<PAGE>
 
                             CENTURY BANCORP, INC.


                               1998 Annual Report
<PAGE>
 
Century Bancorp, Inc. and Subsidiary
--------------------------------------------------------------------------------


TABLE OF CONTENTS


                                                                        Page No.
                                                                        -------
Selected Financial Data..............................................       1
                                                                         
Report to Stockholders...............................................       2
                                                                         
Management's Discussion and Analysis.................................       3
                                                                         
Independent Auditors' Report.........................................      13
                                                                         
Consolidated Financial Statements                                        
                                                                         
   Consolidated Statements of Financial Condition....................      14
                                                                         
   Consolidated Statements of Operations.............................      15
                                                                         
   Consolidated Statements of Stockholders' Equity...................      16
                                                                         
   Consolidated Statements of Cash Flows.............................      17
                                                                         
   Notes to Consolidated Financial Statements........................      19
                                                                         
Corporate Information................................................      42





This annual report to stockholders contains certain forward-looking statements
consisting of estimates with respect to the financial condition, results of
operations and other business of Century Bancorp, Inc. and its wholly-owned
subsidiary, Home Savings, Inc., SSB, that are subject to various factors which
could cause actual results to differ materially from those estimates. Factors
which could influence the estimates include changes in national, regional and
local market conditions, legislative and regulatory conditions, and an adverse
interest rate environment.
<PAGE>
 
<TABLE> 
<CAPTION> 

Century Bancorp, Inc. and Subsidiary
Selected Financial and Other Data
-----------------------------------------------------------------------------------------------------------------------------

                                                                        At or for the Year Ended June 30,
                                                   ---------------------------------------------------------------------------
                                                       1998          1997              1996           1995           1994
                                                   -----------   ------------      -----------    ------------    ------------
                                                                (Dollars in thousands, except per share amounts)
<S>                                                <C>           <C>             <C>            <C>             <C> 
Financial Condition Data:                                      
   Total assets                                    $    96,866   $    100,640      $    81,304    $     75,508    $    73,843
   Investments/(1)/                                     23,935         35,180           22,823          18,852         18,012
   Loans receivable, net                                69,997         62,333           55,193          54,020         53,802
   Deposits                                             73,023         69,699           69,669          64,448         63,937
   Stockholders' equity                                 18,732         30,303           11,245          10,640          9,610
Operating Data:                                                                  
   Interest income                                 $     7,225   $      6,663      $     5,869    $      5,371    $     5,337
   Interest expense                                      3,709          3,512            3,541           2,788          2,487
                                                   -----------   ------------      -----------    ------------    -----------
     Net interest income                                 3,516          3,151            2,328           2,583          2,850
   Provision for loan losses                                18             17              165             105            114
                                                   -----------   ------------      -----------    ------------    -----------
     Net interest income after provision for                                     
      loan losses                                        3,498          3,134            2,163           2,478          2,736
   Noninterest income                                       42             47               35              15             40
   Noninterest expense                                   1,731          1,507            1,169             979            910
                                                   -----------   ------------      -----------    ------------    -----------
     Income before income taxes                          1,809          1,674            1,029           1,514          1,866
   Income tax expense                                      605            558              352             593            694
                                                   -----------   ------------      -----------    ------------    -----------
     Net income                                    $     1,204   $      1,116      $       677    $        921    $     1,172
                                                   ===========   ============      ===========    ============    ===========
                                                                                 
Per Common Share Data:                                                           
   Net income, basic/(2)/, /(4)/                   $      1.06   $       0.82/(3)/ $         -    $          -    $         -
   Net income, diluted /(2)/ /(4)/                        1.06           0.82/(3)/           -               -              -
   Regular cash dividends/(4)/                            0.67           0.17                -               -              -
   Dividend payment ratio /(5)/                          63.27%         20.73%               -               -              -
   Special return of capital dividend /(4)/        $     10.00              -                -               -              -
   Book value per common share /(4)/               $     14.74          24.80                -               -              -
                                                                                 
Selected Other Data:                                                             
   Return on average assets                               1.19%          1.22%            0.86%           1.25%          1.59%
   Return on average equity                               4.51%          5.43%            6.19%           9.15%         12.82%
   Average equity to average assets                      26.40%         22.44%           13.94%          13.68%         12.43%
   Interest rate spread                                   2.26%          2.54%            2.41%           3.10%          3.55%
   Net yield on average interest-earning assets           3.59%          3.56%            3.05%           3.61%          3.97%
   Average interest-earning assets to averag                                     
    interest-bearing liabilities                        135.21%        125.89%          113.86%         113.08%        112.12%
   Ratio of noninterest expense to average total                                 
    assets                                                1.71%          1.64%            1.49%           1.33%          1.24%
   Nonperforming assets to total assets                   0.35%          0.13%            0.76%           1.21%          2.32%
   Nonperforming loans to total loans                     0.47%          0.12%            0.52%           1.56%          2.98%
   Allowance for loan losses to total loans               0.78%          0.88%            0.97%           0.74%          0.55%
   Allowance for loan losses to nonperforming loans     166.82%        423.08%          187.02%          47.68%         18.38%
                                                                
</TABLE>                                                         
                                                                 
                                                                 
/(1)/ Includes interest-earning balances in other banks, FHLB st ock and
      investment securities.                                     
                                                                
/(2)/ On December 20, 1996, Home Savings, Inc., SSB converted from a state-
      chartered mutual savings bank to a state-chartered stock s avings bank and
      became a wholly-owned subsidiary of Century Bancorp, Inc.  
                                                                 
/(3)/ Earnings per share is based on earnings from December 20, 1996 to June 30,
      1997 divided by the weighted average number of shares outstanding during
      the same period.                                          
                                                                 
/(4)/ Adjusted for the effects of the three-for-one stock split effected in the
      form of a stock dividend paid April 6, 1998.               
                                                                 
/(5)/ The dividend payment ratio represents regular dividends per share as a
      percentage of earnings per share, and excludes the special  nonrecurring
      $10.00 return of capital dividend paid during the year ended June 30,
      1998.                                                      
                                                                 
                                      -1-                       
<PAGE>
 
                      Century Bancorp, Inc. and Subsidiary
                      Management's Discussion and Analysis
--------------------------------------------------------------------------------

Management's discussion and analysis is intended to assist readers in the
understanding and evaluation of the financial condition and results of
operations of Century Bancorp, Inc. and its wholly-owned subsidiary, Home
Savings, Inc., SSB. It should be read in conjunction with the audited
consolidated financial statements and accompanying notes included in this report
and the supplemental financial data appearing throughout this discussion and
analysis.

                             Description of Business

Century Bancorp, Inc. ("Century" or "Parent") was incorporated under the laws of
the State of North Carolina for the purpose of becoming the bank holding company
of Home Savings, Inc., SSB (the "Bank" or "Home Savings") in connection with the
Bank's conversion from a state-chartered mutual savings bank to a
state-chartered stock savings bank (the "Conversion"), pursuant to its Plan of
Conversion. Century was organized to acquire all of the common stock of Home
Savings upon its conversion to stock form. A subscription and community offering
(the "Offering") of Century's common stock closed on December 20, 1996, at which
time Century acquired all of the outstanding common stock of the Bank and
commenced operations.

In accordance with the Plan of Conversion, Century issued common stock with a
value of $20,366,500 in the Offering and received proceeds of $19,453,837, net
of Conversion costs. Century transferred $8,950,949 of the net proceeds to Home
Savings for the purchase of all of the outstanding common stock of the Bank.

Century has no operations and conducts no business of its own other than owning
Home Savings, investing its portion of the net proceeds received in the
Conversion, and lending funds to the Home Savings, Inc., SSB Employee Stock
Ownership Plan (the "ESOP") which was formed in connection with the Conversion.
The principal business of the Bank is accepting deposits from the general public
and using those deposits and other sources of funds to make loans secured by
real estate located in the Bank's primary market area within approximately a ten
mile radius of Thomasville, North Carolina. On June 30, 1998, approximately 98%
of the Bank's net loan portfolio was composed of real estate loans.

Century's principal sources of income are earnings on capital retained by
Century, interest payments received from the ESOP with respect to the ESOP loan,
and dividends paid by the Bank to Century, if any. Revenues of Home Savings are
derived primarily from interest on loans. In addition, Home Savings receives
interest income from its investment securities and interest-earning deposit
balances. The major expenses of Home Savings are interest on deposits and
general and administrative expenses such as salaries, employee benefits, federal
deposit insurance premiums, data processing expenses and occupancy and related
expenses.

Because Century has no operations and conducts no business other than as
described above, the discussion contained in this "Management's Discussion and
Analysis" concerns primarily the business of the Bank; however, for ease of
reading, and because the financial statements are presented on a consolidated
basis, Century and Home Savings are collectively referred to herein as the
"Company," unless otherwise noted.

                                      -3-
<PAGE>
 
                      Century Bancorp, Inc. and Subsidiary
                Management's Discussion and Analysis (Continued)
--------------------------------------------------------------------------------

                                   Market Risk

Market risk is the risk of loss from adverse changes in market prices and rates.
The Company's market risk primarily stems from interest rate risk, the potential
economic loss due to future changes in interest rates, which is inherent in
lending and deposit gathering activities. The Company's objective is to manage
the mix of interest-sensitive assets and liabilities to moderate interest rate
risk and stabilize the net interest margin while enhancing profitability.

                Asset/Liability and Interest Rate Risk Management

The Company's asset/liability management, or interest rate risk management,
program is focused primarily on evaluating and managing the composition of its
assets and liabilities in view of various interest rate scenarios. Factors
beyond the Company's control, such as market interest rates and competition, may
also have an impact on the Company's interest income and interest expense.

In the absence of other factors, the yield or return associated with the
Company's earning assets generally will increase from existing levels when
interest rates rise over an extended period of time, and conversely interest
income will decrease when interest rates decrease. In general, interest expense
will increase when interest rates rise over an extended period of time, and
conversely interest expense will decrease when interest rates decrease.

Interest Rate Gap Analysis. As a part of its interest rate risk management
policy, the Company calculates an interest rate "gap." Interest rate "gap"
analysis is a common, though imperfect, measure of interest rate risk, which
measures the relative dollar amounts of interest-earning assets and
interest-bearing liabilities which reprice within a specific time period, either
through maturity or rate adjustment. The "gap" is the difference between the
amounts of such assets and liabilities that are subject to repricing. A
"negative" gap for a given period means that the amount of interest-bearing
liabilities maturing or otherwise repricing within that period exceeds the
amount of interest-earning assets maturing or otherwise repricing within the
same period. Accordingly, in a declining interest rate environment, an
institution with a negative gap would generally be expected, absent the effects
of other factors, to experience a lower decrease in the yield of its assets
relative to the cost of its liabilities and its income should be positively
affected. Conversely, the cost of funds for an institution with a negative gap
would generally be expected to increase more quickly than the yield on its
assets in a rising interest rate environment, and such institution's net
interest income generally would be expected to be adversely affected by rising
interest rates. Changes in interest rates generally have the opposite effect on
an institution with a "positive gap."

The Company's one-year interest sensitivity gap as a percentage of total
interest-earning assets at June 30, 1998 was a negative 56.13%. At June 30,
1998, the Company's three-year and five-year cumulative interest sensitivity
gaps as a percentage of total interest-earning assets were a negative 54.94% and
a negative 46.55%, respectively.

                                      -4-
<PAGE>
 
                      Century Bancorp, Inc. and Subsidiary
                Management's Discussion and Analysis (Continued)
-------------------------------------------------------------------------------

The following table sets forth the amounts of interest-earning assets and
interest-bearing liabilities outstanding at June 30, 1998 which are projected to
reprice or mature in each of the future time periods shown. Except as stated
below, the amounts of assets and liabilities shown which reprice or mature
within a particular period were determined in accordance with the contractual
terms of the assets or liabilities. Loans with adjustable rates are shown as
being due at the end of the next upcoming adjustment period. Passbook accounts,
money market deposit accounts and negotiable order of withdrawal or other
transaction accounts are assumed to be subject to immediate repricing and
depositor availability and have been placed in the shortest period. In making
the gap computations, none of the assumptions sometimes made regarding
prepayment rates and deposit decay rates have been used for any other
interest-earning assets or interest-bearing liabilities. In addition, the table
does not reflect scheduled principal payments which will be received throughout
the lives of the loans. The interest rate sensitivity of the Company's assets
and liabilities illustrated in the following table would vary substantially if
different assumptions were used or if actual experience differs from that
indicated by such assumptions.

<TABLE> 
<CAPTION> 
                                                                        Terms to Repricing at June 30, 1998
                                                    --------------------------------------------------------------------------
                                                                     More Than      More Than
                                                       1 Year        1 Year to      3 Years to      More Than
                                                      or Less         3 Years        5 Years         5 Years          Total
                                                    -----------    ------------    -----------    ------------    ------------
                                                                              (Dollars in Thousands)
<S>                                                <C>             <C>             <C>            <C>             <C>    
INTEREST-EARNING ASSETS:
   Loans receivable:
     Adjustable rate residential 1-4 family         $     6,561    $         95    $         -    $          -    $     6,656
     Fixed rate residential 1-4 family                       63             462          2,336          50,444         53,305
     Other secured - real estate - fixed                      -              22            304           3,400          3,726
     Other secured - real estate - adjustable             4,691             536              -               -          5,227
     Other loans                                            660             332            562              80          1,634
                                                    -----------    ------------    -----------    ------------    -----------
           Total loans receivable                        11,975           1,447          3,202          53,924         70,548

   Interest-earnings balances in other banks              5,356               -              -               -          5,356
   Investments                                              705           5,830          4,722           6,669         17,926
   FHLB common stock(1)                                       -               -              -             653            653
                                                    -----------    ------------    -----------    ------------    -----------
           Total interest-earning assets            $    18,036    $      7,277    $     7,924    $     61,246    $    94,483
                                                    ===========    ============    ===========    ============    ===========
INTEREST-BEARING LIABILITIES:
   Deposits:
     Passbook and statement accounts                $     5,344    $          -    $         -    $          -    $     5,344
     NOW and money market checking accounts              15,067               -              -               -         15,067
     Noninterest-bearing accounts                            78               -              -               -             78
     Certificate accounts                                46,384           6,150              -               -         52,534
                                                    -----------    ------------    -----------    ------------    -----------
                                                         66,873           6,150              -               -         73,023
   Note payable                                           4,200               -              -               -          4,200
                                                    -----------    ------------    -----------    ------------    -----------
           Total interest-bearing liabilities       $    71,073    $      6,150    $         -    $          -    $    77,223
                                                    ===========    ============    ===========    ============    ===========

INTEREST SENSITIVITY GAP PER PERIOD                 $   (53,037)   $      1,127    $     7,924    $     61,246    $    17,260

CUMULATIVE INTEREST SENSITIVITY GAP                 $   (53,037)   $    (51,910)   $   (43,986)   $     17,260    $    17,260

CUMULATIVE GAP AS A PERCENTAGE OF TOTAL
  INTEREST-EARNING ASSETS                                (56.13)%        (54.94)%       (46.55)%         18.27%         18.27%

CUMULATIVE INTEREST-EARNING ASSETS AS A
  PERCENTAGE OF TOTAL INTEREST-BEARING
  LIABILITIES                                             25.38%          32.78%         43.04%         122.35%        122.35%

</TABLE> 

/(1)/ Nonmarketable equity security; substantially all required to be maintained
      and assumed to mature in periods greater than 10 years.

                                      -5-

<PAGE>
 
                      Century Bancorp, Inc. and Subsidiary
                Management's Discussion and Analysis (Continued)
================================================================================

In addition to the traditional gap analysis, the Company also uses a computer
based interest rate risk simulation model. This comprehensive model includes
rate sensitivity gap analysis, rate shock net interest margin analysis, and
asset/liability term and rate analysis. The Company uses this model to monitor
interest rate risk on a quarterly basis and to detect trends that may affect
overall interest income. As a result, this analysis more accurately predicts the
risk to net interest income over the upcoming twelve-month period. The Company
has a policy establishing the maximum allowable risk to net interest income
caused by changes in interest rates. The modeling results indicate that the
Company is within the established parameters of the interest rate risk policy.


                               Net Interest Income

Net interest income represents the difference between income derived from
interest-earning assets and interest expense incurred on interest-bearing
liabilities. Net interest income is affected by both (i) the difference between
the rates of interest earned on interest-earning assets and the rates paid on
interest-bearing liabilities ("interest rate spread") and (ii) the relative
amounts of interest-earning assets and interest-bearing liabilities ("net
earning balance"). The following table sets forth information relating to
average balances of the Company's assets and liabilities for the years ended
June 30, 1998 and 1997. For the periods indicated, the table reflects the
average yield on interest-earning assets and the average cost of
interest-bearing liabilities (derived by dividing income or expense by the
monthly average balance of interest-earning assets or interest-bearing
liabilities, respectively) as well as the net yield on interest-earning assets
(which reflects the impact of the net earning balance). Nonaccruing loans were
included in the computation of average balances.

<TABLE> 
<CAPTION> 

                                                         Year Ended June 30, 1998                   Year Ended June 30, 1997
                                                  ---------------------------------------    ---------------------------------------
                                                    Average                      Average       Average                       Average
                                                    Balance      Interest         Rate         Balance      Interest          Rate
                                                  ----------    ----------      ---------    ----------    -----------      --------
                                                                                (Dollars in Thousands)
<S>                                              <C>            <C>             <C>          <C>           <C>              <C> 
Interest-earning assets:                      
  Interest-earning balances                       $    3,125    $      182          5.82%    $    5,611    $       342         6.10%
  Investments                                         28,493         1,730          6.07%        24,818          1,505         6.06%
  Loans                                               66,213         5,313          8.02%        58,008          4,816         8.30%
                                                  ----------    ----------      --------     ----------    -----------      -------
      Total interest-earning assets                   97,831         7,225          7.39%        88,437          6,663         7.53%
Other assets                                           3,192                                      3,174
                                                  ----------                                 ----------
      Total assets                                $  101,023                                 $   91,611
                                                  ==========                                 ==========
Interest-bearing liabilities:                 
  Deposits                                        $   71,316         3,643          5.11%    $   70,252          3,512         5.00%
  Borrowings                                           1,038            66          6.36%             -              -            -
                                                  ----------    ----------      --------     ----------    -----------      ------- 
      Total interest-bearing liabilities              72,354         3,709          5.13%        70,252          3,512         5.00%
                                                                ----------                                 -----------
                                              
Other liabilities                                      1,994                                        806
Stockholders' equity                                  26,675                                     20,553
                                                  ----------                                 ----------
                                              
      Total liabilities and stockholders' 
       equity                                     $  101,023                                 $   91,611                           
                                                  ==========                                 ==========                           
                                                                                                                                   
                                                  
Net interest income and interest rate spread                    $    3,516          2.26%                  $     3,151        2.54% 
                                                                ==========      ========                   ===========      ======  

Net yield on average interest-earning assets                                        3.59%                                     3.56% 
                                                                                ========                                    ======  
Ratio of average interest-earning assets to                                                                                         
average interest-bearing liabilities                  135.21%                                    125.89%                            
                                                  ==========                                 ==========       

</TABLE> 

                                      -6-

<PAGE>
 
                      Century Bancorp, Inc. and Subsidiary
                Management's Discussion and Analysis (Continued)
--------------------------------------------------------------------------------


                              Rate/Volume Analysis

The following table analyzes the dollar amount of changes in interest income and
interest expense for major components of interest-earning assets and
interest-bearing liabilities. The table distinguishes between (i) changes
attributable to volume (changes in volume multiplied by the prior period's
rate), (ii) changes attributable to rate (changes in rate multiplied by the
prior period's volume), and (iii) net change (the sum of the previous columns).
The change attributable to both rate and volume (changes in rate multiplied by
changes in volume) has been allocated equally to both the changes attributable
to volume and the changes attributable to rate.

<TABLE> 
<CAPTION> 

                                                                    Year Ended June 30, 1998 vs. 1997
                                                             --------------------------------------------------
                                                                        Increase (Decrease) Due To
                                                             --------------------------------------------------
                                                                Volume             Rate               Total
                                                             -----------       ------------        ------------
                                                                           (Dollars in Thousands)       
         <S>                                                 <C>               <C>                 <C>     
         Interest income:
            Interest-bearing balances                        $      (145)       $       (15)        $      (160)
            Investments                                              223                  2                 225
            Loans                                                    651               (154)                497
                                                             -----------        -----------         -----------
                      Total interest income                          729               (167)                562
                                                             -----------        -----------         -----------
         Interest expense:
            Deposits                                                  54                 77                 131
            Borrowings                                                66                  -                  66
                                                             -----------        -----------         -----------
                      Total interest expense                         120                 77                 197
                                                             -----------        -----------         -----------
         Net interest income                                 $       609        $      (244)        $       365
                                                             ===========        ===========         ===========
</TABLE> 

           Comparison of Financial Condition at June 30, 1998 and 1997

Total consolidated assets decreased by $3.7 million during 1998, from $100.6
million at June 30, 1997 to $96.9 million at June 30, 1998. This decrease
resulted from the payment during the fourth quarter of the current fiscal year
of a special $10.00 per share ($30.00 per share prior to the stock split) return
of capital dividend which aggregated $12.7 million, reducing both total assets
and stockholders' equity by that amount. Investment securities decreased by
$13.9 million from $31.8 million to $17.9 million during the year ended June 30,
1998, while loans receivable increased by $7.7 million from $62.3 million at
June 30, 1997 to $70.0 million at June 30, 1998. The funds provided from the
decrease in investments, net of the increase in loans, combined with an increase
in deposits of $3.3 million from $69.7 million to $73.0 million during the year
ended June 30, 1998, new borrowings of $4.2 million, and the Company's net
income of $1.2 million for the year ended June 30, 1998 were used to pay the
$12.7 million return of capital dividend, with the balance increasing cash and
interest-earning balances in other banks.

Total stockholders' equity was $18.7 million at June 30, 1998 as compared with
$30.3 million at June 30, 1997, a decrease of $11.6 million which resulted from
the special return of capital dividend discussed above. Net income for the year
was $1.2 million, while regular quarterly dividends 

                                      -7-
<PAGE>
 
                      Century Bancorp, Inc. and Subsidiary
                Management's Discussion and Analysis (Continued)
--------------------------------------------------------------------------------


aggregated $761,545 or $.67 per share. At June 30, 1998, Century and the Bank
continued to significantly exceed all applicable regulatory capital
requirements.

                                 Asset Quality

Non-performing assets include non-accrual loans, accruing loans contractually
past due 90 days or more, restructured loans, other real estate and other real
estate under contract for sale. Loans are placed on non-accrual when management
has concerns relating to the ability to collect the loan principal and interest,
and generally when such loans are 90 days or more past due. While non-performing
assets represent potential losses to the Company, management does not anticipate
any aggregate material losses since most loans are believed to be adequately
secured. Management believes the allowance for loan losses is sufficient to
absorb known risks in the portfolio. No assurance can be given that economic
conditions will not adversely affect borrowers and result in increased losses.
The following table summarizes non-performing assets by type at the dates
indicated. Other than the amounts listed, there were no other loans that (i)
represent or result from trends or uncertainties which management reasonably
expects will materially impact future operating results, liquidity or capital
resources or (ii) represent material credits about which management has
information that causes them to have serious doubts as to the ability of such
borrowers to comply with the loan repayment terms.

                        Schedule of Non-Performing Assets
<TABLE> 
<CAPTION> 

                                                                                           At June 30,
                                                                                   ------------------------
                                                                                      1998           1997
                                                                                   -----------   ----------
<S>                                                                                <C>           <C> 
Non-accrual loans                                                                  $       330   $       77
Loans past due 90 days or more and still accruing                                            -            -
Other real estate                                                                            8           53
Renegotiated troubled debt                                                                   -            -
                                                                                   -----------   ----------
                                                                              
                  Total non-performing assets                                      $       338   $      130
                                                                                   ===========   ==========
</TABLE> 
                                  Net Income

The Company earned consolidated net income of $1.2 million, or $1.06 per share,
during the year ended June 30, 1998 as compared with net income of $1.1 million
during the prior year, an increase of $88,000. This increase resulted primarily
from the absence of the special Savings Association Insurance Fund ("SAIF")
deposit insurance assessment of $407,000 which, net of an income tax benefit of
$149,000, decreased net income for the year ended June 30, 1997 by approximately
$260,000. An increase of $366,000 in net interest income was offset by increased
personnel costs of $563,000.

                              Net Interest Income

Net interest income increased to $3.5 million during the year ended June 30,
1998 as compared with $3.1 million during the previous year. This increase of
$366,000 resulted from an increase in net interest-earning assets. Average
interest-earning assets exceeded average interest-bearing liabilities by $25.4
million during the year ended June 30, 1998, and by $18.1 million during the
year ended June 30, 1997. A substantial portion of the growth in average
interest-earning assets was in higher 

                                      -8-
<PAGE>
 
                     Century Bancorp, Inc. and Subsidiary
               Management's Discussion and Analysis (Continued)
--------------------------------------------------------------------------------


yielding loans receivable. As a result of loan growth over the last two years,
the average balance of loans receivable increased from $58.0 million during
fiscal 1997 to $66.2 million during fiscal 1998. In addition, the average
balance of investments increased from $24.8 million during fiscal 1997 to $28.5
million during fiscal 1998.

                           Provision for Loan Losses

The provision for loan losses was $18,000 and $16,500 for the years ended June
30, 1998 and 1997, respectively. Management believes that the provision for loan
losses and the resulting loan loss allowance at June 30, 1998 will be adequate
to absorb losses on existing loans. There was $18,000 in net loan charge-offs
during the year ended June 30, 1998 as compared with net recoveries of $600
during the year ended June 30, 1997. Nonaccrual loans aggregated $330,000 at
June 30, 1998.

                                 Other Income

Other income remained relatively stable, decreasing from $47,000 during fiscal
1997 to $42,000 during fiscal 1998, principally as a result of reduced income
from foreclosed real estate.

                                Other Expenses

Exclusive of the special SAIF assessment explained under the caption "Net
Income," (also see Note I to the consolidated financial statements) of $407,000
that was incurred during the year ended June 30, 1997, other expenses increased
by $633,000 from $1,099,000 during the year ended June 30, 1997 to $1,732,000
during the year ended June 30, 1998. This increase was primarily due to an
increase of $563,000 in personnel costs, $436,000 of which resulted from the
expense incurred under the Company's new Management Recognition Plan which was
approved by shareholder vote at the last annual meeting. In addition, expenses
of the Company's ESOP, which was in effect for the full year, increased by
$38,000.

                          Provision for Income Taxes

The provision for income taxes, as a percentage of income before income taxes,
was 33.5% and 33.3% for the years ended June 30, 1998 and 1997, respectively.


                        Liquidity and Capital Resources

Century paid regular cash dividends of $.67 a share. Century also paid a special
nonrecurring return of capital dividend of $10.00 per share during the last
quarter of 1998. Although Century Bancorp anticipates that it will continue to
declare cash dividends on a regular basis, the Board of Directors will continue
to review its policy on the payment of dividends on an ongoing basis, and such
payment will be subject to future earnings, cash flows, capital needs,
regulatory restrictions and other factors.

Maintaining adequate liquidity while managing interest rate risk is the primary
goal of the Company's asset and liability management strategy. Liquidity is the
ability to fund the needs of the Bank's borrowers and depositors, pay operating
expenses, and meet regulatory liquidity requirements. Maturing investments, loan
and mortgage-backed security principal repayments, deposits and income from
operations are the main sources of liquidity. The Company's primary uses of
liquidity are to fund loans and to make investments.

                                      -9-
<PAGE>
 
                     Century Bancorp, Inc. and Subsidiary
               Management's Discussion and Analysis (Continued)
--------------------------------------------------------------------------------


As of June 30, 1998, liquid assets (cash and marketable investment securities)
were approximately $24.7 million, which represents 33.9% of deposits. As a North
Carolina-chartered savings bank, Home Savings is required to maintain liquid
assets equal to at least 10% of its total assets. For purposes of this
requirement, liquid assets consist of cash and readily marketable investment
securities. At June 30, 1998, this liquidity ratio, based on North Carolina
regulations, was 25.5%. Management considers current liquidity levels to be
adequate to meet Home Savings' foreseeable needs.

At June 30, 1998, outstanding mortgage loan commitments were $2.5 million,
available line-of-credit balances were $825,000, and the undisbursed portion of
construction loans was $2.4 million. Funding for these commitments is expected
to be provided from deposits, loan and mortgage-backed securities principal
repayments, maturing investments and income generated from operations.

Under federal capital regulations, Home Savings must satisfy certain minimum
leverage ratio requirements and risk-based capital requirements. Failure to meet
such requirements can initiate certain mandatory and possibly additional
discretionary actions by regulators that, if undertaken, could have a direct
material effect on Home Savings' financial statements. At June 30, 1998 and
1997, Home Savings exceeded all such requirements. (See Note K to the
Consolidated Financial Statements.)

                       Accounting and Regulatory Matters

Management is not aware of any known trends, events, uncertainties or current
recommendations by regulatory authorities that will have or that are reasonably
likely to have a material effect on the Company's liquidity, capital resources,
or other operations.

                    Impact of Inflation and Changing Prices

The financial statements and notes thereto presented herein have been prepared
in accordance with generally accepted accounting principles, which require the
measurement of financial position and operating results in terms of historical
dollars without considering the change in the relative purchasing power of money
over time and due to inflation. The impact of inflation is reflected in the
increased cost of operations. Unlike most industrial companies, nearly all the
assets and liabilities of the Company are monetary in nature. As a result,
interest rates have a greater impact on the Company's performance than do the
effects of general levels of inflation. Interest rates do not necessarily move
in the same direction or to the same extent as the price of goods and services.


                      Impact of New Accounting Standards

In June 1997, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 130, Reporting Comprehensive
Income. This Statement establishes standards of reporting and display of
comprehensive income and its components in a full set of general-purpose
financial statements. In addition to net income, as has been historically
determined, comprehensive income for the Company would include unrealized
holding gains and losses on available-for-sale securities. This Statement will
be effective for the Company's fiscal year ending June 30, 1999, and the Company
does not intend to early adopt. Had the Company early-adopted this Statement, it
would have reported comprehensive income of $1,368,318 and $1,362,961 for the
years ended June 30, 1998 and 1997, respectively.

                                      -10-
<PAGE>
 
                     Century Bancorp, Inc. and Subsidiary
               Management's Discussion and Analysis (Continued)
--------------------------------------------------------------------------------

In June 1997, the FASB issued SFAS No. 131, Disclosures about Segments of an
Enterprise and Related Information. This Statement establishes standards for the
way that public business enterprises report information about operating segments
and certain other information in annual financial statements and requires that
those enterprises report selected information about operating segments in
interim financial reports issued to shareholders. This Statement will be
effective for the Company's fiscal year ending June 30, 1999. Management
anticipates that this Statement will not have a material effect on the Company's
consolidated financial statements.

In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities. SFAS No. 133 standardizes the accounting for
derivative instruments, including certain derivative instruments embedded in
other contracts. Under this standard, entities are required to carry all
derivative instruments in the statement of financial position at fair value. The
accounting for changes in the fair value (i.e., gains or losses) of a derivative
instrument depends on whether it has been designated and qualifies as part of a
hedging relationship and, if so, on the reason for holding it. If certain
conditions are met, entities may elect to designate a derivative instrument as a
hedge of exposure to changes in fair values, cash flows, or foreign currencies.
If the hedged exposure is a fair value exposure, the gain or loss on the
derivative instrument is recognized in earnings in the period of change together
with the offsetting loss or gain on the hedged item attributable to the risk
being hedged. If the hedged exposure is a cash flow exposure, the effective
portion of the gain or loss on the derivative instrument is reported initially
as a component of other comprehensive income (outside earnings) and subsequently
reclassified into earnings when the forecasted transaction affects earnings. Any
amounts excluded from the assessment of hedge effectiveness as well as the
ineffective portion of the gain or loss is reported in earnings immediately.
Accounting for foreign currency hedges is similar to accounting for fair value
and cash flow hedges. If the derivative \instrument is not designated as a
hedge, the gain or loss is recognized in earnings in the period of change.
Management anticipates that this statement will have no effect on its
consolidated financial statements.

                             Year 2000 Compliance

The "Year 2000" issue confronting the Company and its suppliers, customers,
customers' suppliers and competitors centers on the inability of computer
systems to recognize the year 2000. Many existing computer programs and systems
were originally programmed with six digit dates that provided only two digits to
identify the calendar year in the date field, without considering the upcoming
change in the century. With the impending new millennium, these programs and
computers will recognize "00" as the year 1900 rather than the year 2000. Like
most financial service providers, the Company and its operations may be
significantly affected by the Year 2000 issue due to its dependence on computer
generated financial information. Software, hardware, and equipment both within
and outside the Company's direct control and with whom the Company
electronically or operationally interfaces (e.g. third party vendors providing
data processing, information system management, maintenance of computer systems,
and credit bureau information) are likely to be affected. Furthermore, if
computer systems are not adequately changed to identify the Year 2000, many
computer applications could fail or create erroneous results. As a result, many
calculations which rely on date field information, such as interest, payment or
due dates and other operating functions, could generate results which are
significantly misstated, and the Company could experience a temporary inability
to process transactions, prepare statements or engage in similar

                                      -11-
<PAGE>
 
                     Century Bancorp, Inc. and Subsidiary
               Management's Discussion and Analysis (Continued)
--------------------------------------------------------------------------------


normal business activities. In addition, under certain circumstances, failure to
adequately address the Year 2000 issue could adversely affect the viability of
the Company's suppliers and creditors and the creditworthiness of its borrowers.
Thus, if not adequately addressed, the Year 2000 matter could result in a
significant adverse impact on products, services and the competitive condition
of the Company.

Financial institution regulators have recently increased their focus upon Year
2000 compliance issues, issuing guidance concerning the responsibilities of
senior management and directors. The Federal Financial Institutions Examination
Council ("FFIEC") has issued several interagency statements on Year 2000 Project
Management Awareness. These statements require financial institutions to, among
other things, examine the Year 2000 implications of reliance on vendors, data
exchange and potential impact on customers, suppliers and borrowers. These
statements also require each federally regulated financial institution to survey
its exposure, measure its risk and prepare a plan in order to solve the Year
2000 issue. In addition, the federal banking regulators have issued safety and
soundness guidelines to be followed by insured depository institutions, such as
the Bank, to assure resolution of any Year 2000 problems. The federal banking
agencies have asserted that Year 2000 testing and certification is a key safety
and soundness issue in conjunction with regulatory exams, and thus an
institution's failure to address appropriately the Year 2000 issue could result
in supervisory action, including such enforcement actions as the reduction of
the institution's supervisory ratings, the denial of applications for approval
of a merger or acquisition, or the imposition of civil money penalties.

In order to address the Year 2000 issue and to minimize its potential adverse
impact, management is engaged in a process to identify areas that will be
affected by the Year 2000, assess their potential impact on operations, monitor
the progress of third party software vendors in addressing the matter, test
changes provided by these vendors, and develop contingency plans for any
critical systems which are not effectively reprogrammed. The plan is divided
into the five phases: (1) awareness, (2) assessment, (3) renovations, (4)
validation, and (5) implementation.

The Company has substantially completed the first two phases of the plan and is
currently working internally and with external vendors on the final three
phases. The Company outsources its item processing operations to a service
provider. The Company's Year 2000 compliance is being closely coordinated with
that of the service provider.

The Company does not currently expect that the cost of its Year 2000 compliance
program will be material to its financial condition or results of operations,
and expects that it will satisfy such compliance program without material
disruption of its operations. In the event that the Company's significant
suppliers do not successfully and timely achieve Year 2000 compliance, the
Company's business, results of operations or financial condition could be
adversely affected.

                                      -12-
<PAGE>
 
                           [LETTERHEAD APPEARS HERE]


                         INDEPENDENT AUDITORS' REPORT



To the Board of Directors and Stockholders
Century Bancorp, Inc.
Thomasville, North Carolina


We have audited the accompanying consolidated statements of financial condition
of Century Bancorp, Inc. and subsidiary as of June 30, 1998 and 1997 and the
related consolidated statements of operations, stockholders' equity, and cash
flows for the years then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Century Bancorp,
Inc. and subsidiary at June 30, 1998 and 1997, and the results of their
operations and their cash flows for the years then ended in conformity with
generally accepted accounting principles.



/s/ Dixon Odom PLLC
Dixon Odom PLLC
Southern Pines, North Carolina
August 7, 1998

                                      -13-
<PAGE>
 
CENTURY BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
June 30, 1998 and 1997
-------------------------------------------------------------------------------
<TABLE> 
<CAPTION> 
ASSETS                                                                                    1998                 1997
                                                                                    ----------------     -----------------
<S>                                                                                 <C>                  <C> 
Cash on hand and in banks                                                           $      1,449,725     $       1,368,525
Interest-earning balances in other banks                                                   5,355,957             2,787,870
Investment securities available for sale, at fair value (amortized cost of
  $6,971,897 and $20,278,239 at June 30, 1998 and 1997,
  respectively) (Note B)                                                                   7,708,723            20,744,701
Investment securities held to maturity, at amortized cost (fair
  value of $10,325,595 and $11,101,018 at June 30, 1998 and 1997,
  respectively) (Note B)                                                                  10,216,633            11,060,458
Loans receivable, net (Note C)                                                            69,997,493            62,332,801
Accrued interest receivable                                                                  545,189               840,503
Premises and equipment, net (Note D)                                                         687,295               709,121
Stock in the Federal Home Loan Bank of Atlanta, at cost                                      652,600               586,500
Foreclosed real estate                                                                         7,500                53,002
Other assets                                                                                 244,601               156,341
                                                                                    ----------------     -----------------

                                                                                    $     96,865,716     $     100,639,822
                                                                                    ================     =================

LIABILITIES AND STOCKHOLDERS' EQUITY

LIABILITIES
   Deposit accounts (Note G)                                                        $     73,022,971     $      69,698,673
   Note payable (Note F)                                                                   4,200,000                     -
   Accrued interest payable                                                                  151,578               107,687
   Advance payment by borrowers for property taxes and insurance                             171,140               125,863
   Deferred income taxes (Note J)                                                            184,995               128,242
   Accrued expenses and other liabilities                                                    403,359               276,590
                                                                                    ----------------     -----------------

                                                              TOTAL LIABILITIES           78,134,043            70,337,055
                                                                                    ----------------     -----------------

Commitments and contingencies (Notes C and L)

STOCKHOLDERS' EQUITY (Note K)
   Preferred stock, no par value, 5,000,000 shares
      authorized, no shares issued and outstanding                                                 -                     -
   Common stock, no par value, 20,000,000 shares
      authorized: 1,270,869 and 407,330 issued and
      outstanding at June 30, 1998 and 1997, respectively                                  9,223,975            19,467,082
   Deferred management recognition plan (Note H)                                          (1,016,392)                    -
   ESOP note receivable                                                                   (1,525,938)           (1,585,150)
   Unearned ESOP compensation (Note H)                                                      (977,580)                    -
   Retained earnings, substantially restricted                                            12,579,161            12,136,999
   Unrealized holding gains                                                                  448,447               283,836
                                                                                    ----------------     -----------------

                                                     TOTAL STOCKHOLDERS' EQUITY           18,731,673            30,302,767
                                                                                    ----------------     -----------------

                                                          TOTAL LIABILITIES AND
                                                           STOCKHOLDERS' EQUITY     $     96,865,716     $     100,639,822
                                                                                    ================     =================
</TABLE> 


See accompanying notes.

                                      -14-
<PAGE>
 
CENTURY BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended June 30, 1998 and 1997
<TABLE> 
<CAPTION> 
--------------------------------------------------------------------------------------------------------------------------
                                                                                                                 
                                                                                             1998           1997
                                                                                         -----------     -----------
<S>                                                                                      <C>                <C>  
INTEREST INCOME
   Loans                                                                                 $ 5,312,884     $ 4,815,505
   Investments and deposits in other banks                                                 1,912,550       1,847,447
                                                                                         -----------     -----------
                                                                                                          
                                                                TOTAL INTEREST INCOME      7,225,434       6,662,952
                                                                                         -----------     -----------
                                                                                                          
INTEREST EXPENSE                                                                                          
   Deposit accounts (Note G)                                                               3,642,529       3,512,248
   Borrowings                                                                                 66,167               -
                                                                                         -----------     -----------
                                                                                                          
                                                               TOTAL INTEREST EXPENSE      3,708,696       3,512,248
                                                                                         -----------     -----------
                                                                                                          
                                                                  NET INTEREST INCOME      3,516,738       3,150,704
                                                                                                          
PROVISION FOR LOAN LOSSES (Note C)                                                            18,000          16,500
                                                                                         -----------     -----------
                                                                                                          
                                                            NET INTEREST INCOME AFTER                     
                                                            PROVISION FOR LOAN LOSSES      3,498,738       3,134,204
                                                                                         -----------     -----------
                                                                                                          
OTHER INCOME (EXPENSES)                                                                                   
   Service charges and other fees                                                             29,420          34,284
   Gain (loss) on sale of investments                                                         11,628         (15,358)
   Gain (loss) on sale of foreclosed real estate                                              (1,077)         12,061
   Other                                                                                       1,826          15,752
                                                                                         -----------     -----------
                                                                                              41,797          46,739
                                                                                         -----------     -----------
                                                                                                          
                                                                         TOTAL INCOME      3,540,535       3,180,943
                                                                                         -----------     -----------
                                                                                                          
GENERAL AND ADMINISTRATIVE EXPENSES                                                                       
   Compensation and benefits                                                               1,180,645         618,051
   Occupancy                                                                                  89,517          80,577
   Data processing expenses                                                                  113,348         102,645
   Federal deposit insurance premiums                                                         43,860          66,093
   FDIC special assessment (Note I)                                                                -         408,521
   Provision for loss on foreclosed real estate                                               17,500               -
   Other expenses                                                                            286,958         231,245
                                                                                         -----------     -----------
                                                                                                          
                                                                    TOTAL GENERAL AND                     
                                                              ADMINISTRATIVE EXPENSES      1,731,828       1,507,132
                                                                                         -----------     -----------
                                                                                                          
                                                           INCOME BEFORE INCOME TAXES      1,808,707       1,673,811
                                                                                                          
INCOME TAXES (Note J)                                                                        605,000         557,700
                                                                                         -----------     -----------
                                                                                                          
                                                                           NET INCOME    $ 1,203,707     $ 1,116,111
                                                                                         ===========     ===========
                                                                                                          
NET INCOME PER COMMON SHARE (Note A)                                                                      
   Basic and diluted                                                                     $      1.06     $      0.82
                                                                                         ===========     ===========
   Weighted average shares outstanding                                                     1,136,778       1,126,881
                                                                                         ===========     ===========
                                                                                                          
DIVIDENDS PER COMMON SHARE (Note A)                                                                               
   Regular dividends per common share                                                    $       .67     $       .17
                                                                                         ===========     ===========
   Special return of capital dividend per common share                                   $     10.00     $         -
                                                                                         ===========     ===========
</TABLE> 


See accompanying notes.

                                      -15-
<PAGE>
 
CENTURY BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years Ended June 30, 1998 and 1997
<TABLE> 
<CAPTION> 
----------------------------------------------------------------------------------------------------------------

                                                                                 Deferred
                                                      Common stock              management          ESOP        
                                              -----------------------------     recognition         note        
                                                 Shares           Amount           plan           receivable    
                                              -------------    ------------    -------------     ------------   
<S>                                           <C>              <C>             <C>               <C> 
Balance at June 30, 1996                                  -    $          -    $           -     $          -   

   Net income                                             -               -                -                -   

   Net proceeds from issuance of 407,330
    shares of no par value common stock             407,330      19,453,837                -                    

   Purchase of 32,586 shares of common
    stock by the ESOP                                     -               -                -       (1,629,300)  

   Principal payments on note receivable
    from ESOP                                             -               -                -           44,150   

   ESOP contribution                                                 13,245                -                -   

   Regualar cash dividends paid                           -               -                -                -   

   Change in unrealized holding gains
    (losses), net of income taxes of $158,588             -               -                -                -   
                                              -------------    ------------    -------------    -------------   

Balance at June 30, 1997                            407,330      19,467,082                -       (1,585,150)  

   Net income                                             -               -                -                -   

   Regular cash dividends paid                            -               -                -                -   

   Return of capital dividend                             -     (11,731,110)               -                -   

   Adoption of deferred management
    recognition plan                                 16,293       1,452,114       (1,452,114)               -   

   Vesting of deferred management recognition
    plan                                                  -               -          435,722                -   

   Principal payments on note receivable from
    ESOP                                                  -               -                -           59,212   

   ESOP contribution                                      -          35,889                -                -   

   Three-for-one stock split                        847,246               -                -                -   

   Change in unrealized holding gains (losses),
    net of income taxes of $105,753                       -               -                -                -   
                                              -------------    ------------    -------------    -------------   

Balance at June 30, 1998                          1,270,869    $  9,223,975    $  (1,016,392)   $  (1,525,938)  
                                              =============    ============    =============    =============   

<CAPTION>


                                              -----------------------------------------------------------    
                                                                                                             
                                                 Unearned                     Unrealized       Total       
                                                   ESOP         Retained        holding     stockholders'   
                                               compensation     earnings         gains         equity      
                                               ------------   -------------  ------------  --------------    
<S>                                            <C>            <C>            <C>           <C> 
Balance at June 30, 1996                       $          -   $  11,208,260  $     36,986  $   11,245,246     
                                                                                                              
   Net income                                             -       1,116,111                     1,116,111     
                                                                                                              
   Net proceeds from issuance of 407,330                                                                      
    shares of no par value common stock                   -               -             -      19,453,837     
                                                                                                              
   Purchase of 32,586 shares of common                                                                        
    stock by the ESOP                                     -               -             -      (1,629,300)    
                                                                                                              
   Principal payments on note receivable                                                                      
    from ESOP                                             -               -             -          44,150     
                                                                                                              
   ESOP contribution                                      -               -             -          13,245     
                                                                                                              
   Regular cash dividends paid                            -        (187,372)            -        (187,372)    
                                                                                                              
   Change in unrealized holding gains                                                                         
    (losses), net of income taxes of $158,588             -               -       246,850         246,850     
                                               ------------   -------------  ------------  --------------    
                                                                                                              
Balance at June 30, 1997                                         12,136,999       283,836      30,302,767     
                                                                                                              
   Net income                                             -       1,203,707             -       1,203,707     
                                                                                                              
   Regular cash dividends paid                            -        (761,545)            -        (761,545)    
                                                                                                              
   Return of capital dividend                      (977,580)              -             -     (12,708,690)    
                                                                                                              
   Adoption of deferred management                                                                            
    recognition plan                                      -               -             -               -     
                                                                                                              
   Vesting of deferred management recognition                                                                 
    plan                                                  -               -             -         435,722     
                                                                                                              
   Principal payments on note receivable from                                                                 
    ESOP                                                  -               -             -          59,212     
                                                                                                              
   ESOP contribution                                      -               -             -          35,889     
                                                                                                              
   Three-for-one stock split                              -               -             -               -     
                                                                                                              
   Change in unrealized holding gains (losses)                                                               ,
    net of income taxes of $105,753                       -               -       164,611         164,611     
                                               ------------   -------------  ------------  --------------    
                                                                                                             
Balance at June 30, 1998                       $   (977,580)  $  12,579,161  $    448,447  $   18,731,673    
                                               ============   =============  ============  ==============    
</TABLE> 
                                              


See accompanying notes.

                                      -16-
<PAGE>
 
CENTURY BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended June 30, 1998 and 1997

<TABLE> 
<CAPTION> 
------------------------------------------------------------------------------------------------------------------------------


                                                                                            1998                1997
                                                                                      ----------------     ---------------
<S>                                                                                   <C>                  <C> 
CASH FLOWS FROM OPERATING ACTIVITIES
   Net income                                                                         $      1,203,707     $     1,116,111
   Adjustments to reconcile net income to net cash provided by operating activities:
      Depreciation                                                                              48,526              46,313
      Deferred income taxes                                                                    (49,000)             65,592
      Deferred compensation                                                                     22,000              22,000
      Amortization of discounts and premiums on securities                                     (88,650)              9,079
      Provision for loan losses                                                                 18,000              16,500
      Provision for loss on foreclosed real estate                                              17,500                   -
      ESOP contribution expense                                                                 35,889              13,245
      Vesting of deferred management recognition plan                                          435,722                   -
      (Gain) loss on sale of investment securities                                             (11,628)             15,358
      (Gain) loss on sale of real estate acquired in foreclosure                                 1,077             (12,061)
      Change in assets and liabilities
        (Increase) decrease in accrued interest receivable                                     295,314            (283,833)
        (Increase) decrease in other assets                                                    (88,260)             15,390
        Increase (decrease) in accrued interest payable                                         43,891              (8,549)
        Increase in accrued expense and other liabilities                                      104,769              87,096
                                                                                      ----------------     ---------------

                                                              NET CASH PROVIDED BY
                                                              OPERATING ACTIVITIES           1,988,857           1,102,241
                                                                                      ----------------     ---------------

CASH FLOWS FROM INVESTING ACTIVITIES
   Net (increase) decrease in interest-earning balances in other banks                      (2,568,087)            856,989
   Purchases of:
      Available for sale investment securities                                              (8,846,351)        (12,922,555)
      Held to maturity investment securities                                                (3,095,650)         (6,000,000)
   Proceeds from maturities and calls of:
      Available for sale investment securities                                              20,730,818           2,263,008
      Held to maturity investment securities                                                 3,950,000           1,800,000
   Proceeds from sales of available for sale investment securities                           1,511,628           2,000,000
   Purchases of FHLB stock                                                                     (66,100)                  -
   Net increase in loans                                                                    (7,682,692)         (7,156,734)
   Purchases of property and equipment                                                         (26,700)             (7,269)
   Proceeds from redemption of FHLB stock                                                            -              27,200
   Proceeds from sale of real estate acquired in settlement of loans                            26,925             291,933
                                                                                      ----------------     ---------------

                                                          NET CASH PROVIDED (USED)
                                                           BY INVESTING ACTIVITIES           3,933,791         (18,847,428)
                                                                                      ----------------     ---------------
</TABLE> 


See accompanying notes.

                                      -17-
<PAGE>
 
CENTURY BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended June 30, 1998 and 1997
--------------------------------------------------------------------------------

<TABLE> 
<CAPTION> 
                                                                                            1998                1997
                                                                                      ----------------     ---------------
<S>                                                                                   <C>                  <C> 
CASH FLOWS FROM FINANCING ACTIVITIES
   Net increase in demand deposits                                                    $      1,540,839     $     1,299,423
   Net increase (decrease) in certificate accounts                                           1,783,459          (1,269,986)
   Increase in advances from borrowers for property
      taxes and insurance                                                                       45,277              19,993
   Proceeds from note payable                                                                4,200,000                   -
   Net proceeds from issuance of common stock                                                        -          19,453,837
   Decrease in stock conversion costs incurred                                                       -              40,449
   Loan to ESOP for purchase of common stock                                                         -          (1,629,300)
   Principal payments received on note receivable from ESOP                                     59,212              44,150
   Regular cash dividends paid                                                                (761,545)           (187,372)
   Special return of capital dividend                                                      (12,708,690)                  -
                                                                                      ----------------     ---------------

                                                          NET CASH PROVIDED (USED)
                                                           BY FINANCING ACTIVITIES          (5,841,448)         17,771,194
                                                                                      ----------------     ---------------

                                                              NET INCREASE IN CASH
                                                              ON HAND AND IN BANKS              81,200              26,007

CASH ON HAND AND IN BANKS, BEGINNING                                                         1,368,525           1,342,518
                                                                                      ----------------     ---------------

                                                                  CASH ON HAND AND
                                                                  IN BANKS, ENDING    $      1,449,725     $     1,368,525
                                                                                      ================     ===============


SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION 
   Cash paid during the year for:
      Interest                                                                        $      3,664,805     $     3,520,797
                                                                                      ================     ===============
      Income taxes                                                                    $        580,418     $       482,300
                                                                                      ================     ===============

SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING ACTIVITIES
   Unrealized gain on investment securities available
      for sale, net of deferred income taxes                                          $        164,611     $       246,850
                                                                                      ================     ===============

   Adoption of deferred management recognition plan                                   $      1,452,114     $             -
                                                                                      ================     ===============
</TABLE> 




See accompanying notes.

                                      -18-
<PAGE>
 
CENTURY BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1998 and 1997
--------------------------------------------------------------------------------

NOTE A - SIGNIFICANT ACCOUNTING POLICIES

Organization and Operations
---------------------------

In December 1996, pursuant to a Plan of Conversion which was approved by its
members and regulators, Home Savings, Inc., SSB ("Home Savings" or "Bank")
converted from a North Carolina-chartered mutual savings bank to a North
Carolina-chartered stock savings bank (the "Conversion") and became a
wholly-owned subsidiary of Century Bancorp, Inc. ("Century" or "Parent").
Century was formed to acquire all of the common stock of Home Savings upon its
conversion to stock form. Century has no operations and conducts no business on
its own other than owning Home Savings, investing its portion of the net
proceeds received in the Conversion and lending funds to the Employee Stock
Ownership Plan (the "ESOP") which was formed in connection with the Conversion.

Nature of Business
------------------

Home Savings maintains its offices and conducts its primary business in
Thomasville, Davidson County, North Carolina. The Bank is primarily engaged in
the business of attracting deposits from the general public and using such
deposits to make mortgage loans secured by one-to-four family residential real
estate located in its primary market area. The Bank also makes home equity line
of credit loans, multi-family residential loans, commercial loans, construction
loans, loans secured by deposit accounts, and various types of consumer loans.
Home Savings is a portfolio lender in that it does not originate its fixed or
adjustable rate loans for sale in the secondary market. Home Savings has been
and intends to continue to be a community-oriented financial institution
offering a variety of financial services to meet the needs of the communities it
serves.

Basis of Presentation
---------------------

The accompanying consolidated financial statements include the accounts of the
Parent and the Bank, together referred to as the "Company." All significant
intercompany transactions and balances are eliminated in consolidation.

Use of Estimates
----------------

The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.

Material estimates that are particularly sensitive to significant change relate
to the determination of the allowance for losses on loans and the valuation of
real estate acquired in connection with foreclosures or in satisfaction of
loans. In connection with the determination of the allowances for losses on
loans and foreclosed real estate, management obtains independent appraisals for
significant properties.

                                      -19-
<PAGE>
 
CENTURY BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1998 and 1997
--------------------------------------------------------------------------------


NOTE A - SIGNIFICANT ACCOUNTING POLICIES (Continued)

Use of Estimates (Continued)
---------------------------

A majority of the Bank's loan portfolio consists of single-family residential
loans in its market area. The regional economy is currently stable and consists
of various types of industry. Real estate prices in this market are also stable;
however, the ultimate collectibility of a substantial portion of the Bank's loan
portfolio is susceptible to changes in local market conditions.

While management uses available information to recognize losses on loans and
foreclosed real estate, future additions to the allowances may be necessary
based on changes in local economic conditions. In addition, regulatory agencies,
as an integral part of their examination process, periodically review the Bank's
allowances for losses on loans and foreclosed real estate. Such agencies may
require the Bank to recognize additions to the allowances based on their
judgments about information available to them at the time of their examination.
Because of these factors, it is reasonably possible that the allowances for
losses on loans and foreclosed real estate may change materially in the near
term.

Investment Securities
---------------------

The Company classifies its securities in one of three categories: trading,
available for sale, or held to maturity. There were no trading securities at
June 30, 1998 or 1997. Securities held to maturity are those securities for
which the Bank has the ability and intent to hold to maturity. All other
securities are classified as available for sale.

Available for sale securities consist of investment securities not classified as
trading securities or held to maturity securities and are recorded at fair
value. Held to maturity securities are recorded at cost, adjusted for the
amortization or accretion of premiums or discounts. Unrealized holding gains and
losses, net of the related tax effect, on securities available for sale are
excluded from earnings and are reported as a separate component of stockholders'
equity until realized. Transfers of securities between categories are recorded
at fair value at the date of transfer. Unrealized holding gains or losses
associated with transfers of securities from held to maturity to available for
sale are recorded as a separate component of stockholders' equity.

A decline in the market value of any available for sale or held to maturity
investment below cost that is deemed other than temporary is charged to earnings
and establishes a new cost basis for the security.

Premiums and discounts are amortized or accreted over the life of the related
security as an adjustment to the yield. Realized gains and losses are included
in earnings and the costs of securities sold are derived using the specific
identification method.

                                      -20-
<PAGE>
 
CENTURY BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1998 and 1997
--------------------------------------------------------------------------------


NOTE A - SIGNIFICANT ACCOUNTING POLICIES (Continued)

Loans Receivable
----------------

Loans receivable are stated at unpaid balances, less the allowance for loan
losses and net deferred loan fees.

Loan origination and commitment fees, as well as certain direct origination
costs, are deferred and amortized as a yield adjustment over the lives of the
related loans using the interest method. Amortization of deferred loan fees is
discontinued when a loan is placed on nonaccrual status.

Loans are placed on nonaccrual when a loan is specifically determined to be
impaired or when principal or interest is delinquent for 90 days or more.
Interest income generally is not recognized on specific impaired loans unless
the likelihood of further loss is remote. Interest payments received on such
loans are applied as a reduction of the loan principal balance. Interest income
on other nonaccrual loans is recognized only to the extent of interest payments
received.

The Bank accounts for impaired loans in accordance with Statement of Financial
Accounting Standards ("SFAS") No. 114, Accounting by Creditors for Impairment of
a Loan, as amended by SFAS No. 118, Accounting by Creditors for Impairment of a
Loan - Income Recognition and Disclosure. A loan is impaired when, based on
current information and events, it is probable that all amounts due according to
the contractual terms of the loan agreement will not be collected. Impaired
loans are measured based on the present value of expected future cash flows,
discounted at the loan's effective interest rate, or at the loan's observable
market price, or the fair value of the collateral of the loan if the loan is
collateral dependent. Interest income from impaired loans is recognized using
the cash basis method of accounting during the time within that period in which
the loans were impaired.

Allowance for Loan Losses
-------------------------

The Bank provides for loan losses on the allowance method. Accordingly, all loan
losses are charged to the related allowance and all recoveries are credited to
it. Additions to the allowance for loan losses are provided by charges to
operations based on various factors which, in management's judgment, deserve
current recognition in estimating possible losses. Such factors considered by
management include the market value of the underlying collateral, growth and
composition of the loan portfolio, the relationship of the allowance for loan
losses to outstanding loans, delinquency trends, and economic conditions.
Management evaluates the carrying value of loans periodically and the allowance
is adjusted accordingly. While management uses the best information available to
make evaluations, future adjustments to the allowance may be necessary if
conditions differ substantially from the assumptions used in making the
evaluations.

In addition, various regulatory agencies, as an integral part of their
examination process, periodically review the Bank's allowance for loan losses.
Such agencies may require the Bank to recognize additions to the allowance based
on their judgments of information available to them at the time of their
examination.

                                      -21-
<PAGE>
 
CENTURY BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1998 and 1997
--------------------------------------------------------------------------------


NOTE A - SIGNIFICANT ACCOUNTING POLICIES (Continued)

Premises and Equipment
----------------------

Bank premises and equipment are stated at cost less accumulated depreciation.
Depreciation of premises and equipment is recorded on a straight-line basis over
the estimated useful lives of the related assets.

Expenditures for maintenance and repairs are charged to expense as incurred,
while those for improvements are capitalized. The costs and accumulated
depreciation relating to premises and equipment retired or otherwise disposed of
are eliminated from the accounts, and any resulting gains or losses are credited
or charged to earnings.

Investment in Federal Home Loan Bank Stock
------------------------------------------

As a requirement for membership, the Bank invests in stock of the Federal Home
Loan Bank of Atlanta ("FHLB"). This investment is carried at cost.

Real Estate Acquired In Settlement of Loans
-------------------------------------------

Real estate acquired in settlement of loans is carried at the lower of cost or
fair value less estimated costs to dispose. Generally accepted accounting
principles define fair value as the amount that is expected to be received in a
current sale between a willing buyer and seller other than in a forced or
liquidation sale. Fair values at foreclosure are based on appraisals. Losses
arising from the acquisition of foreclosed properties are charged against the
allowance for loan losses. Subsequent writedowns are provided by a charge to
operations through the allowance for losses on other real estate in the period
in which the need arises.

Income Taxes
------------
Deferred tax assets and liabilities are recorded for the future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases. Future tax
benefits are recognized to the extent that realization of such benefits is more
likely than not. Deferred tax assets and liabilities are measured using enacted
tax rates expected to apply to taxable income in the years in which the assets
and liabilities are expected to be recovered or settled. The effect on deferred
tax assets and liabilities of a change in tax rates is recognized in income tax
expense in the period that includes the enactment date.

In the event the future tax consequences of differences between the financial
reporting bases and the tax bases of the Company's assets and liabilities result
in deferred tax assets, applicable accounting standards require an evaluation of
the probability of being able to realize the future benefits indicated by such
assets. A valuation allowance is provided when it is more likely than not that
some portion or all of the deferred tax assets will not be realized. In
assessing the realizability of the deferred tax assets, management considers the
scheduled reversals of deferred tax liabilities, projected future taxable
income, and tax planning strategies.

                                      -22-
<PAGE>
 
CENTURY BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1998 and 1997
--------------------------------------------------------------------------------


NOTE A - SIGNIFICANT ACCOUNTING POLICIES (Continued)

Income Taxes (Continued)
------------------------

A deferred tax liability is not recognized for portions of the allowance for
loan losses for income tax purposes in excess of the financial statement
balance, as described in Note J. Such a deferred tax liability will only be
recognized when it becomes apparent that those temporary differences will
reverse in the foreseeable future.

Net Income Per Common Share
---------------------------

Effective with the year ended June 30, 1998, the Company has implemented
Statement of Financial Accounting Standards ("SFAS") No. 128, Earnings Per
Share. This Statement simplifies the standards for computing earnings per share
previously found in Accounting Principles Board ("APB") Opinion No. 15, Earnings
Per Share, and makes them comparable to international earnings per share ("EPS")
standards. It replaces the presentation of primary EPS with the presentation of
basic EPS. It also requires dual presentation of basic and diluted EPS on the
face of the statement of operations for all entities with complex capital
structures. It also requires a reconciliation of the numerator and the
denominator of the basic EPS computation to the numerator and denominator of the
diluted EPS computation. Basic EPS excludes dilution, and it is computed by
dividing income available to common shareholders by the weighted-average number
of common shares outstanding for the period. Diluted EPS reflects the potential
dilution that could occur if securities or other contracts to issue common stock
were exercised or converted into common stock or resulted in the issuance of
common stock that then shared in the earnings of the entity. For the years ended
June 30, 1998 and 1997, basic and diluted earnings per share are the same
amounts because the dilutive effect of stock options is not significant.

Net income per common share for the year ended June 30, 1997 is based on
unaudited net income earned from the date of Conversion, December 20, 1996, to
the end of the fiscal year, divided by the weighted average number of common
shares outstanding during that period. Net income per common share for the year
ended June 30, 1998 is based on net income earned divided by the weighted
average number of shares outstanding during the year. For purposes of this
computation, the number of shares of common stock purchased by the Bank's
Employee Stock Ownership Plan and Management Recognition Plan which has not been
allocated to participant accounts is not assumed to be outstanding.

On March 17, 1998, the Company's Board of Directors declared a three-for-one
stock split, effected in the form of a dividend, whereby all shareholders
received two additional shares of common stock for each share of stock held. The
dividend was paid on April 6, 1998 to shareholders of record on March 27, 1998.
Unless otherwise noted, all information presented in the consolidated financial
statements regarding earnings per share, dividends per share and weighted
average number of shares outstanding has been computed giving effect to this
stock dividend.

                                      -23-
<PAGE>
 
CENTURY BANCORP, INC. 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1998 and 1997
--------------------------------------------------------------------------------


NOTE A - SIGNIFICANT ACCOUNTING POLICIES (Continued)

Stock-Based Compensation
------------------------

In October 1995, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 123, Accounting for
Stock Based Compensation. The Company accounts for its stock-based compensation
plans using the accounting prescribed by Accounting Principles Board Opinion No.
25, Accounting for Stock Issued to Employees. Since the Company is not required
to adopt the fair value based recognition provisions prescribed under SFAS No.
123, it has elected only to comply with the disclosure requirements set forth in
the Statement, which includes disclosing pro forma net income as if the fair
value based method of accounting had been applied. (See Note H.)

Recent Accounting Pronouncements
--------------------------------

In June 1997, the FASB issued SFAS No. 130, Reporting Comprehensive Income. This
Statement establishes standards of reporting and display of comprehensive income
and its components in a full set of general-purpose financial statements. In
addition to net income as has been historically determined, comprehensive income
for the Company would include unrealized holding gains and losses on available
for sale securities. This Statement will be effective for the Company's fiscal
year ending June 30, 1999, and the Company does not intend to early adopt. Had
the Company early-adopted this Statement, it would have reported comprehensive
income of $1,368,318 and $1,362,961 for the years ended June 30, 1998 and 1997,
respectively.

In June 1997, the FASB issued SFAS No. 131, Disclosures about Segments of an
Enterprise and Related Information. This Statement establishes standards for the
way that public business enterprises report information about operating segments
and certain other information in annual financial statements and requires that
those enterprises report selected information about operating segments in
interim financial reports issued to shareholders. This Statement will be
effective for the Company's fiscal year ending June 30, 1999.

In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities. SFAS No. 133 standardizes the accounting for
derivative instruments, including certain derivative instruments embedded in
other contracts. Under this standard, entities are required to carry all
derivative instruments in the statement of financial position at fair value. The
accounting for changes in the fair value (i.e., gains or losses) of a derivative
instrument depends on whether it has been designated and qualifies as part of a
hedging relationship and, if so, on the reason for holding it. If certain
conditions are met, entities may elect to designate a derivative instrument as a
hedge of exposure to changes in fair values, cash flows, or foreign currencies.
If the hedged exposure is a fair value exposure, the gain or loss on the
derivative instrument is recognized in earnings in the period of change together
with the offsetting loss or gain on the hedged item attributable to the risk
being hedged. If the hedged exposure is a cash flow exposure, the effective
portion of the gain or loss on the derivative instrument is reported initially
as a component of other comprehensive income (outside earnings) and subsequently
reclassified into earnings when the forecasted transaction affects earnings. Any
amounts excluded from the assessment of hedge effectiveness as well as the
ineffective portion of the gain or loss is reported in earnings immediately.
Accounting for foreign currency hedges is similar to accounting for fair value
and cash flow hedges. If the derivative instrument is not designated as a hedge,
the gain or loss is recognized in earnings in the period of change. Management
anticipates that this statement will have no effect on its consolidated
financial statements.

                                      -24-
<PAGE>
 
CENTURY BANCORP, INC. 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1998 and 1997
--------------------------------------------------------------------------------

NOTE B - INVESTMENT SECURITIES

The following is a summary of the securities portfolios by major classification:

<TABLE> 
<CAPTION> 

                                                                                    June 30, 1998
                                                       ----------------------------------------------------------------------  
                                                            Gross              Gross              Gross
                                                          Amortized         Unrealized         Unrealized           Fair
                                                            Cost               Gains             Losses             Value
                                                       --------------     --------------     --------------    --------------
<S>                                                    <C>               <C>                <C>               <C>     
Securities available for sale:
   U. S. government securities and obligations
    of U. S. government agencies                       $    3,376,213     $       30,361     $            -    $    3,406,574
   Mortgage-backed securities                               2,254,645              4,343                  -         2,258,988
   Municipal bonds                                          1,326,587             21,924                  -         1,348,511
   Equity securities                                           14,452            680,198                  -           694,650
                                                       --------------     --------------     --------------    --------------

                                                       $    6,971,897     $      736,826     $            -    $    7,708,723
                                                       ==============     ==============     ==============    ==============
Securities held to maturity:
   U. S. government securities and obligations
    of U. S. government agencies                       $    9,728,827     $       52,880     $            -    $    9,781,707
   Municipal bonds                                            487,806             56,082                  -           543,888
                                                       --------------     --------------     --------------    --------------

                                                       $   10,216,633     $      108,962     $            -    $   10,325,595
                                                       ==============     ==============     ==============    ==============
<CAPTION> 
                                                                                    June 30, 1997
                                                       ---------------------------------------------------------------------- 
                                                            Gross              Gross              Gross
                                                          Amortized         Unrealized         Unrealized           Fair
                                                            Cost               Gains             Losses             Value
                                                       --------------     --------------     --------------    --------------
<S>                                                    <C>               <C>                <C>               <C>     
Securities available for sale:
   U. S. government securities and obligations
    of U. S. government agencies                       $   14,852,472     $       11,638     $            -    $   14,864,110
   Mortgage-backed securities                               4,542,979                  -             47,403         4,495,576
   Municipal bonds                                            868,336                 79                  -           868,415
   Equity securities                                           14,452            502,148                  -           516,600
                                                       --------------     --------------     --------------    --------------
                                                       $   20,278,239     $      513,865     $       47,403    $   20,744,701
                                                       ==============     ==============     ==============    ==============
Securities held to maturity:
   U. S. government securities and obligations
    of U. S. government agencies                       $   10,676,038     $        2,806     $            -    $   10,678,844
   Municipal bonds                                            384,420             37,754                  -           422,174
                                                       --------------     --------------     --------------    --------------
                                                       $   11,060,458     $       40,560     $            -    $   11,101,018
                                                       ==============     ==============     ==============    ==============
</TABLE> 

Gross realized gains and gross realized losses on sales of available for sale
securities were $16,539 and $4,911, respectively, during the year ended June 30,
1998 and $-0- and $15,358, respectively, during the year ended June 30, 1997.

                                      -25-
<PAGE>
 
CENTURY BANCORP, INC. 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1998 and 1997
--------------------------------------------------------------------------------


NOTE B - INVESTMENT SECURITIES (Continued)

The amortized cost and fair values of securities at June 30, 1998 by contractual
maturity are shown below. Expected maturities will differ from contractual
maturities because borrowers may have the right to call or prepay obligations
with or without call or prepayment penalties.

<TABLE> 
<CAPTION> 
                                                          Securities Available for Sale        Securities Held to Maturity
                                                       ---------------------------------     --------------------------------  
                                                          Amortized            Fair             Amortized           Fair
                                                            Cost               Value              Cost              Value
                                                       --------------     --------------     --------------    --------------
<S>                                                    <C>                <C>                <C>               <C>  
         Due within one year                           $      503,248     $      506,094     $      199,361    $      199,688
         Due after one year through five years              2,635,307          2,668,526          7,882,509         7,953,594
         Due after five years through ten years             3,573,225          3,576,722          2,012,056         2,031,807
         Due after ten years                                  260,117            957,381            122,707           140,506
                                                       --------------     --------------     --------------    --------------

                                                       $    6,971,897     $    7,708,723     $   10,216,633    $   10,325,595
                                                       ==============     ==============     ==============    ==============
</TABLE> 

For purposes of the maturity table, mortgage-backed securities, which are not
due at a single maturity date, have been allocated over maturity groupings based
on the weighted-average contractual maturities of underlying collateral. The
mortgage-backed securities may mature earlier than their weighted-average
contractual maturities because of principal prepayments.

Securities with a carrying value of $4,297,213 and $3,015,322 and a fair value
of $4,310,846 and $3,022,735 at June 30, 1998 and 1997, respectively, were
pledged to secure public monies on deposit as required by law.

The following table sets forth certain information regarding the carrying value,
weighted average yields and contractual maturities of the Company's investment
portfolio at June 30, 1998. FHLB and FHLMC common stock, nonmarketable equity
securities, substantially all of which are required to be maintained, are
assumed to mature in periods greater than ten years.

<TABLE> 
<CAPTION> 

                                                                                Carrying Value
                                                 ----------------------------------------------------------------------------
                                                                   After One      After Five
                                                  One Year       Year Through    Years Through       After
                                                   or Less        Five Years      Ten Years        Ten Years        Total
                                                 -----------     -----------     ------------     -----------     -----------
                                                                                (In Thousands)
<S>                                              <C>             <C>             <C>              <C>             <C> 
Securities available for sale
   U. S. government and agency securities        $       506     $     2,042     $        859     $         -     $     3,407
   Mortgage-backed securities                              -               -            2,259               -           2,259
   Municipal bonds                                         -             627              458             263           1,348
   FHLMC stock                                             -               -                -             695             695

Securities held to maturity:
   U. S. government and agency securities                199           7,783            1,747               -           9,729
   Municipal bonds                                         -             100              265             123             488

Other investments:
   Interest-earning balances in other banks            5,356               -                -               -           5,356
   Federal Home Loan Bank stock                            -               -                -             653             653
                                                 -----------     -----------     ------------     -----------     -----------
                                                 $     6,061     $    10,552     $      5,588     $     1,734     $    23,935
                                                 ===========     ===========     ============     ===========     ===========

</TABLE> 

                                      -26-
<PAGE>
 
CENTURY BANCORP, INC. 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1998 and 1997
--------------------------------------------------------------------------------

NOTE B - INVESTMENT SECURITIES (Continued)

<TABLE> 
<CAPTION> 

                                                                                     Average Yield
                                                 ----------------------------------------------------------------------------
                                                                   After One       After Five
                                                  One Year       Year Through    Years Through       After
                                                   or Less        Five Years       Ten Years       Ten Years        Total
                                                 -----------     -----------     ------------     -----------     -----------
<S>                                              <C>             <C>             <C>              <C>             <C>  
Securities available for sale
   U. S. government and agency securities              6.02%           6.46%            5.40%              -%           6.13%
   Mortgage-backed securities                             -%              -%            6.39%              -%           6.39%
   Municipal bonds                                        -%           6.76%            5.94%           5.46%           5.93%
   FHLMC stock                                            -%              -%               -%           0.93%           0.93%

Securities held to maturity:
   U. S. government and agency securities              6.15%           6.61%            6.08%              -%           6.51%
   Municipal bonds                                        -%           4.30%            6.20%           6.20%           5.81%

Other investments:
   Interest-earning balances in other banks            6.10%              -%               -%              -%           6.10%
   Federal Home Loan Bank stock                           -%              -%               -%           7.50%           7.50%

   Weighted average                                    6.09%           6.59%            6.02%           4.47%           6.17%

</TABLE> 


NOTE C - LOANS RECEIVABLE

Loans receivable consist of the following:

<TABLE> 
<CAPTION> 

                                                                 1998                               1997
                                                   -------------------------------     -----------------------------
                                                                       Percentage                         Percentage
                                                       Amount           of Total           Amount          of Total
                                                   --------------     ------------     -------------      ----------
<S>                                                <C>                <C>             <C>                 <C> 
      Type of loan:                               
         Real estate loans:                       
           One-to-four family residential          $   56,753,361          81.08%      $  49,415,155          79.28%
           Multi-family residential and           
            commercial                                  9,026,127          12.89           9,479,925          15.21
           Construction                                 4,709,350           6.73           4,209,050           6.75
           Home equity lines of credit                  1,230,152           1.76           1,202,807           1.93
                                                   --------------       --------       -------------       --------
                  Total real estate loans              71,718,990         102.46          64,306,937         103.17
                                                   --------------       --------       -------------       --------
         Other loans:                             
           Consumer loans                               1,412,902           2.01           1,115,449           1.79
           Loans secured by deposits                      220,934           0.32             171,077           0.27
                                                   --------------       --------       -------------       --------
                  Total other loans                     1,633,836           2.33           1,286,526           2.06
                                                   --------------       --------       -------------       --------
                  Total loans                          73,352,826         104.79          65,593,463         105.23
                                                  
      Less:                                       
         Construction loans in process                  2,412,740           3.45           2,382,580           3.82
         Net deferred loan fees                           392,095           0.56             328,084           0.53
         Allowance for loan losses                        550,498           0.78             549,998           0.88
                                                   --------------       --------       -------------       --------
                                                   $   69,997,493         100.00%      $  62,332,801         100.00%
                                                   ==============       =========      =============       =========
</TABLE> 

                                      -27-
<PAGE>
 
CENTURY BANCORP, INC. 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1998 and 1997
--------------------------------------------------------------------------------


NOTE C - LOANS RECEIVABLE (Continued)

The allowance for loan losses is summarized as follows:

<TABLE> 
<CAPTION> 
                                                                                         1998             1997
                                                                                     ------------     ------------
<S>                                                                                  <C>              <C>    
         Balance at beginning of year                                                $    549,998     $    532,903
                                                                                     ------------     ------------
            Loans charged off:
               Real estate                                                                (17,500)               -
               Other                                                                            -           (1,023)
                                                                                     ------------     ------------
                    Total loans charged off                                               (17,500)          (1,023)
                                                                                     ------------     ------------
            Recoveries:
               Real estate                                                                      -                -
               Other                                                                            -            1,618
                                                                                     ------------     ------------
                    Total recoveries                                                            -            1,618
                                                                                     ------------     ------------
            Provision for loan losses                                                      18,000           16,500
                                                                                     ------------     ------------
         Balance at end of year                                                      $    550,498     $    549,998
                                                                                     ============     ============
         Ratio of net charge-offs to average loans outstanding                               0.03%               -%
                                                                                           ======            =====
</TABLE> 

The allocation of the allowance for loan losses applicable to each category of
loans at June 30, 1998 and 1997 is as follows:

<TABLE> 
<CAPTION> 

                                                               1998                                   1997
                                               ------------------------------------   ------------------------------------
                                                             Percent of    Percent                   Percent of   Percent
                                                              Allowance   of Loans                   Allowance   of Loans
                                                Amount of     to Total     to Total     Amount of    to Total    to Total
                                                Allowance     Allowance     Loans       Allowance    Allowance     Loans
                                               -----------    ---------   ---------   -----------   -----------  ---------
<S>                                            <C>            <C>         <C>         <C>           <C>          <C> 
Real estate loans:
  One-to-four family residential               $   258,210        46.91%      77.37%  $   206,000        37.46%      75.34%
  Multi-family residential and commercial          109,383        19.87       12.30       119,000        21.64       14.45
  Construction                                      22,966         4.17        6.42        18,000         3.27        6.42
  Home equity lines of credit                       12,302         2.23        1.68        12,000         2.18        1.83

Other loans:
  Consumer loans                                    42,387         7.70        1.93        33,000         6.00        1.70
  Loans secured by deposits                              -            -        0.30             -            -        0.26

Unallocated                                        105,250        19.12           -       161,998        29.45           -
                                               -----------    ---------   ---------   -----------   ----------    --------
                                               $   550,498       100.00%     100.00%  $   549,998       100.00%     100.00%
                                               ===========    =========   =========   ===========   ==========    ========
</TABLE> 

Nonaccrual loans, which consisted of loans on which principal or interest was
delinquent for 90 days or more, totaled approximately $330,000 and $77,000 at
June 30, 1998 and 1997, respectively. Such loans had the effect of reducing
interest income by approximately $6,000 and $4,000 during the years ended June
30, 1998 and 1997, respectively.

                                      -28-
<PAGE>
 
CENTURY BANCORP, INC. 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1998 and 1997
--------------------------------------------------------------------------------


NOTE C - LOANS RECEIVABLE (Continued)

At June 30, 1998, the Bank had mortgage loan commitments outstanding of
$2,544,000 and pre-approved but unused lines of credit totaling $825,000. In
management's opinion, these commitments and undisbursed proceeds on construction
loans in process, reflected above, represent no more than normal lending risk to
the Bank and will be funded from normal sources of liquidity.

The Bank has had loan transactions with its directors and executive officers.
Such loans were made in the ordinary course of business and also on
substantially the same terms and collateral as those comparable transactions
prevailing at the time and did not involve more than the normal risk of
collectibility or present other unfavorable features. A summary of related party
loan transactions is as follows:

<TABLE> 
<CAPTION>         
                                                                                            1998           1997
                                                                                        -----------     ----------
         <S>                                                                            <C>             <C>   
         Balance at beginning of year                                                   $   401,756     $  415,257
         Additional borrowings                                                              261,700              -
         Loan repayments                                                                    (24,716)       (13,501)
                                                                                        -----------     ----------

         Balance at end of year                                                         $   638,740     $  401,756
                                                                                        ===========     ==========
<CAPTION> 
NOTE D - PREMISES AND EQUIPMENT

Premises and equipment consist of the following:

                                                                                            1998           1997
                                                                                        -----------     ----------
         <S>                                                                            <C>             <C>  
         Land                                                                           $    61,203     $   61,203
         Building and improvements                                                          737,557        735,416
         Office furniture, fixtures and equipment                                           233,389        223,862
         Automotive equipment                                                                44,805         29,772
                                                                                        -----------     ----------
                                                                                          1,076,954      1,050,253
         Accumulated depreciation                                                          (389,659)      (341,132)
                                                                                        -----------     ----------

                                                                                        $   687,295     $  709,121
                                                                                        ===========     ==========
<CAPTION> 
NOTE E - FEDERAL INSURANCE OF DEPOSITS

Eligible deposit accounts are insured up to $100,000 by the Federal Deposit Insurance Corporation.

NOTE F - NOTE PAYABLE

                                                                                           1998            1997
                                                                                        -----------     ----------
<S>                                                                                     <C>             <C> 
Note payable to a bank, due July 2, 1998, bearing interest at 6.46%, and secured
     by the outstanding common stock of Home Savings.
     This note was paid in full on July 2, 1998.                                        $ 4,200,000     $        -
                                                                                        ===========     ==========
</TABLE> 

At June 30, 1998, Home Savings also had $10,000,000 available on a line of
credit from the Federal Home Loan Bank. Any advances would be secured by a
blanket floating lien on the Bank's one-to-four family residential mortgage
loans. There were no advances made during the years ended June 30, 1998 or 1997.

                                      -29-
<PAGE>
 
CENTURY BANCORP, INC. 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1998 and 1997
--------------------------------------------------------------------------------


NOTE G - DEPOSIT ACCOUNTS

A comparative summary of deposit accounts at June 30, 1998 and 1997 follows:
<TABLE> 
<CAPTION> 
                                                                      1998                                 1997
                                                       ---------------------------------     --------------------------------
                                                                             Weighted                             Weighted
                                                           Balance           Avg. Rate           Balance          Avg. Rate
                                                       ---------------      -----------      --------------      ------------     
<S>                                                    <C>                   <C>             <C>                  <C> 
         Demand deposits:
            Negotiable orders of withdrawal            $     3,516,274           2.75%       $    3,477,858            2.75%
            Passbook and statement accounts                  5,343,812           3.00%            5,410,379            3.00%
            Money market checking                           11,550,528           4.51%           10,007,355            4.16%
            Non-interest-bearing checking                       78,028              -                52,211               -
                                                       ---------------                       --------------
                                                            20,488,642           3.80%           18,947,803            3.56%
         Certificates of deposit                            52,534,329           5.65%           50,750,870            5.58%
                                                       ---------------                       --------------

              Total deposit accounts                   $    73,022,971           5.13%       $   69,698,673            5.03%
                                                       ===============                       ==============
<CAPTION> 
A summary of certificate accounts by maturity as of June 30, 1998 follows:
                                                    
                                                                        Less than           $100,000
                                                                        $100,000             or More             Total
                                                                     --------------     ---------------     -------------- 
                                                                                        (In Thousands)
<S>                                                                  <C>                <C>                 <C> 
         Three months or less                                        $       13,489     $         7,043     $       20,532
         Over three months through six months                                 6,950               3,736             10,686
         Over six months through twelve months                                9,991               5,175             15,166
         Over twelve months through twenty-four months                        5,423                 314              5,737
         Over twenty-four months                                                413                   -                413
                                                                     --------------     ---------------     --------------

                                                                     $       36,266     $        16,268     $       52,534
                                                                     ==============     ===============     ==============
<CAPTION> 
Interest expense on deposits for the years ended June 30 is summarized as
follows:

                                                                                             1998               1997
                                                                                        --------------     ---------------
        <S>                                                                             <C>                <C> 
         Passbook and statement accounts                                                $      158,605     $       182,892
         NOW accounts                                                                           79,488              62,902
         Money market accounts                                                                 441,520             436,637
         Certificates of deposit                                                             2,968,113           2,837,261
                                                                                        --------------     ---------------
                                                                                             3,647,726           3,519,692
         Penalties for early withdrawal                                                          5,197               7,444
                                                                                        --------------     ---------------

                                                                                        $    3,642,529     $     3,512,248
                                                                                        ==============     ===============
</TABLE> 

                                      -30-
<PAGE>
 
CENTURY BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1998 and 1997
--------------------------------------------------------------------------------


NOTE H - EMPLOYEE AND DIRECTOR BENEFIT PLANS

Defined Benefit Plan
--------------------

The Bank established a pension plan for the benefit of its employees on March 1,
1973. The pension plan covered all full-time employees who had completed five
months continuous service with the Bank. The plan was funded by the purchase of
level premium insurance policies and an annual contribution to an auxiliary
fund. This plan was terminated, with IRS approval, during the year ended June
30, 1998. The following is a summary of the plan's funded status as of June 30,
1997:

<TABLE> 

<S>                                                                                        <C> 
         Actuarial present value of benefit obligations:                                   
            Vested benefits                                                                $       369,644
                                                                                           ===============
                                                                                           
            Accumulated benefits                                                           $       369,644
                                                                                           ===============
                                                                                           
         Projected benefits                                                                $       369,644
         Plan assets, at fair value                                                                390,956
                                                                                           ---------------
         Plan assets in excess of projected benefit obligation                                      21,312
         Unrecognized transition account                                                                 -
         Unrecognized prior service cost                                                                 -
         Unrecognized net loss                                                                           -
                                                                                           ---------------
                                                                                           
         Net pension asset                                                                 $        21,312
                                                                                           ===============

Assumptions used in determining the funded status of the pension plan are as follows at June 30, 1997:

         Discount rate                                                                             7.0%
         Rates of increase in compensation levels                                                  6.0%
         Expected long-term rate of return on plan assets                                          7.0%
                                                                                           
Net pension cost includes the following components for the year ended June 30, 1997:       
                                                                                           
         Service cost                                                                      $        28,101
         Interest cost on projected benefit obligation                                              40,040
         Actual return on assets                                                                   (35,757)
         Other - net                                                                                21,587
                                                                                           ---------------
                                                                                           
         Net periodic pension cost                                                         $        53,971
                                                                                           ===============
</TABLE> 

                                      -31-
<PAGE>
 
CENTURY BANCORP, INC. 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1998 and 1997
--------------------------------------------------------------------------------


NOTE H - EMPLOYEE AND DIRECTOR BENEFIT PLANS (Continued)

Management Recognition and Stock Option Plans
---------------------------------------------

At a special meeting of the Company's stockholders held on February 17, 1998,
the stockholders approved the Century Bancorp, Inc. Stock Option Plan ("SOP")
and the Home Savings Bank, Inc., SSB Management Recognition Plan ("MRP"). The
SOP provides for the issuance to directors, officers and employees of the Bank
options to purchase up to 122,199 shares (40,733 shares prior to the stock
split) of the Company's common stock. The MRP provides for the award of up to
48,879 shares (16,293 shares prior to the stock split) of the Company's common
stock to directors, officers and employees of the Bank with shares awarded
vesting over a three year period. The Company may elect to fund the plans
through the issuance of authorized but unissued shares, or may elect to purchase
the shares to fund the plans in the open market.

During March of 1998, 43,995 shares (14,665 shares prior to the stock split) of
newly issued common stock were awarded under the MRP at a value of $29.71 per
share ($89.13 prior to the effect of the stock split). In addition, 4,884 of
newly issued shares, which had a total value at issuance of $145,096, were
issued to the MRP for future grants. These shares had not been granted as of
June 30, 1998. Personnel costs for the year ended June 30, 1998 include
$435,722, which represents the value of MRP shares earned through that date.

On March 10, 1998, the Company granted options to purchase 109,983 shares of
common stock at an exercise price of $20.45 per share, including 24,444 options
granted to the Company's directors and 85,539 options granted to the Company's
executive officers and employees. Options granted to directors were fully vested
on the date of grant. Options granted to executive officers and employees vested
25% on the date of grant and will vest 25% annually thereafter. All options will
expire if not exercised within ten years from the date of grant. None of the
options were exercised during the year ended June 30, 1998. At such date,
options to purchase 45,829 shares at $20.45 per share were exercisable. As
permitted by SFAS No. 123, the Company has applied APB Opinion No. 25 for
measurement of stock-based compensation in the accompanying financial
statements. If the Company had used the fair value based method of accounting
for stock-based compensations, operating results for the year ended June 30,
1998 would have been affected as set forth below:

<TABLE> 
<CAPTION> 

                                                            As Reported            Pro Forma
                                                          ----------------      --------------- 
       <S>                                                <C>                   <C>   
       Net income                                         $   1,203,707          $   977,909
                                                                                    
       Net income per share, basic and diluted            $        1.06          $      0.86
</TABLE> 

In determining the pro forma disclosures above, the fair value of options
granted was estimated as of the grant date using the Black-Scholes Option
Pricing Model using the following assumptions: a risk-free interest rate of
5.5%, a dividend yield of 3.33%, an expected life of 7 years, and a volatility
ratio of 20%. The effects of applying SFAS No. 123 in the above pro forma
disclosure are not indicative of future amounts.

                                      -32-
<PAGE>
 
CENTURY BANCORP, INC. 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1998 and 1997
--------------------------------------------------------------------------------


NOTE H - EMPLOYEE AND DIRECTOR BENEFIT PLANS (Continued)

Employee Stock Ownership Plan
-----------------------------

The Bank has established an ESOP to benefit all qualified employees. The ESOP
purchased 97,758 shares (32,586 shares prior to the stock split) of common stock
in the Conversion with proceeds received from a loan of $1,629,300 from the
Parent. The loan is to be repaid over fifteen years in quarterly installments of
principal and interest. Interest is based upon the prime rate and will be
adjusted annually. The loan may be prepaid without penalty. The unallocated
shares of stock held by the ESOP are pledged as collateral for the loan. The
ESOP is funded by contributions made by the Bank in amounts sufficient to retire
the debt. At June 30, 1998 and 1997, the outstanding balance of the loan is
$1,525,938 and $1,585,150, respectively, and is presented as a reduction of
stockholders' equity.

Shares released as the debt is repaid and earnings from the common stock held by
the ESOP are allocated among active participants on the basis of compensation in
the year of allocation. Benefits become 100% vested after seven years of
credited service. Forfeitures of nonvested benefits will be reallocated among
remaining participating employees in the same proportion as contributions.

Dividends on unallocated shares may be used by the ESOP to repay the loan to the
Company and are not reported as dividends in the financial statements. Dividends
on allocated or committed to be allocated shares are credited to the accounts of
the participants and reported as dividends in the financial statements. Special
return of capital dividends on unallocated ESOP shares totaling $977,580 are
recorded as unearned ESOP compensation and reported as a separate component of
stockholders' equity. These funds will be used by the ESOP to purchase
additional shares of the Company's common stock, which may result in the ESOP
owning a larger percentage of the outstanding common stock than was originally
anticipated at the time of the Conversion.

Expense of $95,101 and $57,395 during the years ended June 30, 1998 and 1997,
respectively, has been incurred in connection with the ESOP. The expense for the
years ended June 30, 1998 and 1997 includes, in addition to the cash
contributions necessary to fund the ESOP, $35,889 and $13,245, respectively,
which represents the differences between the fair value of the shares which have
been released or committed to be released to participants, and the cost of these
shares to the ESOP. The Bank has credited these amounts to common stock.

At June 30, 1998, 7,119 shares held by the ESOP have been released or committed
to be released to the plan's participants for purposes of computing earnings per
share. The fair value of the unallocated shares amounted to approximately
$1,541,000 at June 30, 1998.

Executive's Deferred Compensation Plan
--------------------------------------

The Bank has a deferred compensation plan for its chief executive officer under
which he will be paid specified amounts during the fifteen-year period following
retirement at age 65, or upon death or permanent disability. The Bank has made
current provision for future payments under this plan, and the related liability
and deferred income tax benefits are included in the accompanying financial
statements. The Bank has purchased life insurance policies with the Bank named
as beneficiary to fund the benefits. Expenses associated with this plan were
$22,000 for each of the years ended June 30, 1998 and 1997.

                                      -33-
<PAGE>
 
CENTURY BANCORP, INC. 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1998 and 1997
--------------------------------------------------------------------------------



NOTE H - EMPLOYEE AND DIRECTOR BENEFIT PLANS (Continued)

Employment Agreement
--------------------

The Bank has entered into an employment agreement with its chief executive
officer to ensure a stable and competent management base. The agreement provides
for a three-year term, but, upon each anniversary, the agreement may be extended
for an additional year so that the remaining term shall always be three years.
The agreement provides for benefits as spelled out in the contract and cannot be
terminated by the Board of Directors, except for cause, without prejudicing the
officer's right to receive certain vested rights, including compensation, for
the remaining term of the agreement. In the event of a change in control of the
Bank, as defined in the agreement, the agreement will automatically be extended
for three years from the date of such change in control and the acquirer will be
bound to the terms of the contract for that period.

Termination Agreements
----------------------

The Bank has entered into special termination agreements with two key employees
which provide for severance pay benefits in the event of a change in control of
the Bank which results in the termination of such employees or diminished
compensation, duties or benefits within two years of a change in control. The
employees covered under this agreement are entitled to a cash payment equal to
two times their annual compensation for income tax purposes for the most recent
tax year prior to the change in control. The agreements are initially effective
for a three-year period and may be extended annually for an additional year.

Severance Plan
--------------

The Bank has also adopted a severance plan for the benefit of its employees in
the event of a change in control of the Bank which provides for varying
severance benefits for employees based on their salaries and length of service
with the Bank.

NOTE I - SPECIAL SAIF ASSESSMENT

On September 30, 1997, the Deposit Insurance Funds Act of 1997 was signed into
law. The legislation included a special assessment to recapitalize the Savings
Association Insurance Fund ("SAIF") insurance fund up to its statutory goal of
1.25% of insured deposits. The assessment required the Bank to pay an amount
equal to 65.7 basis points of its SAIF-assessable deposit base as of March 31,
1995, which resulted in a charge to income during the year ended June 30, 1997
of $408,521.

                                      -34-
<PAGE>
 
CENTURY BANCORP, INC. 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1998 and 1997
--------------------------------------------------------------------------------


NOTE J - INCOME TAXES

The components of income tax expense are as follows for the years ended June 30,
1998 and 1997:

<TABLE> 
<CAPTION> 
                                                                                             1998               1997
                                                                                        --------------     ---------------
<S>                                                                                     <C>                <C> 
         Current tax expense                                                            $      654,000     $       492,108

         Net deferred tax expense (benefit) included in operations                             (49,000)             65,592
                                                                                        --------------     ---------------

                                                                                        $      605,000     $       557,700
                                                                                        ==============     ===============
</TABLE> 

The differences between the provision for income taxes and the amount computed
by applying the statutory federal income tax rate of 34% to income before income
taxes were as follows for the years ended June 30, 1998 and 1997:

<TABLE> 
<CAPTION> 
                                                                                             1998               1997
                                                                                        --------------     ---------------
<S>                                                                                     <C>                <C> 
         Income tax at federal statutory rate                                           $      615,000     $       569,100
         State income tax, net of federal tax benefit                                            4,000               7,300
         Tax exempt interest income                                                            (19,000)            (16,000)
         Other                                                                                   5,000              (2,700)
                                                                                        --------------     ---------------

                                                                                        $      605,000     $       557,700
                                                                                        ==============     ===============
</TABLE> 

Deferred tax assets and liabilities arising from temporary differences at June
30, 1998 and 1997 are summarized as follows:

<TABLE> 
<CAPTION> 
                                                                                             1998               1997      
                                                                                        --------------     ---------------
        <S>                                                                             <C>                <C> 
         Deferred tax assets relating to:
            Loan fees and costs                                                         $          464     $         2,922
            Deferred compensation                                                              123,669              73,927
            Bad debt reserves                                                                  125,100             124,898
                                                                                        --------------     ---------------
                      Gross deferred tax assets                                                249,233             201,747
            Valuation allowance                                                                      -                   -
                                                                                        --------------     ---------------
                      Net deferred tax assets                                                  249,233             201,747
                                                                                        --------------     ---------------

         Deferred tax liabilities relating to:
            Property and equipment                                                             (41,186)            (42,531)
            FHLB stock dividends                                                              (104,832)           (104,832)
            Net unrealized gain on securities available for sale                              (288,210)           (182,626)
                                                                                        --------------     ---------------
                      Total deferred tax liabilities                                          (434,228)           (329,989)
                                                                                        --------------     ---------------

                      Net deferred tax liability                                        $     (184,995)    $      (128,242)
                                                                                        ==============     ===============
</TABLE> 

                                      -35-
<PAGE>
 
CENTURY BANCORP, INC. 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1998 and 1997
--------------------------------------------------------------------------------


NOTE J - INCOME TAXES (Continued)

Retained earnings at June 30, 1998 include approximately $1,534,000 for which no
deferred income tax liability has been recognized. This amount represents an
allocation of income to bad debt deductions for income tax purposes only.
Reductions of the amount so allocated for purposes other than tax bad debt
losses or adjustments arising from carryback of net operating losses would
create income which would be subject to the then current corporate income tax
rate.

During 1996, Congress enacted certain tax legislation that exempted thrift
institutions from being taxed on these pre-1987 bad debt reserves. Further, the
use of the reserve method is now required for all thrifts. The Bank will be
recapturing $264,000 of its tax bad debt reserve created subsequent to 1986 by
using the percentage of taxable income method, requiring payment of additional
income taxes of approximately $100,000. Deferred income taxes have been
previously established for the taxes arising from the reserve recapture, and
therefore the ultimate payment of the taxes will not result in a charge to
earnings.

NOTE K - REGULATORY RESTRICTIONS

Capital Requirements
--------------------

The Parent is regulated by the Board of Governors of the Federal Reserve System
and is subject to securities registration and public reporting regulations of
the Securities and Exchange Commission. The Bank is regulated by the Federal
Deposit Insurance Corporation ("FDIC") and the Administrator, Savings
Institutions Division, North Carolina Department of Commerce (the
"Administrator").

The Bank is subject to the capital requirements of the FDIC and the
Administrator. The FDIC requires the Bank to maintain minimum ratios of Tier 1
capital to risk-weighted assets and total capital to risk-weighted assets of 4%
and 8%, respectively. Tier 1 capital consists of total shareholders' equity
calculated in accordance with generally accepted accounting principles less
intangible assets, and total capital is comprised of Tier 1 capital plus certain
adjustments, the only one of which applies to the Bank is the allowance for
possible loan losses. Risk-weighted assets refer to the on- and off-balance
sheet exposures of the Bank adjusted for their relative risk levels using
formulas set forth in FDIC regulations. The Bank is also subject to an FDIC
leverage capital requirement, which calls for a minimum ratio of Tier 1 capital
(as defined above) to quarterly average total assets of 3% to 5%, depending on
the institution's composite ratings as determined by its regulators. The
Administrator requires a net worth equal to at least 5% of total assets.

                                      -36-
<PAGE>
 
CENTURY BANCORP, INC. 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1998 and 1997
--------------------------------------------------------------------------------


NOTE K - REGULATORY RESTRICTIONS (Continued)

At June 30, 1998, the Bank was in compliance with all of the aforementioned
capital requirements as shown below:

<TABLE> 
<CAPTION> 


                                                       Leverage          Tier I Risk-
                                                       Ratio of            Adjusted          Risk-Based         N. C. Savings
                                                    Tier I Capital          Capital            Capital          Bank Capital
                                                    ---------------    ---------------     ---------------    ---------------
<S>                                                 <C>                <C>                 <C>                <C>     
Consolidated stockholders' equity                   $    18,731,673    $    18,731,673     $    18,731,673    $    18,731,673
Additional equity of the Bank                             3,308,388          3,308,388           3,308,388          3,308,388
Unrealized gain on securities                              (448,447)          (448,447)           (448,447)          (448,447)
Loan loss allowance                                               -                  -             550,498            550,498
                                                    ---------------    ---------------     ---------------    ---------------

           Regulatory capital                            21,591,614         21,591,614          22,142,112         22,142,112

Minimum capital requirement                               2,990,000          3,631,000           7,262,000          4,839,000
                                                    ---------------    ---------------     ---------------    ---------------

           Excess regulatory capital                $    18,601,614    $    17,960,614     $    14,880,112    $    17,303,112
                                                    ===============    ===============     ===============    ===============
</TABLE> 

Liquidation Account
-------------------

At the time of Conversion, the Bank established a liquidation account in an
amount equal to its net worth at June 30, 1996. The liquidation account will be
maintained for the benefit of eligible deposit account holders who continue to
maintain their deposit accounts in the Bank after Conversion. Only in the event
of a complete liquidation will each eligible deposit account holder be entitled
to receive a liquidation distribution from the liquidation account in the amount
of the then current adjusted subaccount balance for deposit accounts then held
before any liquidation distribution may be made from the Bank to Century.
Dividends cannot be paid from this liquidation account.

Dividends
---------

Subject to applicable law, the Boards of Directors of the Bank and the Parent
may each provide for the payment of dividends. Future declarations of cash
dividends, if any, by the Parent may depend upon dividend payments by the Bank
to the Parent. Subject to regulations of the Administrator, the Bank may not
declare or pay a cash dividend on or repurchase any of its common stock if its
stockholders' equity would thereby be reduced below either the aggregate amount
then required for the liquidation account or the minimum regulatory capital
requirements imposed by federal and state regulations. In addition, for a period
of five years after the Conversion, the Bank will be required, under existing
North Carolina regulations, to obtain prior written approval of the
Administrator before it can declare and pay a cash dividend on its capital stock
in an amount in excess of one-half of the greater of (i) its net income for the
most recent fiscal year, or (ii) the average of its net income after dividends
for the most recent fiscal year and not more than two of the immediately
preceding fiscal years, if applicable.

During the year ended June 30, 1997, the Bank paid dividends of $500,000 to the
Parent. During the year ended June 30, 1998, the Bank did not pay any dividends
to Century. However, subsequent to June 30, 1998, with the permission of the
Administrator, the Bank paid $4,268,593 in dividends to the Parent.

                                      -37-
<PAGE>
 
CENTURY BANCORP, INC. 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1998 and 1997
--------------------------------------------------------------------------------

NOTE K - REGULATORY RESTRICTIONS (Continued)

Century Bancorp, Inc. paid, after giving effect to the 3 for 1 stock dividend,
regular cash dividends totaling $.67 and $.17 per share during the years ended
June 30, 1998 and 1997, respectively, and a special nonrecurring return of
capital dividend of $10.00 per share during the year ended June 30, 1998.

NOTE L - CONCENTRATION OF CREDIT RISK AND OFF-BALANCE SHEET RISK

The Bank generally originates single-family residential loans within its primary
lending area within ten miles of Thomasville, North Carolina. The Bank's
underwriting policies require such loans to be made at no greater than 80%
loan-to-value based upon appraised values unless private mortgage insurance is
obtained. These loans are secured by the underlying properties.

The Bank is a party to financial instruments with off-balance sheet risk in the
normal course of business to meet the financing needs of its customers. These
financial instruments include commitments to fund loans, standby letters of
credit and equity lines of credit. Those instruments involve, to varying
degrees, elements of credit and interest rate risk in excess of the amount
recognized in the statements of financial condition. The contract or notional
amounts of those instruments reflect the extent of involvement the Bank has in
particular classes of financial instruments.

A summary of the contract amount of the Bank's exposure to off-balance sheet
risk as of June 30, 1998 is as follows:

    Financial instruments whose contract amounts represent credit risk:

      Commitments to extend credit, mortgage loans                 $2,544,000
      Undisbursed construction loans                                2,413,000
      Undisbursed lines of credit                                     825,000


NOTE M - DISCLOSURES ABOUT FAIR VALUES OF FINANCIAL INSTRUMENTS

The Company has implemented Statement of Financial Accounting Standards No. 107,
Disclosures about Fair Value of Financial Instruments ("SFAS 107"), which
requires disclosure of the estimated fair values of the Company's financial
instruments whether or not recognized in the balance sheet, where it is
practical to estimate that value. Such instruments include cash and
interest-earning balances in other banks, investment securities, loans
receivable, accrued interest receivable, stock in the Federal Home Loan Bank of
Atlanta, deposit accounts, note payable and commitments. Fair value estimates
are made at a specific point in time, based on relevant market information and
information about the financial instrument. These estimates do not reflect any
premium or discount that could result from offering for sale at one time the
Company's entire holdings of a particular financial instrument. Because no
active market readily exists for a portion of the Company's financial
instruments, fair value estimates are based on judgments regarding future
expected loss experience, current economic conditions, risk characteristics of
various financial instruments, and other factors. These estimates are subjective
in nature and involve uncertainties and matters of significant judgment and,
therefore, cannot be determined with precision. Changes in assumptions could
significantly affect the estimates. 

                                      -38-
<PAGE>
 
CENTURY BANCORP, INC. 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1998 and 1997
--------------------------------------------------------------------------------

NOTE M - DISCLOSURES ABOUT FAIR VALUES OF FINANCIAL INSTRUMENTS (Continued)

The following methods and assumptions were used to estimate the fair value of
each class of financial instruments for which it is practicable to estimate that
value:

         Cash and Interest-Earning Balances in Other Banks

            The carrying amounts for cash and interest-earning balances in other
            banks approximate fair value because of the short maturities of
            those instruments.

         Investment Securities

            Fair value for investment securities equals quoted market price if
            such information is available. If a quoted market price is not
            available, fair value is estimated using quoted market prices for
            similar securities.

         Loans Receivable

            For certain homogenous categories of loans, such as residential
            mortgages, fair value is estimated using the quoted market prices
            for securities backed by similar loans, adjusted for differences in
            loan characteristics. The fair value of other types of loans is
            estimated by discounting the future cash flows using the current
            rates at which similar loans would be made to borrowers with similar
            credit ratings and for the same remaining maturities.

         Stock in Federal Home Loan Bank of Atlanta

            The fair value for FHLB stock is its carrying value, since this is
            the amount for which it could be redeemed. There is no active market
            for this stock and the Bank is required to maintain a minimum
            balance based on the unpaid principal of home mortgage loans.

         Deposit Liabilities

            The fair value of demand deposits is the amount payable on demand at
            the reporting date. The fair value of certificates of deposit is
            estimated using the rates currently offered for deposits of similar
            remaining maturities.

         Note Payable

            The fair value of the note payable is based upon the discounted
            value using current rates at which borrowings of similar maturity
            could be obtained.

         Financial Instruments with Off-Balance Sheet Risk

            With regard to financial instruments with off-balance sheet risk
            discussed in Note L, it is not practicable to estimate the fair
            value of future financing commitments.

                                      -39-
<PAGE>
 
CENTURY BANCORP, INC. 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1998 and 1997
--------------------------------------------------------------------------------


NOTE M - DISCLOSURES ABOUT FAIR VALUES OF FINANCIAL INSTRUMENTS (Continued)

The carrying amounts and estimated fair values of the Company's financial
instruments, none of which are held for trading purposes, are as follows at June
30, 1998 and 1997:

<TABLE> 
<CAPTION> 
                                                                      1998                                 1997
                                                       ---------------------------------     --------------------------------
                                                          Carrying           Estimated          Carrying          Estimated
                                                           Amount           Fair Value           Amount          Fair Value
                                                       --------------     --------------     --------------    -------------- 
<S>                                                    <C>                <C>                <C>               <C>       
      Financial assets:
        Cash and interest-bearing balances             $    6,805,682     $    6,805,682     $    4,156,395    $    4,156,395
        Investment securities:
          Available for sale                                7,708,723          7,708,723         20,744,701        20,744,701
          Held to maturity                                 10,216,633         10,325,595         11,060,458        11,101,018
        Loans                                              69,997,493         70,818,000         62,332,801        62,051,000
        Stock in Federal Home Loan Bank of Atlanta            652,600            652,600            586,500           586,500

      Financial liabilities:
        Deposits                                           73,022,971         72,603,000         69,698,673        68,820,000
        Notes payable                                       4,200,000          4,192,000                  -                 -

</TABLE> 

NOTE N - PARENT COMPANY FINANCIAL DATA

The following is a summary of the condensed financial statements of Century
Bancorp, Inc. as of and for the periods ended June 30, 1998 and 1997:

                       Condensed Statements of Operations
   Year Ended June 30, 1998 and Period from December 20, 1996 to June 30, 1997

<TABLE> 
<CAPTION> 
                                                                                    1998               1997
                                                                              ---------------    ---------------
<S>                                                                          <C>                <C> 
         Interest income                                                      $       520,743    $       313,117
         Equity in earnings of Home Savings, Inc., SSB                                910,455            727,797
         Interest expense                                                             (66,167)                 -
         Other expenses                                                                (1,324)                 -
         Income taxes                                                                (160,000)          (114,000)
                                                                              ---------------    ---------------
                     Net income                                               $     1,203,707    $       926,914
                                                                              ===============    ===============
</TABLE> 

                                      -40-
<PAGE>
 
CENTURY BANCORP, INC. 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1998 and 1997
--------------------------------------------------------------------------------

NOTE N - PARENT COMPANY FINANCIAL DATA (Continued)



                   Condensed Statements of Financial Condition
                             June 30, 1998 and 1997

<TABLE> 
<CAPTION> 
                                                                                    1998                1997
                                                                              ----------------   ----------------
<S>                                                                           <C>                <C> 
         Assets:
            Cash                                                              $        539,904   $        595,908
            Investment securities available for sale                                         -          8,819,705
            Investment in Home Savings, Inc., SSB                                   22,488,508         20,864,250
            Accrued interest receivable                                                      -            241,778
            Other assets                                                                     -              2,705
                                                                              ----------------   ----------------

                                                                              $     23,028,412   $     30,524,346
                                                                              ================   ================

         Liabilities and Stockholders' Equity:
            Liabilities:
               Note payable                                                   $      4,200,000   $              -
               Payable to Home Savings, Inc., SSB                                            -            160,000
               Accounts payable                                                              -             34,579
               Accrued interest payable                                                 66,167                  -
               Income taxes payable                                                     30,572             27,000
                                                                              ----------------   ----------------
                                                                                     4,296,739            221,579
                                                                              ----------------   ---------------- 
            Stockholders' equity:
               Common stock                                                          9,223,975         19,467,082
               Deferred management recognition plan                                 (1,016,392)                 -
               ESOP note receivable                                                 (1,525,938)        (1,585,150)
               Unearned ESOP compensation                                             (977,580)                 -
               Retained earnings                                                    12,579,161         12,136,999   
               Unrealized holding gains                                                448,447            283,836
                                                                              ----------------   ----------------  
                                                                                    18,731,673         30,302,767
                                                                              ----------------   ---------------- 
                                                                              $     23,028,412   $     30,524,346
                                                                              ================   ================
</TABLE> 
 

                                      -41-
<PAGE>
 
                              CENTURY BANCORP, INC.
                              CORPORATE INFORMATION
--------------------------------------------------------------------------------


                               Executive Officers

                              James G. Hudson, Jr.
                          President, CEO and Treasurer

        Drema A. Michael                                   John E. Todd
Secretary and Assistant Treasurer                         Vice President

                                    Directors

    Henry H. Darr             James G. Hudson, Jr.           John R. Hunnicutt
      President,         President, CEO and Treasurer    President, McThom, Inc.
J.L. Darr & Son, Inc.   of Home Savings and the Company      and McLex, Inc.


     F. Stuart Kennedy                                Milton T. Riley, Jr.
  Chairman of the Board,                              Personal Investments,
     Rex Oil Company                           Retired Partner - Dixon Odom PLLC
                                                 Certified Public Accountants


     Stock Transfer Agent                             Annual Meeting

  Registrar and Transfer Company         The 1998 annual meeting of stockholders
       10 Commerce Street                of Century Bancorp, Inc. will be held
       Cranford, NJ 07016                at 5:00 p.m. on November 17, 1998 at
                                         the Company's corporate office at  
                                         22 Winston Street, Thomasville, NC.
                                         

     Special Legal Counsel                             Form 10-KSB          

   Brooks, Pierce, McLendon,             A copy of Form 10-KSB, including  
   Humphrey & Leonard, L.L.P.            financial statements and financial 
    2000 Renaissance Plaza               statement schedules, as filed with
    230 North Elm Street                 the Securities and Exchange Commission
    Greensboro, NC 27420                 for the Company's most recent fiscal
                                         year will be furnished without charge 
                                         to the Company's stockholders    
                                         upon written request to James G. 
                                         Hudson, Jr., Century Bancorp,    
                                         Inc., P. O. Box 989, Thomasville,
                                         NC 27361.                        
      Independent Auditors    
                                
       Dixon Odom PLLC                             Corporate Office   
       6 Turnberry Wood                                         
    Southern Pines, NC 28387                      22 Winston Street         
                                                Thomasville, NC 27360  

                           Common Stock Information

The Company's stock began trading on December 23, 1996. There are 1,270,869
shares of common stock outstanding which were held by approximately 295
stockholders of record (excluding shares held in street name) on June 30, 1998.
The Company's common stock is quoted on the NASDAQ SmallCap Market under the
symbol "CENB." The following table reflects the stock trading and dividend
payment frequency of the Company for the years ended June 30, 1998 and 1997.

                                      -42-
<PAGE>
                             CENTURY BANCORP, INC.
                             CORPORATE INFORMATION
--------------------------------------------------------------------------------

                      Common Stock Information (Continued)

<TABLE> 
<CAPTION> 

                           

                                                            Stock price/(1)/                   Dividends, per share/(2)/
                                                    --------------------------------     ---------------------------------    
                                                         High                Low             Regular            Special
                                                    -------------     --------------     --------------     -------------- 
<S>                                                 <C>               <C>               <C>                 <C> 

For the year ended June 30, 1998:

First quarter ending September 30                   $       80.25      $       69.75     $        0.167     $         -
Second quarter ending December 31                   $       85.00      $       80.00     $        0.167     $         -
Third quarter ending March 31                       $      117.00      $       84.75     $        0.167     $         -
Fourth quarter ending June 30/(2)/                  $      110.25      $       15.25     $        0.170     $        30.00
                                                                                                                
For the year ended June 30, 1997:                                                                               
                                                                                                                
First quarter ending September 30                   $        -         $        -        $         -        $         -
Second quarter ending December 31                   $       66.00      $       61.00     $         -        $         -
Third quarter ending March 31                       $       71.00      $       62.00     $         -        $         -
Fourth quarter ending June 30                       $       70.25      $       68.00     $        0.167     $         -

</TABLE> 



/(1)/ This represents the high and low bid quotations on the NASDAQ SmallCap
      Market for the dates indicated. Such quotations reflect inter-dealer
      prices, without retail mark-up, mark-down or commissions and may not
      reflect actual sales transactions. Stock prices have not been adjusted for
      the effect of the three-for-one stock split effected in the form of a
      stock dividend during the quarter ended June 30, 1998.

/(2)/ Adjusted for the effects of the three-for-one stock dividend.


                                   Disclaimer

This annual report has not been reviewed or confirmed for accuracy or relevance
by the Federal Deposit Insurance Corporation.

                                      -43-