 7.4 155 6.2 139 5.9
Overdrafts.................... 9 0.2 3 0.1 2 0.1 3 0.1 0 0.1
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
$4,446 100.0% $4,179 100.0% $4,193 100.0% $4,239 100.0% $5,129 100.0%
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
</TABLE>
INVESTMENT ACTIVITIES
The following table sets forth certain information regarding the Company's
investment portfolio. Dollar amounts reflect carrying values. At December 31,
1997, the market value of securities available-for-sale was $89.2 million
compared to the amortized cost of $89.0 million for such securities. At December
31, 1997, the market value of securities held-to-maturity was $109.5 million,
compared to the amortized cost of $109.2 million of such securities.
<TABLE>
<CAPTION>
SECURITIES AVAILABLE-FOR-SALE SECURITIES HELD-TO-MATURITY
DECEMBER 31, DECEMBER 31,
------------------------------- -----------------------------
BALANCE AT END OF PERIOD APPLICABLE TO 1997 1996 1995 1997 1996 1995
- -------------------------------------- -------- -------- --------- -------- -------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
U.S. Government and Agencies........ $84,763 $77,155 $ 97,482 $107,117 $105,582 $74,710
Obligations of states and political
subdivision....................... 750 1,241 1,510 22 34 179
Other............................. 3,677 2,619 1,762 2,100 2,099 3,098
------- ------- -------- -------- -------- -------
$89,190 $81,015 $100,754 $109,239 $107,715 $77,987
======= ======= ======== ======== ======== =======
</TABLE>
The following table sets forth the maturities of the Company's investment
securities on the basis of their carrying values at December 31, 1997 and the
weighted average yields of securities, which are based on amortized cost,
calculated on a fully taxable equivalent basis.
<TABLE>
<CAPTION>
SECURITIES AVAILABLE-FOR-SALE
-------------------------------------------------------------------------------------
AFTER ONE AFTER FIVE
WITHIN BUT WITHIN BUT WITHIN AFTER
ONE YEAR FIVE YEARS TEN YEARS TEN YEARS TOTAL
--------------- --------------- -------------- -------------- ---------------
AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD
------- ----- ------- ----- ------ ----- ------ ----- ------- -----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
U. S. Government and
Agencies............... $29,503 5.97% $54,251 6.24% $1,000 6.50% $ 0 0.00% $84,754 6.15%
Obligations of states and
political
subdivisions........... 750 4.18% 0 0.00% 0 0.00% 0 0.00% 750 4.18%
Other.................... 0 0.00% 0 0.00% 259 7.80% 3,427 6.38% 3,686 6.48%
------- ---- ------- ---- ------ ---- ------ ---- ------- ----
$30,253 5.92% $54,251 6.24% $1,259 6.77% $3,427 6.38% $89,190 6.15%
======= ==== ======= ==== ====== ==== ====== ==== ======= ====
</TABLE>
10
<PAGE> 71
<TABLE>
<CAPTION>
SECURITIES HELD-TO-MATURITY
---------------------------------------------------------------------------------------
AFTER ONE AFTER FIVE
WITHIN BUT WITHIN BUT WITHIN AFTER
ONE YEAR FIVE YEARS TEN YEARS TEN YEARS TOTAL
--------------- --------------- --------------- -------------- ----------------
AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD
------- ----- ------- ----- ------- ----- ------ ----- -------- -----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
U. S. Government and
Agencies............... $ 9,970 6.12% $79,191 6.37% $16,956 6.57% $1,000 6.65% $107,117 6.38%
Obligations of states and
political
subdivisions........... 11 8.65% 11 8.65% 0 0.00% 0 0.00% 22 8.65%
Other.................... 2,025 4.91% 50 4.19% 25 5.50% 0 0.00% 2,100 4.90%
------- ---- ------- ---- ------- ---- ------ ---- -------- ----
$12,006 5.91% $79,252 6.37% $16,981 6.57% $1,000 6.65% $109,239 6.35%
======= ==== ======= ==== ======= ==== ====== ==== ======== ====
</TABLE>
Obligations of states and political subdivisions consist primarily of
obligations of the Commonwealth of Massachusetts and entities within it having
other relationships with the Company. The Company regularly bids on tax
anticipation notes and other short-term instruments of municipalities who have
depository relationships with it. The Company also writes equipment leases to
finance acquisition of computers, fire trucks, snow plows and other equipment
used by municipalities.
Except for obligations of the United States Government, the portfolio at
December 31, 1997 did not include securities of any single issuer in an amount
in excess of 10% of stockholders' equity.
DEPOSITS
The Company offers savings accounts, NOW accounts, demand deposits,
certificates of deposit and money market accounts. The Company offers cash
management accounts which provide either automatic transfer of funds above a
specified level from the customer's checking account to a money market account
or short-term borrowings. Also, an account reconciliation service is offered
whereby the Company provides a computerized report balancing the customer's
checking account.
Interest rates on deposits are set weekly by the Treasurer, based on
factors including loan demand, maturities and a review of competing interest
rates offered. Interest rate policies are reviewed periodically by the Executive
Management Committee.
The following table shows the average amount of and average interest rate
paid on various categories of deposits during the years indicated.
<TABLE>
<CAPTION>
1997 1996 1995
------------------- ------------------- -------------------
AVERAGE AVERAGE AVERAGE
INTEREST INTEREST INTEREST
AVERAGE RATE AVERAGE RATE AVERAGE RATE
AMOUNT PAID AMOUNT PAID AMOUNT PAID
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Interest-bearing deposits:
NOW accounts.......................... $ 91,938 2.79% $ 84,620 2.80% $ 82,628 3.11%
Savings accounts...................... 55,911 2.56% 55,905 2.57% 50,916 2.62%
Money market accounts................. 66,936 2.82% 70,735 2.95% 78,029 3.19%
Time deposits of $100,000 or more..... 35,939 5.14% 34,542 5.19% 26,872 5.50%
Other time deposits................... 119,668 5.54% 123,495 5.85% 107,897 5.69%
-------- -------- --------
Total interest-bearing deposits....... 370,392 3.88% 369,297 4.04% 346,342 4.04%
Non interest-bearing demand
deposits............................ 105,417 99,179 86,328
-------- -------- --------
Total average deposits................ $475,809 3.02% $468,476 3.18% $432,670 3.24%
======== ==== ======== ==== ======== ====
</TABLE>
Total deposits at December 31, 1997 amounted to $515 million, including $63
million of time deposits of $100,000 or more. Traditionally, the Company
experiences a decline in deposits during the first and third quarters of each
year because of the deposit cycles of certain of its customers, notably
municipalities.
11
<PAGE> 72
The Company's time certificates of deposit in amounts of $100,000 or more
at December 31, 1997 mature as follows.
<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
Three months or less................................... $49,960
Three through six months............................... 6,193
Six through twelve months.............................. 6,279
Over twelve months..................................... 782
-------
$63,214
=======
</TABLE>
BORROWED FUNDS
The Company sells securities under repurchase agreements and enters into
other borrowings to obtain funds to support asset growth. Pertinent data
relating to borrowed funds is presented below.
<TABLE>
<CAPTION>
1997 1996 1995
------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Securities sold under agreements to repurchase:
Amount outstanding at year end.............................. $32,850 $17,790 $21,580
Weighted average interest rate at end of year............... 4.49% 4.34% 4.25%
Maximum amount outstanding at any month end during year..... $39,060 $17,790 $21,580
Daily average amount outstanding during year................ $24,994 $16,654 $14,390
Weighted average interest rate during year.................. 4.30% 4.28% 4.39%
Other borrowed funds:
Amount outstanding at year end.............................. $13,474 $12,353 $ 1,897
Weighted average interest rate at end of year............... 6.96% 7.16% 5.21%
Maximum amount outstanding at any month end during year..... $36,609 $17,577 $ 1,897
Daily average amount outstanding during year................ $ 7,908 $ 3,135 $ 960
Weighted average interest rate during year.................. 6.21% 5.81% 5.42%
</TABLE>
Securities sold under agreements to repurchase are primarily over-night
demand obligations and are collateralized by U.S. Government and Agency
securities.
OTHER SERVICES
In addition to fees derived from traditional banking activities such as
loan origination fees, the Company derives revenues from its automated lock box
collection system and full service securities brokerage offered through
Commonwealth Equity Services, Inc., a registered securities broker-dealer and
investment adviser.
Under the lock-box program, which is not tied to extensions of credit by
the Company, the Company's customer arranges for payments of its accounts
receivable to be made directly to the Company. The Company records on its
computer the amounts paid to its customers, deposits the funds to the customer's
account with the Company and provides computerized records of the amounts
received to the Company's customers. Typical customers for the lock box service
are municipalities who use it to automate tax collections, cable TV companies,
and other commercial enterprises.
Through Commonwealth Equity Services, Inc., the Bank provides full service
securities brokerage services. Registered representatives employed by the Bank
offer investment advice, execute transactions and assist customers in financial
and retirement planning. Commonwealth Equity Services, Inc., provides research
to and supervises the representatives in exchange for payment by the Bank for a
fixed fee and a share in the commission revenues.
12
<PAGE> 73
EMPLOYEES
As of December 31, 1997, the Company had 201 full-time and 85 part-time
employees. The Company's employees are not represented by any collective
bargaining unit. The Company believes that its employee relations are good.
HOLDING COMPANY REGULATION
The Company is a bank holding company as defined by the Bank Holding
Company Act of 1956, as amended (the "Holding Company Act") and is registered as
such with the Federal Reserve Board (the "FRB"), which is responsible for
administration of the Holding Company Act. As required by the Holding Company
Act, the Company files with the FRB an annual report regarding its financial
condition and operations, management and intercompany relationships of the
Company and the Bank. It is also subject to examination by the FRB and must
obtain FRB approval before (i) acquiring direct or indirect ownership or control
of more than 5% of the voting stock of any bank, unless it already owns or
controls a majority of the voting stock of that bank, (ii) acquiring all or
substantially all of the assets of a bank, except through a subsidiary which is
a bank, or (iii) merging or consolidating with any other bank holding company. A
bank holding company must also give the FRB prior written notice before
purchasing or redeeming its equity securities if the gross consideration for the
purchase or redemption, when aggregated with the net consideration paid by the
company for all such purchases or redemptions during the preceding 12 months, is
equal to 10% or more of the Company's consolidated net worth.
The Holding Company Act prohibits a bank holding company, with certain
exceptions, from (i) acquiring direct or indirect ownership or control of any
voting shares of any company which is not a bank or a bank holding company, or
(ii) engaging in any activity other than managing or controlling banks, or
furnishing services to or performing services for its subsidiaries. A bank
holding company may own, however, shares of a company engaged in activities
which the FRB has determined are so closely related to banking or managing or
controlling banks as to be a proper incident thereto. Such activities include
leasing real or personal property under certain conditions; operating as a
mortgage finance or factoring company; servicing loans and other extensions of
credit; acting as a fiduciary; acting as investment or financial advisor under
certain conditions; acting as insurance agent or broker principally in
connection with extension of credit by the bank holding company or any
subsidiary; acting as underwriter for credit life insurance and credit accident
and health insurance which is directly related to extension of credit by the
bank holding company or any subsidiary; arranging commercial real estate equity
financing under certain circumstances; providing securities brokerage and
related services as agent for the account of customers; providing bookkeeping or
data processing services for the bank holding company, its affiliates and other
institutions, with certain limitations; making certain equity and debt
investments in community rehabilitation and development corporations; and
providing certain kinds of management consulting advice to unaffiliated banks.
A bank holding company and its subsidiaries are prohibited from acquiring
any voting shares of, interest in, or all or substantially all of the assets of,
any bank located outside the state in which the operations of the bank holding
company's banking subsidiaries are principally conducted, unless the acquisition
is specifically authorized by the statutes of the state in which the bank to be
acquired is located.
The Company and its subsidiaries are examined by federal and state
regulators. The FRB has responsibility for holding company activities and
performed a review in 1997.
The regulatory standard for capital adequacy assigns risk factors to asset
categories and certain off-balance sheet commitments. The fully-phased in 1992
standard requires a tier-1 capital to risk assets ratio of 4.00% and a total
capital to risk assets ratio of 8.00%. At December 31, 1997, the Company's
ratios were 15.51% and 16.76%, respectively. The Bank also exceeded these
risk-weighted capital measures at December 31, 1997. In addition to these risk
based capital requirements, federal banking regulators have leverage guidelines.
The minimum leverage requirement is 4% as measured by the ratio of core capital,
net of intangible assets, to total assets. At December 31, 1997 the Company's
ratio was 9.09%. The Bank also exceeded the leverage requirement at December 31,
1997.
13
<PAGE> 74
FEDERAL DEPOSIT INSURANCE CORPORATION IMPROVEMENT ACT OF 1991
On December 19, 1991, the FDIC Improvement Act of 1991 (the "1991 Act") was
enacted. This legislation seeks to recapitalize the Bank Insurance Fund of the
FDIC ("BIF") so that the BIF can continue to resolve its caseload of failed
banks. The recapitalization will be funded through, among other things,
increased deposit insurance assessments payable by BIF-insured institutions,
which will increase the cost of doing business by all BIF-insured institutions,
including the Company's subsidiary. The 1991 Act also provides for, among other
things: enhanced federal supervision of depository institutions, including
greater authority for the appointment of a conservator or receiver for
undercapitalized institutions; the establishment of risk-based deposit insurance
premiums; a requirement that the federal banking agencies amend their risk-based
capital requirements to include components for interest-rate risk, concentration
of credit risk, and the risk of nontraditional activities; expanded authority
for cross-industry mergers and acquisitions; mandated consumer protection
disclosures with respect to deposit accounts; and imposed restrictions on the
activities of state-chartered banks, including the Company's subsidiary.
Provisions of the 1991 Act relating to the activities of state-chartered
banks may significantly impact the way the Company conducts its business. In
this regard, the 1991 Act provides that, effective one year from date of
enactment, insured state banks, such as the Company's subsidiary, may not engage
as principal in any activity that is not permissible for a national bank, unless
the FDIC has determined that the activity would pose no significant risk to the
BIF and the state bank is in compliance with applicable capital standards.
Activities of subsidiaries of insured state banks are similarly restricted to
those activities permissible for subsidiaries of national banks, unless the FDIC
has determined that the activity would pose no significant risk to the BIF and
the state bank is in compliance with applicable capital standards.
COMPETITION
The Company experiences substantial competition in attracting deposits and
making loans from commercial banks, thrift institutions and other enterprises
such as insurance companies and mutual funds. These competitors include several
major commercial banks whose greater resources may afford them a competitive
advantage by enabling them to maintain numerous branch offices and mount
extensive advertising campaigns.
ITEM 2. PROPERTIES
The Company owns its main banking office, headquarters, and operations
center in Medford, and 11 of the 14 other facilities in which its branch offices
are located. The remaining offices are occupied under leases expiring on various
dates from 1997 to 2026. The Company has renovated its Medford operations center
to provide space for its Executive and Lending staff.
ITEM 3. LEGAL PROCEEDINGS
The Company and its subsidiaries are parties to various claims and lawsuits
arising in the course of their normal business activities. Although the ultimate
outcome of these suits cannot be ascertained at this time, it is the opinion of
management that none of these matters, when resolved, will have a material
adverse effect on the Company's consolidated financial position.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of Security Holders during the fourth
quarter of the fiscal year ended December 31, 1997.
14
<PAGE> 75
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
(a) The Class A Common Stock of the Company is traded on the NASDAQ system.
The price range of the Company's common stock since January 1, 1996 is shown on
page 19.
The shares of Class A Common Stock are not entitled to vote in the
election of Company Directors but, in limited circumstances, are entitled to
vote as a class on certain extraordinary transactions, including any merger or
consolidation (other than one in which the Company is the surviving corporation
or one which by law may be approved by the directors without any stockholder
vote) or the sale, lease, or exchange of all or substantially all of the
property and assets of the Company. Since the vote of a majority of the shares
of Class B Common Stock, voting as a class, is required to approve certain
extraordinary corporate transactions, the Board of Directors of the Company has
power to prevent any takeover of the Company not approved by them in their
capacity as Class B stockholders.
(b) Approximate number of equity security holders as of December 31, 1997.
<TABLE>
<CAPTION>
APPROXIMATE NUMBER
TITLE OF CLASS OF RECORD HOLDERS
- -------------- ------------------
<S> <C>
Class A Common Stock....................................... 347
Class B Common Stock....................................... 79
</TABLE>
(c) Under the Company's Articles of Organization, the holders of the Class
A Common Stock are entitled to receive dividends per share equal to at least
200% of that paid, if any, from time to time on each share of Class B Common
Stock.
The following table shows the dividends paid by the Company on the Class A
and Class B Common Stock for the periods indicated.
<TABLE>
<CAPTION>
DIVIDENDS PER SHARE
--------------------
CLASS A CLASS B
-------- --------
<S> <C> <C>
1995
First quarter...................................... $.030 $.0042
Second quarter..................................... .030 .0042
Third quarter...................................... .030 .0042
Fourth quarter..................................... .030 .0042
1996
First quarter...................................... $.040 $.0056
Second quarter..................................... .040 .0056
Third quarter...................................... .040 .0056
Fourth quarter..................................... .040 .0056
1997
First quarter...................................... $.050 $.0070
Second quarter..................................... .050 .0070
Third quarter...................................... .050 .0070
Fourth quarter..................................... .050 .0070
</TABLE>
As a bank holding company, the Company's ability to pay dividends is
dependent in part upon the dividend payments it receives from the Bank, which
are subject to certain restrictions on the payment of dividends. A Massachusetts
trust company may pay dividends out of net profits from time to time, provided
that either (I) the trust company's capital stock and surplus account equal an
aggregate of at least 10% of its deposit liability, or (ii) the amount of its
surplus account is equal to at least the amount of its capital account.
15
<PAGE> 76
ITEM 6. SELECTED FINANCIAL DATA
The information required herein is shown on page 19 and 20.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The information required herein is shown on pages 21 through 24.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information required herein is shown on page 23.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required herein is shown on pages 25 through 44.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- ------------
(DOLLARS IN THOUSANDS EXCEPT SHARE DATA)
<S> <C> <C> <C>
YEAR-END
Total assets.................................. $ 631,125 $ 560,857 $ 531,928
Total loans................................... 316,390 288,280 285,438
Total deposits................................ 515,449 476,135 458,615
Total stockholders' equity.................... 53,857 47,489 42,935
YEARLY AVERAGES
Total assets.................................. $ 566,827 $ 540,396 $ 494,485
Total earning assets.......................... 510,028 483,109 442,837
Total securities available-for-sale........... 83,396 91,524 71,839
Total securities held-to-maturity............. 109,491 94,505 62,338
Total loans................................... 304,147 281,943 279,555
Total deposits................................ 475,809 468,476 432,670
Total borrowed funds.......................... 32,902 19,789 15,350
Total stockholders' equity.................... 50,329 44,791 40,381
EARNINGS
Net income.................................... $ 6,823 $ 5,434 $ 4,574
Net interest income, taxable equivalent....... 25,448 23,132 21,502
Other operating income........................ 4,994 4,761 4,722
Operating expenses............................ 18,600 17,874 18,224
PERFORMANCE MEASURES
Earnings per share, basic..................... $ 1.18 $ 0.95 $ 0.80
Earnings per share, diluted................... $ 1.17 $ 0.93 $ 0.78
Return on average stockholders' equity........ 13.56% 12.13% 11.33%
Book value per share at December 31........... $ 9.30 $ 8.25 $ 7.50
Return on average assets...................... 1.20% 1.01% .92%
COMMON SHARE DATA
Average shares outstanding, basic............. 5,772,135 5,736,230 5,722,646
Average shares outstanding, diluted........... 5,830,910 5,818,942 5,831,042
Shares outstanding at year-end................ 5,790,417 5,758,467 5,724,117
</TABLE>
16
<PAGE> 77
PER SHARE DATA
<TABLE>
<CAPTION>
1997, QUARTER ENDED
---------------------------------------------------
DECEMBER 31, SEPTEMBER 30, JUNE 30, MARCH 31,
------------ ------------- -------- ---------
<S> <C> <C> <C> <C>
Market price range (Class A)
High................................... $ 19.00 $ 17.25 $13.875 $14.125
Low.................................... 16.625 13.25 12.625 12.75
Dividends class A........................ 0.05 0.05 0.05 0.05
Dividends class B........................ 0.007 0.007 0.007 0.007
<CAPTION>
1996, QUARTER ENDED
---------------------------------------------------
DECEMBER 31, SEPTEMBER 30, JUNE 30, MARCH 31,
------------ ------------- -------- ---------
<S> <C> <C> <C> <C>
Market price range (Class A)
High................................... $ 14.50 $13.00 $12.875 $11.375
Low.................................... 12.25 11.50 11.00 10.00
Dividends class A........................ 0.04 0.04 0.04 0.04
Dividends class B........................ 0.0056 0.0056 0.0056 0.0056
SELECTED FINANCIAL DATA
<CAPTION>
1997 1996 1995 1994 1993
---------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS EXCEPT SHARE DATA)
<S> <C> <C> <C> <C> <C>
FOR THE YEAR
Interest income.................. $ 41,216 $ 38,777 $ 35,988 $ 30,461 $ 29,262
Interest expense................. 15,922 15,805 14,686 10,924 11,813
---------- ---------- ---------- ---------- ----------
Net interest income............ 25,294 22,972 21,302 19,537 17,449
Provision for loan losses........ 660 1,020 1,560 1,620 1,800
---------- ---------- ---------- ---------- ----------
Net interest income after
provision for loan losses... 24,634 21,952 19,742 17,917 15,649
Other operating income........... 4,994 4,761 4,722 5,420 6,833
Operating expenses............... 18,600 17,874 18,224 19,265 20,654
---------- ---------- ---------- ---------- ----------
Income before income taxes..... 11,028 8,839 6,240 4,072 1,828
Provision for income taxes....... 4,205 3,405 1,666 768 605
---------- ---------- ---------- ---------- ----------
Net income..................... $ 6,823 $ 5,434 $ 4,574 $ 3,304 $ 1,223
========== ========== ========== ========== ==========
Average shares outstanding,
basic.......................... 5,772,135 5,736,230 5,722,646 5,722,450 5,722,450
Average shares outstanding,
diluted........................ 5,830,910 5,818,942 5,831,042 5,832,093 5,722,450
Earnings per share:
Basic.......................... $ 1.18 $ 0.95 $ 0.80 $ 0.58 $ 0.21
Diluted........................ $ 1.17 $ 0.93 $ 0.78 $ 0.57 $ 0.21
Dividend payout ratio............ 11.1% 10.9% 9.6% 10.9% 28.9%
AT YEAR-END
Assets........................... $ 631,125 $ 560,857 $ 531,928 $ 465,419 $ 469,823
Loans............................ 316,390 288,280 285,438 272,721 272,040
Deposits......................... 515,449 476,135 458,615 409,542 421,395
Stockholders' equity............. 53,857 47,489 42,935 37,553 35,505
Book value per share............. $ 9.30 $ 8.25 $ 7.50 $ 6.56 $ 6.20
</TABLE>
17
<PAGE> 78
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
SELECTED FINANCIAL PERCENTAGES
Return on average assets......... 1.20% 1.01% 0.92% 0.70% 0.25%
Return on average stockholders'
equity......................... 13.56% 12.13% 11.33% 9.11% 3.48%
Net yield on average earning
assets, taxable equivalent..... 4.99% 4.79% 4.86% 4.70% 4.16%
Net charge-offs as a percent of
average loans.................. 0.13% 0.37% 0.57% 0.94% 1.32%
Average stockholders' equity to
average assets................. 8.88% 8.29% 8.17% 7.67% 7.30%
</TABLE>
18
<PAGE> 79
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION
OVERVIEW
Century Bancorp, Inc. (the "Company") had net income of $6,823,000 for the
year ended December 31, 1997, compared with net income of $5,434,000 for year
ended December 31, 1996 and net income of $4,574,000 for the year ended December
31, 1995. Basic earnings per share were $1.18 in 1997 compared to $0.95 in 1996
and $0.80 in 1995. Diluted earnings per share were $1.17 in 1997 compared to
$0.94 in 1996 and $0.79 in 1995.
Total assets were $631,125,000 at December 31, 1997, an increase of 12.5%
from total assets of $560,857,000 on December 31, 1996, which, in turn, were
5.4% higher than total assets of $531,928,000 on December 31, 1995.
On December 31, 1997, stockholders' equity totaled $53,857,000 compared
with $47,489,000 on December 31, 1996, and $42,935,000 on December 31, 1995.
Book value increased to $9.30 at December 31, 1997 from $8.25 on December 31,
1996, which had increased from $7.50 on December 31, 1995.
On December 10, 1997 the Company announced an agreement to merge Haymarket
Cooperative Bank, based in Boston, Massachusetts, into Century Bank and Trust
Company. The agreement called for the Bank to acquire assets of approximately
$142 million and operate two banking offices located in Boston. Century Bank and
Trust Company will pay approximately $20 million in cash for Haymarket
Cooperative Bank and is subject to federal and state regulatory approval. The
transaction will be accounted for using the purchase method of accounting.
During 1997 the Company conducted a comprehensive review of its computer
systems to identify the systems that could be affected by the "Year 2000" issue
and has developed an implementation plan to resolve the issue. The Year 2000
problem is the result of computer programs being written using two digits rather
than four to define the applicable year. Any of the Company's programs that have
time-sensitive software may recognize a date using "00" as the year 1900 rather
then the year 2000. This could result in a major system failure or
miscalculations. The Company presently believes that, with the previously
planned conversion to a new core processing software and modifications to
existing software, the Year 2000 problem will not pose significant operational
problems for the Company's computer systems as so modified and converted. The
new core processing software is Year 2000 compliant and the other systems which
require modifications are not significant and the cost is not material. However,
if such modifications and conversions are not completed timely, the Year 2000
problem may have a material impact on the operations of the Company.
RESULTS OF OPERATIONS
The Company's operating results depend primarily on net interest income and
fees received for providing services. Net interest income on a fully taxable
equivalent basis increased 10.0% in 1997 to $25,448,000 compared with
$23,132,000 in 1996. Interest income was affected positively by improvements in
the interest earned in most categories of earning assets. Much of the Company's
earning assets were repriced to improve their respective returns. Net interest
income is affected by the level of interest rates, the ability of the Company's
earning assets and deposits to adjust to changes in interest rates and the mix
of the Company's earning assets and deposits. The net yield on earning assets on
a fully taxable equivalent basis increased to 4.99% in 1997 from 4.79% in 1996
which, in turn, had decreased from 4.86% in 1995.
Average earning assets were $510,028,000 in 1997, an increase of
$26,919,000 or 5.6% from the average in 1996, which was 9.1% higher than the
average in 1995. Total average securities, including securities available for
sale and securities held to maturity, increased 3.7% to $192,887,000. The
increase in securities volume combined with a slight lengthening in the maturity
of the portfolios resulted in higher securities income, which increased 4.1% to
$12,156,000. Total average loans increased 7.9% to $304,147,000 after increasing
$2,388,000 in 1996. The increase in loan volume combined with a slightly higher
level of interest
19
<PAGE> 80
rates resulted in higher loan income, which increased by 7.8% or $2,062,000 to
$28,353,000. Total loan income was $26,326,000 in 1995.
The Company's sources of funds include deposits and borrowed funds. On
average, deposits showed an increase of 1.6% in 1997 after increasing by 8.3% in
1996. Borrowed funds increased by 66.3% in 1997 following an increase of 28.9%
in 1996. The majority of the Company's borrowed funds are in repurchase
agreements. Interest expense totaled $15,922,000 in 1997, an increase of
$117,000 or .7% from 1996 when interest expense increased 7.6% from 1995. This
increase in interest expense is due primarily to an increase in deposits and
borrowed funds volume.
PROVISION FOR LOAN LOSS
The provision for loan losses was $660,000 in 1997 compared with $1,020,000
in 1996 and $1,560,000 in 1995. These provisions are the result of management's
evaluation of the quality of the loan portfolio considering such factors as loan
status, collateral values, financial condition of the borrower, the state of the
economy and other relevant information.
The allowance for loan losses was $4,446,000 at December 31, 1997 compared
with $4,179,000 at December 31, 1996 and $4,193,000 at December 31, 1995.
Expressed as a percentage of outstanding loans at year-end, the allowance was
1.41% in 1997, 1.45% in 1996 and 1.47% in 1995.
Management believes that the allowance for loan losses is adequate.
Management uses available information to provide for losses but recognizes that
changes in economic conditions may result in additional losses and additional
loss provisions. Also, the allowance is reviewed in conjunction with regulatory
examinations. These reviews may require the Company to make additional
provisions to the allowance based on judgements made by the regulators.
The Company experienced a decrease in net charge-offs in 1997 with net
charge-offs as a percent of average loans outstanding at 0.13%. The comparable
figures for 1996 and 1995 were 0.37% and 0.57% respectively. Non-performing
loans, which include all non-accruing loans and certain restructured, accruing
loans, totaled $2,731,000 on December 31, 1997, compared with $3,304,000 on
December 31, 1996.
OTHER OPERATING INCOME
The Company continued to experience good results in its fee-based services
in 1997. These fee-based services include deposit related services, lock-box
processing, mortgage origination services and securities brokerage services.
Total other operating income in 1997, was $4,994,000 an increase of
$233,000 or 4.9% compared to 1996. This increase followed an increase of $39,000
or 0.8% in 1996, compared to 1995. Service charge income, which continues to be
the largest area of other operating income with $1,791,000 in 1997, saw an
increase of $164,000 in 1997 as more customers paid demand deposit fees.
Lock-box revenues totaled $1,467,000 up $187,000 in 1997, primarily as a result
of an increase in the lock-box customer base. Brokerage commissions increased
slightly to $1,171,000 in 1997 from $1,072,000 in 1996, which, saw an increase
of $45,000 from 1995. Gain on sale of loans decreased to $136,000 in 1997 from
$290,000 in 1996 and $217,000 in 1995. There were no security transactions in
1997, 1996 and 1995.
OPERATING EXPENSES
Total operating expenses excluding other real estate owned (OREO) expenses
and writedowns were $18,578,000 in 1997 compared to $17,894,000 in 1996 and
$18,007,000 in 1995. Total OREO expenses were $22,000 in 1997, $(20,000) in 1996
and $217,000 in 1995. At year-end the Company had $0 of OREO compared with
$182,000 at December 31, 1996.
Salaries and employee benefits expenses increased by $379,000 or 3.2% in
1997 after increasing 3.0% in 1996. Nearly all of the increase, for 1997 and
1996, was in the salaries category and was caused by an increase in the wage
base.
20
<PAGE> 81
Occupancy expense decreased by $50,000 or 3.8% in 1997 primarily because of
an increase in tenant rents. Occupancy expense decreased by 6.4% in 1996
primarily because of a decrease in building depreciation. Equipment expense
increased by $5,000 in 1997 primarily because of increased equipment
depreciation. Equipment expense increased by $54,000 in 1996 also because of
increased equipment depreciation.
Other operating expenses increased by $350,000 in 1997, which followed a
$423,000 decrease in 1996. In 1997 increases were primarily the result of
increased marketing, FDIC insurance and other operating expenses. In 1996
decreases in FDIC insurance expense and legal expense were offset by increased
marketing and amortization of the core deposit intangible associated with a
prior branch acquisition.
PROVISION FOR INCOME TAXES
Income tax expense was $4,205,000 in 1997, $3,405,000 in 1996 and
$1,666,000 in 1995. The relatively low tax expense for 1995 is a result of
reductions in the valuation reserve for deferred income taxes. The effective tax
rate was 38.1% in 1997, 38.5% in 1996 and 26.7% in 1995.
MARKET RISK AND ASSET LIABILITY MANAGEMENT
Market risk is the risk of loss from adverse changes in market prices and
rates. The Company's market risk arises primarily from interest rate risk
inherent in its lending and deposit taking activities. To that end, management
actively monitors and manages its interest rate risk exposure.
The Company's profitability is affected by fluctuations in interest rates.
A sudden and substantial increase in interest rates may adversely impact the
Company's earnings to the extent that the interest rates borne by assets and
liabilities do not change at the same speed, to the same extent, or on the same
basis. The Company monitors the impact of changes in interest on its net
interest income using several tools. One measure of the Company's exposure to
differential changes in interest rates between assets and liabilities is shown
in the Company's gap table shown below. Another measure is an interest rate risk
management test. This test measures the impact on net interest income of an
immediate change in interest rates in 100 basis point increments.
<TABLE>
<CAPTION>
PERCENTAGE CHANGE IN
CHANGE IN INTEREST RATES NET INTEREST
(IN BASIS POINTS) INCOME(1)
------------------------ --------------------
<S> <C>
+200 5.1%
+100 2.5%
-100 (2.0)%
-200 (3.8)%
</TABLE>
- ---------------
(1) The percentage change in this column represents net interest income for 12
months in a stable interest rate environment versus the Net Interest Income
in the various rate scenarios.
The Company's primary objective in managing interest rate risk is to
minimize the adverse impact of changes in interest rates on the Company's net
interest income and capital, while structuring the Company's asset-liability
structure to obtain the maximum yield-cost spread on that structure. The Company
relies primarily on its asset-liability structure to control interest rate risk.
The Company manages the mix, maturity and pricing of its assets and
liabilities so that changes in interest rates will not impact earnings
adversely. The interest rate gap is used to measure the Company's exposure. At
December 31, 1997 the gap was:
<TABLE>
<CAPTION>
SUBJECT TO INTEREST RATE CHANGES WITHIN
---------------------------------------
THREE MONTHS THREE TO TWELVE MONTHS
------------- -----------------------
(IN THOUSANDS)
<S> <C> <C>
Assets............... $215,380 $ 83,530
Liabilities.......... 253,991 107,751
-------- --------
Gap.................. $(38,611) $(24,221)
======== ========
</TABLE>
21
<PAGE> 82
LIQUIDITY
Liquidity is provided by maintaining an adequate level of liquid assets
that include cash and due from banks, federal funds sold and other temporary
investments. Liquid assets totaled $97,892,000 on December 31, 1997 compared
with $67,681,000 on December 31, 1996, and $51,114,000 on December 31, 1995. In
each of the three years deposit activity has generally been adequate to support
asset activity.
The source of funds for dividends paid by the Company is dividends received
from the Bank. The Company and the Bank are regulated enterprises and their
abilities to pay dividends are subject to regulatory review and restriction.
Certain regulatory and statutory restrictions exist regarding dividends, loans
and advances from the Bank to the Company. Generally, the Bank has the ability
to pay dividends to the Company subject to minimum regulatory capital
requirements.
CAPITAL ADEQUACY
Total stockholders' equity was $53,857,000 at December 31, 1997, compared
with $47,489,000 at December 31, 1996 and $42,935,000 at December 31, 1995. The
increases in all years reported were primarily the result of retained earnings
less dividends paid, although there was a $123,000 increase in 1997, a $133,000
increase in 1996 and a $6,000 increase in 1995 from the execution of certain
stock options.
Federal banking regulators have issued risk-based capital guidelines which
assign risk factors to asset categories and off-balance sheet items. The current
guidelines require a tier-1 capital-to-risk assets ratio of 4.00% and a total
capital-to-risk assets ratio of 8.00%. The Company and the Bank exceeded these
requirements with a tier-1 capital-to-risk assets ratio of 15.51% and 13.38%
respectively, and total capital-to-risk assets ratio of 16.76% and 14.64%,
respectively at December 31, 1997. Additionally, federal banking regulators have
issued leverage ratio guidelines which supplement the risk-based capital
guidelines. The minimum leverage ratio requirement applicable to the Company is
4.00% and at December 31, 1997, the Company and the Bank exceeded this
requirement with leverage ratios of 9.09% and 7.85%, respectively.
RECENT ACCOUNTING DEVELOPMENTS
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income." SFAS No. 130 establishes standards for reporting and displaying
comprehensive income, which is defined as all changes to equity except
investments by and distributions to shareholders. Net income is a component of
comprehensive income, with all other components referred to in the aggregate as
other comprehensive income. This statement is effective for 1998 financial
statements.
Also in June 1997, the FASB issued SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information," which establishes standards
for reporting information about operating segments. An operating segment is
defined as a components of a business for which separate financial information
is available that is evaluated regularly by the chief operating decision maker
in deciding how to allocate resources and evaluate performance.
This statement requires a company to disclose certain income statement and
balance sheet information by operating segment, as well as provide a
reconciliation of operating segment information to the company's consolidated
balances. This statement is effective for 1998 annual financial statements.
22
<PAGE> 83
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1997 1996
--------- ---------
(DOLLARS IN THOUSANDS
EXCEPT SHARE DATA)
<S> <C> <C>
ASSETS
Cash and due from banks (note 2)............................ $ 46,868 $ 46,681
Federal funds sold and interest-bearing deposits in other
banks..................................................... 51,024 21,000
-------- --------
Total cash and cash equivalents........................ 97,892 67,681
Securities available-for-sale, amortized cost $89,004,000 in
1997 and $81,140,000 in 1996 (note 3)..................... 89,190 81,015
Securities held-to-maturity, market value $109,454,000 in
1997 and $107,331,000 in 1996 (notes 4 and 10)............ 109,239 107,715
Loans, net (note 5)......................................... 316,390 288,280
Less: allowance for loan losses (note 6).................... 4,446 4,179
-------- --------
Net loans.............................................. 311,944 284,101
Bank premises and equipment (note 7)........................ 8,718 8,265
Accrued interest receivable................................. 4,334 4,283
Other real estate owned, net of allowance for losses
(note 8).................................................. -- 182
Other assets (note 13)...................................... 9,808 7,615
-------- --------
Total assets...................................... $631,125 $560,857
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Demand deposits............................................. $123,301 $111,704
Savings and NOW deposits.................................... 149,808 129,792
Money market accounts....................................... 71,061 69,772
Time deposits (note 9)...................................... 171,279 164,867
-------- --------
Total deposits......................................... 515,449 476,135
Securities sold under agreements to repurchase (note 10).... 32,850 17,790
Other borrowed funds (note 11).............................. 13,474 12,353
Other liabilities........................................... 15,495 7,090
-------- --------
Total liabilities...................................... 577,268 513,368
Commitments and contingencies (notes 7, 15 and 16)
Stockholders' equity (note 12):
Class A common stock, $1.00 par value per share;
authorized 10,000,000 shares; issued 3,541,447 shares
in 1997 and 3,488,297 in 1996.......................... 3,541 3,488
Class B common stock, $1.00 par value per share;
authorized 5,000,000 shares; issued 2,326,520 shares in
1997 and 2,347,720 in 1996............................. 2,327 2,348
Additional paid-in-capital................................ 10,877 10,786
Retained earnings......................................... 37,180 31,117
Treasury stock, Class A, 30,000 shares in 1997 and 1996,
at cost................................................ (136) (136)
Treasury stock, Class B, 47,550 shares in 1997 and 1996,
at cost................................................ (41) (41)
-------- --------
Realized stockholders' equity............................. 53,748 47,562
Unrealized gains (losses) on securities
available-for-sale, net of taxes (note 3).............. 109 (73)
-------- --------
Total stockholders' equity............................. 53,857 47,489
-------- --------
Total liabilities and stockholders' equity........ $631,125 $560,857
======== ========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
23
<PAGE> 84
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------
1997 1996 1995
----------- ----------- -----------
(DOLLARS IN THOUSANDS EXCEPT SHARE DATA)
<S> <C> <C> <C>
INTEREST INCOME
Loans................................................ $ 28,353 $ 26,291 $ 26,326
Securities held-to-maturity.......................... 7,049 6,016 3,660
Securities available-for-sale........................ 5,107 5,661 4,278
Federal funds sold and interest-bearing deposits in
other banks....................................... 707 809 1,724
---------- ---------- ----------
Total interest income........................ 41,216 38,777 35,988
INTEREST EXPENSE
Savings and NOW deposits............................. 3,994 3,806 3,903
Money market accounts................................ 1,888 2,084 2,487
Time deposits (note 9)............................... 8,474 9,020 7,612
Securities sold under agreements to repurchase....... 1,075 713 632
Other borrowed funds................................. 491 182 52
---------- ---------- ----------
Total interest expense....................... 15,922 15,805 14,686
---------- ---------- ----------
Net interest income............................... 25,294 22,972 21,302
Provision for loan losses (note 6)................... 660 1,020 1,560
---------- ---------- ----------
Net interest income after provision for loan
losses.......................................... 24,634 21,952 19,742
OTHER OPERATING INCOME
Service charges on deposit accounts.................. 1,791 1,627 1,559
Lockbox fees......................................... 1,467 1,280 1,421
Brokerage commissions................................ 1,171 1,072 1,027
Gain on sales of loans............................... 136 290 217
Other income......................................... 429 492 498
---------- ---------- ----------
Total other operating income................. 4,994 4,761 4,722
OPERATING EXPENSES
Salaries and employee benefits (note 14)............. 12,120 11,741 11,394
Occupancy............................................ 1,272 1,322 1,413
Equipment............................................ 1,140 1,135 1,081
Other real estate owned.............................. 22 (20) 217
Other (note 17)...................................... 4,046 3,696 4,119
---------- ---------- ----------
Total operating expenses..................... 18,600 17,874 18,224
---------- ---------- ----------
Income before income taxes........................ 11,028 8,839 6,240
Provision for income taxes (note 13)................. 4,205 3,405 1,666
---------- ---------- ----------
Net income........................................ $ 6,823 $ 5,434 $ 4,574
========== ========== ==========
SHARE DATA (NOTE 12)
Weighted average number of shares outstanding,
basic............................................. 5,772,135 5,736,230 5,722,646
Weighted average number of shares outstanding,
diluted........................................... 5,830,910 5,818,942 5,831,042
Net income per share, basic.......................... $ 1.18 $ 0.95 $ 0.80
Net income per share, diluted........................ $ 1.17 $ 0.93 $ 0.78
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
24
<PAGE> 85
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
UNREALIZED
GAINS (LOSSES)
ON SECURITIES
CLASS A CLASS B ADDITIONAL TREASURY TREASURY AVAILABLE-
COMMON COMMON PAID-IN RETAINED STOCK STOCK FOR-SALE,
STOCK STOCK CAPITAL EARNINGS CLASS A CLASS B NET OF TAXES
------ ------ ---------- -------- -------- -------- --------------
(DOLLARS IN THOUSANDS EXCEPT SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1994............. $3,312 $2,488 $10,683 $22,142 $(136) $(41) $ (895)
Conversion of Class B common stock to
Class A common stock, 91,698
shares............................... 92 (92) -- -- -- -- --
Stock options exercised, 1,667
shares............................... 2 -- 4 -- -- -- --
Net income............................. -- -- -- 4,574 -- -- --
Cash dividends, Class A common stock
$0.12 per share...................... -- -- -- (397) -- -- --
Cash dividends, Class B common stock
$0.0168 per share.................... -- -- -- (41) -- -- --
Change in unrealized gains (losses) on
securities available-for-sale, net of
taxes................................ -- -- -- -- -- -- 1,240
------ ------ ------- ------- ----- ---- ------
BALANCE, DECEMBER 31, 1995............. 3,406 2,396 10,687 26,278 (136) (41) 345
Conversion of Class B common stock to
Class A common stock, 48,200
shares............................... 48 (48) -- -- -- -- --
Stock options exercised, 34,350
shares............................... 34 -- 99 -- -- -- --
Net income............................. -- -- -- 5,434 -- -- --
Cash dividends, Class A common stock
$0.16 per share...................... -- -- -- (543) -- -- --
Cash dividends, Class B common stock
$0.0224 per share.................... -- -- -- (52) -- -- --
Change in unrealized gains (losses) on
securities available-for-sale, net of
taxes................................ -- -- -- -- -- -- (418)
------ ------ ------- ------- ----- ---- ------
BALANCE, DECEMBER 31, 1996............. 3,488 2,348 10,786 31,117 (136) (41) (73)
Conversion of Class B common stock to
Class A common stock, 21,200
shares............................... 21 (21) -- -- -- -- --
Stock options exercised, 31,950
shares............................... 32 -- 91 -- -- -- --
Net income............................. -- -- -- 6,823 -- -- --
Cash dividends, Class A common stock
$0.20 per share...................... -- -- -- (696) -- -- --
Cash dividends, Class B common stock
$0.028 per share..................... -- -- -- (64) -- -- --
Change in unrealized gains (losses) on
securities available-for-sale, net of
taxes................................ -- -- -- -- -- -- 182
------ ------ ------- ------- ----- ---- ------
BALANCE, DECEMBER 31, 1997............. $3,541 $2,327 $10,877 $37,180 $(136) $(41) $ 109
====== ====== ======= ======= ===== ==== ======
<CAPTION>
TOTAL
STOCKHOLDERS'
EQUITY
-------------
<S> <C>
BALANCE, DECEMBER 31, 1994............. $37,553
Conversion of Class B common stock to
Class A common stock, 91,698
shares............................... --
Stock options exercised, 1,667
shares............................... 6
Net income............................. 4,574
Cash dividends, Class A common stock
$0.12 per share...................... (397)
Cash dividends, Class B common stock
$0.0168 per share.................... (41)
Change in unrealized gains (losses) on
securities available-for-sale, net of
taxes................................ 1,240
-------
BALANCE, DECEMBER 31, 1995............. 42,935
Conversion of Class B common stock to
Class A common stock, 48,200
shares............................... --
Stock options exercised, 34,350
shares............................... 133
Net income............................. 5,434
Cash dividends, Class A common stock
$0.16 per share...................... (543)
Cash dividends, Class B common stock
$0.0224 per share.................... (52)
Change in unrealized gains (losses) on
securities available-for-sale, net of
taxes................................ (418)
-------
BALANCE, DECEMBER 31, 1996............. 47,489
Conversion of Class B common stock to
Class A common stock, 21,200
shares............................... --
Stock options exercised, 31,950
shares............................... 123
Net income............................. 6,823
Cash dividends, Class A common stock
$0.20 per share...................... (696)
Cash dividends, Class B common stock
$0.028 per share..................... (64)
Change in unrealized gains (losses) on
securities available-for-sale, net of
taxes................................ 182
-------
BALANCE, DECEMBER 31, 1997............. $53,857
=======
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
25
<PAGE> 86
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------
1997 1996 1995
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income................................................ $ 6,823 $ 5,434 $ 4,574
Adjustments to reconcile net income to net cash provided
by operating activities:
Provision for loan losses.............................. 660 1,020 1,560
Deferred income taxes.................................. (710) (616) (82)
Net depreciation and amortization...................... 586 668 548
(Increase) decrease in accrued interest receivable..... (51) 9 (1,001)
(Increase) decrease in other assets.................... (1,818) 72 1,382
Loans originated for sale.............................. (9,442) (18,033) (16,407)
Proceeds from sales of loans........................... 10,507 19,317 16,025
Gain on sales of loans................................. (137) (290) (226)
Loss (gain) on sales of other real estate owned........ 1 (82) (27)
Provision for losses on other real estate owned........ -- -- 70
Increase (decrease) in other liabilities............... 8,405 189 (690)
-------- -------- --------
Net cash provided by operating activities............ 14,824 7,688 5,726
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturities of securities
available-for-sale..................................... 30,235 49,193 27,860
Purchase of securities available-for-sale................. (37,934) (29,999) (56,543)
Proceeds from maturities of securities held-to-maturity... 39,013 53,946 38,447
Purchase of securities held-to-maturity................... (40,418) (83,675) (68,575)
Net cash and cash equivalents received from
acquisitions........................................... -- -- 17,877
Net increase in loans..................................... (29,400) (4,823) (13,618)
Proceeds from sales of other real estate owned............ 566 1,121 2,744
Capital expenditures...................................... (1,533) (608) (1,416)
-------- -------- --------
Net cash used in investing activities.................. (39,471) (14,845) (53,224)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in time deposit accounts..................... 6,412 9,849 17,658
Net increase in demand, savings, money market and NOW
deposits............................................... 32,902 7,671 11,499
Net proceeds from the issuance of common stock............ 123 133 6
Cash Dividends............................................ (760) (595) (438)
Net increase (decrease) in securities sold under
agreements to repurchase............................... 15,060 (3,790) 11,780
Net increase in other borrowed funds...................... 1,121 10,456 963
-------- -------- --------
Net cash provided by financing activities.............. 54,858 23,724 41,468
-------- -------- --------
Net increase (decrease) in cash and cash equivalents........ 30,211 16,567 (6,030)
Cash and cash equivalents at beginning of year............ 67,681 51,114 57,144
-------- -------- --------
Cash and cash equivalents at end of year.................. $ 97,892 $ 67,681 $ 51,114
======== ======== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest............................................... $ 14,800 $ 16,170 $ 13,884
Income taxes........................................... 4,784 3,644 1,512
Noncash transactions:
Property acquired through foreclosure.................. $ 385 $ 376 $ 440
Change in unrealized gains (losses) on securities
available-for-sale, net of taxes....................... $ 182 $ (418) $ 1,240
Assets acquired and liabilities assumed through
acquisitions:
Assets acquired, net of cash and cash equivalents
received.............................................. -- -- $ 2,040
Cash and cash equivalents received..................... -- -- 17,877
Liabilities assumed.................................... -- -- 19,917
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
26
<PAGE> 87
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The consolidated financial statements include the accounts of Century
Bancorp, Inc. (the "Company") and its wholly-owned subsidiary, Century Bank and
Trust Company (the "Bank"). The Company provides a full range of banking
services to individual, business and municipal customers in Massachusetts. As a
bank holding company, the Company is subject to the regulation and supervision
of the Federal Reserve Board. The Bank, a state chartered financial institution,
is subject to supervision and regulation by applicable state and federal banking
agencies, including the Federal Reserve Board, the Office of the Comptroller of
the Currency (the "Comptroller"), the Federal Deposit Insurance Corporation (the
"FDIC") and the Commonwealth of Massachusetts Commissioner of Banks. The Bank is
also subject to various requirements and restrictions under federal and state
law, including requirements to maintain reserves against deposits, restrictions
on the types and amounts of loans that may be granted and the interest that may
be charged thereon, and limitations on the types of investments that may be made
and the types of services that may be offered. Various consumer laws and
regulations also affect the operations of the Bank. In addition to the impact of
regulation, commercial banks are affected significantly by the actions of the
Federal Reserve Board as it attempts to control the money supply and credit
availability in order to influence the economy. All aspects of the Company's
business are highly competitive. The Company faces aggressive competition from
other lending institutions and from numerous other providers of financial
services.
Basis of Financial Statement Presentation
The financial statements have been prepared in conformity with generally
accepted accounting principles and to general practices within the banking
industry. In preparing the financial statements, management is required to make
estimates and assumptions that affect the reported amounts of assets and
liabilities as of the date of the balance sheet and revenues and expenses for
the period. Actual results could differ from those estimates.
Material estimates that are susceptible to change in the near-term relate
to the allowance for losses on loans. Management believes that the allowance for
losses on loans is adequate based on independent appraisals and review of other
factors associated with the assets. While management uses available information
to recognize losses on loans, future additions to the allowance for loans may be
necessary based on changes in economic conditions. In addition, regulatory
agencies periodically review the Company's allowance for losses on loans. Such
agencies may require the Company to recognize additions to the allowance for
loans based on their judgements about information available to them at the time
of their examination.
Investment Securities
Debt securities that the Company has the positive intent and ability to
hold to maturity are classified as held-to-maturity and reported at amortized
cost; debt and equity securities that are bought and held principally for the
purpose of selling are classified as trading and reported at fair value, with
unrealized gains and losses included in earnings; and debt and equity securities
not classified as either held-to-maturity or trading are classified as
available-for-sale and reported at fair value, with unrealized gains and losses
excluded from earnings and reported as a separate component of stockholders'
equity, net of estimated related income taxes. The Company has no securities
held for trading.
Premiums and discounts on investment securities are amortized or accreted
into income by use of the level-yield method. If a decline in fair value below
the amortized cost basis of an investment is judged to be other than temporary,
the cost basis of the investment is written down to fair value. The amount of
the writedown is included as a charge to earnings. Gains and losses on the sale
of investment securities are recognized at the time of sale on a specific
identification basis.
27
<PAGE> 88
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Loans
Interest on loans is recognized based on the daily principal amount
outstanding. Accrual of interest is discontinued when loans become 90 days
delinquent unless the collateral is sufficient to cover both principal and
interest and the loan is in the process of collection. Loans, including impaired
loans, on which the accrual of interest has been discontinued are designated
non-accrual loans. When a loan is placed on non-accrual, all income which has
been accrued but remains unpaid is reversed against current period income and
all amortization of deferred loan fees is discontinued. Non-accrual loans may be
returned to an accrual status when principal and interest payments are not
delinquent and the risk characteristics of the loan have improved to the extent
that there no longer exists a concern as to the collectibility of principal and
income. Income received on non-accrual loans is either recorded in income or
applied to the principal balance of the loan depending on management's
evaluation as to the collectibility of principal.
Loans held for sale are carried at the lower of aggregate cost or market
value. Gain or loss on sales of loans is recognized at the time of sale when the
sales proceeds exceed or are less than the Bank's investment in the loans.
Additionally, gains and losses are recognized when the average interest rate on
the loans sold, adjusted for normal servicing fee, differs from the agreed yield
to the buyer. The resulting excess service fee receivables, if any, are
amortized using the interest method over the estimated life of the loans,
adjusted for estimated prepayments.
Discounts and premiums on loans purchased from failed financial
institutions that represent market yield adjustments are accreted or amortized
to interest income over the estimated lives of the loans using the level-yield
method.
Loan origination fees and related direct incremental loan origination costs
are offset and the resulting net amount is deferred and amortized over the life
of the related loans using the level-yield method.
The Bank accounts for impaired loans, except those loans that are accounted
for at fair value or at lower of cost or fair value, at the present value of the
expected future cash flows discounted at the loan's effective interest rate.
This method applies to all loans, uncollateralized as well as collateralized,
except large groups of smaller-balance homogeneous loans that are collectively
evaluated for impairment, loans that are measured at fair value and leases and
debt securities. Management considers the payment status, net worth and earnings
potential of the borrower, and the value and cash flow of the collateral as
factors to determine if a loan will be paid in accordance with its contractual
terms. Management does not set any minimum delay of payments as a factor in
reviewing for impaired classification. Impaired loans are charged-off when
management believes that the collectibility of the loan's principal is remote.
In addition, criteria for classification of a loan as in-substance foreclosure
has been modified so that such classification need be made only when a lender is
in possession of the collateral. The Bank measures the impairment of troubled
debt restructurings using the pre-modification rate of interest.
The Bank recognizes the rights to service mortgage loans for others as an
asset, including rights acquired through both purchases and originations.
Capitalized mortgage servicing rights are amortized over the period of estimated
net servicing income and are periodically evaluated for impairment based on
their fair value.
Effective January 1, 1997, the Bank adopted SFAS No. 125, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities."
This statement provides accounting and reporting standards for transfers and
servicing of financial assets and extinguishments of liabilities based on
consistent application of a financial-components approach that focuses on
control. It distinguishes transfers of financial assets that are sales from
transfers that are secured borrowings. Under the financial-components approach,
after a transfer of financial assets, an entity recognizes all financial and
servicing assets it controls and liabilities it has incurred and derecognizes
financial assets it no longer controls and liabilities that have been
extinguished. The financial-components approach focuses on the assets and
liabilities that exist after the transfer. Many of these assets and liabilities
are components of financial assets that existed prior to the transfer. If a
transfer does not meet the criteria for a sale, the transfer is accounted for as
a secured borrowing
28
<PAGE> 89
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
with a pledge of collateral. However, SFAS No. 127, "Deferral of the Effective
Date of Certain Provisions of SFAS No. 125," requires the deferral of
implementation as it relates to repurchase agreements, dollar-rolls, securities
lending and similar transactions until after December 31, 1997. Earlier or
retroactive applications of this statement is not permitted. The Company has
determined that the adoption of SFAS No. 127 will not have a material impact on
its consolidated financial statements. The adoption of SFAS No. 125 did not have
a significant impact.
Allowance for Loan Losses
The allowance for loan losses is based on management's evaluation of the
quality of the loan portfolio and is used to provide for losses resulting from
loans which ultimately prove uncollectible. In determining the level of the
allowance, periodic evaluations are made of the loan portfolio which take into
account such factors as the character of the loans, loan status, financial
posture of the borrowers, value of collateral securing the loans and other
relevant information sufficient to reach an informed judgement. The allowance is
increased by provisions charged to income and reduced by loan charge-offs, net
of recoveries.
While management uses available information in establishing the allowance
for loan losses, future adjustments to the allowance may be necessary if
economic conditions differ substantially from the assumptions used in making the
evaluations. Loans are charged-off in whole or in part when, in management's
opinion, collectibility is not probable.
Management believes that the allowance for loan losses is adequate. In
addition, various regulatory agencies, as part of their examination process,
periodically review the Company's allowance for loan losses. Such agencies may
require the Company to recognize additions to the allowance based on their
judgements about information available to them at the time of their examination.
Other Real Estate Owned
Other real estate owned ("OREO") includes real estate acquired by
foreclosure and real estate substantively repossessed. Real estate acquired by
foreclosure is comprised of properties acquired through foreclosure proceedings
or acceptance of a deed in lieu of foreclosure. Real estate substantively
repossessed includes only those loans for which the Company has taken possession
of the collateral, but has not completed legal foreclosure proceedings. Both
in-substance foreclosures and real estate formally acquired in settlement of
loans are recorded at the lower of the carrying value of the loan or the fair
value of the property constructively or actually received. Loan losses from the
acquisition of such properties are charged against the allowance for loan
losses. After foreclosure, if the fair value of an asset minus its estimated
cost to sell is less than the carrying value of the asset, such amount is
recognized as a valuation allowance. If the fair value of an asset less its
estimated cost to sell subsequently increases so that the resulting amount is
more than the asset's current carrying value, the valuation allowance is
reversed by the amount of the increase. Increases or decreases in the valuation
allowance are charged or credited to income. Gains upon disposition of OREO are
reflected in the statement of income as realized. Realized losses are charged to
the valuation allowance.
Bank Premises and Equipment
Bank premises and equipment are stated at cost less accumulated
depreciation and amortization. Depreciation is computed using the straight-line
method over the estimated useful lives of the assets or the terms of leases, if
shorter. It is general practice to charge the cost of maintenance and repairs to
operations when incurred; major expenditures for improvements are capitalized
and depreciated.
Income Taxes
The Company uses the asset and liability method of accounting for income
taxes. Under the asset and liability method, deferred tax assets and liabilities
are recognized for the future tax consequences attributable
29
<PAGE> 90
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
to differences between the financial statement carrying amounts of existing
assets and liabilities and their respective tax bases. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which temporary differences are expected to be recovered
or settled. Under this method, the effect on deferred tax assets and liabilities
of a change in tax rates is recognized in income in the period that includes the
enactment date.
2. CASH AND DUE FROM BANKS
The Company is required to maintain a portion of its cash and due from
banks as a reserve balance under the Federal Reserve Act. Such reserve is
calculated based upon deposit levels and amounted to $471,000 at December 31,
1997 and $10,768,000 at December 31, 1996.
3. SECURITIES AVAILABLE-FOR-SALE
<TABLE>
<CAPTION>
DECEMBER 31, 1997 DECEMBER 31, 1996
------------------------------------------------ -----------------------------------------------
GROSS GROSS ESTIMATED GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED MARKET AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE COST GAINS LOSSES VALUE
---------- ---------- ---------- --------- --------- ---------- ---------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Government and
Agencies............. $84,582 $237 $56 $84,763 $77,283 $93 $221 $77,155
Obligations of states
and political
subdivisions......... 750 -- -- 750 1,241 -- -- 1,241
FHLB Stock............. 3,419 -- -- 3,419 2,364 -- -- 2,364
Other.................. 253 5 -- 258 252 3 -- 255
------- ---- --- ------- ------- --- ---- -------
$89,004 $242 $56 $89,190 $81,140 $96 $221 $81,015
======= ==== === ======= ======= === ==== =======
The following tables show the maturity distribution of the Company's
securities available-for-sale at December 31, 1997 and 1996:
<CAPTION>
DECEMBER 31, 1997 DECEMBER 31, 1996
----------------------------------------------------------- ----------------------------
OBLIGATIONS OBLIGATIONS
U.S. OF STATES ESTIMATED U.S. OF STATES
GOVERNMENT AND POLITICAL MARKET GOVERNMENT AND POLITICAL
AND AGENCIES SUBDIVISIONS OTHER TOTAL VALUE AND AGENCIES SUBDIVISIONS
------------ ------------- ------ ------- --------- ------------ -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Within one year.................... $29,460 $750 $ -- $30,210 $30,253 $13,988 $1,241
After one but within five years.... 54,122 -- -- 54,122 54,251 63,295 --
After five but within ten years.... 1,000 -- 250 1,250 1,259 -- --
Non-maturing....................... -- -- 3,422 3,422 3,427 -- --
------- ---- ------ ------- ------- ------- ------
$84,582 $750 $3,672 $89,004 $89,190 $77,283 $1,241
======= ==== ====== ======= ======= ======= ======
<CAPTION>
DECEMBER 31, 1996
----------------------------
ESTIMATED
MARKET
OTHER TOTAL VALUE
------ ------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Within one year.................... $ -- $15,229 $15,254
After one but within five years.... -- 63,295 63,142
After five but within ten years.... 250 250 250
Non-maturing....................... 2,366 2,366 2,369
------ ------- -------
$2,616 $81,140 $81,015
====== ======= =======
</TABLE>
There were no sales of securities available-for-sale in 1997, 1996 and
1995.
4. SECURITIES HELD-TO-MATURITY
<TABLE>
<CAPTION>
DECEMBER 31, 1997 DECEMBER 31, 1996
------------------------------------------------ -----------------------------------------------
GROSS GROSS ESTIMATED GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED MARKET AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE COST GAINS LOSSES VALUE
---------- ---------- ---------- --------- --------- ---------- ---------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Government and
Agencies.................... $107,117 $347 $124 $107,340 $105,582 $211 $574 $105,219
Obligations of states and
political subdivisions...... 22 -- -- 22 34 -- -- 34
Other........................ 2,100 -- 8 2,092 2,099 -- 21 2,078
-------- ---- ---- -------- -------- ---- ---- --------
$109,239 $347 $132 $109,454 $107,715 $211 $595 $107,331
======== ==== ==== ======== ======== ==== ==== ========
</TABLE>
30
<PAGE> 91
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Included in U.S. Government and Agency securities are securities pledged to
secure public deposits and repurchase agreements amounting to $40,256,000 at
December 31, 1997 and $24,746,000 at December 31, 1996.
The following tables show the maturity distribution of the Company's
securities held-to-maturity at December 31, 1997 and 1996:
<TABLE>
<CAPTION>
DECEMBER 31, 1997 DECEMBER 31, 1996
------------------------------------------------------------ ----------------------------
OBLIGATIONS OBLIGATIONS
U.S. OF STATES ESTIMATED U.S. OF STATES
GOVERNMENT AND POLITICAL MARKET GOVERNMENT AND POLITICAL
AND AGENCIES SUBDIVISIONS OTHER TOTAL VALUE AND AGENCIES SUBDIVISIONS
------------ ------------- ------ -------- --------- ------------ -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Within one year.................. $ 9,970 $11 $2,025 $ 12,006 $ 12,009 $ 2,511 $11
After one but within five
years........................... 79,191 11 50 79,252 79,439 83,636 23
After five but within ten
years........................... 16,956 -- 25 16,981 17,007 18,935 --
More than ten years.............. 1,000 -- -- 1,000 999 500 --
-------- --- ------ -------- -------- -------- ---
$107,117 $22 $2,100 $109,239 $109,454 $105,582 $34
======== === ====== ======== ======== ======== ===
<CAPTION>
DECEMBER 31, 1996
-----------------------------
ESTIMATED
MARKET
OTHER TOTAL VALUE
------ -------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Within one year.................. $ 2 $ 2,524 $ 2,516
After one but within five
years........................... 2,072 85,731 85,562
After five but within ten
years........................... 25 18,960 18,759
More than ten years.............. -- 500 494
------ -------- --------
$2,099 $107,715 $107,331
====== ======== ========
</TABLE>
There were no sales of securities held-to-maturity in 1997, 1996 or 1995.
5. LOANS
The Company's lending activities are conducted principally in
Massachusetts. The Company grants single and multi-family residential loans,
commercial and commercial real estate loans, and a variety of consumer loans. To
a lesser extent, the Company grants loans for the construction of residential
homes, multi-family properties, commercial real estate properties, and land
development. Most loans granted by the Company are secured by real estate
collateral. The ability and willingness of commercial real estate, commercial,
construction, residential and consumer loan borrowers to honor their repayment
commitments is generally dependent on the health of the real estate market in
the borrowers' geographic areas and the general economy.
The composition of the loan portfolio at December 31, 1997 and 1996 is as
follows:
<TABLE>
<CAPTION>
1997 1996
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Construction and land development........................... $ 7,549 $ 3,576
Commercial and industrial................................... 50,560 41,006
Industrial revenue bonds.................................... 2,693 3,030
Commercial real estate...................................... 140,270 133,757
Residential real estate..................................... 76,160 76,081
Residential real estate held for sale....................... 225 557
Consumer.................................................... 19,254 12,749
Home equity................................................. 19,031 17,330
Overdrafts.................................................. 648 194
-------- --------
$316,390 $288,280
======== ========
</TABLE>
At December 31, 1997 and 1996, loans were carried net of discounts of
$2,875,000 and $3,360,000 respectively. Included in these amounts at December
31, 1997 and 1996, residential real estate loans were carried net of discounts
of $2,847,000 and $3,319,000 respectively, associated with the acquisition of
Wollaston.
31
<PAGE> 92
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The composition of non-accrual loans, impaired loans and troubled debt
restructuring agreements is as follows:
<TABLE>
<CAPTION>
1997 1996
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Loans on non-accrual........................................ $1,705 $2,140
Impaired loans on non-accrual included above.............. 1,235 1,676
Troubled debt restructuring agreements...................... $3,306 $2,543
Impaired troubled debt restructuring agreements included
above.................................................. 2,280 1,377
Total recorded investment in impaired loans................. $3,515 $3,055
Average recorded value of impaired loans.................... $3,157 $2,935
Loans 90 days past due and still accruing................... $ 7 $ 192
Interest income on non-accrual loans according to their
original terms............................................ $ 202 $ 270
Interest income on non-accrual loans actually recorded...... $ 84 $ 98
Interest income recognized on impaired loans................ $ 216 $ 149
The composition of impaired loans at December 31, is as follows:
<CAPTION>
1997 1996
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Residential real estate:
1 to 4 family............................................. $ 250 $ 299
Multi-family.............................................. 771 1,201
Construction and land development........................... -- --
Commercial real estate...................................... 2,323 1,248
Commercial and industrial................................... 171 307
------ ------
Total............................................. $3,515 $3,055
Specific valuation allowance................................ -- --
------ ------
Total impaired loans.............................. $3,515 $3,055
====== ======
</TABLE>
There were no impaired loans with specific reserves at December 31, 1997
and 1996 and in the opinion of management, none of the above listed impaired
loans required a specific reserve. All of the impaired loans listed above have
been measured using the fair value of the collateral method.
The Company was servicing mortgage loans sold to others without recourse of
approximately $18,053,000 at December 31, 1997 and $20,359,000 at December 31,
1996. Additionally, the Company was servicing mortgage loans sold to others with
limited recourse. The outstanding balance of these loans with limited recourse
was approximately $753,000 at December 31, 1997 and $1,092,000 at December 31,
1996.
Directors and officers of the Company and their associates are customers
of, and have other transactions with, the Company in the normal course of
business. All loans and commitments included in such transactions were made on
substantially the same terms, including interest rates and collateral, as those
prevailing at the time for comparable transactions with other persons and do not
involve more than normal risk of collection or present other unfavorable
features.
The following table shows the aggregate amount of loans to directors and
officers of the Company and their associates during 1997.
<TABLE>
<CAPTION>
BALANCE AT REPAYMENTS BALANCE AT
DECEMBER 31, 1996 ADDITIONS AND DELETIONS DECEMBER 31, 1997
- ----------------- --------- ------------- -----------------
(IN THOUSANDS)
<S> <C> <C> <C>
$928 $1,055 $556 $1,427
</TABLE>
32
<PAGE> 93
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
6. ALLOWANCE FOR LOAN LOSSES
<TABLE>
<CAPTION>
1997 1996 1995
------ ------ ------
(IN THOUSANDS)
<S> <C> <C> <C>
Balance at beginning of year........................ $4,179 $4,193 $4,239
Provision charged to operating expense.............. 660 1,020 1,560
Loans charged-off................................... (689) (1,303) (1,828)
Loan recoveries..................................... 296 269 222
------ ------ ------
Balance at end of year.............................. $4,446 $4,179 $4,193
====== ====== ======
7. BANK PREMISES AND EQUIPMENT
<CAPTION>
DECEMBER 31,
-------------------
1997 1996
-------- -------
(IN THOUSANDS)
<S> <C> <C>
Land................................................... $ 1,839 $ 1,839
Bank premises.......................................... 6,533 6,254
Furniture and equipment................................ 9,468 8,261
Leasehold improvements................................. 1,888 1,888
-------- -------
19,728 18,242
Accumulated depreciation and amortization.............. (11,010) (9,977)
-------- -------
$ 8,718 $ 8,265
======== =======
</TABLE>
The Company and its subsidiaries are obligated under a number of
noncancelable operating leases for premises and equipment expiring in various
years through the year 2026. Total lease expense approximated $85,000, $144,000
and $168,000 for the years ended December 31, 1997, 1996 and 1995, respectively.
Future minimum rental commitments for noncancelable operating leases with
initial or remaining terms of one year or more at December 31, 1997 were as
follows:
<TABLE>
<CAPTION>
YEAR AMOUNT
---- --------------
(IN THOUSANDS)
<S> <C>
1998........................................... $ 80
1999........................................... 64
2000........................................... 64
2001........................................... 28
2002........................................... 21
Thereafter..................................... 554
----
$811
====
</TABLE>
8. ALLOWANCE FOR LOSSES ON OTHER REAL ESTATE OWNED
<TABLE>
<CAPTION>
1997 1996 1995
------ ------ ------
(IN THOUSANDS)
<S> <C> <C> <C>
Balance at beginning of year............... $ 19 $ 60 $ 238
Valuation writedowns....................... (19) (41) (248)
Provision charged to expense............... -- -- 70
------ ------ ------
Balance at end of year..................... $ -- $ 19 $ 60
====== ====== ======
</TABLE>
33
<PAGE> 94
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
9. DEPOSITS
Time deposits as of December 31 are as follows:
<TABLE>
<CAPTION>
1997 1996
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Three months or less................................... $101,719 $ 60,569
Three through twelve months............................ 55,263 57,369
Over twelve months..................................... 14,297 46,929
-------- --------
$171,279 $164,867
======== ========
</TABLE>
Time deposits in denominations of $100,000 or more totaled $63,214,000 and
$45,646,000 at December 31, 1997 and 1996, respectively. Interest expense
associated with deposits in denominations of $100,000 or more was $2,251,000,
$2,124,000 and $1,749,000 for the years ended 1997, 1996 and 1995, respectively.
10. SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
<TABLE>
<CAPTION>
1997 1996 1995
------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Average rate at December 31,................................ 4.49% 4.34% 4.25%
Average balance outstanding during the year................. $24,994 $16,654 $14,390
Average rate during the year................................ 4.30% 4.28% 4.39%
Maximum amount outstanding at any month-end................. $39,060 $17,790 $21,580
Amount outstanding at December 31,.......................... $32,850 $17,790 $21,580
</TABLE>
Amounts outstanding at December 31, 1997, 1996 and 1995 carried maturity
dates of the next business day. U.S. Government and Agency securities with a
total book value of $32,776,000, $17,762,000 and $21,497,000 were pledged as
collateral and held by custodians to secure the agreements at December 31, 1997,
1996 and 1995, respectively. The approximate market value of the collateral at
those dates was $32,814,000, $17,605,000 and $21,715,000, respectively.
11. OTHER BORROWED FUNDS
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1997 1996
------- -------
(IN THOUSANDS)
<S> <C> <C>
Treasury tax and loan note.................................. $ 834 $ 726
Federal Home Loan Bank -- IDEAL Advance..................... -- 10,000
Federal Home Loan Bank -- Advance........................... 11,454 1,489
Other....................................................... 1,186 138
------- -------
$13,474 $12,353
======= =======
</TABLE>
The Bank serves as a Treasury Tax and Loan depository under a note option
with the Federal Reserve Bank of Boston. This open-ended interest bearing
borrowing carries an interest rate equal to the daily Federal funds rate less
0.25%. The Bank borrowed $10,000,000 from the Federal Home Loan Bank on December
31, 1997 as an overnight advance. The interest rate on this advance was 7.05%.
The Bank also borrowed $1,500,000 during 1996 from Federal Home Loan Bank. The
borrowing bears interest at a fixed rate of 7.20%, has a remaining principal
balance of $1,454,000 and matures on July 24, 2006.
34
<PAGE> 95
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
12. STOCKHOLDERS' EQUITY
Dividends
Holders of the Class A common stock may not vote in the election of
directors, but may vote as a class to approve certain extraordinary corporate
transactions. Class A common stockholders are entitled to receive dividends per
share equal to at least 200% per share of that paid, if any, on each share of
Class B common stock. Class A common stock is publicly traded. Class B common
stock is not publicly traded, however, it can be converted on a share for share
basis to Class A common stock at any time. Dividend payments by the Company are
dependent in part on the dividends it receives from its bank subsidiary, which
are subject to certain regulatory restrictions.
Earnings Per Share
In February 1997, the FASB issued SFAS No. 128, "Earnings per Share," which
is effective for financial statements for both interim and annual periods ending
December 31, 1997. Primary EPS has been replaced with basic EPS and fully
diluted EPS has been replaced with diluted EPS. Diluted EPS includes the
dilutive effect of common stock equivalents; basic EPS excludes all common stock
equivalents. Diluted EPS is very similar to fully diluted EPS. The statement
also requires a reconciliation of basic EPS to diluted EPS. The only common
stock equivalents for the Company are the stock options discussed below. The
dilutive effect of these stock options for 1997, 1996 and 1995 was an increase
of 58,775, 82,712 and 108,396 shares, respectively.
Stock Option Plan
On March 10, 1987, the common stockholders of the Company approved a stock
option plan (the "Option Plan") that provides for granting of options for not
more than 150,000 shares of Class A common stock. Under the Option Plan, all
officers and other key employees of the Company are eligible to receive non-
qualified and incentive stock options to purchase shares of Class A common
stock. The Option Plan is administered by the Compensation Committee whose
members are ineligible to participate in the Option Plan. Based on management's
recommendations, the Committee submits its recommendations to the Board of
Directors as to persons to whom options are to be granted, the number of shares
to be granted to each, the option price (which may not be less than 85% of the
fair market value for non-qualified stock options, or the fair market value for
incentive stock options, of the shares on the date of grant) and the time period
over which the options are exercisable (no more than ten years from the date of
grant). Options exercisable at December 31, 1997 totaled 78,533 with a weighted
average option price of $3.75.
35
<PAGE> 96
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Information with regard to the stock option plan is as follows:
<TABLE>
<CAPTION>
NUMBER OF WEIGHTED AVERAGE
OPTION SHARES OPTION PRICE PER SHARE
------------- ----------------------
<S> <C> <C>
Outstanding at December 31, 1994.................... 146,500 $3.80
Granted............................................. -- --
Exercised........................................... (1,667) 3.75
Cancelled........................................... -- --
------- -----
Outstanding at December 31, 1995.................... 144,833 3.80
Granted............................................. -- --
Exercised........................................... (34,350) 3.89
Cancelled........................................... -- --
------- -----
Outstanding at December 31, 1996.................... 110,483 3.78
Granted............................................. -- --
Exercised........................................... (31,950) 3.84
Cancelled........................................... -- --
------- -----
Outstanding at December 31, 1997.................... 78,533 $3.75
======= =====
A summary of options by maturity is as follows:
<CAPTION>
EXPIRING DURING THE WEIGHTED AVERAGE
YEAR ENDED DECEMBER 31, NUMBER OF SHARES OPTION PRICE PER SHARE
----------------------- ---------------- ----------------------
<S> <C> <C>
1998............................................. -- --
1999............................................. -- --
2000............................................. -- --
2001............................................. 78,533 $3.75
2002............................................. -- --
------ -----
78,533 $3.75
====== =====
</TABLE>
The Company measures compensation cost for stock-based compensation plans
using the intrinsic value based method prescribed by Accounting Principles Board
Opinion No. 25. The Company granted no stock options during 1997, 1996 or 1995
and, therefore, no disclosures of proforma net income and earnings per share as
if the fair value method had been applied are required. The new disclosures will
be provided when additional stock options are granted.
Capital and Other Regulatory Requirements
The Bank is subject to various regulatory requirements administered by
federal banking agencies. Failure to meet minimum capital requirements can
initiate certain mandatory- and possibly additional discretionary-actions by
regulators that, if undertaken, could have a direct material affect on the
Company's financial statements. Under capital adequacy guidelines and regulatory
framework for prompt corrective action, the Bank must meet specific capital
guidelines that involve quantitative measures of the Bank's assets, liabilities,
and certain off-balance-sheet items as calculated under regulatory accounting
practices. The Bank's capital amounts and classification are also qualitative
judgments by the regulators about components, risk weightings, and other
factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios (set forth in the table
below) of total and Tier I capital (as defined in the regulations) to risk
weighted assets (as defined), and Tier I capital (as defined) to average assets
(as
36
<PAGE> 97
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
defined). Management believes, as of December 31, 1997 that the Bank meets all
capital adequacy requirements to which it is subject.
As of December 31, 1997, the most recent notification from the FDIC
categorized the Bank as well capitalized under the regulatory framework for
prompt corrective action. To be categorized as well capitalized, the Bank must
maintain minimum total risk-based, Tier I risk-based, and Tier I leverage ratios
as set forth in the table. There are no conditions or events since that
notification that management believes would cause a change in the Bank's
categorization.
The Bank's actual capital amounts and ratios are presented in the following
table.
<TABLE>
<CAPTION>
TO BE WELL
CAPITALIZED
UNDER PROMPT
FOR CAPITAL CORRECTIVE
ACTUAL ADEQUACY PURPOSES ACTION PROVISIONS
---------------- ------------------ ------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
------- ----- -------- ------ -------- ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1997:
Total capital (to risk-weighted
assets)......................... $49,735 14.64% $27,179 8.0% $33,974 10.0%
Tier I capital (to risk-weighted
assets)......................... 45,474 13.38% 13,590 4.0% 20,384 6.0%
Tier I capital (to average
assets)......................... 45,474 7.85% 22,670 4.0% 28,338 5.0%
As of December 31, 1996:
Total capital (to risk-weighted
assets)......................... $44,004 14.74% $23,882 8.0% $29,852 10.0%
Tier I capital (to risk-weighted
assets)......................... 40,267 13.49% 11,941 4.0% 17,911 6.0%
Tier I capital (to average
assets)......................... 40,267 7.46% 21,577 4.0% 26,971 5.0%
</TABLE>
In February 1997, the FASB issued SFAS No. 129, "Disclosure of Information
about Capital Structure," which is effective for 1997 financial statements. The
Company's disclosures currently comply with the provisions of this statement.
13. INCOME TAXES
The current and deferred components of income tax expense for the years
ended December 31 are as follows:
<TABLE>
<CAPTION>
1997 1996 1995
------ ------ ------
(IN THOUSANDS)
<S> <C> <C> <C>
Current expense:
Federal................................................ $3,824 $2,959 $1,302
State.................................................. 1,091 1,062 446
------ ------ ------
Total current expense.......................... 4,915 4,021 1,748
====== ====== ======
Deferred expense:
Federal................................................ (541) (238) 716
State.................................................. (169) (78) 337
Change in valuation reserve............................ -- (300) (1,135)
------ ------ ------
Total deferred expense......................... (710) (616) (82)
------ ------ ------
Provision for income taxes............................... $4,205 $3,405 $1,666
====== ====== ======
</TABLE>
37
<PAGE> 98
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Income tax accounts included in other assets and other liabilities at
December 31 are as follows:
<TABLE>
<CAPTION>
1997 1996
------ ------
(IN THOUSANDS)
<S> <C> <C>
Currently payable........................................... $ (419) $ (287)
Deferred income tax asset, net.............................. 2,235 1,655
------ ------
$1,816 $1,368
====== ======
</TABLE>
Income tax expense for the years presented is different from the amounts
computed by applying the statutory Federal income tax rate of 34% to income
before Federal income taxes. The following tabulation reconciles Federal income
tax expense based on statutory rates to the actual income tax expense for the
years ended December 31:
<TABLE>
<CAPTION>
1997 1996 1995
------ ------ ------
(IN THOUSANDS)
<S> <C> <C> <C>
Federal income tax expense at statutory rates............ $3,750 $3,005 $2,121
State income taxes, net of Federal income tax benefit.... 608 649 517
Effect of tax-exempt interest............................ (102) (105) (132)
Change in valuation reserve.............................. -- (300) (1,135)
Other.................................................... (51) 156 295
------ ------ ------
$4,205 $3,405 $1,666
====== ====== ======
Effective Tax Rate....................................... 38.1% 38.5% 26.7%
</TABLE>
Management believes that it is more likely than not that the net deferred
income tax asset of $2,235,000 at December 31, 1997 will be realized. The
federal tax portion of $1,622,000 of the deferred tax asset is supported by the
availability of federal income taxes paid in prior carryback years.
The valuation reserve was reduced by $300,000 in 1996 in recognition of the
operating results achieved and the increase in recoverable federal income taxes
paid in prior years.
The following table sets forth the Company's gross deferred income tax
assets and gross deferred income tax liabilities at December 31:
<TABLE>
<CAPTION>
1997 1996
------ ------
(IN THOUSANDS)
<S> <C> <C>
Deferred income tax assets:
Allowance for loan losses................................. $1,055 $ 722
Other real estate owned writedowns........................ -- 8
Deferred compensation..................................... 1,625 1,340
Unrealized loss on securities available-for-sale.......... -- 52
Acquisition premium....................................... 95 50
Other..................................................... 12 79
------ ------
Gross deferred income tax asset........................ 2,787 2,251
Deferred income tax liabilities:
Unrealized gain on securities available-for-sale.......... (77) --
Purchase accounting....................................... (297) (388)
Depreciation.............................................. (157) (183)
Other..................................................... (21) (25)
------ ------
Deferred income tax asset, net......................... $2,235 $1,655
====== ======
</TABLE>
38
<PAGE> 99
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
14. EMPLOYEE BENEFITS
The Company's noncontributory defined benefit pension plan covers
substantially all full-time employees. Benefits are based on employee's years of
service and highest five year compensation. The plan is funded on a current
basis, in compliance with the requirements of the Employee Retirement Income
Security Act.
<TABLE>
<CAPTION>
1997 1996
-------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Projected benefit obligation................................ $6,319 $4,859
Plan assets at fair value................................... 4,171 3,341
------ ------
Projected benefit obligation in excess of plan assets....... $2,148 $1,518
====== ======
The assumptions used in determining the projected benefits obligation were
as follows:
<CAPTION>
<S> <C> <C>
Discount rate............................................... 7.00% 7.00%
Rate of increase in compensation levels..................... 5.00% 5.00%
</TABLE>
Certain changes in the items shown are not recognized as they occur, but
are amortized over subsequent periods. Unrecognized amounts to be amortized and
the amounts included in the Consolidated Balance Sheets are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------
1997 1996
------ ------
(IN THOUSANDS)
<S> <C> <C>
Unrecognized net loss....................................... $ 987 $ 200
Unrecognized past service costs............................. 722 821
Transition obligation....................................... 3 4
Accrued pension expense..................................... 436 493
------ ------
Projected benefit obligation in excess of plan assets....... $2,148 $1,518
====== ======
</TABLE>
The assumptions used and the components of net pension expense for the
years ended December 31, 1997, 1996 and 1995 include the following:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------
1997 1996 1995
------ ------ ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Assumptions used
Discount rate.......................................... 7.00% 7.00% 8.00%
Rate of increase in compensation levels................ 5.00% 5.00% 5.00%
Expected long term rate of return on plan assets....... 8.00% 8.00% 8.00%
Net pension cost:
Service cost; benefits earned during this period....... $ 357 $ 318 $ 256
Interest cost on projected benefit obligation.......... 340 308 260
Actual return on plan assets........................... (354) (208) (181)
Net amortization and deferral.......................... 174 120 117
------ ------ ------
Net periodic pension expense............................. $ 517 $ 538 $ 452
====== ====== ======
</TABLE>
In 1996, the Company began offering a 401(k) defined contribution plan for
all employees reaching minimum age and service requirements. The plan is
voluntary with no matching contributions. Administrative costs associated with
the plan are absorbed by the Company.
39
<PAGE> 100
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company has a Supplemental Insurance/Retirement Plan which is limited
to certain officers and employees of the Company. The plan is voluntary and
participants are required to contribute to its cost. Under the plan, each
participant will receive a retirement benefit based on compensation and length
of service. Individual life insurance policies are purchased covering the life
of each participant. The Company is the owner of these policies and each
participating employee has received an assignment of a portion of each policy's
proceeds. The amount of pension liability recorded on the books of the Company
related to the supplemental retirement plan was $3.9 million and $3.2 million on
December 31, 1997 and 1996, respectively. The net cost to the Company for this
plan for the years ended December 31, 1997, 1996 and 1995 was $558,000, $306,000
and $247,000, respectively.
The Company does not offer any post retirement benefits other than
pensions.
15. COMMITMENTS AND CONTINGENCIES
A number of legal claims against the Bank arising in the normal course of
business were outstanding at December 31, 1997. Management, after reviewing
these claims with legal counsel, is of the opinion that their resolution will
not have a material adverse affect on the Company's consolidated financial
position.
16. FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
The Company is party to financial instruments with off-balance sheet risk
in the normal course of business to meet the financing needs of its customers.
These financial instruments primarily include commitments to originate and sell
loans, standby letters of credit, unused lines of credit and unadvanced portions
of construction loans. The instruments involve, to varying degrees, elements of
credit and interest rate risk in excess of the amount recognized in the
consolidated balance sheet. The contract or notional amounts of those
instruments reflect the extent of involvement the Company has in these
particular classes of financial instruments.
The Company's exposure to credit loss in the event of non-performance by
the other party to the financial instrument for loan commitments and standby
letters of credit is represented by the contractual amount of those instruments.
The Company uses the same credit policies in making commitments and conditional
obligations as it does for on-balance sheet instruments.
Financial instruments with off-balance sheet risk at December 31 are as
follows:
<TABLE>
<CAPTION>
CONTRACT OR NOTIONAL AMOUNT 1997 1996
--------------------------- ------- -------
(IN THOUSANDS)
<S> <C> <C>
Financial instruments whose contract amount represents
credit risk:
Commitments to originate 1-4 family mortgages............. $ 163 $ 106
Standby letters of credit................................. 1,561 945
Unused lines of credit.................................... 85,204 66,696
Unadvanced portions of construction loans................. 321 2,190
Financial instruments whose contract amount exceeds the
amount of credit risk:
Commitments to sell 1-4 family mortgages.................. 388 663
</TABLE>
Commitments to originate loans, unadvanced portions of construction loans
and unused lines of credit are generally agreements to lend to a customer
provided there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination clauses
and may require payment of a fee. Since many of the commitments are expected to
expire without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. The Company evaluates each
40
<PAGE> 101
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
customer's credit worthiness on a case-by-case basis. The amount of collateral
obtained, if deemed necessary by the Company upon extension of credit, is based
on management's credit evaluation of the borrower.
Standby letters of credit are conditional commitments issued by the Company
to guarantee the performance by a customer to a third party. The credit risk
involved in issuing letters of credit is essentially the same as that involved
in extending loan facilities to customers.
In addition to general commitments, the Company originates 1-4 family
mortgages for sale in the secondary markets. These loans are sold with and
without recourse and no loan is originated without its sale having been
pre-arranged. The Company was servicing mortgage loans sold to others with a
maximum recourse provision of 10% of the outstanding balance of approximately
$753,000 at December 31, 1997 and $1,092,000 at December 31, 1996.
17. OTHER OPERATING EXPENSES
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------
1997 1996 1995
------ ------ ------
(IN THOUSANDS)
<S> <C> <C> <C>
Marketing................................................... $1,024 $ 835 $ 650
Supplies.................................................... 441 471 522
Telephone................................................... 227 218 198
Postage and delivery........................................ 465 512 514
Legal and audit............................................. 330 316 486
Insurance................................................... 187 184 192
FDIC assessment............................................. 57 2 473
Core deposit intangible amortization........................ 200 200 25
Other....................................................... 1,115 958 1,059
------ ------ ------
$4,046 $3,696 $4,119
====== ====== ======
</TABLE>
18. FAIR VALUES OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used by the Company in
estimating fair values of its financial instruments. Excluded from this
disclosure are certain financial instruments for which it is not practical to
estimate their value and all nonfinancial instruments. Accordingly, the
aggregate fair value amounts presented do not represent the underlying value of
the Company.
Cash and cash equivalents: The carrying amounts reported in the balance
sheet for cash and cash equivalents approximate the fair values of these assets
because of the short-term nature of these financial instruments.
Securities held-to-maturity and securities available-for-sale: The fair
value of these securities, excluding certain state and municipal securities
whose fair value is estimated at book value because they are not readily
marketable, is estimated based on bid prices published in financial newspapers
or bid quotations received from securities dealers.
Loans: For variable-rate loans that reprice frequently and with no
significant change in credit risk, fair values are based on carrying amounts.
The fair value of other loans is estimated using discounted cash flow analysis,
based on interest rates currently being offered for loans with similar terms to
borrowers of similar credit quality. Incremental credit risk for non-performing
loans has been considered.
Accrued interest receivable and payable: The carrying amounts for accrued
interest receivable and payable approximate fair values because of the
short-term nature of these financial instruments.
41
<PAGE> 102
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Deposits: The fair value of deposits with no stated maturity, such as
noninterest bearing demand deposits, savings, N.O.W. and money market accounts,
is equal to the amount payable on demand as of the balance sheet date. The fair
value of certificates of deposit is based on the discounted value of contractual
cash flows. The discount rate used is estimated based on the rates currently
offered for deposits of similar remaining maturities.
Repurchase agreements and other borrowed funds: The carrying amounts
reported in the balance sheet for repurchase agreements and other borrowed funds
approximate the fair values of those liabilities because of the short-term
nature of these financial instruments.
Off-balance-sheet instruments: The fair values of the Company's unused
lines of credit, commitments to originate and sell loans and standby letters of
credit are estimated using the fees currently charged to enter into similar
agreements, taking into account the remaining terms of the agreements and the
counterparties' credit standing. The fair value of the Company's commitments to
sell mortgage loans approximates the estimated cost to terminate or otherwise
settle the obligations with the counterparties. Therefore, at December 31, 1997
and 1996, there was no fair value adjustment.
The carrying amounts and fair values of the Company's financial instruments
at December 31 are as follows:
<TABLE>
<CAPTION>
1997 1996
---------------------- ----------------------
CARRYING CARRYING
AMOUNTS FAIR VALUE AMOUNTS FAIR VALUE
-------- ---------- -------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Financial assets:
Cash and cash equivalents..................... $ 97,892 $ 97,892 $ 67,681 $ 67,681
Securities available-for-sale................. 89,190 89,190 81,015 81,015
Investment securities held-to-maturity........ 109,239 109,454 107,715 107,331
Net loans..................................... 311,944 315,653 284,101 286,494
Accrued interest receivable................... 4,334 4,334 4,283 4,283
Financial liabilities:
Deposits...................................... 515,449 515,904 476,135 476,787
Repurchase agreements and other borrowed
funds...................................... 46,324 46,324 30,143 30,143
Accrued interest payable...................... 3,123 3,123 2,000 2,000
</TABLE>
Limitations
Fair value estimates are made at a specific point in time, based on
relevant market information and information about the type of financial
instrument. These estimates do not reflect any premium or discount that could
result from offering for sale at one time the Bank's entire holdings of a
particular financial instrument. Because no market exists for some of the Bank's
financial instruments, fair value estimates are based on judgements regarding
future expected loss experience, cash flows, current economic conditions, risk
characteristics and other factors. These estimates are subjective in nature and
involve uncertainties and matters of significant judgement and therefore cannot
be determined with precision. Changes in assumptions and changes in the loan,
debt and interest rate markets could significantly affect the estimates.
Further, the income tax ramifications related to the realization of the
unrealized gains and losses can have a significant effect on the fair value
estimates and have not been considered.
42
<PAGE> 103
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
19. QUARTERLY RESULT OF OPERATIONS
<TABLE>
<CAPTION>
1997 QUARTER
------------------------------------------------
FOURTH THIRD SECOND FIRST
--------- --------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Interest income............................... $ 10,593 $ 10,395 $ 10,332 $ 9,896
Interest expense.............................. 4,094 3,991 3,992 3,845
--------- --------- --------- ---------
Net interest income......................... 6,499 6,404 6,340 6,051
Provision for loan losses..................... 135 135 135 255
--------- --------- --------- ---------
Net-interest income after provisions for
loan losses.............................. 6,364 6,269 6,205 5,796
Other operating income........................ 1,347 1,248 1,255 1,144
Operating expenses............................ 4,613 4,693 4,663 4,630
--------- --------- --------- ---------
Income before income taxes.................. 3,098 2,824 2,797 2,310
Provision for income taxes.................... 1,045 1,093 1,133 934
Net income.................................. $ 2,053 $ 1,731 $ 1,664 $ 1,376
========= ========= ========= =========
Share Data
Average shares outstanding, basic........... 5,779,946 5,777,767 5,769,282 5,761,278
Average shares outstanding, diluted......... 5,842,167 5,846,473 5,834,441 5,835,391
Earnings per share, basic..................... $ 0.36 $ 0.30 $ 0.29 $ 0.24
Earnings per share, diluted................... $ 0.35 $ 0.30 $ 0.29 $ 0.24
========= ========= ========= =========
<CAPTION>
1996 QUARTER
------------------------------------------------
FOURTH THIRD SECOND FIRST
--------- --------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Interest income............................... $ 9,789 $ 9,887 $ 9,706 $ 9,395
Interest expense.............................. 3,809 4,052 4,041 3,903
--------- --------- --------- ---------
Net interest income......................... 5,980 5,835 5,665 5,492
Provision for loan losses..................... 255 255 255 255
--------- --------- --------- ---------
Net-interest income after provisions for
loan losses.............................. 5,725 5,580 5,410 5,237
Other operating income........................ 1,143 1,060 1,270 1,288
Operating expenses............................ 4,417 4,337 4,502 4,618
--------- --------- --------- ---------
Income before income taxes.................. 2,451 2,303 2,178 1,907
Provision for income taxes.................... 903 899 880 723
--------- --------- --------- ---------
Net income.................................. $ 1,548 $ 1,404 $ 1,298 $ 1,184
========= ========= ========= =========
Share Data
Average shares outstanding, basic........... 5,743,657 5,738,706 5,736,220 5,726,227
Average shares outstanding, diluted......... 5,831,192 5,836,271 5,828,748 5,818,968
Earnings per share, basic..................... $ 0.27 $ 0.24 $ 0.23 $ 0.21
Earnings per share, diluted................... $ 0.27 $ 0.24 $ 0.22 $ 0.20
========= ========= ========= =========
</TABLE>
20. PARENT COMPANY FINANCIAL STATEMENTS
The balance sheets of Century Bancorp, Inc. ("Parent Company") as of
December 31, 1997 and 1996 and the statements of income and cash flows for each
of the years in the three-year period ended December 31, 1997 are presented
below. The statements of changes in stockholders' equity are identical to the
consolidated statements of changes in stockholders' equity and are therefore not
presented here.
43
<PAGE> 104
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1997 1996
------- -------
(IN THOUSANDS)
<S> <C> <C>
Assets:
Cash...................................................... $ 7,602 $ 6,409
Investment in subsidiary, at equity....................... 46,550 41,363
Other assets.............................................. 83 87
------- -------
Total assets...................................... 54,235 $47,859
======= =======
Liabilities and Stockholders' Equity:
Liabilities............................................... $ 378 $ 370
Stockholders' equity...................................... 53,857 47,489
------- -------
Total liabilities and stockholders' equity........ $54,235 $47,859
======= =======
STATEMENTS OF INCOME
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------
1997 1996 1995
------ ------ ------
(IN THOUSANDS)
<S> <C> <C> <C>
Income:
Dividends from subsidiary................................. $1,702 $1,544 $ 939
Interest income from deposits in bank..................... 289 253 216
Other income.............................................. 12 12 12
------ ------ ------
Total income...................................... 2,003 1,809 1,167
Operating expenses.......................................... 73 69 79
------ ------ ------
Income before income taxes and equity in undistributed
income of subsidiary................................... 1,930 1,740 1,088
Income tax expense.......................................... 112 89 66
------ ------ ------
Income before equity in undistributed income of
subsidiary............................................. 1,818 1,651 1,022
Equity in undistributed income of subsidiary................ 5,005 3,783 3,552
------ ------ ------
Net income................................................ $6,823 $5,434 $4,574
====== ====== ======
STATEMENTS OF CASH FLOWS
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------
1997 1996 1995
------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Cash flows from operating activities:
Net income................................................ $ 6,823 $ 5,434 $ 4,574
Adjustments to reconcile net income to net cash provided
by operating activities:
Undistributed income of subsidiary..................... (5,005) (3,783) (3,552)
Depreciation and amortization.......................... 6 6 6
Increase in other assets............................... (2) (1) (3)
Increase (decrease) in liabilities..................... 8 129 (298)
------- ------- -------
Net cash provided by operating activities............ 1,830 1,785 727
------- ------- -------
</TABLE>
44
<PAGE> 105
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------
1997 1996 1995
------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Cash flows from investing activities:
None...................................................... -- -- --
Cash flows from financing activities:
Stock options exercised................................... 123 133 6
Cash dividends paid....................................... (760) (595) (438)
------- ------- -------
Net cash used by financing activities.................. (637) (462) (432)
------- ------- -------
Net increase in cash........................................ 1,193 1,323 295
Cash at beginning of year................................... 6,409 5,086 4,791
------- ------- -------
Cash at end of year......................................... $ 7,602 $ 6,409 $ 5,086
======= ======= =======
Supplemental disclosures of cash flow information: Cash paid
during the year for:
Income taxes.............................................. $ 111 $ 93 $ 70
</TABLE>
21. SUBSEQUENT EVENT -- ACQUISITION
In December 1997, Century Bancorp, Inc. announced an agreement to acquire
Haymarket Cooperative Bank ("Haymarket") and merge Haymarket into Century Bank
and Trust Company. This acquisition is expected to be completed on or before
April 1, 1998. Haymarket is headquartered in Boston, Massachusetts and operates
two banking offices located in Boston. Haymarket is engaged principally in the
business of attracting deposits from the general public and investing those
deposits in residential real estate, consumer and small business loans.
Total assets of Haymarket were approximately $142 million at December 31,
1997. Under the terms of the agreement, Century Bank and Trust Company will pay
approximately $20 million in cash for Haymarket and the acquisition is subject
to federal and state regulatory approval. The transaction will be accounted for
using the purchase method of accounting.
45
<PAGE> 106
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following pro-forma condensed balance sheet was prepared as if this
acquisition had taken place at December 31, 1997.
PRO-FORMA CONDENSED BALANCE SHEETS
DECEMBER 31, 1997
<TABLE>
<CAPTION>
CENTURY PRO-FORMA PRO-FORMA
BANCORP, INC. HAYMARKET ADJUSTMENTS COMBINED
------------- --------- ----------- ---------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Assets:
Cash and cash equivalents............... $ 97,892 $ 5,015 $(20,395)(a) $ 82,512
Securities.............................. 198,429 54,278(b) 252,707
Loans, net.............................. 311,944 79,358(c) 391,302
Bank premises and equipment............. 8,718 725 9,443
Other assets............................ 14,142 2,561 3,397(a) 20,100
-------- -------- -------- --------
Total assets.................... $631,125 $141,937 $(16,998) $756,064
======== ======== ======== ========
Liabilities:
Deposits................................ $515,449 $119,984(c) $635,433
Borrowed funds.......................... 46,324 3,000(c) 49,324
Other liabilities....................... 15,495 1,955 17,450
-------- -------- -------- --------
Total liabilities............... 577,268 124,939 702,207
Stockholders' equity...................... 53,857 16,998 (16,998)(a) 53,857
-------- -------- -------- --------
Total liabilities &
stockholders' equity.......... $631,125 $141,937 $(16,998) $756,064
======== ======== ======== ========
</TABLE>
- ---------------
(a) Purchase of Haymarket funded by sale of federal funds.
(b) All of Haymarket's securities are classified as available-for-sale and
carried at fair value.
(c) Haymarket's loans, deposits and borrowed funds are generally short term in
nature and approximate fair value.
46
<PAGE> 107
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following pro-forma condensed results of Century Bancorp, Inc. were
prepared as if this acquisition had taken place on January 1, 1997. The
pro-forma results are not necessarily indicative of the actual results of
operations had the Company's acquisition of Haymarket actually occurred on
January 1, 1997.
PRO-FORMA CONDENSED STATEMENTS OF INCOME
YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
CENTURY PRO-FORMA PRO-FORMA
BANCORP, INC. HAYMARKET ADJUSTMENTS COMBINED
------------- --------- ----------- ---------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Interest income............................. $41,216 $12,842 $(1,122)(a) $52,936
Interest expense............................ 15,922 6,859 22,781
------- ------- ------- -------
Net interest income....................... 25,294 5,983 (1,122) 30,155
Provision for loan losses................... 660 (841) (181)
------- ------- ------- -------
Net interest income after provision for
loan losses............................ 24,634 6,824 (1,122) 30,336
Operating income............................ 4,994 200 5,194
Operating expenses.......................... 18,600 3,995 340(b) 22,935
------- ------- ------- -------
Income before income taxes.................. 11,028 3,029 (1,462) 12,595
Provision for income taxes.................. 4,205 890 (464)(c) 4,631
------- ------- ------- -------
Net income................................ $ 6,823 $ 2,139 $ (998) $ 7,964
======= ======= ======= =======
Net income per share, basic................. $ 1.18 -- -- $ 1.38
Net income per share, diluted............... $ 1.17 -- -- $ 1.37
</TABLE>
- ---------------
(a) Foregone interest on federal funds sold to finance purchase of Haymarket.
(b) Amortization of goodwill assuming ten year amortization period.
(c) Tax effect of the interest income adjustments.
47
<PAGE> 108
INDEPENDENT AUDITORS' REPORT
KPMG PEAT MARWICK LLP
Certified Public Accountants
99 High Street
Boston, Massachusetts 02110
The Board of Directors Century Bancorp, Inc.:
We have audited the accompanying consolidated balance sheets of Century
Bancorp, Inc. and subsidiary (the Company) as of December 31, 1997 and 1996, and
the related consolidated statements of income, changes in stockholders' equity
and cash flows for each of the years in the three-year period ended December 31,
1997. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Century
Bancorp, Inc. and subsidiary as of December 31, 1997 and 1996, and the results
of their operations and their cash flows for each of the years in the three-year
period ended December 31, 1997 in conformity with generally accepted accounting
principles.
/s/ KPMG PEAT MARWICK LLP
January 12, 1998
48
<PAGE> 109
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The directors of the Company and their ages as of December 31, 1997 are as
follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
George R. Baldwin............... 54 Director, Century Bancorp, Inc., and
Century Bank and Trust Co.,
Roger S. Berkowitz.............. 45 Director, Century Bancorp, Inc., and
Century Bank and Trust Co.
Karl E. Case, Ph.D.............. 51 Director, Century Bancorp, Inc., and
Century Bank and Trust Co.
Henry L. Foster, D.V.M.......... 72 Director, Century Bancorp, Inc., and
Century Bank and Trust Co.
Marshall I. Goldman, Ph.D....... 67 Director, Century Bancorp, Inc., and
Century Bank and Trust Co.
Russell B. Higley, Esquire...... 58 Director, Century Bancorp, Inc., and
Century Bank and Trust Co.
Jonathan B. Kay................. 38 Director, Century Bancorp, Inc., and
Century Bank and Trust Co.
Fraser Lemley................... 57 Director, Century Bancorp, Inc., and
Century Bank and Trust Co.
Joseph P. Mercurio.............. 49 Director, Century Bancorp, Inc., and
Century Bank and Trust Co.
Joseph J. Senna, Esquire........ 58 Director, Century Bancorp, Inc., and
Century Bank and Trust Co.
Barry R. Sloane................. 42 Director, Century Bancorp, Inc., and
Century Bank and Trust Co.
Jonathan G. Sloane.............. 39 Director and Senior Vice President,
Century Bancorp, Inc.; President and COO,
Century Bank and Trust Company
Marshall M. Sloane.............. 71 Chairman, President and CEO, Century
Bancorp, Inc., Chairman and CEO,
Century Bank and Trust Company
Stephanie Sonnabend............. 44 Director, Century Bancorp, Inc., and
Century Bank and Trust Co.
George F. Swansburg............. 55 Director and Executive Vice President,
Century Bancorp, Inc.; Director, Vice
Chairman, Century Bank and Trust
Company
Jon Westling.................... 55 Director, Century Bancorp, Inc., and
Century Bank and Trust Co.
</TABLE>
Mr. Baldwin became a director of the Company in 1996. He has been a
Director of Century Bank and Trust Company since January 1995. Mr. Baldwin is
President and CEO of Arthur J. Gallagher & Co. of Massachusetts. Inc.
Mr. Berkowitz became a director of the Company in 1996. He was elected a
director of Century Bank/Suffolk in 1986 and has been a director of Century Bank
and Trust Company since the banks merged in 1992. Mr. Berkowitz is President of
Legal SeaFoods, Inc.
Dr. Case became a director of the Company in 1996. Dr. Case has been a
director of Century Bank and Trust Company since March 1995. He is the Marion
Butler McLean Professor of Economics at Wellesley College and a Visiting Scholar
at the Federal Reserve Bank of Boston.
49
<PAGE> 110
Dr. Foster has been a director of the Company since its organization in
1972. He was a founding director of Century Bank and Trust Company in 1969. For
over 40 years he has been Chairman of the Board of Charles River Laboratories,
Inc.
Dr. Goldman has been a director of the Company since its organization in
1972. He was also a founding director of Century Bank and Trust Company in 1969.
He has been a Professor of Economics at Wellesley College since 1968 and
Associate Director of the Russian Research Center at Harvard University since
1975.
Mr. Higley became a director of the Company in 1996. He has been a director
of Century Bank and Trust Company since April 1986. Mr. Higley is an attorney.
Mr. Kay became a director of the Company in January 1997. He was also
elected a director of Century Bank and Trust Company in January 1997. Mr. Kay is
President of The Kay Companies.
Mr. Lemley became a director of the Company in 1996. He has been a director
of Century Bank and Trust Company since March 1988. Mr. Lemley is Chairman of
the Board of Sentry Ford, Inc., Sentry Lincoln-Mercury, Inc., and Sentry South
Lincoln-Mercury, Inc.
Mr. Mercurio became a director of the Company in 1991. He was formerly a
director of Century Bank and Trust Company from 1989 to 1991. He is an Executive
Vice President of Boston University.
Mr. Senna became a director of the Company in 1986. He has been a director
of Century Bank and Trust Company since 1979. Mr. Senna is an attorney.
Mr. Barry R. Sloane became a director of the Company in January 1997. He
was also elected a director of Century Bank and Trust Company in January 1997.
Mr. Sloane is Head of Private Banking (North America) at Credit Suisse Private
Banking.
Mr. Jonathan G. Sloane became a director of the Company in 1986. He was
elected President and director of Century Bank/Suffolk in 1983. In 1992 he was
elected Executive Vice President of Century Bank and Trust Company and in 1995
promoted to Senior Executive Vice President. Mr. Sloane is currently President
and COO of Century Bank and Trust Company.
Mr. Marshall M. Sloane is the founder of the Company and has been Chairman,
President and CEO since its organization in 1972. He founded Century Bank and
Trust Company in 1969 and is currently its Chairman and CEO.
Ms. Sonnabend became a director of the Company in July 1997. She has been a
director of Century Bank and Trust Company since April 1997. Ms. Sonnabend is
President of Sonesta International Hotels Corporation.
Mr. Swansburg became a director of the Company in 1986 and was elected
Executive Vice President in 1995. He was President of Century North Shore Bank
and Trust Company. In 1992 he was elected President and COO of Century Bank and
Trust Company. He is currently Vice Chairman of Century Bank and Trust Company.
Mr. Westling became a director of the Company in 1996. He has been a
director of Century Bank and Trust Company since April 1995. Mr. Westling is
President of Boston University.
All of the Company's directors are elected annually and hold office until
their successors are duly elected and qualified. There are no family
relationships between any of the directors or executive officers, except that
Barry R. Sloane and Jonathan G. Sloane are the sons of Marshall M. Sloane and
Jonathan B. Kay is the son-in-law of Marshall M. Sloane.
The Company has a Compensation and Audit Committee. The Compensation
Committee is a committee of the Board of Directors composed of Joseph P.
Mercurio as Chairman, Fraser Lemley and Roger S. Berkowitz. It reviews the
salaries of the Company's officers and administers the Company's Supplemental
Executive Insurance/Retirement Income Plan, Incentive Compensation Plan and
Stock Option Plan.
50
<PAGE> 111
The Audit Committee is composed of Joseph Senna, Chairman and George
Baldwin, Russell B. Higley and Jon Westling. It meets with KPMG Peat Marwick
LLP, independent certified public accountants, in connection with the annual
audit of the Company's financial statements and reviews the findings and
recommendations of the FRB, FDIC and Massachusetts Bank Commissioner's staff in
connection with their examinations and the internal audit reports and procedures
for the Company and its subsidiary.
Directors not employed by the Company receive $100 per Board meeting
attended and $200 per committee meeting attended.
ITEM 11. EXECUTIVE COMPENSATION AND OTHER INFORMATION
Executive officers are elected annually by the Board prior to the Annual
Meeting of Shareholders to serve for a one year term and until their successors
are elected and qualified. The following table sets forth the name of each
executive officer of the Company and the principal positions and offices he
holds with the Company. Unless otherwise noted, each of these officers has
served as an executive officer of the Company or its principal subsidiary for at
least five years.
Marshall M. Sloane........... Chairman, President and CEO; Chairman
and CEO, Century Bank and Trust Company.
George F. Swansburg.......... Director and Executive Vice President;
Director and Vice Chairman, Century
Bank and Trust Company.
Jonathan G. Sloane........... Director and Senior Vice President;
Director President and COO, Century Bank
and Trust Company.
Paul V. Cusick, Jr........... Vice President and Treasurer; Executive
Vice President, Chief Financial Officer
and Treasurer, Century Bank and Trust
Company. Mr. Cusick is 53 years of age.
Donald H. Lang............... Executive Vice President, Century Bank
and Trust Company with responsibility
for lending. Mr. Lang is 57 years of age.
William J. Sloboda........... Executive Vice President, Century Bank
and Trust Company with responsibility
for operations. Mr. Sloboda is 55
years of age.
Compensation Committee Report on Executive Compensation
Decisions on compensation of the Company's executives are generally made by
the Compensation Committee of the Board of Directors. Each member of the
Compensation Committee is a non-employee director. The goal of the Committee is
to provide competitive levels of compensation in order to attract and retain
qualified executive personnel. The Compensation Committee believes that the
actions of each executive officer have the potential to affect the short and
long term profitability of the Company. Accordingly, the Compensation Committee
places considerable importance on the design and administration of the executive
compensation program.
The Company has an executive compensation program that is driven by the
overall performance of the Company, the increase in shareholder value, the
performance of the business unit directly affected by the executive and by the
performance of the individual executive. The three primary components of the
executive compensation program are base salary, cash incentive plan and stock
based incentive plans.
51
<PAGE> 112
Base Salary
Base salary levels are set so that the Company has the management talent to
meet the challenges in the financial services industry. Several factors are
included in setting base salaries including the responsibilities of the
executive officer, the scope of the executive's position, individual performance
and salary levels at peer banks. Historically, the Company's executive
compensation practices have been designed to provide total compensation in the
middle range of compensation levels at similar banking institutions. Salary
increases for the senior management group have averaged 3% to 6% during the last
several years.
Cash Incentive Plans
The Company has a cash incentive compensation plan which provides for the
award of bonuses up to a percentage of base salary to officers of the Company or
its subsidiaries. Recipients of incentive compensation are selected by the
Compensation Committee, upon the recommendation of management, as eligible to
participate in the plan. Awards are based upon the attainments of established
objectives including profitability, expense control, sales volume and overall
job performance. No bonuses are paid unless actual earnings are at least 85% of
budgeted net income. Upon recommendation of the Compensation Committee, the
Board of Directors determines the amounts, if any, to be awarded. Earned bonuses
for 1997, 1996 and 1995 are shown in the Summary Compensation Table.
Stock Incentive Plans
One of the Compensation Committee's priorities is for executives to be
significant shareholders so that the interest of the executives are aligned with
the shareholders and decisions are made as owners of the Company. On March 10,
1987, the stockholders approved a Stock Option Plan (the "Option Plan") that the
Board of Directors adopted on February 24, 1987, that provides for grants of
options to purchase no more than 150,000 shares of Class A Common Stock. Options
may be granted, in the discretion of the Board of Directors, to officers and
other key employees of the Company. Options granted under the Option Plan may be
either incentive stock options as defined in the Internal Revenue Code or
non-qualified stock options. The Option Plan is administrated by the
Compensation Committee (whose members are ineligible to participate in the
Option Plan) which makes recommendations, based upon management's
recommendations, to the Board of Directors as to persons to whom options are to
be granted, the number of shares to be optioned to each, the option price (which
may not be less than 85% of the fair market value for non-qualified stock
options, or the fair market value for incentive stock options, of the shares on
the date of grant) and the time periods during which options are exercisable (no
more than ten years from the date of grants). In the event of a reorganization,
as defined in the Option Plan, the Board of Directors may terminate the exercise
period by giving 30 days notice to all participants, during which time all
outstanding options may be exercised. Options for 146,500 shares were granted in
1994.
Executive Benefits
The Company's executive compensation package includes a special benefits
component in addition to base salary and cash and stock incentive plans. These
special benefits are viewed as less important than the above. Where such
benefits are provided, they are intended to support other business purposes
including facilitating business development efforts.
Chief Executive Officer Compensation
Mr. Marshall Sloane is eligible to participate in the same executive
compensation plans available to other executive officers described above. The
1997 cash compensation for Mr. Sloane was $563,460 of which $438,200 was base
salary.
Conclusion
The Compensation Committee believes that the executive compensation package
will motivate the management team to produce the results the Company has
historically achieved.
52
<PAGE> 113
COMPARISON OF FIVE-YEAR
CUMULATIVE TOTAL RETURN*
[PERFORMANCE GRAPH]
Value of $100 Invested on December 31, 1992 at:
<TABLE>
<CAPTION>
12/31/93 12/31/94 12/31/95 12/31/96 12/31/97
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Century.................... 115.06 267.51 342.97 450.46 621.64
Nasdaq Banks............... 114.04 119.27 169.27 223.41 377.44
Nasdaq U.S................. 114.80 112.16 158.70 195.19 239.53
</TABLE>
- ---------------
* Assumes that the value of the investment in the Company's Common Stock and
each index was $100 on December 31, 1992 and that all dividends were
reinvested.
Summary of Cash and Certain Other Compensation
The following table shows, for fiscal years ending December 31, 1995, 1996
and 1997, the cash compensation paid by the Company and its subsidiaries, as
well as certain other compensation paid, accrued or granted for those years to
the five most highly compensated executive officers of the Company.
53
<PAGE> 114
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM COMPENSATION
---------------------------------
AWARDS PAYOUTS
----------------------- -------
ANNUAL COMPENSATION SECURITIES
-------------------------- RESTRICTED UNDERLYING LTIP
NAME AND SALARY BONUS(1) OTHER STOCK OPTIONS/ PAYOUTS ALL OTHER
PRINCIPAL POSITION YEAR ($) ($) ($) AWARDS SARS (#) ($) COMPENSATION
- ------------------ ---- ------- -------- ----- ---------- ---------- ------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Marshall M. Sloane....... 1997 438,200 139,000 0 0 0 0 0
Chairman 1996 413,400 125,260 0 0 0 0 0
1995 390,000 107,250 0 0 0 0 0
George F. Swansburg...... 1997 191,100 50,496 0 0 0 0 0
Vice Chairman 1996 183,800 45,582 0 0 0 0 0
1995 173,400 39,015 0 0 0 0 0
Jonathan G. Sloane....... 1997 154,000 40,905 0 0 0 0 0
President 1996 148,000 36,852 0 0 0 0 0
1995 140,000 31,500 0 0 0 0 0
Donald H. Lang........... 1997 127,000 30,793 0 0 0 0 0
Executive Vice 1996 123,300 27,742 0 0 0 0 0
President 1995 118,600 23,720 0 0 0 0 0
William J. Sloboda....... 1997 147,900 36,827 0 0 0 0 0
Executive Vice 1996 145,000 29,000 0 0 0 0 0
President 1995 141,900 28,380 0 0 0 0 0
</TABLE>
- ---------------
(1) Bonus amounts are based on performance for the years shown.
Stock Option Plan
The Company has granted incentive stock options to purchase 126,500 shares
of Class A Common Stock, at 100% of the January 19, 1994 closing price of $3.75
per share, to 18 officers and employees. The Company also granted incentive
stock options to purchase 20,000 shares of Class A Common Stock at $4.125 to
Marshall M. Sloane. Options granted to the aforementioned officers are as
follows.
<TABLE>
<CAPTION>
NAME OF INDIVIDUAL NUMBER OF SHARES
------------------ ----------------
<S> <C>
Marshall M. Sloane..................... 20,000
George F. Swansburg.................... 20,000
Donald H. Lang......................... 15,000
Jonathan G. Sloane..................... 16,000
William J. Sloboda..................... 16,000
</TABLE>
Options for the eighteen participants have six year terms and become
exercisable in increments of 33.3% of the shares covered thereby per year,
commencing in January of 1995. Mr. Sloane's options have five year terms.
Supplemental Executive Insurance/Retirement Income Plan
Executive officers of the Company or its subsidiaries who have at least one
year of service may participate in the Supplemental Executive
Insurance/Retirement Income Plan (the "Supplemental Plan").
The Company maintains split dollar life insurance policies for
participants, in addition to the group term life insurance, which provides life
insurance equal to twice the individual's salary with a maximum of $200,000,
which they receive under a policy the Company maintains for its employees
generally. The split dollar insurance provides death benefits if the participant
dies while in the employ of the Company, equal to $2,191,000, $955,500,
$635,000, $770,000, $739,000 for Messrs. Marshall M. Sloane, Swansburg, Lang,
Jonathan G. Sloane and Sloboda.
Premiums paid by the Company in 1997 amounted to $87,800, $31,700, $27,600,
$8,300, $28,400, for policies on the lives of Messrs. Marshall M. Sloane,
Swansburg, Lang, Jonathan G. Sloane and Sloboda. The
54
<PAGE> 115
policies are on an "insurance bonus" basis, which means that the Company pays
the full amount of all premiums on the policies but an amount equal to the
one-year term cost of the insurance is treated for tax purposes as a bonus to
the insured. The Company is the owner of these policies and each participating
employee has received an assignment of a portion of each policy's proceeds. Upon
the death of a participant, the Company will receive benefits equal to the
difference between the death benefits payable to the named beneficiary under the
Supplemental Plan and the face amount of the policy (less any policy loans then
in force).
A participant in the Supplemental Plan is also entitled to retirement
benefits. Participants, upon retirement at age 65, after a specified number of
years of service, are entitled to receive for life, with ten years certain, 75%
of their highest 60 months salary for certain executives, or 66% of such salary
if the participants are Senior Vice Presidents and equivalents (as determined by
the Compensation Committee), less the primary social security benefits and the
benefit received from the defined benefit retirement plan. If a participant
retires or terminates employment prior to age 65 such person is entitled to a
reduced benefit. Five years of service are required for any benefits to become
vested. Thereafter benefits vest incrementally.
The following table illustrates representative annual retirement benefits
at various compensation levels for executive management employees under the
Supplemental Plan who retire at age 65 and with 15 years of service, without
reflecting the required offset of benefits from social security and the defined
benefit retirement plan.
<TABLE>
<CAPTION>
FIVE YEAR
AVERAGE COMPENSATION ANNUAL BENEFIT
-------------------- --------------
<S> <C>
$ 50,000 $ 37,500
100,000 75,000
150,000 112,500
200,000 150,000
250,000 187,500
300,000 225,000
</TABLE>
As of January 1, 1997, Messrs. Marshall M. Sloane, Swansburg, Lang,
Jonathan G. Sloane, and Sloboda were 100%, 77.5%, 85.0%, 100%, and 100% vested,
respectively, under the Supplemental Plan.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information as to the number and
percentage of shares of Class A and Class B Common Stock beneficially owned as
of December 31, 1997 (i) by each person known by the Company to own beneficially
more than 5% of the Company's outstanding shares of Class A or Class B Common
Stock (ii) by each of the Company's directors and certain officers; and (iii) by
all directors and officers of the Company as a group.
55
<PAGE> 116
<TABLE>
<CAPTION>
NUMBER OF BENEFICIAL
OWNER & ADDRESS OR NUMBER CLASS A % A CLASS B % B
OF PERSONS IN GROUP OWNED OWNED OWNED OWNED
------------------------- ------- ------- --------- -----
<S> <C> <C> <C> <C>
Charles J. Moore,(i)................................ 222,000 6.32%
The Banc Funds
208 South LaSalle Street
Chicago, IL 60604
Marshall M. Sloane,(i),(ii)......................... 15,973(1) 0.45% 1,714,330(2) 75.22%
400 Mystic Ave.
Medford, MA 02155
George R. Baldwin,(ii).............................. 5,960 0.17%
Roger S. Berkowitz,(ii)............................. 1,934 0.06%
Karl E. Case,(ii)................................... 342 0.01%
Paul V. Cusick, Jr., (ii)........................... 8,200 0.23%
Henry L. Foster, D.V.M.,(ii)........................ 18,471 0.53% 1,000 0.04%
Marshall I. Goldman,(ii)............................ 261(3) 0.01% 30,000(4) 1.32%
Russell B. Higley, Esquire,(ii)..................... 4,440 0.13%
Jonathan B. Kay,(ii)................................ 2,946 0.08% 60,000(6) 2.63%
Donald H. Lang,(ii)................................. 6,600 0.19%
Fraser Lemley,(ii).................................. 2,219 0.06%
Joseph P. Mercurio,(ii)............................. 1,362 0.04%
Joseph J. Senna,(ii)................................ 2,818 0.08% 42,000(5) 1.84%
Barry R. Sloane,(ii)................................ 251 0.01%
Jonathan G. Sloane,(ii)............................. 614 0.02% 60,000 2.63%
William J. Sloboda,(ii)............................. 7,009 0.20% 500 0.02%
Stephanie Sonnabend,(ii)............................ 126 0.00%
George F. Swansburg,(ii)............................ 17,100 0.49%
Jon Westling,(ii)................................... 385 0.01%
All directors and officers as a group (20 in
number),(iii)..................................... 101,111 2.87% 1,907,930 83.72%
</TABLE>
- ---------------
(1) Includes 2,500 shares owned by Mrs. Sloane and also includes 13,316 shares
held in trust for Mr. Sloane's grandchildren.
(2) Includes 1,500 shares owned by Mrs. Sloane, and does not include 120,000
shares owned by Mr. Sloane's children. Mr. Sloane disclaims beneficial
ownership of such 120,000 shares.
(3) Does not include 9,000 shares held of record by Mr. Goldman's children; Mr.
Goldman disclaims beneficial ownership of such shares.
(4) Does not include 9,000 shares held of record by Mr. Goldman's children; Mr.
Goldman disclaims beneficial ownership of such shares.
(5) Includes 34,800 shares owned by Mrs. Senna.
(6) Entire 60,000 shares are owned by Mrs. Kay, Marshall Sloane's daughter.
Compliance with Section 16(a) of the Exchange Act
Section 16(a) of the Exchange Act requires the Company's Executive Officers
and Directors, and any persons who own more than 10% of a registered class of
the Company's equity securities, to file reports of ownership and changes in
ownership of securities with the SEC and NASDAQ. Executive Officers, Directors,
and greater than 10% stockholders (of which, to the Company's knowledge, there
currently are none) are required by SEC regulation to furnish the Company's with
copies of all Section 16(a) forms they file. Based solely on a review of the
copies of such reports received by it or written representations from certain
reporting persons that no other reports were required, the corporation believes
that, during 1997, all Section 16(a) filing requirements applicable to its
Executive Officers and Directors were complied with, except that reports on
initial holdings and subsequent purchases by one director were filed late.
56
<PAGE> 117
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) (1) Financial Statements.
The following financial statements of the company and its subsidiaries are
presented in Item 8:
Independent Auditors' Report
Consolidated Balance Sheets -- December 31, 1997 and 1996
Consolidated Statements of Income -- Years Ended December 31, 1997,
1996 and 1995
Consolidated Statements of Changes in Stockholders' Equity -- Years
ended December 31, 1997, 1996 and 1995
Consolidated Statements of Cash Flows -- Years Ended December 31,
1997, 1996 and 1995
Notes to Consolidated Financial Statements
(2) Financial Statement Schedules
All schedules are omitted because either the required information is
shown in the financial statements or notes incorporated by reference, or
they are not applicable, or the data is not significant.
(3) Exhibits
Those exhibits required by Item 601 of Regulation S-K and by paragraph
(C) below previously filed.
(b) Reports on Form 8K.
There were no items reported on Form 8K during the last quarter of the
period covered by this Form.
(c) Exhibits required by Item 601 of Regulation S-K.
Required exhibits previously filed
(d) Financial Statement required by Regulation S-X.
Schedules to Consolidated Financial Statements required by Regulation S-X
are not required under the related instructions or are inapplicable, and
therefore have been omitted.
57
<PAGE> 118
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, on this 10th day of
March 1998
CENTURY BANCORP, INC.
By: /s/ MARSHALL M. SLOANE
-----------------------------------
Marshall M. Sloane, Chairman,
President and Chief Executive
Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities indicated and on the date indicated.
<TABLE>
<S> <C>
/s/ GEORGE R. BALDWIN /s/ BARRY R. SLOANE
- ------------------------------------- -----------------------------------------------------
George R. Baldwin, Director Barry R. Sloane, Director
/s/ ROGER S. BERKOWITZ /s/ STEPHANIE SONNABEND
- ------------------------------------- -----------------------------------------------------
Roger S. Berkowitz, Director Stephanie Sonnabend, Director
/s/ KARL E. CASE /s/ JON WESTLING
- ------------------------------------- -----------------------------------------------------
Karl E. Case, Ph.D., Director Jon Westling, Director
/s/ HENRY L. FOSTER /s/ JONATHAN G. SLOANE
- ------------------------------------- -----------------------------------------------------
Henry L. Foster, D.V.M., Director Jonathan G. Sloane, Director and Senior Vice
President
/s/ MARSHALL I. GOLDMAN /s/ MARSHALL M. SLOANE
- ------------------------------------- -----------------------------------------------------
Marshall I. Goldman, Ph.D., Director Marshall M. Sloane, Chairman, President and Chief
Executive Officer
/s/ RUSSELL B. HIGLEY /s/ GEORGE F. SWANSBURG
- ------------------------------------- -----------------------------------------------------
Russell B. Higley, Esquire, Director George F. Swansburg, Director and Executive Vice
President
/s/ JONATHAN B. KAY /s/ PAUL V. CUSICK, JR.
- ------------------------------------- -----------------------------------------------------
Jonathan B. Kay, Director Paul V. Cusick, Jr., Vice President and Treasurer,
Principal Financial Officer
/s/ FRASER LEMLEY /s/ KENNETH A. SAMUELIAN
- ------------------------------------- -----------------------------------------------------
Fraser Lemley, Director Kenneth A. Samuelian, Vice President, Controller and
Compliance Officer, Century Bank and Trust Company,
Principal Accounting Officer
/s/ JOSEPH P. MERCURIO
- -------------------------------------
Joseph P. Mercurio, Director
/s/ JOSEPH J. SENNA
- -------------------------------------
Joseph J. Senna, Esquire, Director
</TABLE>
58
<PAGE> 119
===============================================================================
TABLE OF CONTENTS
PAGE
----
Summary............................................................. 5
Selected Consolidated Financial Data................................ 11
Risk Factors........................................................ 12
Century Bancorp, Inc. .............................................. 21
Century Bancorp Capital Trust....................................... 22
Use of Proceeds..................................................... 24
Market for the Preferred Securities................................. 24
Accounting Treatment................................................ 24
Capitalization...................................................... 25
Description of the Preferred Securities............................. 26
Description of the Junior Subordinated Debentures................... 36
Description of the Guarantee........................................ 44
Expense Agreement................................................... 46
Relationship Among the Preferred Securities, the Junior
Subordinated Debentures and the Guarantee......................... 46
Certain Federal Income Tax Consequences............................. 48
ERISA Considerations................................................ 51
Underwriting........................................................ 52
Legal Matters....................................................... 53
Experts............................................................. 53
Incorporation of Certain Documents by Reference..................... 54
Available Information............................................... 54
Appendix A -- Annual Report on Form
10-K for the year ended December 31,
1997
------------------------
NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS IN
CONNECTION WITH THE OFFERING COVERED BY THIS PROSPECTUS. IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED
BY THE COMPANY OR THE UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER
TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, THE PREFERRED SECURITIES IN ANY
JURISDICTION WHERE, OR TO ANY PERSON TO WHOM, IT IS UNLAWFUL TO MAKE SUCH OFFER
OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE
HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS
NOT BEEN ANY CHANGE IN THE FACTS SET FORTH IN THIS PROSPECTUS OR THE AFFAIRS OF
THE COMPANY SINCE THE DATE HEREOF.
===============================================================================
2,500,000 PREFERRED SECURITIES
CENTURY BANCORP
CAPITAL TRUST
8.30% CUMULATIVE TRUST
PREFERRED SECURITIES
(LIQUIDATION AMOUNT $10 PER
PREFERRED SECURITY)
GUARANTEED, AS DESCRIBED HEREIN, BY
[CENTURY BANCORP LOGO]
CENTURY BANCORP, INC.
$25,000,000
8.30% JUNIOR SUBORDINATED
DEBENTURES OF
CENTURY BANCORP, INC.
------------------------
PROSPECTUS
------------------------
MAY 13, 1998
TUCKER ANTHONY
INCORPORATED
================================================================================
