<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE
ACT OF 1934 (FEE REQUIRED)
For the fiscal year ended DECEMBER 31, 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 or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification number)
400 MYSTIC AVENUE, MEDFORD, MA 02155
(Address of principal executive offices) (Zip Code)
Registrant's telephone number including area code: (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.
X Yes No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
form 10-K. [ ]
State the aggregate market value of the voting stock held by nonaffiliates of
the registrant as of February 28, 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
i
<PAGE> 2
CENTURY BANCORP INC.
FORM 10-K
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PART I
ITEM 1 BUSINESS 1-16
ITEM 2 PROPERTIES 17
ITEM 3 LEGAL PROCEEDINGS 17
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY 17
HOLDERS
PART II
ITEM 5 MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED 17-18
STOCKHOLDER MATTERS
ITEM 6 SELECTED FINANCIAL DATA 18
ITEM 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL 18
CONDITION AND RESULTS OF OPERATIONS
ITEM 7a QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET 18
RISK
ITEM 8 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 18
ITEM 9 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS 18
ON ACCOUNTING AND FINANCIAL DISCLOSURE
PART III
ITEM 10 DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT 45-47
ITEM 11 EXECUTIVE COMPENSATION AND OTHER INFORMATION 47-51
ITEM 12 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS 52
AND MANAGEMENT
ITEM 13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 53
PART IV
ITEM 14 EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND 53
REPORTS ON FORM 8-K
SIGNATURES 54
</TABLE>
ii
<PAGE> 3
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.
-1-
<PAGE> 4
The following table sets forth the distribution of the Company's average assets,
liabilities and stockholders' equity, and average rates earned or paid on a
fully taxable equivalent basis for each of the years indicated.
YEAR ENDED DECEMBER 31,
<TABLE>
<CAPTION>
1997 1996
---- ----
Average Interest Rate Average Interest Rate
Balance Income (1) Earned (1) Balance Income (1) Earned (1)
--------- --------- ---------- --------- --------- ----------
(Dollars In Thousands)
<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
========= =========
</TABLE>
<TABLE>
<CAPTION>
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.
-2-
<PAGE> 5
YEAR ENDED DECEMBER 31,
<TABLE>
<CAPTION>
1997 1996
Average Interest Income Rate Earned Average Interest Income Rate Earned
Balance /Expense (1) /Paid (1) Balance /Expense (1) /Paid (1)
-------- --------------- ----------- -------- --------------- -----------
<S> <C> <C> <C> <C> <C> <C>
(Dollars In Thousands)
Liabilities and Stockholders'
Equity
Interest-bearing deposits:
NOW accounts $ 91,938 $ 2,561 2.79% $ 84,620 $ 2,367 2.80%
Savings accounts 55,911 1,433 2.56% 55,905 1,439 2.57%
Money market accounts 66,936 1,888 2.82% 70,735 2,084 2.95%
Time deposits 155,607 8,474 5.45% 158,037 9,020 5.71%
-------- -------- -------- --------
Total interest-bearing
deposits 370,392 14,356 3.88% 369,297 14,910 4.04%
Securities sold under
agreements to repurchase 24,994 1,075 4.30% 16,654 713 4.28%
Other borrowed funds 7,908 491 6.21% 3,135 182 5.81%
-------- -------- -------- --------
Total interest-bearing
liabilities 403,294 15,922 3.95% 389,086 15,805 4.06%
-------- -------- ---- -------- -------- ----
Non interest-bearing
liabilities
Demand deposits 105,417 99,179
Other liabilities 7,787 7,340
-------- --------
Total liabilities 516,498 495,605
Stockholders' equity 50,329 44,791
-------- --------
Total liabilities &
stockholders' equity $566,827 $540,396
======== ========
Net interest income(1) $ 25,448 $ 23,132
======== ========
Net interest spread 4.16% 4.00%
---- ----
Net yield on earnings assets 4.99% 4.79%
---- ----
</TABLE>
<TABLE>
<CAPTION>
1995
Average Interest Income Rate Earned
Balance /Expense (1) /Paid (1)
-------- ---------------- -----------
<S> <C> <C> <C>
Liabilities and Stockholders'
Equity
Interest-bearing deposits:
NOW accounts $ 82,628 $ 2,568 3.11%
Savings accounts 50,916 1,335 2.62%
Money market accounts 78,029 2,487 3.19%
Time deposits 134,769 7,612 5.65%
-------- --------
Total interest-bearing
deposits 346,342 14,002 4.04%
Securities sold under
agreements to repurchase 14,390 632 4.39%
Other borrowed funds 960 52 5.42%
-------- -------- -----------
Total interest-bearing
liabilities 361,692 14,686 4.06%
-------- ----
Non interest-bearing
liabilities
Demand deposits 86,328
Other liabilities 6,084
-----------
Total liabilities 454,104
Stockholders' equity 40,381
-----------
Total liabilities &
stockholders' equity $ 494,485
===========
Net interest income(1) $21,502
=======
Net interest spread 4.11%
----
Net yield on earnings assets 4.86%
----
</TABLE>
- --------------------------------------------------------------------------------
(1) On a fully taxable equivalent basis calculated using a federal tax rate of
34%.
-3-
<PAGE> 6
The following table summarizes the year-to-year changes in the Company's net
interest income resulting from fluctuations in interest rates and volume changes
in earning assets and interest bearing liabilities. Changes due to rate are the
change in rate multiplied by the prior year's volume. Changes due to volume are
the change in volume multiplied by the prior year's rate. Changes in volume and
rate that cannot be separately identified have been allocated in proportion to
the relationship of the absolute dollar amounts of each change.
Net interest income improved in 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>
-4-
<PAGE> 7
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 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
-----------------------------------------------------------------------------------
December 31, 1997 3 months 4 months One year Over Non-
or less to 12 months to 5 years 5 years Maturing(1) Total
-----------------------------------------------------------------------------------
Interest-earning assets: (Dollars in Thousands)
- ------------------------
<S> <C> <C> <C> <C> <C> <C>
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% --
(1) Represents loans placed on nonaccrual status.
</TABLE>
-5-
<PAGE> 8
LENDING ACTIVITIES
The following summary shows the composition of the loan portfolio at the dates
indicated.
<TABLE>
<CAPTION>
December 31,
1997 1996 1995
---- ---- ----
Percent Percent Percent
Amount of Total Amount of Total Amount of Total
-------- -------- -------- -------- -------- --------
(Dollars In Thousands)
<S> <C> <C> <C> <C> <C> <C>
Construction and land development $ 7,549 2.4% $ 3,576 1.2% $ 1,444 0.5%
Commercial and industrial 50,560 16.0 41,006 14.2 37,811 13.2
Industrial revenue bonds 2,693 0.9 3,030 1.1 3,362 1.2
Commercial real estate 140,270 44.3 133,757 46.4 130,173 45.6
Residential real estate 76,385 24.1 76,638 26.6 82,132 28.8
Consumer 19,254 6.1 12,749 4.4 9,243 3.2
Home equity 19,031 6.0 17,330 6.0 21,130 7.4
Overdrafts 648 0.2 194 0.1 143 0.1
-------- ----- -------- ----- -------- -----
Loans(net of unearned
discount) $316,390 100.0% $288,280 100.0% $285,438 100.0%
======== ===== ======== ===== ======== =====
</TABLE>
<TABLE>
<CAPTION>
1994 1993
---- ----
Percent Percent
Amount of Total Amount of Total
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Construction and land development $ 1,924 0.7% $ 1,228 0.5%
Commercial and industrial 33,283 12.2 29,664 10.9
Industrial revenue bonds 3,873 1.4 4,186 1.5
Commercial real estate 122,538 44.9 120,064 44.2
Residential real estate 82,028 30.1 85,260 31.3
Consumer 12,017 4.4 15,208 5.6
Home equity 16,826 6.2 16,180 5.9
Overdrafts 232 0.1 250 0.1
-------- ----- -------- -----
Loans(net of unearned
discount) $272,721 100.0% $272,040 100.0%
======== ===== ======== =====
</TABLE>
-6-
<PAGE> 9
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 Five Over
or Less 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.
December 31, 1997
<TABLE>
<CAPTION>
One to Five Over
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 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.
-7-
<PAGE> 10
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.
-8-
<PAGE> 11
NONPERFORMING ASSETS AND ALLOWANCE FOR POSSIBLE LOAN LOSSES
Loans are placed on nonaccrual status when any payment of principal and/or
interest is 90 days or more past due, unless the collateral is sufficient to
cover both principal and interest and the loan is in the process of collection.
The Company monitors closely the performance of its loan portfolio. In addition
to internal loan review, the Company has contracted with an independent
organization to review the Company's commercial and commercial real estate loan
portfolios. This independent review was performed in each of the past five
years. The status of delinquent loans, as well as situations identified as
potential problems, are reviewed on a regular basis by senior management and
monthly by the Board of Directors of the Bank.
The following table summarizes the Company's nonperforming assets at the dates
indicated.
December 31,
<TABLE>
<CAPTION>
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>
-9-
<PAGE> 12
The Company maintains an allowance for loan losses in an amount determined by
management on the basis of the character of the loans, loan performance, the
financial condition of borrowers, the value of collateral securing loans and
other relevant factors. The following table summarizes the changes in the
Company's allowance for loan losses for the years indicated.
<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.
10
<PAGE> 13
The allowance for loan losses is an estimate of the amount needed for an
adequate reserve to absorb losses in the existing loan portfolio. This amount is
determined by an evaluation of the loan portfolio including input from an
independent organization engaged to review selected larger loans, a review of
loan loss experience and current economic conditions. At December 31, the
allowance was comprised of the following components.
<TABLE>
<CAPTION>
1997 1996 1995 1994
---- ---- ---- ----
Percent of Percent of Percent of Percent of
loans in loans in loans in loans in
each category each category each category each category
Balance at end of to total to total to total to total
period applicable to Amount loans Amount loans Amount loans Amount loans
- -------------------- ------ ----- ------ ----- ------ ----- ------ -----
(Dollars In Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Construction and land development $ 104 2.4% $ 48 1.2% $ 21 0.5% $ 49 0.7%
Commercial and industrial 716 16.0 660 14.2 595 13.2 530 12.2
Industrial revenue bonds 17 0.9 17 1.1 23 1.2 26 1.4
Commercial real estate 2,138 44.3 2,201 46.4 2,095 45.6 2,158 44.9
Residential real estate 846 24.1 830 26.6 1,031 28.8 1,025 30.1
Consumer 402 6.1 233 4.4 228 3.2 293 4.4
Home equity 214 6.0 187 6.0 198 7.4 155 6.2
Overdrafts 9 0.2 3 0.1 2 0.1 3 0.1
------- ----- ------ ----- ------ ----- ------ -----
$ 4,446 100.0% $4,179 100.0% $4,193 100.0% $4,239 100.0%
======= ===== ====== ===== ====== ===== ====== =====
</TABLE>
<TABLE>
<CAPTION>
1993
----
Percent of
loans in
each category
Balance at end of to total
period applicable to Amount loans
- -------------------- ------ -----
(Dollars In Thousands)
<S> <C> <C>
Construction and land development $ 102 0.5%
Commercial and industrial 958 10.9
Industrial revenue bonds 23 1.5
Commercial real estate 2,422 44.1
Residential real estate 1,023 31.3
Consumer 462 5.6
Home equity 139 5.9
Overdrafts 0 0.1
------ -----
$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,
----------------------------------- -----------------------------------
1997 1996 1995 1997 1996 1995
---- ---- ---- ---- ---- ----
(In Thousands) (In Thousands)
<S> <C> <C> <C> <C> <C> <C>
Balance at end of
period applicable to
U.S. Government and Agencies $84,763 $ 77,155 $ 97,482 $107,117 $105,582 $74,710
Obligations of states and political
subdivison 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>
-11-
<PAGE> 14
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>
<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>
-12-
<PAGE> 15
Obligations of states and political subdivisions consist primarily of
obligations of the Commonwealth of Massachusetts and entities within it having
other relationships with the Company. The Company regularly bids on tax
anticipation notes and other short-term instruments of municipalities who have
depository relationships with it. The Company also writes equipment leases to
finance acquisition of computers, fire trucks, snow plows and other equipment
used by municipalities.
Except for obligations of the United States Government, the portfolio at
December 31, 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.
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>
-13-
<PAGE> 16
BORROWED FUNDS
The Company sells securities under repurchase agreements and enters into other
borrowings to obtain funds to support asset growth. Pertinent data relating to
borrowed funds is presented below.
<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.
-14-
<PAGE> 17
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.
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.
-15-
<PAGE> 18
The regulatory standard for capital adequacy assigns risk factors to asset
categories and certain off-balance sheet commitments. The fully-phased in 1992
standard requires a tier-1 capital to risk assets ratio of 4.00% and a total
capital to risk assets ratio of 8.00%. At December 31, 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.
FEDERAL DEPOSIT INSURANCE CORPORATION IMPROVEMENT ACT OF 1991
On December 19, 1991, the FDIC Improvement Act of 1991 (the "1991 Act") was
enacted. This legislation seeks to recapitalize the Bank Insurance Fund of the
FDIC ("BIF") so that the BIF can continue to resolve its caseload of failed
banks. The recapitalization will be funded through, among other things,
increased deposit insurance assessments payable by BIF-insured institutions,
which will increase the cost of doing business by all BIF-insured institutions,
including the Company's subsidiary. The 1991 Act also provides for, among other
things: enhanced federal supervision of depository institutions, including
greater authority for the appointment of a conservator or receiver for
undercapitalized institutions; the establishment of risk-based deposit insurance
premiums; a requirement that the federal banking agencies amend their risk-based
capital requirements to include components for interest-rate risk, concentration
of credit risk, and the risk of nontraditional activities; expanded authority
for cross-industry mergers and acquisitions; mandated consumer protection
disclosures with respect to deposit accounts; and imposed restrictions on the
activities of state-chartered banks, including the Company's subsidiary.
Provisions of the 1991 Act relating to the activities of state-chartered banks
may significantly impact the way the Company conducts its business. In this
regard, the 1991 Act provides that, effective one year from date of enactment,
insured state banks, such as the Company's subsidiary, may not engage as
principal in any activity that is not permissible for a national bank, unless
the FDIC has determined that the activity would pose no significant risk to the
BIF and the state bank is in compliance with applicable capital standards.
Activities of subsidiaries of insured state banks are similarly restricted to
those activities permissible for subsidiaries of national banks, unless the FDIC
has determined that the activity would pose no significant risk to the BIF and
the state bank is in compliance with applicable capital standards.
COMPETITION
The Company experiences substantial competition in attracting deposits and
making loans from commercial banks, thrift institutions and other enterprises
such as insurance companies and mutual funds. These competitors include several
major commercial banks whose greater resources may afford them a competitive
advantage by enabling them to maintain numerous branch offices and mount
extensive advertising campaigns.
-16-
<PAGE> 19
ITEM 2. PROPERTIES
The Company owns its main banking office, headquarters, and operations center in
Medford, and 11 of the 14 other facilities in which its branch offices are
located. The remaining offices are occupied under leases expiring on various
dates from 1997 to 2026. The Company has renovated its Medford operations center
to provide space for its Executive and Lending staff.
ITEM 3. LEGAL PROCEEDINGS
The Company and its subsidiaries are parties to various claims and lawsuits
arising in the course of their normal business activities. Although the ultimate
outcome of these suits cannot be ascertained at this time, it is the opinion of
management that none of these matters, when resolved, will have a material
adverse effect on the Company's consolidated financial position.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of Security Holders during the fourth
quarter of the fiscal year ended December 31, 1997.
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.
Approximate Number
Title of Class of Record Holders
Class A Common Stock 347
Class B Common Stock 79
(C) Under the Company's Articles of Organization, the holders of
the Class A Common Stock are entitled to receive dividends per
share equal to at least 200% of that paid, if any, from time
to time on each share of Class B Common Stock.(cont.)
-17-
<PAGE> 20
The following table shows the dividends paid by the Company
on the Class A and Class B Common Stock for the periods
indicated.
Dividends Per Share
<TABLE>
<CAPTION>
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.
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.
-18-
<PAGE> 21
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>
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
</TABLE>
<TABLE>
<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
</TABLE>
19
<PAGE> 22
SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
(dollars in thousands except share data)
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
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>
20
<PAGE> 23
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 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.
21
<PAGE> 24
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.
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.
22
<PAGE> 25
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>
--------------------------------------------------------------------------------------------
Change in Interest Rates (in Basis Points) Percentage Change in Net Interest 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>
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.
23
<PAGE> 26
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.
24
<PAGE> 27
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.
25
<PAGE> 28
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.
26
<PAGE> 29
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
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
(dollars in thousands except share data)
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
=====================================================================================
</TABLE>
<TABLE>
<CAPTION>
Total
Stockholders'
Equity
- --------------------------------------------------------
<S> <C>
(dollars in thousands except share data)
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.
27
<PAGE> 30
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.
28
<PAGE> 31
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.
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.
29
<PAGE> 32
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 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.
30
<PAGE> 33
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 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
=============================================== ===============================================
</TABLE>
31
<PAGE> 34
The following tables show the maturity distribution of the Company's securities
available-for-sale at December 31, 1997 and 1996:
<TABLE>
<CAPTION>
December 31, 1997
-----------------------------------------------------------
Obligations
U.S. of States Estimated
Government and Political Market
and Agencies Subdivisions Other Total Value
- ---------------------------------------------------------------------------------------------
(in thousands)
<S> <C> <C> <C> <C> <C>
Within one year $29,460 $750 $ -- $30,210 $30,253
After one but within five years 54,122 -- -- 54,122 54,251
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
===========================================================
</TABLE>
<TABLE>
<CAPTION>
December 31, 1996
-----------------------------------------------------------
Obligations
U.S. of States Estimated
Government and Political Market
and Agencies Subdivisions Other Total Value
- ---------------------------------------------------------------------------------------------
(in thousands)
<S> <C> <C> <C> <C> <C>
Within one year $13,988 $1,241 $ -- $15,229 $15,254
After one but within five years 63,295 -- -- 63,295 63,142
After five but within ten years -- -- 250 250 250
Non-maturing -- -- 2,366 2,366 2,369
-----------------------------------------------------------
$77,283 $1,241 $2,616 $81,140 $81,015
===========================================================
</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>
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
------------------------------------------------------------
Obligations
U.S. of States Estimated
Government and Political Market
and Agencies Subdivisions Other Total Value
- ----------------------------------------------------------------------------------------------
(in thousands)
<S> <C> <C> <C> <C> <C>
Within one year $ 9,970 $11 $2,025 $ 12,006 $ 12,009
After one but within five years 79,191 11 50 79,252 79,439
After five but within ten years 16,956 -- 25 16,981 17,007
More than ten years 1,000 -- -- 1,000 999
------------------------------------------------------------
$107,117 $22 $2,100 $109,239 $109,454
============================================================
</TABLE>
<TABLE>
<CAPTION>
December 31, 1996
------------------------------------------------------------
Obligations
U.S. of States Estimated
Government and Political Market
and Agencies Subdivisions Other Total Value
- ----------------------------------------------------------------------------------------------
(in thousands)
<S> <C> <C> <C> <C> <C>
Within one year $ 2,511 $11 $ 2 $ 2,524 $ 2,516
After one but within five years 83,636 23 2,072 85,731 85,562
After five but within ten years 18,935 -- 25 18,960 18,759
More than ten years 500 -- -- 500 494
------------------------------------------------------------
$105,582 $34 $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.
32
<PAGE> 35
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
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
</TABLE>
The composition of impaired loans at December 31, is as follows:
<TABLE>
<CAPTION>
1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C>
(in thousands)
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.
33
<PAGE> 36
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> <C>
$ 928 $1,055 $ 556 $1,427
-----------------------------------------------------------------
</TABLE>
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
=======================================
</TABLE>
7. BANK PREMISES AND EQUIPMENT
<TABLE>
<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> <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>
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.
34
<PAGE> 37
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
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
35
<PAGE> 38
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.
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
================================================================================
</TABLE>
A summary of options by maturity is as follows:
<TABLE>
<CAPTION>
Expiring During the Number of Weighted average
Year Ended December 31, 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 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.
36
<PAGE> 39
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Bank's actual capital amounts and ratios are presented in the following
table.
<TABLE>
<CAPTION>
To Be Well Capitalized
Under Prompt Corrective
Actual For Capital 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>
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.
37
<PAGE> 40
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>
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
==========================
</TABLE>
The assumptions used in determining the projected benefits obligation were
as follows:
<TABLE>
<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.
38
<PAGE> 41
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 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.
39
<PAGE> 42
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.
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.
40
<PAGE> 43
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
(in thousands)
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.
19. QUARTERLY RESULT OF OPERATIONS
<TABLE>
<CAPTION>
1997 Quarters Fourth Third Second First
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
(in thousands, except per share data)
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
=========================================================
</TABLE>
<TABLE>
<CAPTION>
1996 Quarters Fourth Third Second First
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
(in thousands, except per share data)
Interest income $ 9,789 $ 9,887 $ 9,706 $ 9,395
Interest expense 3,809 4,052 4,041 3,903
---------------------------------------------------------
Net interest income 5,980 5,835 5,665 5,492
Provision for loan losses 255 255 255 255
---------------------------------------------------------
Net-interest income after provisions
for loan losses 5,725 5,580 5,410 5,237
Other operating income 1,143 1,060 1,270 1,288
Operating expenses 4,417 4,337 4,502 4,618
---------------------------------------------------------
Income before income taxes 2,451 2,303 2,178 1,907
Provision for income taxes 903 899 880 723
---------------------------------------------------------
Net income $ 1,548 $ 1,404 $ 1,298 $ 1,184
=========================================================
Share Data
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>
41
<PAGE> 44
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.
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, 1997 1996
- ------------------------------------------------------------------------------------------------
<S> <C> <C>
(in thousands)
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
=================================
</TABLE>
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Year Ended December 31, 1997 1996 1995
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
(in thousands)
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
==========================================
</TABLE>
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31, 1997 1996 1995
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
(in thousands)
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
-----------------------------------------
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>
42
<PAGE> 45
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
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>
(unaudited) Century Pro-Forma Pro-Forma
Bancorp, Inc. Haymarket Adjustments Combined
- -----------------------------------------------------------------------------------------------------------
(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.
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.
<TABLE>
<CAPTION>
PRO-FORMA CONDENSED STATEMENTS OF INCOME
YEAR ENDED DECEMBER 31,1997
(unaudited) Century Pro-Forma Pro-Forma
Bancorp, Inc. Haymarket Adjustments Combined
- ----------------------------------------------------------------------------------------------------------------------------
(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.
43
<PAGE> 46
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
44
<PAGE> 47
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>
-45-
<PAGE> 48
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.
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.
-46-
<PAGE> 49
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.
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.
<TABLE>
<S> <C>
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.
</TABLE>
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.
-47-
<PAGE> 50
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.
-48-
<PAGE> 51
Comparison of Five-Year
Cumulative Total Return*
[LINE 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 $100 on December 31, 1992 and that all dividends were reinvested.
-49-
<PAGE> 52
SUMMARY OF CASH AND CERTAIN OTHER COMPENSATION
The following table shows, for fiscal years ending December 31, 1995, 1996 and
1997, the cash compensation paid by the Company and its subsidiaries, as well as
certain other compensation paid, accrued or granted for those years to the five
most highly compensated executive officers of the Company.
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
- ----------------------------------------------------------------------------------------------------------------------------------
Long-Term Compensation
-------------------------------------------
Annual Compensation Awards Payouts
- ------------------------------------------------------------------------------------------------------------------
Restricted Securities
Name Stock Underlying LTIP
and Salary Bonus(1) Other Awards Options/ Payouts All Other
Principal Position Year ($) ($) ($) ($) SARs (#) ($) 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.
-50-
<PAGE> 53
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 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> <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.
-51-
<PAGE> 54
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.
<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.
-52-
<PAGE> 55
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.
-53-
<PAGE> 56
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.
/s/ Marshall M. Sloane
------------------------------------------------
By: Marshall M. Sloane, Chairman, President and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities indicated and on the date indicated.
<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>
-54-
<TABLE> <S> <C>
<ARTICLE> 9
<RESTATED>
<CIK> 0000812348
<NAME> CENTURY BANCORP, INC.
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<EXCHANGE-RATE> 1
<CASH> 46,868
<INT-BEARING-DEPOSITS> 24
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<INVESTMENTS-MARKET> 109,454
<LOANS> 316,390
<ALLOWANCE> 4,446
<TOTAL-ASSETS> 631,125
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0
0
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<EXPENSE-OTHER> 18,600
<INCOME-PRETAX> 11,028
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</TABLE>
