<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, 1998
-------------------------------------------------
[ ] 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, 1999:
$5,778,720
Indicate the number of shares outstanding of each of the registrant's classes of
common stock as of February 28,1999:
CLASS A COMMON STOCK, $1.00 PAR VALUE 3,648,397 SHARES
CLASS B COMMON STOCK, $1.00 PAR VALUE 2,178,770 SHARES
<PAGE> 2
CENTURY BANCORP INC.
FORM 10-K
TABLE OF CONTENTS
PAGE
----
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 HOLDERS 17
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
----------
ii
<PAGE> 3
PART I
ITEM 1. BUSINESS
THE COMPANY
Century Bancorp, Inc. (together with its bank 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 $853.3 million on December 31, 1998. The Company presently operates 16
banking offices in 15 cities and towns in Massachusetts 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 June 11, 1998, the Company completed its acquisition of Haymarket
Co-operative Bank ("Haymarket"), headquartered in Boston, Massachusetts, and
merged Haymarket into the Bank. The purchase price paid by the Company to the
shareholders of Haymarket was $21.1 million in cash and the transaction was
accounted for using the purchase method of accounting. The results of operations
include the effect of the Haymarket acquisition for the 203 day period beginning
June 12, 1998.
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 Massachusetts.
-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.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------
1998 1997 1996
---- ---- ----
Average Interest Rate Average Interest Rate Average Interest Rate
Balance Income(1) Earned(1) Balance Income(1) Earned(1) Balance Income(1) Earned(1)
------- --------- --------- ------- --------- --------- ------- --------- ---------
(Dollars In Thousands)
ASSETS
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans(2) $358,498 $33,461 9.33% $304,147 $28,479 9.36% $281,943 $26,429 9.37%
Securities available-for-sale:
Taxable 138,104 8,314 6.02% 82,069 5,054 6.16% 90,652 5,627 6.21%
Tax-exempt 808 47 5.82% 1,327 80 6.03% 872 52 5.96%
Securities held-to-maturity:
Taxable 137,238 8,610 6.27% 109,458 7,047 6.44% 94,335 6,007 6.37%
Tax-exempt 21 3 14.29% 33 3 9.09% 170 13 7.65%
Federal funds sold 28,241 1,516 5.37% 12,864 706 5.49% 15,090 807 5.35%
Interest bearing deposits
in other banks 571 44 7.71% 36 1 2.78% 47 2 4.26%
----------------- ------------------ ------------------
Total interest-earning assets 663,481 51,995 7.84% 509,934 41,370 8.11% 483,109 38,937 8.06%
------- ------- ---- ------- ----
Non interest-earning assets 61,421 61,305 61,450
Allowance for loan losses (5,452) (4,412) (4,163)
-------- -------- --------
Total assets $719,450 $566,827 $540,396
======== ======== ========
</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
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------
1998 1997 1996
---- ---- ----
Interest Rate Interest Rate Interest
Average Income/ Earned/ Average Income/ Earned/ Average Income/ Rate
Balance Expense(1) Paid(1) Balance Expense(1) Paid(1) Balance Expense(1) Earned(1)
------- ---------- --------- ------- --------- --------- ------- --------- ---------
(Dollars In Thousands)
LIABILITIES AND STOCKHOLDERS'
EQUITY
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-bearing deposits:
NOW accounts $110,066 $ 2,745 2.49% $ 91,938 $ 2,561 2.79% $ 84,620 $ 2,367 2.80%
Savings accounts 56,802 1,422 2.50% 55,911 1,433 2.56% 55,905 1,439 2.57%
Money market accounts 77,930 2,255 2.89% 66,936 1,888 2.82% 70,735 2,084 2.95%
Time deposits 213,861 11,445 5.35% 155,607 8,474 5.45% 158,037 9,020 5.71%
-------- ------- -------- ------- -------- -------
Total interest-bearing
deposits 458,659 17,867 3.90% 370,392 14,356 3.88% 369,297 14,910 4.04%
Securities sold under
agreements to repurchase 36,953 1,574 4.26% 24,994 1,075 4.30% 16,654 713 4.28%
Other borrowed funds and
Long Term Debt 38,293 2,574 6.72% 7,908 491 6.21% 3,135 182 5.81%
----------------- ------------------ ------------------
Total interest-bearing
liabilities 533,905 22,015 4.12% 403,294 15,922 3.95% 389,086 15,805 4.06%
------- ---- ------- ---- ------- ----
Non interest-bearing liabilities
Demand deposits 119,802 105,417 99,179
Other liabilities 8,204 7,787 7,340
-------- -------- --------
Total liabilities 661,911 516,498 495,605
-------- -------- --------
Stockholders' equity 57,539 50,329 44,791
Total liabilities &
stockholders' equity $719,450 $566,827 $540,396
======== ======== ========
Net interest income(1) $29,980 $25,448 $23,132
======= ======= =======
Net interest spread 3.72% 4.16% 4.00%
==== ==== ====
Net yield on earnings assets 4.52% 4.99% 4.79%
==== ==== ====
</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
computed by multiplying the change in rate by the prior year's volume. Changes
due to volume are computed by multiplying the change in volume 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 1998. Interest income was affected positively by
higher loan volume, primarily as a result of the Haymarket acquisition. 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,
-----------------------
1998 Compared with 1997 1997 Compared with 1996
------------------------------------- ------------------------------------
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 $ 5,073 $ (91) $ 4,982 $ 2,079 $ (29) $ 2,050
Securities available-for-sale:
Taxable 3,376 (116) 3,260 (523) (50) (573)
Tax-exempt (30) (3) (33) 27 1 28
Securities held-to-maturity:
Taxable 1,747 (183) 1,564 973 66 1,039
Tax-exempt (1) 1 (0) (12) 2 (10)
Federal funds sold 826 (16) 810 (122) 21 (101)
Interest-bearing deposits
in other banks 40 2 42 (1) 1 0
-------- -------- -------- -------- -------- --------
Total interest income 11,031 (406) 10,625 2,422 11 2,433
-------- -------- -------- -------- -------- --------
Interest expense:
Deposits:
NOW accounts 470 (286) 184 204 (10) 194
Savings accounts 23 (34) (11) 0 (6) (6)
Money market accounts 19 348 367 (109) (87) (196)
Time deposits 2,980 (9) 2,971 (137) (409) (546)
-------- -------- -------- -------- -------- --------
Total interest-bearing
deposits 3,492 19 3,511 (42) (512) (554)
Securities sold under
agreements to repurchase 509 (10) 499 359 3 362
Other borrowed funds
and long term debt 2,040 43 2,083 262 13 309
-------- -------- -------- -------- -------- --------
Total interest expense 6,041 52 6,093 612 (495) 117
-------- -------- -------- -------- -------- --------
Change in net interest income $ 4,990 $ (458) $ 4,532 $ 1,811 $ 505 $ 2,316
======== ======== ======== ======== ======== ========
</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 +/- 20% within 3 months or less and +/- 20%
within 4 to 12 months with a cumulative 1 year Gap at +/- 20%. 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 savings and money market 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, 1998 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 $ 232,904 $ 92,982 $ 56,812 $ 11,923 $ 1,282 $ 395,903
Securities available-for-sale:
Taxable 20,821 6,513 138,585 44,238 0 210,157
Tax exempt 0 0 0 0 0 0
Securities held-to-maturity:
Taxable 1,026 1,005 83,846 73,987 0 159,864
Tax exempt 0 11 0 0 0 11
Federal funds sold 26,500 0 0 0 0 26,500
Interest-bearing deposits in other banks: 1 0 0 0 0 1
--------------------------------------------------------------------------------------
Total interest-earning assets 281,252 100,511 279,243 130,148 1,282 792,436
--------------------------------------------------------------------------------------
INTEREST-BEARING LIABILITIES:
Deposits:
NOW accounts 98,127 0 0 0 0 98,127
Savings accounts 55,080 0 0 0 0 55,080
Money market deposits 84,848 0 0 0 0 84,848
Time deposits 78,845 121,731 41,553 0 0 242,129
--------------------------------------------------------------------------------------
Total interest-bearing deposits 316,900 121,731 41,553 0 0 480,184
Securities sold under agreements
to repurchase 57,690 0 0 0 0 57,690
Other borrowed funds & Long Term Debt 6,382 1,048 0 56,166 0 63,596
--------------------------------------------------------------------------------------
Total interest-bearing liabilities 380,972 122,779 41,553 56,166 0 601,470
--------------------------------------------------------------------------------------
Interest-earning assets minus
interest-bearing liabilities(Gap) ($99,720) ($22,268) $ 237,690 $ 73,982 $ 1,282 $ 190,966
Management adjustment 200,653 (17,448) (155,437) 0 0 27,768
--------------------------------------------------------------------------------------
Management-adjusted Gap $ 100,933 ($39,716) $ 82,253 $ 73,982 $ 1,282 $ 218,734
Management-adjusted Cumulative Gap 61,217 143,470 217,452 218,734 --
Management-adjusted Gap/Total Assets 11.75% -4.62% 9.57% 8.61% 0.15% 25.45%
Management-adjusted Cumulative Gap/
Total Assets 7.12% 16.70% 25.30% 25.45% --
December 31, 1997
Management-adjusted Gap/Total Assets 0.92% 1.82% 17.22% 5.28% 0.27% 25.50%
Management-adjusted Cumulative Gap/
Total Assets 2.74% 19.96% 25.24% 25.50% --
</TABLE>
(1) Represents loans placed on nonaccrual status.
-5-
<PAGE> 8
LENDING ACTIVITIES
The following summary shows the composition of the loan portfolio at the dates
indicated.
<TABLE>
<CAPTION>
December 31,
------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
----------------- --------------- ---------------- --------------- ---------------
Percent Percent Percent Percent Percent
Amount of Total Amount of Total Amount of Total Amount of Total Amount of Total
------ -------- ------ -------- ------ -------- ------ -------- ------ --------
(Dollars In Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Construction and
land development....... $ 21,691 5.5% $ 7,549 2.4% $ 3,576 1.2% $ 1,444 0.5% $ 1,924 0.7%
Commercial and
industrial............. 64,822 16.4 50,560 16.0 41,006 14.2 37,811 13.2 33,283 12.2
Industrial revenue
bonds.................. 1,034 0.2 2,693 0.9 3,030 1.1 3,362 1.2 3,873 1.4
Commercial real estate.. 187,285 47.3 140,270 44.3 133,757 46.4 130,173 45.6 122,538 44.9
Residential real
estate................. 87,518 22.1 76,385 24.1 76,638 26.6 82,132 28.8 82,028 30.1
Consumer................ 14,355 3.6 19,254 6.1 12,749 4.4 9,243 3.2 12,017 4.4
Home equity............. 18,839 4.8 19,031 6.0 17,330 6.0 21,130 7.4 16,826 6.2
Overdrafts.............. 359 0.1 648 0.2 194 0.1 143 0.1 232 0.1
-------- ----- ------- ----- -------- ----- -------- ----- -------- -----
Loans (net of unearned
discount).............. $395,903 100.0% $316,390 100.0% $288,280 100.0% $285,438 100.0% $272,721 100.0%
======== ===== ======== ===== ======== ===== ======== ===== ======== =====
</TABLE>
-6-
<PAGE> 9
The following table summarizes the remaining maturity distribution of certain
components of the Company's loan portfolio at December 31, 1998. 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.
<TABLE>
<CAPTION>
Remaining Maturities of Selected Loans at December 31, 1998
-----------------------------------------------------------
One Year One to Five Over
or Less Years Five Years Total
------- ----- ---------- -----
(In Thousands)
<S> <C> <C> <C> <C>
Construction and land development $ 20,009 $ 1,682 $ 0 $ 21,691
Commercial and industrial 62,766 2,415 0 65,181
Industrial revenue bonds 339 0 695 1,034
Commercial real estate 167,744 18,398 1,143 187,285
-------- -------- -------- --------
Total $250,858 $ 22,495 $ 1,838 $275,191
======== ======== ======== ========
</TABLE>
The following table indicates the rate variability of the above loans due after
one year.
<TABLE>
<CAPTION>
December 31, 1998
-----------------
One to Five Over
Years Five Years Total
----- ---------- -----
(In Thousands)
<S> <C> <C> <C>
Predetermined interest rates $19,895 $ 1,838 $21,733
Floating or adjustable interest rates 2,600 0 2,600
------- ------- -------
Total $22,495 $ 1,838 $24,333
======= ======= =======
</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;
Jonathan G. Sloane, Executive 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 in
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 between 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 $20 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 Fannie Mae but normally only one or three year adjustable interest rates
are used. The Bank utilizes mortgage insurance 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 economic environment impacts the risks
associated with this category. In the recent period, the environment has
improved, and the market has generally been stable. Declining interest rates
could negatively impact the interest rate 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 property value of 75%.
The Bank intends 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 estimated 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, 1998, the
Company was obligated to advance a total of $321 thousand to complete projects
under construction.
At December 31, 1998 approximately 47.3% of the Company's loan portfolio
consisted of commercial real estate loans. Construction loans had increased to
5.5 % of the Company's outstanding loans.
At December 31, 1998, the Company's residential mortgage loans amounted to $87.5
million. The Company's consumer loan portfolio amounted to $33.2 million at
December 31, 1998, primarily consisting of home equity loans of $18.8 million
and personal lines of credit, motor vehicle loans and other installment loans of
$14.4 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.
<TABLE>
<CAPTION>
December 31,
------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Loans on nonaccrual $1,281 $1,705 $2,140 $3,751 $2,954
Loans not included above
which are nonperforming
troubled debt restructurings -0- -0- -0- 1,457 3,113
Other real estate owned , net -0- -0- 182 845 3,192
------ ------ ------ ------ ------
Total nonperforming assets $1,281 $1,705 $2,322 $6,053 $9,259
====== ====== ====== ====== ======
Percentage of nonperforming
assets to total loans and
other related assets 0.32% 0.54% 0.81% 2.12% 3.39%
====== ====== ====== ====== ======
</TABLE>
The lower level of nonperforming assets in 1998 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 $2,872,000 of troubled debt restructurings and performing impaired loans at
December 31, 1998 amounted to $196,000 for the year then ended. Interest income
for the same period would have amounted to $260,000 under the original terms and
agreements of the notes. As a result of placing loans on non-accrual status, the
Company has foregone $139,000 of interest income during 1998 compared to
$118,000 during 1997.
In addition to the above, the Company is monitoring closely $8.7 million of
loans for which management has concerns regarding 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, 1998, 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, 1998 and
1997 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,
------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Loans past due 90 days or
more and still accruing $ 698 $ 7 $ 192 $ 87 $ 114
Impaired loans $2,992 $3,515 $3,055 $3,356 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,
-----------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Year end loans outstanding
(net of unearned discount) $395,903 $316,390 $288,280 $285,438 $272,721
======== ======== ======== ======== ========
Average loans outstanding
(net of unearned discount) $358,498 $304,147 $281,943 $279,555 $267,123
======== ======== ======== ======== ========
Balance of allowance for
loan losses at
beginning of year $ 4,446 $ 4,179 $ 4,193 $ 4,239 $ 5,129
-------- -------- -------- -------- --------
Loans charged-off:
Commercial 316 25 2 2 781
Construction and land development 0 0 0 0 292
Commercial real estate 21 48 380 1,144 433
Residential real estate 0 363 801 551 1,016
Consumer 506 253 120 131 242
-------- -------- -------- -------- --------
Total loans charged-off 843 689 1,303 1,828 2,764
-------- -------- -------- -------- --------
Recoveries of loans previously charged-off:
Commercial 21 76 78 39 23
Real estate 367 162 163 134 204
Consumer 37 58 28 49 27
-------- -------- -------- -------- --------
Total recoveries of loans
previously charged-off 425 296 269 222 254
-------- -------- -------- -------- --------
Net loans charged-off 418 393 1,034 1,606 2,510
-------- -------- -------- -------- --------
Additions to allowance charged to
operating expense 800 660 1,020 1,560 1,620
Acquired allowance 1,194 -- -- -- --
-------- -------- -------- -------- --------
Balance at end of year $ 6,022 $ 4,446 $ 4,179 $ 4,193 $ 4,239
======== ======== ======== ======== ========
Ratio of net charge-offs during
the year to average loans
outstanding 0.12% 0.13% .37% .57% 1.32%
======== ======== ======== ======== ========
Ratio of allowance for
loan losses to loans
outstanding 1.52% 1.41% 1.45% 1.47% 1.89%
======== ======== ======== ======== ========
</TABLE>
The provision for 1998, while below the prior four year average, remains above
historical levels and reflects significant improvements in the loan portfolio.
At December 31, 1998 nonperforming assets were $1.3 million or .32% 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>
1998 1997 1996 1995 1994
----------------- ---------------- ---------------- ---------------- ----------------
Percent of Percent of Percent of Percent of Percent of
loans in loans in loans in loans in loans in
each category each category each category each category each category
Balance at end of to total to total to total to total to total
period applicable to Amount loans Amount loans Amount loans Amount loans Amount loans
- -------------------- ------ -------- ------ -------- ------ -------- ------ -------- ------ --------
(Dollars In Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Construction and land
development............. $ 361 5.5% $ 104 2.4% $ 48 1.2% $ 21 0.5% $ 49 0.7%
Commercial and
industrial.............. 912 16.4 716 16.0 660 14.2 595 13.2 530 12.2
Industrial revenue
bonds................... 6 0.2 17 0.9 17 1.1 23 1.2 26 1.4
Commercial real estate... 2,737 47.3 2,138 44.3 2,201 46.4 2,095 45.6 2,158 44.9
Residential real estate.. 1,296 22.1 846 24.1 830 26.6 1,031 28.8 1,025 30.1
Consumer................. 508 3.6 402 6.1 233 4.4 228 3.2 293 4.4
Home equity.............. 197 4.8 214 6.0 187 6.0 198 7.4 155 6.2
Overdrafts............... 5 0.1 9 0.2 3 0.1 2 0.1 3 0.1
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
$6,022 100.0% $4,446 100.0% $4,179 100.0% $4,193 100.0% $4,239 100.0%
====== ===== ====== ===== ====== ===== ====== ===== ====== =====
</TABLE>
INVESTMENT ACTIVITIES
The following table sets forth certain information regarding the Company's
investment portfolio. Dollar amounts reflect carrying values. At December 31,
1998, the market value of securities available-for-sale was $210.2 million
compared to the amortized cost of $210.3 million for such securities. At
December 31, 1998, the market value of securities held-to-maturity was $160.1
million, compared to the amortized cost of $159.9 million of such securities.
<TABLE>
<CAPTION>
Securities available-for-sale Securities held-to-maturity
December 31, December 31,
--------------------------------- ---------------------------------
1998 1997 1996 1998 1997 1996
--------- -------- -------- --------- --------- ---------
(In Thousands) (In Thousands)
Balance at end of
period applicable to
- --------------------
<S> <C> <C> <C> <C> <C> <C>
U.S. Government and Agencies...... $202,925 $84,763 $77,155 $159,789 $107,117 $105,582
Obligations of states and
political subdivision............ 0 750 1,241 11 22 34
Other............................. 7,232 3,677 2,619 75 2,100 2,099
-------- ------- ------- -------- -------- --------
$210,157 $89,190 $81,015 $159,875 $109,239 $107,715
======== ======= ======= ======== ======== ========
</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, 1998 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................. $20,527 6.02% $138,480 5.82% $42,918 5.84% $1,000 6.01% $202,925 5.85%
Obligations of states and
political subdivisions... 0 0.00% 0 0.00% 0 0.00% 0 0.00% 0 0.00%
Other..................... 0 0.00% 105 6.30% 268 7.80% 6,859 6.40% 7,232 6.45%
------- -------- ------- ------ --------
$20,527 6.02% $138,585 5.82% $43,186 5.86% $7,861 6.35% $210,157 5.87%
======= ==== ======== ==== ======= ==== ====== ==== ======== ====
</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................. $2,006 5.92% $83,822 6.05% $19,996 5.98% $36,623 7.12% $142,447 6.31%
Obligations of states and
political subdivisions... 11 8.65% 0 0.00% 0 0.00% 0 0.00% 11 8.65%
Other..................... 25 7.25% 25 4.00% 25 5.50% 17,342 6.35% 17,417 6.53%
------ ------- ------- ------- -------
$2,042 5.95% $83,847 6.05% $20,021 5.98% $53,965 6.93% $159,875 6.34%
====== ==== ======= ==== ======= ==== ======= ==== ======== ====
</TABLE>
-12-
<PAGE> 15
Obligations of states and political subdivisions consist primarily of
obligations of the Commonwealth of Massachusetts and its subdivisions having
other relationships with the Company. The Company regularly bids on tax
anticipation notes and other short-term instruments of municipalities who have
other 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.
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 bi-monthly by the Bank's rate setting
committee, 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>
1998 1997 1996
---------------------- ---------------------- ----------------------
(Dollars In Thousands)
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 $110,066 2.49% $ 91,938 2.79% $ 84,620 2.80%
Savings accounts 56,802 2.50% 55,911 2.56% 55,905 2.57%
Money market accounts 77,930 2.89% 66,936 2.82% 70,735 2.95%
Time deposits of $100,000 or more 60,895 5.37% 35,939 5.14% 34,542 5.19%
Other time deposits 152,966 5.34% 119,668 5.54% 123,495 5.85%
-------- ---- -------- ---- -------- ----
Total interest-bearing deposits 458,659 3.90% 370,392 3.88% 369,297 4.04%
Non interest-bearing demand deposits 119,802 105,417 99,179
-------- -------- --------
Total average deposits $578,461 3.09% $475,809 3.02% $468,476 3.18%
======== ==== ======== ==== ======== ====
</TABLE>
Total deposits at December 31, 1998 amounted to $643 million, including $72
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, 1998 mature as follows.
<TABLE>
<CAPTION>
(In Thousands)
<S> <C>
Three months or less $43,637
Three through six months 13,264
Six through twelve months 8,419
Over twelve months 6,512
-----
$71,832
=======
</TABLE>
-13-
<PAGE> 16
BORROWED FUNDS AND LONG TERM DEBT
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 and long term debt is presented below.
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
(Dollars In Thousands)
Securities sold under agreements
to repurchase:
<S> <C> <C> <C>
Amount outstanding at year end $57,690 $32,850 $17,790
Weighted average interest rate
at end of year 3.53% 4.49% 4.34%
Maximum amount outstanding at
any month end during year $57,690 $39,060 $17,790
Daily average amount outstanding
during year $36,953 $24,994 $16,654
Weighted average interest rate
during year 4.26% 4.30% 4.28%
Other borrowed funds and long term debt:
Amount outstanding at year end $63,596 $13,474 $12,353
Weighted average interest rate
at end of year 6.65% 6.96% 7.16%
Maximum amount outstanding at
any month end during year $79,377 $36,609 $17,577
Daily average amount outstanding
during year $38,293 $ 7,908 $ 3,135
Weighted average interest rate
during year 6.72% 6.21% 5.81%
</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., an unaffiliated 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, 1998, the Company had 214 full-time and 72 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 extensions 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 extensions 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 1998.
-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, 1998, the Company's
ratios were 16.66% and 19.72%, respectively. The Bank also exceeded these
risk-weighted capital measures at December 31, 1998. 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, 1998 the Company's
ratio was 9.55%. The Bank also exceeded the leverage requirement at December 31,
1998.
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 sought to recapitalize the Bank Insurance Fund of the
FDIC ("BIF"), which had been severely depleted as a result of the larger members
of failed banks. The recapitalization continues to be funded through, among
other things, increased deposit insurance assessments payable by BIF-insured
institutions, which increases the cost of doing business by all BIF-insured
institutions, including the Bank. 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 Bank.
Provisions of the 1991 Act relating to the activities of state-chartered banks
significantly impact the way the Company conducts its business. In this regard,
the 1991 Act provides that insured state banks, such as the Bank, 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.
INTERSTATE BANKING
As of September 29, 1995, the Riegle-Neal Interstate Banking and Branching
Efficiency Act of 1994 (the "RNA") permitted adequately capitalized and managed
bank holding companies to acquire control of banks in any state. Additionally,
beginning on June 1, 1997, the RNA provides for banks to branch across state
lines, although individual states are authorized to permit interstate branches
earlier or to elect to opt out entirely.
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 15 other facilities in which its branch offices are
located. The remaining offices are occupied under leases expiring on various
dates from 1998 to 2026.
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, 1998.
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 Class A common stock since
January 1, 1997 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, 1998.
Approximate Number
Title of Class of Record Holders
Class A Common Stock 330
Class B Common Stock 69
(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.
<TABLE>
<CAPTION>
Dividends Per Share
Class A Class B
------- -------
<S> <C> <C>
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
1998
First quarter $ .050 $.0070
Second quarter .050 .0070
Third quarter .050 .0070
Fourth quarter .060 .0170
</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 liabilities, 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 25.
ITEM 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information required herein is shown on page 23 and 24.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required herein is shown on pages 26 through 44.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
-18-
<PAGE> 21
<TABLE>
<CAPTION>
.................................................................. FINANCIAL HIGHLIGHTS
.............
1998 1997 1996
........................................................................................
(dollars in thousands except share data)
<S> <C> <C> <C>
YEAR-END
Total assets $ 853,326 $ 631,125 $ 560,857
Total loans 395,903 316,390 288,280
Total deposits 643,425 515,449 476,135
Total stockholders' equity 61,051 53,857 47,489
YEARLY AVERAGES
Total assets $ 719,450 $ 566,827 $ 540,396
Total earning assets 663,481 509,934 483,109
Total securities available-for-sale 138,912 83,396 91,524
Total securities held-to-maturity 137,259 109,491 94,505
Total loans 358,498 304,147 281,943
Total deposits 578,461 475,809 468,476
Total borrowed funds 56,079 32,902 19,789
Total stockholders' equity 57,539 50,329 44,791
EARNINGS
Net income $ 8,105 $ 6,823 $ 5,434
Net interest income, taxable equivalent 29,980 25,448 23,132
Other operating income 5,230 4,994 4,761
Operating expenses 21,326 18,600 17,874
PERFORMANCE MEASURES
Earnings per share, basic $ 1.40 $ 1.18 $ 0.95
Earnings per share, diluted $ 1.39 $ 1.17 $ 0.93
Return on average stockholders' equity 14.09% 13.56% 12.13%
Book value per share at December 31 $ 10.49 $ 9.30 $ 8.25
Return on average assets 1.13% 1.20% 1.01%
Common Share Data
Average shares outstanding, basic 5,806,445 5,772,135 5,736,230
Average shares outstanding, diluted 5,847,444 5,830,910 5,818,942
Shares outstanding at year-end 5,822,167 5,790,417 5,758,467
...........
</TABLE>
PER SHARE DATA
<TABLE>
<CAPTION>
.......................................................
1998, Quarter Ended December 31, September 30, June 30, March 31,
.......................................................................................
<S> <C> < <C> <C>
Market price range (Class A)
High $ 20.50 $21.75 $ 22.75 $ 23.75
Low 15.00 16.00 20.00 17.875
Dividends class A 0.06 0.05 0.05 0.05
Dividends class B 0.017 0.007 0.007 0.007
.......................................................
</TABLE>
<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>
-19-
<PAGE> 22
<TABLE>
<CAPTION>
............................................................................................SELECTED FINANCIAL DATA
............
1998 1997 1996 1995 1994
...................................................................................................................
(dollars in thousands except share data)
<S> <C> <C> <C> <C> <C>
FOR THE YEAR
Interest income $ 51,878 $ 41,216 $ 38,777 $ 35,988 $ 30,461
Interest expense 22,015 15,922 15,805 14,686 10,924
----------------------------------------------------------------------
Net interest income 29,863 25,294 22,972 21,302 19,537
Provision for loan losses 800 660 1,020 1,560 1,620
----------------------------------------------------------------------
Net interest income after
provision for loan losses 29,063 24,634 21,952 19,742 17,917
Other operating income 5,230 4,994 4,761 4,722 5,420
Operating expenses 21,326 18,600 17,874 18,224 19,265
----------------------------------------------------------------------
Income before income taxes 12,967 11,028 8,839 6,240 4,072
Provision for income taxes 4,862 4,205 3,405 1,666 768
----------------------------------------------------------------------
Net income $ 8,105 $ 6,823 $ 5,434 $ 4,574 $ 3,304
======================================================================
Average shares outstanding, basic 5,806,445 5,772,135 5,736,230 5,722,646 5,722,450
Average shares outstanding, diluted 5,847,444 5,830,910 5,818,942 5,831,042 5,832,093
Earnings per share:
Basic $ 1.40 $ 1.18 $ 0.95 $ 0.80 $ 0.58
Diluted $ 1.39 $ 1.17 $ 0.93 $ 0.78 $ 0.57
Dividend payout ratio 10.3% 11.1% 10.9% 9.6% 10.9%
AT YEAR-END
Assets $ 853,326 $ 631,125 $ 560,857 $ 531,928 $ 465,419
Loans 395,903 316,390 288,280 285,438 272,721
Deposits 643,425 515,449 476,135 458,615 409,542
Stockholders' equity 61,051 53,857 47,489 42,935 37,553
Book value per share $ 10.49 $ 9.30 $ 8.25 $ 7.50 $ 6.56
SELECTED FINANCIAL PERCENTAGES
Return on average assets 1.13% 1.20% 1.01% 0.92% 0.70%
Return on average stockholders' equity 14.09% 13.56% 12.13% 11.33% 9.11%
Net yield on average earning assets,
taxable equivalent 4.52% 4.99% 4.79% 4.86% 4.70%
Net charge-offs as a percent of
average loans 0.12% 0.13% 0.37% 0.57% 0.94%
Average stockholders' equity to
average assets 7.99% 8.88% 8.29% 8.17% 7.67%
............
</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 $8,105,000 for the year
ended December 31, 1998, compared with net income of $6,823,000 for year ended
December 31, 1997 and net income of $5,434,000 for the year ended December 31,
1996. Basic earnings per share were $1.40 in 1998 compared to $1.18 in 1997 and
$0.95 in 1996. Diluted earnings per share were $1.39 in 1998 compared to $1.17
in 1997 and $0.93 in 1996.
Total assets were $853,326,000 at December 31, 1998, an increase of 35.2% from
total assets of $631,125,000 on December 31, 1997, which, in turn, were 12.5%
higher than total assets of $560,857,000 on December 31, 1996.
On December 31, 1998, stockholders' equity totaled $61,051,000 compared with
$53,857,000 on December 31, 1997, and $47,489,000 on December 31, 1996. Book
value increased to $10.49 at December 31, 1998 from $9.30 on December 31, 1997,
which had increased from $8.25 on December 31, 1996.
On June 11, 1998 The Company acquired Haymarket Co-operative Bank ("Haymarket"),
headquartered in Boston Massachusetts, and merged Haymarket into the Company's
subsidiary, Century Bank and Trust Company (the "Bank"). The purchase price was
$21.1 million and was accounted for using the purchase method of accounting. The
results of operations include the effect of the purchase for the 203 day period
beginning June 12, 1998.
In May 1998 the Company, through its newly formed subsidiary, Century Bancorp
Capital Trust, issued 2,875,000 shares of Cumulative Trust Preferred Securities
with a liquidation value of $10 per share. These securities pay dividends at an
annualized rate of 8.30%. The Company is using the proceeds primarily for
general business purposes.
YEAR 2000
................................................................................
The Company has completed its assessment of Year 2000 issues and developed a
plan, budget, and testing strategy for mission-critical systems. The Bank relies
on its recently converted new core processing system for critical data
warehousing and transaction processing. Other, less critical, systems are
supported by purchased applications software. The Bank is continually evaluating
mission-critical vendor plans and monitoring project milestones. The Bank has
begun testing its key transaction processing system and is expected to
substantially complete testing on its core processing system and on most other
applications no later than March 31, 1999. The vendor, of the core processing
system, has disclosed that its processing system is Year 2000 compliant.
Currently, there are five vendors for which testing will not commence until the
first quarter of 1999. There can be no guarantee that the systems of other
companies, or third party vendors on which the Company's systems rely, will be
remedied on a timely basis. Therefore, the Company could possibly be negatively
impacted to the extent other entities not affiliated with the Company are
unsuccessful in properly addressing their respective Year 2000 compliance
responsibilities. Specific factors that might cause such material differences
include, but are not limited to, the availability and cost of personnel trained
in this area, the ability to locate and correct all relevant computer codes, and
similar uncertainties.
The Company will continue to utilize both internal and external resources to
update, or replace, develop and test all software information systems for Year
2000 modification. The Bank's cost of Year 2000 remediation, which includes its
cost of converting to new mainframe software and certain internal costs, is
expected to approach $1.5 - $2.0 million of which approximately $1.2 million has
been incurred. The Company expects that the majority of the costs yet to be
incurred will be to replace or update existing hardware and software, which will
be capitalized and amortized in accordance with the Company's existing
accounting policy. In most instances, upgrades to computer hardware and software
are being made to improve the capacity and performance of the systems as well as
to achieve Year 2000 compliance. Maintenance and modification costs will be
expensed as incurred.
The costs of the project and the date on which the Bank plans to complete Year
2000 testing are based on management's best estimates, which were derived
utilizing numerous assumptions of future events including the continued
availability of certain resources, third party modification plans and other
factors.
The Bank has also assessed the impact of the Year 2000 issue on its major
borrowing customers. Borrowers that could experience a significant disruption in
their business due to a Year 2000 failure have been identified. Management is in
the process of obtaining information as to the readiness of these borrowers for
Year 2000. Management is expected to substantially complete this assessment
process by March 31, 1999.
After the Bank completes its testing of mission-critical systems, a contingency
plan will be completed for non-compliant systems. The Bank's contingency plan is
expected to be in place by the second quarter of 1999.
-21-
<PAGE> 24
................................................................................
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 17.8% in 1998 to $29,980,000 compared with
$25,448,000 in 1997. Interest income was affected positively by the acquisition
of Haymarket. 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 decreased to 4.52%
in 1998 from 4.99% in 1997 which, in turn, had increased from 4.79% in 1996.
Average earning assets were $663,481,000 in 1998, an increase of $153,453,000 or
30.1% from the average in 1997, which was 5.6% higher than the average in 1996.
Total average securities, including securities available for sale and securities
held to maturity, increased 43.2% to $276,171,000. The increase in average
securities-held-to-maturity increased primarily as a result of leveraged balance
sheet transactions. Total securities available-for-sale increased primarily as a
result of the acquisition of Haymarket. Haymarket securities contributed
approximately $20,000,000 to the Bank's year-to-date average. This increase in
securities volume resulted in higher securities income, which increased 39.5% to
$16,957,000. Total average loans increased 17.9% to $358,498,000 after
increasing $22,204,000 in 1997. Total loans increased in 1998 primarily as a
result of the acquisition of Haymarket. Haymarket loans contributed
approximately $42,000,000 to the Bank's year-to-date average. The increase in
loan volume resulted in higher loan income, which increased by 17.7% or
$5,008,000 to $33,361,000. Total loan income was $26,291,000 in 1996.
The Company's sources of funds include deposits and borrowed funds. On average,
deposits showed an increase of 21.6% in 1998 after increasing by 1.6% in 1997.
Deposits increased in 1998, primarily as a result of the acquisition of
Haymarket. Haymarket deposits contributed approximately $58,000,000 to the
Bank's year-to-date average. Borrowed funds increased by 70.4% in 1998 following
an increase of 66.3% in 1997. The majority of the Company's borrowed funds are
in retail repurchase agreements. Interest expense totaled $22,015,000 in 1998,
an increase of $6,093,000 or 38.3% from 1997 when interest expense increased .7%
from 1996. This increase in interest expense is due primarily to the acquisition
of Haymarket.
PROVISION FOR LOAN LOSS
................................................................................
The provision for loan losses was $800,000 in 1998 compared with $660,000 in
1997 and $1,020,000 in 1996. 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 $6,022,000 at December 31, 1998 compared with
$4,446,000 at December 31, 1997 and $4,179,000 at December 31, 1996. Expressed
as a percentage of outstanding loans at year-end, the allowance was 1.52% in
1998, 1.41% in 1997 and 1.45% in 1996. This increased ratio reflects the
uncertain incremental risks associated with the acquisition of Haymarket. Also,
a certain section of the consumer loan portfolio has had higher than anticipated
charge-off activity, accordingly the reserve has been increased.
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 slight decrease in net charge-offs in 1998 with net
charge-offs as a percent of average loans outstanding at 0.12%. The comparable
figures for 1997 and 1996 were 0.13% and 0.37% respectively. Non-performing
loans, which include all non-accruing loans, totaled $1,281,000 on December 31,
1998, compared with $1,705,000 on December 31, 1997.
-22-
<PAGE> 25
................................................................................
OTHER OPERATING INCOME
................................................................................
The Company continued to experience good results in its fee-based services in
1998. These fee-based services include deposit related services, lock-box
processing and securities brokerage services.
Total other operating income in 1998, was $5,230,000 an increase of $236,000 or
4.7% compared to 1997. This increase followed an increase of $233,000 or 4.9% in
1997, compared to 1996. Service charge income, which continues to be the largest
area of other operating income with $1,800,000 in 1998, saw an increase of
$9,000 in 1998. Lock-box revenues totaled $1,660,000 up $193,000 in 1998,
primarily as a result of an increase in the lock-box customer base. Brokerage
commissions decreased slightly to $1,130,000 in 1998 from $1,171,000 in 1997,
which, saw an increase of $99,000 from 1996.
OPERATING EXPENSES
................................................................................
Total operating expenses were $21,326,000 in 1998 compared to $18,600,000 in
1997 and $17,874,000 in 1996.
Salaries and employee benefits expenses increased by $1,312,000 or 10.8% in 1998
after increasing 3.2% in 1997. The majority of the 1998 increase was in the
salaries category and was caused by an increase in the wage base increased
accruals for incentive compensation, and personnel costs associated with the
acquisition of Haymarket. Nearly all of the increase for 1997 was in the
salaries category and was caused by an increase in the wage base.
Occupancy expense increased by $182,000 or 14.3% in 1998 primarily because of
the acquisition of Haymarket properties and the assumption of Haymarket leases.
Occupancy expense decreased by 3.8% in 1997 primarily because of an increase in
tenant rents. Equipment expense increased by $158,000 in 1998 primarily because
of increased equipment depreciation associated with the purchase of Haymarket.
Equipment expense increased by $5,000 in 1997 also because of increased
equipment depreciation.
Other operating expenses increased by $1,072,000 in 1998, which followed a
$350,000 increase in 1997. In 1998 increase were primarily the result of costs
associated with the purchase of Haymarket, amortization of costs associated with
the Trust Preferred Offering, expenses relating to increased professional fees
for certain strategic initiatives and amortization of costs associated with the
new core processing system. In 1997 increases were primarily the result of
increased marketing, Federal Deposit Insurance Corporation (the "FDIC")
insurance and other operating expenses.
PROVISION FOR INCOME TAXES
................................................................................
Income tax expense was $4,862,000 in 1998, $4,205,000 in 1997 and $3,405,000 in
1996. The effective tax rate was 37.5% in 1998, 38.1% in 1997 and 38.5% in 1996.
The Company is realizing savings in this area as a result of strategic tax
savings initiatives.
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.
-23-
<PAGE> 26
................................................................................
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 4.7%
+100 2.3%
-100 (2.3%)
-200 (4.6%)
</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 31,1998
the gap was:
................................................................................
Subject to Interest Rate Changes Within Three Months Three to Twelve Months
................................................................................
(in thousands)
Assets $309,020 $100,511
Liabilities $263,501 176,222
................................................................................
Gap $ 45,519 $(75,711)
................................................................................
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 $61,019,000 on December 31, 1998 compared
with $97,892,000 on December 31, 1997, and $67,681,000 on December 31, 1996. In
each of the three years deposit activity has generally been adequate to support
asset activity.
The source of funds for dividends paid by the Company is dividends received from
the Bank. The Company and the Bank are regulated enterprises and their abilities
to pay dividends are subject to regulatory review and restriction. Certain
regulatory and statutory restrictions exist regarding dividends, loans and
advances from the Bank to the Company. Generally, the Bank has the ability to
pay dividends to the Company subject to minimum regulatory capital requirements.
CAPITAL ADEQUACY
................................................................................
Total stockholders' equity was $61,051,000 at December 31, 1998, compared with
$53,857,000 at December 31, 1997 and $47,489,000 at December 31, 1996. The
increases in all years reported were primarily the result of retained earnings
less dividends paid, although there was a $120,000 increase in 1998, a $123,000
increase in 1997 and a $133,000 increase in 1996 from the execution of certain
incentive 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-I 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 16.66% and 10.62%
respectively, and total capital-to-risk assets ratio of 19.72% and 11.87%,
respectively at December 31, 1998. 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, 1998, the Company and the Bank exceeded this
requirement with leverage ratios of 9.55% and 6.08%, respectively.
-24-
<PAGE> 27
................................................................................
RECENT ACCOUNTING DEVELOPMENTS
................................................................................
In June 1997, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("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. The Bank has adopted SFAS No. 130 effective for
January 1, 1998.
In February 1998, the FASB issued SFAS No. 132, "Employers' Disclosures about
Pensions and Other Postretirement Benefits -- an amendment of FASB Statements
No. 87, 88, and 106." This Statement revises employers' disclosures about
pension and other postretirement benefit plans. It does not change the
measurement or recognition of those plans. It standardizes the disclosure
requirements for pensions and other postretirement benefits to the extent
practicable, requires additional information on changes in the benefit
obligations and fair values of plan assets that will facilitate analysis, and
eliminates certain disclosures that are no longer as useful as they were when
FASB Statements No. 87, "Employers' Accounting for Pensions," No. 88,
"Employers' Accounting for Settlements and Curtailments of Defined Benefit
Pension Plans and for Termination Benefits," and No. 106, "Employers' Accounting
for Postretirement Benefits Other Than Pensions," were issued. The Statement
suggests combined formats for presentation of pension and other postretirement
benefit disclosures. The provisions of the statement has been adopted in the
December 31, 1998 financial statements.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities" which amends FASB Statements No. 52, 80,
105, and 107, as well as, nullifies or modifies the consenses reached in a
number of issues addressed by the Emerging Issues Task Force. This statement
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts,
(collectively referred to as derivatives) and for hedging activities. It
requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those instruments
at fair value. If certain conditions are met, a derivative may be specifically
designated as (a) a hedge of the exposure to changes in the fair value of a
recognized asset or liability or an unrecognized firm commitment, (b) a hedge of
the exposure to variable cash flows of a forecasted transaction, or (c) a hedge
of the foreign currency exposure of a net investment in a foreign operation, an
unrecognized firm commitment, an available-for-sale security or a foreign-
currency-denominated forecasted transaction.
Under this Statement, an entity that elects to apply hedge accounting is
required to establish at the inception of the hedge the method it will use for
assessing the effectiveness of the hedging derivative and the measurement
approach for determining the ineffective aspect of the hedge. Those methods must
be consistent with the entity's approach to managing risk.
This Statement is effective for the year 2000 financial statements. This
statement is not expected to have a material impact on the financial statements.
-25-
<PAGE> 28
<TABLE>
<CAPTION>
..............................................................................CONSOLIDATED BALANCE SHEETS
..........
December 31, 1998 1997
.........................................................................................................
(dollars in thousands except share data)
<S> <C> <C>
ASSETS
Cash and due from banks (note 2) $ 34,518 $ 46,868
Federal funds sold and interest-bearing deposits in other banks 26,501 51,024
...........................
Total cash and cash equivalents 61,019 97,892
Securities available-for-sale, amortized cost $210,290 in 1998
and $89,004 in 1997 (note 3) 210,157 89,190
Securities held-to-maturity, market value $160,109 in 1998
and $109,454 in 1997 (notes 4 and 9) 159,875 109,239
Loans, net (note 5) 395,903 316,390
Less: allowance for loan losses (note 6) 6,022 4,446
...........................
Net loans 389,881 311,944
Bank premises and equipment (note 7) 10,543 8,718
Accrued interest receivable 6,518 4,334
Other assets (note 12) 15,333 9,808
...........................
Total assets $853,326 $631,125
===========================
LIABILITIES AND STOCKHOLDERS' EQUITY
Demand deposits $163,241 $123,301
Savings and NOW deposits 153,207 149,808
Money market accounts 84,848 71,061
Time deposits (note 8) 242,129 171,279
...........................
Total deposits 643,425 515,449
Securities sold under agreements to repurchase (note 9) 57,690 32,850
Other borrowed funds (note 10) 34,846 13,474
Other liabilities 27,564 15,495
Long term debt (note 10) 28,750 -
...........................
Total liabilities 792,275 577,268
Commitments and contingencies (notes 7, 14 and 15)
Stockholders' equity (note 11):
Class A common stock,
$1.00 par value per share; authorized 10,000,000 shares;
issued 3,673,397 shares in 1998 and 3,541,447 in 1997 3,673 3,541
Class B common stock,
$1.00 par value per share; authorized 5,000,000 shares;
issued 2,226,320 shares in 1998 and 2,326,520 in 1997 2,227 2,327
Additional paid-in-capital 10,965 10,877
Retained earnings 44,451 37,180
Treasury stock, Class A, 30,000 shares in 1998 and 1997, at cost (136) (136)
Treasury stock, Class B, 47,550 shares in 1998 and 1997, at cost (41) (41)
...........................
61,139 53,748
Accumulated other comprehensive income (loss), net of taxes (note 3) (88) 109
...........................
Total stockholders' equity 61,051 53,857
...........................
Total liabilities and stockholders' equity $853,326 $631,125
===========================
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
-26-
<PAGE> 29
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF INCOME..............................................................................
............
Year Ended December 31, 1998 1997 1996
...............................................................................................................
(dollars in thousands except share data)
<S> <C> <C> <C>
INTEREST INCOME
Loans $ 33,361 $ 28,353 $ 26,291
Securities held-to-maturity 8,612 7,049 6,016
Securities available-for-sale 8,345 5,107 5,661
Federal funds sold and interest-bearing deposits in other banks 1,560 707 809
--------------------------------------
Total interest income 51,878 41,216 38,777
INTEREST EXPENSE
Savings and NOW deposits 4,167 3,994 3,806
Money market accounts 2,255 1,888 2,084
Time deposits (note 8) 11,445 8,474 9,020
Securities sold under agreements to repurchase 1,574 1,075 713
Other borrowed funds 2,574 491 182
--------------------------------------
Total interest expense 22,015 15,922 15,805
--------------------------------------
Net interest income 29,863 25,294 22,972
Provision for loan losses (Note 6) 800 660 1,020
--------------------------------------
Net interest income after provision for loan losses 29,063 24,634 21,952
OTHER OPERATING INCOME
Service charges on deposit accounts 1,800 1,791 1,627
Lockbox fees 1,660 1,467 1,280
Brokerage commissions 1,130 1,171 1,072
Gain on sales of loans 49 136 290
Other income 591 429 492
-------------------------------------
Total other operating income 5,230 4,994 4,761
OPERATING EXPENSES
Salaries and employee benefits (note 13) 13,432 12,120 11,741
Occupancy 1,454 1,272 1,322
Equipment 1,298 1,140 1,135
Other (note 16) 5,142 4,068 3,676
--------------------------------------
Total operating expenses 21,326 18,600 17,874
--------------------------------------
Income before income taxes 12,967 11,028 8,839
Provision for income taxes (Note 12) 4,862 4,205 3,405
--------------------------------------
NET INCOME $ 8,105 $ 6,823 $ 5,434
======================================
SHARE DATA (NOTE 11)
Weighted average number of shares outstanding, basic 5,806,445 5,772,135 5,736,230
Weighted average number of shares outstanding, diluted 5,847,444 5,830,910 5,818,942
Net income per share, basic $ 1.40 $ 1.18 $ 0.95
Net income per share, diluted $ 1.39 $ 1.17 $ 0.93
............
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
-27-
<PAGE> 30
<TABLE>
<CAPTION>
.........................................................................CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Accumulated
Class A Class B Additional Treasury Treasury Other Total
Common Common Paid-In Retained Stock Stock Comprehensive Stockholders'
Stock Stock Capital Earnings Class A Class B Income(Loss) Equity
....................................................................................................................................
(dollars in thousands except share data)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1995 $3,406 $2,396 $10,687 $26,278 $(136) $(41) $345 $42,935
Net income - - - 5,434 - - - 5,434
Other comprehensive income, net of tax:
Increase in unrealized losses on
securities available-for-sale,
net of $299 in taxes - - - - - - (418) (418)
..........
Comprehensive income 5,016
Conversion of Class B common
stock to Class A common
stock, 48,200 shares 48 (48) - - - - - -
Stock options exercised,
34,350 shares 34 - 99 - - - - 133
Cash dividends, Class A common
stock $0.16 per share - - - (543) - - - (543)
Cash dividends, Class B common
stock $0.0224 per share - - - (52) - - - (52)
.......................................................................................
BALANCE, DECEMBER 31, 1996 3,488 2,348 10,786 31,117 (136) (41) (73) 47,489
Net income - - - 6,823 - - - 6,823
Other comprehensive income, net of tax:
Increase in unrealized gains on
securities available-for-sale,
net of $129 in taxes - - - - - - 182 182
..........
Comprehensive income 7,005
Conversion of Class B common
stock to Class A common
stock, 21,200 shares 21 (21) - - - - - -
Stock options exercised,
31,950 shares 32 - 91 - - - - 123
Cash dividends, Class A common
stock $0.20 per share - - - (696) - - - (696)
Cash dividends, Class B common
stock $0.028 per share - - - (64) - - - (64)
.......................................................................................
BALANCE, DECEMBER 31, 1997 3,541 2,327 10,8773 7,180 (136) (41) 109 53,857
.......................................................................................
Net income - - - 8,105 - - - 8,105
Other comprehensive income, net of tax:
Increase in unrealized losses on
securities available-for-sale,
net of $102 in taxes - - - - - - (197) (197)
..........
Comprehensive income 7,908
Conversion of Class B common
stock to Class A common
stock, 100,200 shares 100 (100) - - - - - -
Stock options exercised,
31,750 shares 32 - 88 - - - - 120
Cash dividends, Class A common
stock $0.21 per share - - - (749) - - - (749)
Cash dividends, Class B common
stock $0.038 per share - - - (85) - - - (85)
.......................................................................................
BALANCE, DECEMBER 31, 1998 $3,673 $2,227 $10,965 $44,451 $(136) $(41) $(88) $61,051
=======================================================================================
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
-28-
<PAGE> 31
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS....................................................................
...........
Year Ended December 31, 1998 1997 1996
.........................................................................................................
(in thousands)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 8,105 $ 6,823 $ 5,434
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 800 660 1,020
Deferred income taxes (434) (710) (616)
Net depreciation and amortization 1,389 586 668
(Increase) decrease in accrued interest receivable (1,506) (51) 9
(Increase) decrease in other assets (2,174) (1,818) 72
Loans originated for sale (2,532) (9,442) (18,033)
Proceeds from sales of loans 3,179 10,507 19,317
Gain on sales of loans (48) (137) (290)
(Gain) loss on sales of other real estate owned (7) 1 (82)
(Decrease) increase in other liabilities (31) 8,405 189
----------------------------------------
Net cash provided by operating activities 6,741 14,824 7,688
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturities of securities available-for-sale 111,641 30,235 49,193
Purchase of securities available-for-sale (179,295) (37,934) (29,999)
Proceeds from maturities of securities held-to-maturity 89,659 39,013 53,946
Purchase of securities held-to-maturity (140,304) (40,418) (83,675)
Increase in investments purchased payable 11,493 - -
Net cash paid for acquired institution (5,786) - -
Net increase in loans (5,521) (29,400) (4,823)
Proceeds from sales of real estate owned 137 566 1,121
Capital expenditures (1,801) (1,533) (608)
----------------------------------------
Net cash used in investing activities (119,777) (39,471) (14,845)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net (decrease) increase in time deposit accounts (31,483) 6,412 9,849
Net increase in demand, savings,
money market and NOW deposits 33,398 32,902 7,671
Net proceeds from the issuance of common stock 120 123 133
Cash Dividends (834) (760) (595)
Net increase (decrease) in securities sold
under agreements to repurchase 24,840 15,060 (3,790)
Net increase in FHLB borrowings and other borrowed funds 21,372 1,121 10,456
Issuance of long term debt 28,750 - -
----------------------------------------
Net cash provided by financing activities 76,163 54,858 23,724
----------------------------------------
Net (decrease) increase in cash and cash equivalents (36,873) 30,211 16,567
Cash and cash equivalents at beginning of year 97,892 67,681 51,114
Cash and cash equivalents at end of year $ 61,019 $ 97,892 $ 67,681
========================================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest $ 24,047 $ 14,800 $ 16,170
Income taxes 3,963 4,784 3,644
Noncash transactions:
Property acquired through foreclosure $ 130 $ 385 $ 376
Change in unrealized (losses) gains
on securities available-for-sale, net of taxes $ (197) $ 182 $ (418)
...........
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
-29-
<PAGE> 32
......................................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. The Company has one reportable operating segment under FASB 131.
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.
-30-
<PAGE> 33
................................................................................
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. 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.
ALLOWANCE FOR LOAN LOSSES
................................................................................
The allowance for loan losses is based on management's evaluation of the quality
of the loan portfolio and is used to provide for losses resulting from loans
which ultimately prove uncollectible. In determining the level of the allowance,
periodic evaluations are made of the loan portfolio which take into account such
factors as the character of the loans, loan status, financial posture of the
borrowers, value of collateral securing the loans and other relevant information
sufficient to reach an informed judgement. The allowance is increased by
provisions charged to income and reduced by loan charge-offs, net of recoveries.
While management uses available information in establishing the allowance for
loan losses, future adjustments to the allowance may be necessary if economic
conditions differ substantially from the assumptions used in making the
evaluations. Loans are charged-off in whole or in part when, in management's
opinion, collectibility is not probable.
Management believes that the allowance for loan losses is adequate. In addition,
various regulatory agencies, as part of their examination process, periodically
review the Company's allowance for loan losses. Such agencies may require the
Company to recognize additions to the allowance based on their judgements about
information available to them at the time of their examination.
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.
-31-
<PAGE> 34
......................................NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 $0 at December 31, 1998 and $471,000
at December 31, 1997.
3. SECURITIES AVAILABLE-FOR-SALE
................................................................................
<TABLE>
<CAPTION>
................................................
December 31, 1998 December 31, 1997
................................................ ................................................
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 $202,903 $343 $323 $202,923 $84,582 $237 $56 $84,763
Obligations of states
and political subdivisions - - - - 750 - - 750
FHLB Stock 4,415 - - 4,415 3,419 - - 3,419
Other 2,972 18 171 2,819 253 5 - 258
................................................ ................................................
$210,290 $361 $494 $210,157 $89,004 $242 $56 $89,190
================================================ ================================================
</TABLE>
Included in U.S. Government and Agency Securities are Securities pledged to
secure public deposits and repurchase agreements amounting to $53,972,000 at
December 31, 1998 and $13,137,000 at December 31, 1997.
The following tables show the maturity distribution of the Company's securities
available-for-sale at December 31, 1998 and 1997:
<TABLE>
<CAPTION>
........................................................
December 31, 1998 December 31, 1997
........................................................ .....................................................
Obligations Obligations
U.S. of States Estimated U.S. of States Estimated
Government and Political Market Government and Political Market
and Agencies Subdivisions Other Total Value and Agencies Subdivisions Other Total Value
.............................................................................. .....................................................
(in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Within one year $ 20,445 $ - $ - $ 20,445 $ 20,525 $ 29,460 $750 $ - $30,210 $30,253
After one but within
five years 138,475 - 100 138,575 138,585 54,122 - - 54,122 54,251
After five but
within ten years 42,984 - 256 43,240 43,188 1,000 - 250 1,250 1,259
More than ten years 999 - 49 1,048 1,050 - - - - -
Non-maturing - - $6,982 6,982 6,809 - - 3,422 3,422 3,427
........................................................ .....................................................
$202,903 $ - $7,387 $210,290 $210,157 $84,582 $750 $3,672 $89,004 $89,190
======================================================== =====================================================
</TABLE>
The weighed average remaining life of investment securities available-for-sale
at December 31, 1998 and 1997 was 4.0 years and 2.0 years, respectively.
Included in the weighted average remaining life calculation at December 31, 1998
were $138.6 million of U.S. Agency obligations that are callable at the
discretion of the issuer. These call dates were not utilized in computing the
weighted average remaining life.
4. SECURITIES HELD-TO-MATURITY
<TABLE>
<CAPTION>
................................................
December 31, 1998 December 31, 1997
................................................ ................................................
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 $202,903 $343 $323 $202,923 $ 84,582 $237 $ 56 $ 84,763
U.S. Government and Agencies $142,447 $607 $275 $142,779 $107,117 $347 $124 $107,340
Obligations of states
and political subdivisions 11 - - 11 22 - - 22
Other 17,417 - 98 17,319 2,100 - 8 2,092
................................................ ................................................
$159,875 $607 $373 $160,109 $109,239 $347 $132 $109,454
=============================================== ================================================
</TABLE>
Included in U.S. Government and Agency securities are securities pledged to
secure public deposits and repurchase agreements amounting to $11,676,000 at
December 31, 1998 and $27,119,000 at December 31, 1997.
-32-
<PAGE> 35
................................................................................
The following tables show the maturity distribution of the Company's securities
held-to-maturity at December 31, 1997 and 1996:
<TABLE>
<CAPTION>
........................................................
December 31,1998 December 31,1997
........................................................ .....................................................
Obligations Obligations
U.S. of States Estimated U.S. of States Estimated
Government and Political Market Government and Political Market
and Agencies Subdivisions Other Total Value and Agencies Subdivisions Other Total Value
.............................................................................. .....................................................
(in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Within one year $ 2,006 $11 $25 $ 2,042 $ 2,050 $ 9,970 $1l $2,025 $ 12,006 $12,009
After one but
within five years 83,822 - 25 83,847 84,142 79,191 11 50 79,252 79,439
After five but
within ten years 19,996 - 25 20,021 20,014 16,956 - 25 16,981 17,007
More than ten years 36,623 - 17,342 53,965 53,903 1,000 - - 1,000 999
..............................................................................................................
$142,447 $11 $17,417 $159,875 $160,109 $107,117 $22 $2,100 $109,239 $109,454
........................................................ .....................................................
</TABLE>
The weighted average remaining life of investment securities held-to-maturity at
December 31, 1998 and 1997 was 11.1 years and 3.5 years, respectively. Included
in the weighted average remaining life calculation at December 31, 1998 were
$89.0 million of U.S. Agency obligations that are callable at the discretion of
the issuer. These call dates were not utilized in computing the weighted average
remaining life.
5. LOANS
................................................................................
The Company's lending activities are conducted principally in Massachusetts. The
Company grants single and multi-family residential loans, commercial and
commercial real estate loans, and a variety of consumer loans. To a lesser
extent, the Company grants loans for the construction of residential homes,
multi-family properties, commercial real estate properties, and land
development. Most loans granted by the Company are secured by real estate
collateral. The ability and willingness of commercial real estate, commercial,
construction, residential and consumer loan borrowers to honor their repayment
commitments is generally dependent on the health of the real estate market in
the borrowers' geographic areas and the general economy.
The composition of the loan portfolio at December 31, 1998 and 1997 is as
follows:
............
1998 1997
........................................................................
(in thousands)
Construction and land development $ 21,691 $ 7,549
Commercial and industrial 64,822 50,560
Industrial revenue bonds 1,034 2,693
Commercial real estate 187,285 140,270
Residential real estate 87,518 76,160
Residential real estate held for sale - 225
Consumer 14,355 19,254
Home equity 18,839 19,031
Overdrafts 359 648
........................
$395,903 $316,390
........................
At December 31, 1997 and 1996, loans were carried net of discounts of $2,399,000
and $2,875,000 respectively. Included in these amounts at December 31, 1998 and
1997, residential real estate loans were carried net of discounts of $2,375,000
and $2,847,000 respectively, associated with a prior financial institution
acquisition.
The composition of non-accrual loans and impaired loans is as follows:
............
1998 1997
........................................................................
(in thousands)
Loans on non-accrual $1,281 $1,705
Impaired loans on non-accrual included above 1,131 1,235
--------------------------------------------------------------------
Total recorded investment in impaired loans $2,992 $3,515
Average recorded value of impaired loans $3,048 $3,157
- ----------------------------------------------------------------------
Loans 90 days past due and still accruing $ 698 $ 7
- ----------------------------------------------------------------------
Interest income on non-accrual loans
according to their original terms $ 166 $ 202
Interest income on non-accrual loans
actually recorded $ 27 $ 84
Interest income recognized on impaired loans $ 142 $ 216
............
-33-
<PAGE> 36
......................................NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The composition of impaired loans at December 31, is as follows:
............
1998 1997
........................................................................
(in thousands)
Residential real estate:
1 to 4 family $ 330 $ 250
Multi-family 729 771
Construction and land development - -
Commercial real estate 1,662 2,323
Commercial and industrial 271 171
........................
Total $2,992 $3,515
Specific valuation allowance - -
........................
Total impaired loans $2,992 $3,515
========================
There were no impaired loans with specific reserves at December 31, 1998 and
1997 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 $16,123,000 at December 31, 1998 and $18,053,000 at December 31,
1997. Additionally, the Company was servicing mortgage loans sold to others with
limited recourse. The outstanding balance of these loans with limited recourse
was approximately $501,000 at December 31, 1998 and $753,000 at December 31,
1997.
Directors and officers of the Company and their associates are customers of, and
have other transactions with, the Company in the normal course of business. All
loans and commitments included in such transactions were made on substantially
the same terms, including interest rates and collateral, as those prevailing at
the time for comparable transactions with other persons and do not involve more
than normal risk of collection or present other unfavorable features.
The following table shows the aggregate amount of loans to directors and
officers of the Company and their associates during 1998.
<TABLE>
<CAPTION>
..................................................
Balance at Repayments Balance at
December 31, 1997 Additions and Deletions December 31, 1998
.........................................................................................................
(in thousands)
<S> <C> <C> <C> <C>
$1,427 $355 $517 $1,265
========================================================================
</TABLE>
6. ALLOWANCE FOR LOAN LOSSES
............
1998 1997 1996
...............................................................................
(in thousands)
Balance at beginning of year $4,446 $4,179 $4,193
Acquired allowance 1,194 - -
Provision charged to operating expense 800 660 1,020
Loans charged-off (843) (689) (1,303)
Loan recoveries 425 296 269
.......................................
Balance at end of year $ 6,022 $4,446 $4,179
=======================================
7. BANK PREMISES AND EQUIPMENT
...........
December 31, 1998 1997
.....................................................................
(in thousands)
Land $ 1,839 $ 1,839
Bank premises 6,533 6,533
Furniture and equipment 12,504 9,468
Leasehold improvements 1,888 1,888
........................
22,764 19,728
Accumulated depreciation and amortization (12,221) (11,010)
........................
$ 10,543 $ 8,718
========================
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 $111,000, $85,000 and $144,000
for the years ended December 31, 1998, 1997 and 1996, respectively.
-34-
<PAGE> 37
................................................................................
Future minimum rental commitments for noncancelable operating leases with
initial or remaining terms of one year or more at December 31, 1998 were as
follows:
<TABLE>
<CAPTION>
Year Amount
- --------------------------------------------------------------------------------
(in thousands)
<S> <C> <C>
1999 $ 126
2000 126
2001 89
2002 82
2003 82
Thereafter 582
-----------------------------------
$ 1,087
===================================
</TABLE>
8. DEPOSITS
- -------------------------------------------------------------------------------
Time deposits as of December 31 are as follows:
<TABLE>
<CAPTION>
1998 1997
- --------------------------------------------------------------------------------
(in thousands)
<S> <C> <C>
Three months or less 78,845 $101,719
Three through twelve months $121,732 55,263
Over twelve months 41,552 14,297
------------------------------------
$242,129 $171,279
====================================
</TABLE>
Time deposits in denominations of $100,000 or more totaled $71,832,000 and
$63,214,000 at December 31, 1998 and 1997, respectively. Interest expense
associated with deposits in denominations of $100,000 or more was $3,547,000,
$2,251,000 and $2,124,000 for the years ended 1998, 1997 and 1996, respectively.
9. SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1998 1997 1996
- -----------------------------------------------------------------------------------------------------
(dollars in thousands)
<S> <C> <C> <C>
Average rate at December 31, 3.53% 4.49% 4.34%
Average balance outstanding during the year $36,953 $24,994 $16,654
Average rate during the year 4.26% 4.30% 4.28%
Maximum amount outstanding at any month-end $57,690 $39,060 $17,790
Amount outstanding at December 31, $57,690 $32,850 $17,790
</TABLE>
Amounts outstanding at December 31, 1998, 1997 and 1996 carried maturity dates
of the next business day. U.S. Government and Agency securities with a total
book value of $57,654,000, $32,776,000 and $17,762,000 were pledged as
collateral and held by custodians to secure the agreements at December 31, 1998,
1997 and 1996, respectively. The approximate market value of the collateral at
those dates was $57,626,000, $32,814,000 and $17,605,000, respectively.
10. OTHER BORROWED FUNDS AND LONG TERM DEBT
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
December 31, 1998 1997
- -----------------------------------------------------------------------------------
(in thousands)
<S> <C> <C>
Treasury tax and loan note $ 1,234 $ 834
Federal Home Loan Bank-IDEAL Advance 5,000 --
Federal Home Loan Bank-Advance 27,415 11,454
Other 1,196 1,186
------------------------
Total other borrowed funds $34,846 $13,474
========================
</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 had a credit line advance of $5,000,000 with the Federal Home Loan Bank on
December 31, 1998. The interest rate on this line was 5.40%. The Bank also
borrowed $1,500,000 from the Federal Home Loan Bank in July 1996. The borrowing
bears interest at a fixed rate of 7.20%, has a remaining principal balance of
$1,415,000 and matures on July 24, 2006. In addition, the Bank borrowed three
term loans with the Federal Home Loan Bank on July 31, 1998. These loans total
$26,000,000, bear a weighted average interest rate of 5.39% and mature on July
30, 2008.
In May 1998 the Company, through its newly formed subsidiary, Century Bancorp
Capital Trust, issued 2,875,000 shares of Cumulative Trust Preferred Securities
with a liquidation value of $10 per share. These securities pay dividends at an
annualized rate of 8.30% and mature on June 30, 2029. The Company is using the
proceeds primarily for general business purposes.
-35-
<PAGE> 38
11. 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 earnings per share ("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 1998, 1997 and 1996 was an
increase of 37,999, 58,775 and 82,712 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 key employees of the Company are eligible to receive non-qualified
and incentive stock options to purchase shares of Class A common stock. The
Option Plan is administered by the Compensation Committee whose members are
ineligible to participate in the Option Plan. Based on management's
recommendations, the Committee submits its recommendations to the Board of
Directors as to persons to whom options are to be granted, the number of shares
to be granted to each, the option price (which may not be less than 85% of the
fair market value for non-qualified stock options, or the fair market value for
incentive stock options, of the shares on the date of grant) and the time period
over which the options are exercisable (no more than ten years from the date of
grant). Options exercisable at December 31, 1998 totaled 46,783 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, 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
Granted -- --
Exercised (31,750) 3.75
Cancelled -- --
- --------------------------------------------------------------------------------------------
Outstanding at December 31, 1998 46,783 $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>
1999 -- --
2000 46,783 $3.75
- --------------------------------------------------------------------------------------------
46,783 $3.75
============================================================================================
</TABLE>
-36-
<PAGE> 39
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 1998, 1997 or 1996
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, 1998 that the Bank meets
all capital adequacy requirements to which it is subject.
As of December 31, 1997, the most recent notification from the FDICcategorized
the Bank as well capitalized under the regulatory framework for prompt
corrective action. To be categorized as well capitalized, the Bank must maintain
minimum total risk-based, Tier I risk-based, and Tier I leverage ratios as set
forth in the table. There are no conditions or events since that notification
that management believes would cause a change in the Bank's categorization.
The Bank's actual capital amounts and ratios are presented in the following
table.
<TABLE>
<CAPTION>
To Be Well Capitalized
Under Prompt 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, 1998:
Total capital (to risk-weighted assets) $54,777 11.87% $36,922 8.0% $46,153 10.6%
Tier I capital (to risk-weighted assets) 49,005 10.62% 18,461 4.0% 27,692 6.0%
Tier I capital (to average assets) 49,005 6.08% 32,254 4.0% 40,318 5.0%
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%
</TABLE>
12. INCOME TAXES
- --------------------------------------------------------------------------------
The current and deferred components of income tax expense for the years ended
December 31 are as follows:
<TABLE>
<CAPTION>
1998 1997 1996
- -----------------------------------------------------------------------------------------------
(in thousands)
Current expense:
<S> <C> <C> <C>
Federal $4,884 $3,824 $2,959
State 349 1,091 1,062
------------------------------------------
Total current expense 5,233 4,915 4,021
------------------------------------------
Deferred expense:
Federal (1,001) (541) (238)
State 630 (169) (78)
Change in valuation allowance -- -- (300)
------------------------------------------
Total deferred expense (371) (710) (616)
------------------------------------------
Provision for income taxes $4,862 $4,205 $3,405
==========================================
</TABLE>
Income tax accounts included in other assets and other liabilities at December
31 are as follows:
<TABLE>
<CAPTION>
1998 1997
- ------------------------------------------------------------------------------------
(in thousands)
<S> <C> <C>
Currently payable $(1,112) $ (419)
Deferred income tax asset, net 1,834 2,235
--------------------------
$ 722 $1,816
==========================
</TABLE>
-37-
<PAGE> 40
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>
1998 1997 1996
- -------------------------------------------------------------------------------------------
(in thousands)
<S> <C> <C> <C>
Federal income tax expense
at statutory rates $4,409 $3,750 $3,005
State income taxes, net of Federal
income tax benefit 646 608 649
Effect of tax-exempt interest (77) (102) (105)
Change in valuation allowance -- -- (300)
Other (116) (51) 156
----------------------------------------
$4,862 $4,205 $3,405
========================================
Effective Tax Rate 37.5% 38.1% 38.5%
</TABLE>
Management believes that it is more likely than not that the net deferred income
tax asset of $1,834,000 at December 31, 1998 will be realized. The federal tax
portion of $1,834,000 of the deferred tax asset is supported by the availability
of federal income taxes paid in prior carryback years.
The valuation allowance was reduced by $300,000 in 1996 in recognition of the
operating results achieved and the increase in recoverable federal income taxes
paid in prior years.
The following table sets forth the Company's gross deferred income tax assets
and gross deferred income tax liabilities at December 31:
<TABLE>
<CAPTION>
1998 1997
- ------------------------------------------------------------------------------------
(in thousands)
<S> <C> <C>
Deferred income tax assets:
Allowance for loan losses $1,578 $1,055
Deferred compensation 1,554 1,625
Unrealized loss on securities available-for-sale 45 --
Acquisition premium 114 95
Capital loss carryforward 79 --
Investments writedown 62 --
Deferred origination fees 47 --
Other -- 12
----------------------
Gross deferred income tax asset 3,479 2,787
Valuation allowance (79) --
----------------------
Net deferred income tax asset 3,400 2,787
Deferred income tax liabilities:
Unrealized gain on securities available-for-sale -- (77)
Purchase accounting (276) (297)
Depreciation (186) (157)
Limited partnerships (1,099) --
Other (5) (21)
----------------------
Deferred income tax asset, net $1,834 $2,235
======================
</TABLE>
13. EMPLOYEE BENEFITS
- -------------------------------------------------------------------------------
The Company has a qualified Defined Benefit Pension Plan (the "Plan"), which is
offered to all employees reaching minimum age and service requirements. A
decrease in the discount rate and a stable work force in 1998 resulted in an
increase in pension cost.
The Company has a Supplemental Insurance/Retirement Plan(the "Supplemental
Plan"), which is limited to certain officers and employees of the Company. The
Supplemental Plan is voluntary and participants are required to contribute to
its cost. Under the Supplemental Plan, each participant will receive a
retirement benefit based on compensation and length of service. Individual life
insurance policies, which are owned by the Company, are purchased covering the
lives of each participant.
-38-
<PAGE> 41
<TABLE>
<CAPTION>
Defined Benefit Pension Plan Supplemental Insurance/Retirement Plan
- -----------------------------------------------------------------------------------------------------------------------------
1998 1997 1998 1997
<S> <C> <C> <C> <C>
Change in benefit obligation:
Benefit obligation at beginning of year $ 6,319 $ 4,859 $ 4,260 $ 3,557
Service cost 413 357 107 78
Interest cost 442 340 298 263
Plan amendments -- -- -- 10
Actuarial gain 917 862 902 372
Benefits paid (139) (99) (10) (20)
------------------------------------------------------------
Benefit obligation at end of year $ 7,952 $ 6,319 $ 5,557 $ 4,260
------------------------------------------------------------
Change in plan assets:
Fair value of plan assets at beginning of year $ 4,171 $ 3,341
Actual return of plan assets 268 354
Employer contributions 575 575
Benefits paid (139) (99)
------------------------------------------------------------
Fair value of plan assets at end of year $ 4,875 $ 4,171
------------------------------------------------------------
Funded status $(3,077) $(2,148) $(5,557) $(4,260)
Unrecognized transition obligation (2) (3) (309) (412)
Unrecognized prior service cost (622) (722) 955 1,023
Unrecognized net actuarial loss (1,941) (987) (1,929) (1,245)
------------------------------------------------------------
Accrued benefit cost $ (512) $ (436) $(4,274) $(3,626)
============================================================
Weighted-average assumptions as of December 31:
Discount rate 6.25% 7.00% 6.25% 7.00%
Expected return on plan assets 8.00% 8.00% N/A N/A
Rate of compensation increase 5.00% 5.00% 5.00% 5.00%
Components of net periodic benefit cost:
Service cost $ 413 $ 357 $ 107 $ 78
Interest cost 442 340 298 263
Expected return on plan assets (328) (270) 0 0
Amortization of unrecognized
transition obligation 1 1 103 103
Recognized prior service cost 99 99 (68) (69)
Recognized net gains 24 0 54 20
------------------------------------------------------------
Net periodic cost $ 651 $ 527 $ 494 $ 395
============================================================
</TABLE>
The Company offers a 401(k) defined contribution plan for all employees reaching
minimum age and service requirements. The plan is voluntary and, as of January
1, 1998, employee contributions are matched by the Company at a rate of 25% for
the first 4% of compensation contributed by each employee. The Company's match
totaled $67,000 for 1998. Administrative costs associated with the plan are
absorbed by the Company.
The Company does not offer any post retirement programs other than pensions.
14. COMMITMENTS AND CONTINGENCIES
- --------------------------------------------------------------------------------
A number of legal claims against the Bank arising in the normal course of
business were outstanding at December 31, 1998. 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.
15. 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.
-39-
<PAGE> 42
Financial instruments with off-balance sheet risk at December 31 are as follows:
<TABLE>
<CAPTION>
Contract or Notional Amount 1998 1997
- --------------------------------------------------------------------------------------
(in thousands)
<S> <C> <C>
Financial instruments whose contract amount
represents credit risk:
Commitments to originate 1-4 family mortgages $ 1,146 $ 163
Standby letters of credit 1,935 1,561
Unused lines of credit 73,926 85,204
Unadvanced portions of construction loans 1,308 321
Financial instruments whose contract amount
exceeds the amount of credit risk:
Commitments to sell 1-4 family mortgages -- 388
</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 $501,000 at
December 31, 1998 and $753,000 at December 31, 1997.
16. OTHER OPERATING EXPENSES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended December 31, 1998 1997 1996
- ---------------------------------------------------------------------------------------------------------
(in thousands)
<S> <C> <C> <C>
Marketing $1,079 $1,024 $ 835
Supplies 488 441 471
Telephone 267 227 218
Postage and delivery 459 465 512
Legal and audit 381 330 316
Insurance 172 187 184
FDIC assessment 70 57 2
Core deposit intangible amortization 200 200 200
Goodwill amortization 171 -- --
Other 1,855 1,137 938
-----------------------------------------
$5,142 $4,068 $3,676
=========================================
</TABLE>
17. 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.
-40-
<PAGE> 43
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, 1998
and 1997, there was no fair value adjustment.
The carrying amounts and fair values of the Company's financial instruments at
December 31 are as follows:
<TABLE>
<CAPTION>
1998 1997
- ------------------------------------------------------------------------------------------
Carrying Carrying
Amounts Fair Value Amounts Fair Value
- ------------------------------------------------------------------------------------------
(in thousands)
Financial assets:
<S> <C> <C> <C> <C>
Cash and cash equivalents $ 61,019 $ 61,019 $ 97,892 $ 97,892
Securities available-for-sale 210,157 210,157 89,190 89,190
Investment securities held-to-maturity 159,875 160,109 109,239 109,454
Net loans 389,881 395,751 311,944 315,653
Accrued interest receivable 6,518 6,518 4,334 4,334
Financial liabilities:
Deposits 643,425 644,885 515,449 515,904
Repurchase agreements
and other borrowed funds 92,536 92,536 46,324 46,324
Accrued interest payable 1,612 1,612 3,123 3,123
</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 active 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.
18. QUARTERLY RESULT OF OPERATIONS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1998 Quarters Fourth Third Second First
- ------------------------------------------------------------------------------------------------
(in thousands, except per share data)
<S> <C> <C> <C> <C>
Interest income $ 14,451 $ 14,403 $ 12,090 $ 10,934
Interest expense 6,301 6,595 5,039 4,080
-------------------------------------------------------
Net interest income 8,150 7,808 7,051 6,854
Provision for loan losses 225 225 185 165
-------------------------------------------------------
Net-interest income after provisions
for loan losses 7,925 7,583 6,866 6,689
Other operating income 1,365 1,251 1,367 1,247
Operating expenses 5,667 5,472 5,115 5,072
-------------------------------------------------------
Income before income taxes 3,623 3,362 3,118 2,864
Provision for income taxes 1,394 1,273 1,133 1,062
-------------------------------------------------------
Net income $ 2,229 $ 2,089 $ 1,985 $ 1,802
=======================================================
Share Data
Average shares outstanding, basic 5,818,156 5,817,667 5,809,420 5,792,160
Average shares outstanding, diluted 5,855,477 5,858,784 5,851,732 5,853,993
Earnings per share, basic $ 0.38 $ 0.36 $ 0.34 $ 0.31
Earnings per share, diluted $ 0.38 $ 0.36 $ 0.34 $ 0.31
</TABLE>
-41-
<PAGE> 44
<TABLE>
<CAPTION>
1997 Quarters Fourth Third Second First
- --------------------------------------------------------------------------------------------------------
(in thousands, except per share data)
<S> <C> <C> <C> <C>
Interest income $ 10,593 $ 10,395 $ 10,332 $ 9,896
Interest expense 4,094 3,991 3,992 3,845
-------------------------------------------------------
Net interest income 6,499 6,404 6,340 6,051
Provision for loan losses 135 135 135 255
-------------------------------------------------------
Net-interest income after provisions
for loan losses 6,364 6,269 6,205 5,796
Other operating income 1,347 1,248 1,255 1,144
Operating expenses 4,613 4,693 4,663 4,630
Income before income taxes 3,098 2,824 2,797 2,310
Provision for income taxes 1,045 1,093 1,133 934
-------------------------------------------------------
Net income $ 2,053 $ 1,731 $ 1,664 $ 1,376
=======================================================
Share Data
Average shares outstanding, basic 5,779,946 5,777,767 5,769,282 5,761,278
Average shares outstanding, diluted 5,842,167 5,846,473 5,834,441 5,835,391
Earnings per share, basic $ 0.36 $ 0.30 $ 0.29 $ 0.24
Earnings per share, diluted $ 0.35 $ 0.30 $ 0.29 $ 0.24
=======================================================
</TABLE>
19. PARENT COMPANY FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
The balance sheets of Century Bancorp, Inc. ("Parent Company") as of December
31, 1998 and 1997 and the statements of income and cash flows for each of the
years in the three-year period ended December 31, 1998 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.
<TABLE>
<CAPTION>
Balance Sheets
- ------------------------------------------------------------------
December 31, 1998 1997
- ------------------------------------------------------------------
(in thousands)
<S> <C> <C>
Assets:
Cash $35,162 $ 7,602
Investment in subsidiary, at equity 53,383 46,550
Other assets 1,672 83
-------------------
Total assets 90,217 54,235
===================
Liabilities and Stockholders' Equity:
Liabilities $ 416 $ 378
Long term debt 28,750 --
Stockholders' equity 61,051 53,857
-------------------
Total liabilities and stockholders' equity $90,217 $54,235
===================
</TABLE>
<TABLE>
<CAPTION>
Statements of Income
- ---------------------------------------------------------------------------------
Year Ended December 31, 1998 1997 1996
- ---------------------------------------------------------------------------------
(in thousands)
<S> <C> <C> <C>
Income:
Dividends from subsidiary $ 1,435 $ 1,702 $ 1,544
Interest income from deposits in bank 1,159 289 253
Other income 12 12 12
--------------------------------
Total income 2,606 2,003 1,809
Interest expense 1,485 -- --
Operating expenses 212 73 69
--------------------------------
Income before income taxes and equity in
undistributed income of subsidiary 909 1,930 1,740
Income tax expense (167) 112 89
--------------------------------
Income before equity in undistributed
income of subsidiary 1,076 1,818 1,651
Equity in undistributed income of subsidiary 7,029 5,005 3,783
--------------------------------
Net income $ 8,105 $ 6,823 $ 5,434
================================
</TABLE>
-42-
<PAGE> 45
Statements of Cash Flows
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended December 31, 1998 1997 1996
- -------------------------------------------------------------------------------------------
(in thousands)
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 8,105 $ 6,823 $ 5,434
Adjustments to reconcile net income to
net cash provided by operating activities:
Undistributed income of subsidiary (7,029) (5,005) (3,783)
Depreciation and amortization 138 6 6
Increase in other assets (1,728) (2) (1)
Increase in liabilities 38 81 29
------------------------------------
Net cash (used in) provided
by operating activities (476) 1,830 1,785
------------------------------------
Cash flows from financing activities:
Stock options exercised 120 123 133
Cash dividends paid (834) (760) (595)
Issuance of long term debt 28,750 -- --
------------------------------------
Net cash provided by (used in)
financing activities 28,036 (637) (462)
-----------------------------------
Net increase in cash 27,560 1,193 1,323
Cash at beginning of year 7,602 6,409 5,086
------------------------------------
Cash at end of year $ 35,162 $ 7,602 $ 6,409
====================================
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Income taxes $ 25 $ 111 $ 93
</TABLE>
20. ACQUISITION
- --------------------------------------------------------------------------------
On June 11, 1998 The Company acquired Haymarket Co-operative Bank ("Haymarket"),
headquartered in Boston, Massachusetts and merged Haymarket into the Bank. The
purchase price was $21.1 million and was accounted for using the purchase method
of accounting. The results of operations include the effect of the purchase for
the 203 day period beginning June 12, 1998. In connection with the acquisition,
the fair value of the assets acquired and liabilities assumed were as follows:
<TABLE>
<CAPTION>
June 11, 1998
- ---------------------------------------------------------------
(in thousands)
<S> <C>
Assets acquired:
Cash and due from banks $ 4,035
Federal funds sold and interest-bearing
deposits in other banks 11,300
Securities available-for-sale 53,473
Net loans 73,823
Accrued interest receivable 678
Premises and equipment 1,649
Other Assets 84
--------
Total assets acquired 145,042
Liabilities assumed:
Deposits accounts 126,572
Accrued expenses and other liabilities 1,045
--------
Total liabilities assumed 127,617
--------
Assets in excess of liabilities 17,425
Cash paid to Haymarket shareholders 21,121
Goodwill $ 3,696
========
</TABLE>
Goodwill is included as a component of other assets.
The following condensed consolidated pro-forma results of the Company were
prepared as if the acquisition had taken place on January 1 of the respective
year. 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 of the respective year.
<TABLE>
<CAPTION>
1998 1997
- ---------------------------------------------------------------------
<S> <C> <C>
Net interest income $31,736 $30,336
Net income 8,453 7,964
Basic earnings per share $ 1.46 $ 1.38
Diluted earnings per share $ 1.45 $ 1.37
</TABLE>
-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, 1998 and 1997, 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,
1998. 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, 1998 and 1997, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1998 in conformity with generally accepted accounting
principles.
KPMG Peat Marwick LLP
January 8, 1999
-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, 1998 are as
follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
<S> <C> <C>
George R. Baldwin 55 Director, Century Bancorp, Inc., and Century Bank and Trust Co.,
Roger S. Berkowitz 46 Director, Century Bancorp, Inc., and Century Bank and Trust Co.
Karl E. Case, Ph. D. 52 Director, Century Bancorp, Inc., and Century Bank and Trust Co.
Henry L. Foster, D.V.M. 73 Director, Century Bancorp, Inc., and Century Bank and Trust Co.
Marshall I. Goldman, Ph. D. 68 Director, Century Bancorp, Inc., and Century Bank and Trust Co.
Russell B. Higley, Esquire 59 Director, Century Bancorp, Inc., and Century Bank and Trust Co.
Jonathan B. Kay 39 Director, Century Bancorp, Inc., and Century Bank and Trust Co.
Fraser Lemley 58 Director, Century Bancorp, Inc., and Century Bank and Trust Co.
Joseph P. Mercurio 50 Director, Century Bancorp, Inc., and Century Bank and Trust Co.
Joseph J. Senna, Esquire 59 Director, Century Bancorp, Inc., and Century Bank and Trust Co.
Barry R. Sloane 43 Director, Century Bancorp, Inc., and Century Bank and Trust Co.
Jonathan G. Sloane 40 Director and Senior Vice President, Century Bancorp, Inc.; President
and COO, Century Bank and Trust Company
Marshall M. Sloane 72 Chairman, President and CEO, Century Bancorp, Inc., Chairman and
CEO, Century Bank and Trust Company
Stephanie Sonnabend 45 Director, Century Bancorp, Inc., and Century Bank and Trust Co.
George F. Swansburg 56 Director, Century Bancorp, Inc., and Century Bank and Trust Co.
Jon Westling 56 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 Baldwin & Co.
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 Region Head of The Citibank Private Bank.
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 Executive Vice
President of Century Bancorp Inc. and 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 now retired.
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.
Marshall M. Sloane Chairman, President and CEO; Chairman and CEO, Century
Bank and Trust Company. Mr. Sloane is 72 years of age.
Jonathan G. Sloane Director and Executive Vice President; Director,
President and COO, Century Bank and Trust Company.
Mr. Sloane is 40 years of age.
Paul V. Cusick, Jr. Vice President and Treasurer; Executive Vice President,
Chief Financial Officer and Treasurer, Century Bank and
Trust Company. Mr. Cusick is 54 years of age.
Kenneth M. Johnson President, Century Financial Services, Inc.
Mr. Johnson is 38 years of age.
Donald H. Lang Executive Vice President, Century Bank and Trust
Company with responsibility for lending. Mr. Lang
is 58 years of age.
William J. Sloboda Executive Vice President, Century Bank and Trust
Company with responsibility for operations.
Mr. Sloboda is 56 years of age.
COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
Decisions on compensation of the Company's executives are generally made by the
Compensation Committee of the Board of Directors. Each member of the
Compensation Committee is a non-employee director. The goal of the Committee is
to provide competitive levels of compensation in order to attract and retain
qualified executive personnel. The Compensation Committee believes that the
actions of each executive officer have the potential to affect the short and
long term profitability of the Company. Accordingly, the Compensation Committee
places considerable importance on the design and administration of the executive
compensation program.
The Company has an executive compensation program that is driven by the overall
performance of the Company, the increase in shareholder value, the performance
of the business unit directly affected by the executive and by the performance
of the individual executive. The three primary components of the executive
compensation program are base salary, cash incentive plan and stock based
incentive plans.
-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 90% 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 1998, 1997 and 1996 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
1998 cash compensation for Mr. Sloane was $603,500 of which $464,500 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*
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
$600
$500
$400 Century
$300 NASDAQ Bank
Stocks
$200
NASDAQ U.S.
$100
$ 0
12/31/93 12/31/94 12/31/95 12/31/96 12/31/97 12/31/98
</TABLE>
Value of $100 Invested on December 31, 1993 at:
<TABLE>
<CAPTION>
12/31/94 12/31/95 12/31/96 12/31/97 12/31/98
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Century 232.49 298.07 391.50 540.26 557.67
Nasdaq Banks 99.64 148.38 195.91 328.02 324.90
Nasdaq U.S. 97.75 138.26 170.01 208.58 293.21
* Assumes that the value of the investment in the Company's Common Stock and
each index was $100 on December 31, 1993 and that all dividends were
reinvested.
-49-
</TABLE>
<PAGE> 52
SUMMARY OF CASH AND CERTAIN OTHER COMPENSATION
The following table shows, for fiscal years ending December 31, 1996, 1997 and
1998, the cash compensation paid by the Company and its subsidiaries, as well as
certain other compensation paid, accrued or granted for those years to the five
most highly compensated executive officers of the Company.
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
====================================================================================================================================
Long-Term Compensation
----------------------------------
Annual Compensation Awards Payouts
======================================================================================================================
Restricted Securities
Stock Underlying LTIP All Other
Salary Bonus(1) Other Awards Options/ Payouts Compensation
Name and Principal Position Year ($) ($) ($) ($) SARs(#) ($) ($)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Marshall M. Sloane 1998 464,500 199,400 0 0 0 0 0
Chairman, President and 1997 438,200 139,000 0 0 0 0 0
CEO, Century Bancorp, Inc. 1996 413,400 125,260 0 0 0 0 0
Chairman and CEO, Century
Bank and Trust Company
- ------------------------------------------------------------------------------------------------------------------------------------
Jonathan G. Sloane 1998 200,000 79,760 0 0 0 0 0
Executive Vice President 1997 154,000 40,905 0 0 0 0 0
Century Bancorp, Inc. 1996 148,000 36,852 0 0 0 0 0
President and COO, Century
Bank and Trust Company
- ------------------------------------------------------------------------------------------------------------------------------------
Kenneth M. Johnson 1998 202,947 0 0 0 0 0 0
President 1997 218,827 0 0 0 0 0 0
Century Financial Services, 1996 177,859 0 0 0 0 0 0
Inc.
- ------------------------------------------------------------------------------------------------------------------------------------
William J. Sloboda 1998 152,400 30,000 0 0 0 0 0
Executive Vice President 1997 147,900 36,827 0 0 0 0 0
Century Bank and Trust 1996 145,000 29,000 0 0 0 0 0
Company
- ------------------------------------------------------------------------------------------------------------------------------------
Donald H. Lang 1998 132,000 40,000 0 0 0 0 0
Executive Vice President 1997 127,000 30,793 0 0 0 0 0
Century Bank and Trust 1996 123,300 27,742 0 0 0 0 0
Company
====================================================================================================================================
</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 officers listed
below are as follows.
<TABLE>
<CAPTION>
NAME OF INDIVIDUAL NUMBER OF SHARES
------------------ ----------------
<S> <C>
Marshall M. Sloane 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 $2,322,500, $1,000,000, $762,000, $660,000 for
Messrs. Marshall M. Sloane, Jonathan G. Sloane, Sloboda and Lang.
Premiums paid by the Company in 1998 amounted to $87,800, $8,300, $28,400,
$27,600, for policies on the lives of Messrs. Marshall M. Sloane, Jonathan G.
Sloane, Sloboda, and Lang,. 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 Officers (as determined by the Compensation Committee),
less the primary social security benefits and the benefit received from the
defined benefit retirement plan. If a participant retires or terminates
employment prior to age 65 such person is entitled to a reduced benefit. Five
years of service are required for any benefits to become vested. Thereafter
benefits vest incrementally.
The following table illustrates representative annual retirement benefits at
various compensation levels for executive management employees under the
Supplemental Plan who retire at age 65 and with 15 years of service, without
reflecting the required offset of benefits from social security and the defined
benefit retirement plan.
<TABLE>
<CAPTION>
Five Year
Average Compensation Annual Benefit
-------------------- --------------
<S> <C>
$ 50,000 $ 37,500
100,000 75,000
150,000 112,500
200,000 150,000
250,000 187,500
300,000 225,000
</TABLE>
As of January 1, 1998, Messrs. Marshall M. Sloane, Jonathan G. Sloane, Sloboda,
and Lang, were 100%, 100%, 100%, and 92.5%, 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, 1998 (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 6.09%
The Banc Funds
208 South LaSalle Street
Chicago, IL 60604
Warburg Pincus Asset
Management, Inc. (i) 215,855 5.92%
466 Lexington Avenue
New York, New York 10017
Marshall M. Sloane (i)(ii) 16,113(1) 0.44% 1,705,630(2) 78.28%
400 Mystic Ave.
Medford, MA 02155
George R. Baldwin (ii) 6,270 0.17%
Roger S. Berkowitz (ii) 2,013 0.06%
Karl E. Case (ii) 422 0.01%
Paul V. Cusick, Jr. (ii) 11,200 0.31%
Henry L. Foster, D.V.M. (ii) 18,536 0.51% 1,000 0.05%
Marshall I. Goldman (ii) 341(3) 0.01% 30,000(4) 1.38%
Russell B. Higley, Esquire (ii) 4,527 0.12%
Jonathan B. Kay (ii) 3,305(7) 0.09% 60,000(6) 2.75%
Donald H. Lang (ii) 10,600 0.29%
Fraser Lemley (ii) 4,052 0.11% 500(9) 0.02%
Joseph P. Mercurio (ii) 1,628 0.04%
Joseph J. Senna (ii) 44,905(5) 1.23%
Barry R. Sloane (ii) 399 0.01%
Jonathan G. Sloane (ii) 927(8) 0.03% 60,000 2.75%
William J. Sloboda (ii) 11,509 0.32% 500 0.02%
Stephanie Sonnabend (ii) 213 0.01%
George F. Swansburg (ii) 30,040 0.82%
Jon Westling (ii) 472 0.01%
All directors and officers as a group
(20 in number) (iii) 171,572 4.71% 1,857,730 85.27%
</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.
(7) Includes 10 shares owned by Mrs. Kay.
(8) Includes 10 shares owned by Mrs. Debra Sloane and includes 320 shares owned
by Mr. Jonathan Sloane's children.
(9) Entire 500 shares owned by Mrs. Lemley.
-52-
<PAGE> 55
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 1998, 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.
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, 1998 and 1997
Consolidated Statements of Income -- Years Ended December
31, 1998, 1997 and 1996
Consolidated Statements of Changes in Stockholders' Equity
-- Years ended December 31, 1998, 1997 and 1996
Consolidated Statements of Cash Flows -- Years Ended
December 31, 1998, 1997 and 1996
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 9th day of March
1999.
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.
/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/ GEORGE F. SWANSBURG
- ----------------------------------- --------------------------------------
Karl E. Case, Ph.D., Director George F. Swansburg, Director
/s/ HENRY L. FOSTER /s/ JON WESTLING
- ----------------------------------- --------------------------------------
Henry L. Foster, D.V.M., Director Jon Westling, Director
/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/ JONATHAN G. SLOANE
- ----------------------------------- --------------------------------------
Russell B. Higley, Esquire, Director Jonathan G. Sloane, 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
-54-
<TABLE> <S> <C>
<ARTICLE> 9
<CIK> 0000812348
<NAME> CENTURY BANCORP, INC.
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<EXCHANGE-RATE> 1
<CASH> 34,518
<INT-BEARING-DEPOSITS> 1
<FED-FUNDS-SOLD> 26,500
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 210,157
<INVESTMENTS-CARRYING> 159,875
<INVESTMENTS-MARKET> 160,109
<LOANS> 395,903
<ALLOWANCE> 6,022
<TOTAL-ASSETS> 853,326
<DEPOSITS> 643,425
<SHORT-TERM> 66,536
<LIABILITIES-OTHER> 27,564
<LONG-TERM> 54,750
0
0
<COMMON> 5,900
<OTHER-SE> 55,151
<TOTAL-LIABILITIES-AND-EQUITY> 853,326
<INTEREST-LOAN> 33,361
<INTEREST-INVEST> 16,957
<INTEREST-OTHER> 1,560
<INTEREST-TOTAL> 51,878
<INTEREST-DEPOSIT> 17,867
<INTEREST-EXPENSE> 22,015
<INTEREST-INCOME-NET> 29,863
<LOAN-LOSSES> 800
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 21,326
<INCOME-PRETAX> 12,967
<INCOME-PRE-EXTRAORDINARY> 8,105
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 8,105
<EPS-PRIMARY> 1.40
<EPS-DILUTED> 1.39
<YIELD-ACTUAL> 4.52
<LOANS-NON> 1,281
<LOANS-PAST> 698
<LOANS-TROUBLED> 1,011
<LOANS-PROBLEM> 8,700
<ALLOWANCE-OPEN> 4,446
<CHARGE-OFFS> 843
<RECOVERIES> 425
<ALLOWANCE-CLOSE> 6,022
<ALLOWANCE-DOMESTIC> 6,022
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
