FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM____________ TO ____________.
COMMISSION FILE NUMBER: 0-16234
CENTURY BANCSHARES, INC.
(Exact Name of Registrant as Specified in its Charter)
DELAWARE 52-1489098
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1275 PENNSYLVANIA AVENUE, N.W.
WASHINGTON, D. C. 20004
(Address of Principal Executive Offices)
(Zip Code)
(202) 496-4100
(Registrant's Telephone Number, Including Area Code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
At October 31, 1998 there were 2,417,982 shares of the registrant's Common
Stock, par value $1.00 per share outstanding.
<PAGE>
CENTURY BANCSHARES, INC.
QUARTERLY REPORT ON FORM 10-Q
For The Quarter Ended September 30, 1998
TABLE OF CONTENTS
<TABLE>
<CAPTION>
<S> <C> <C>
PAGE
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements 1
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 8
Item 3. Quantitative and Qualitative Disclosures About Market Risk 21
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 22
Item 2. Changes in Securities and Use of Proceeds 22
Item 3. Defaults Upon Senior Securities 22
Item 4. Submission of Matters to a Vote of Security Holders 22
Item 5. Other Information 22
Item 6. Exhibits and Reports on Form 8-K 22
Signatures 23
</TABLE>
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Condensed Financial Information
CENTURY BANCSHARES, INC.
QUARTERLY REPORT ON FORM 10-Q
Consolidated Statements of Financial Condition
September 30, 1998 , and December 31, 1997
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
(Unaudited)
----------------- -----------------
<S> <C> <C>
ASSETS
Cash and due from banks $ 7,526,399 $ 7,069,139
Federal funds sold 19,000,000 5,000,000
Interest bearing deposits in other banks 13,724,299 22,223,037
Investment securities available-for-sale, at fair value 9,424,073 15,776,517
Investment securities, at cost, fair value of $2,388,582
and $3,634,867 at September 30, 1998
and December 31, 1997, respectively 2,375,930 3,632,076
Loans, net of unearned income 103,433,140 94,171,450
Less: allowance for loan losses (1,030,095) (887,046)
----------------- -----------------
Loans, net 102,403,045 93,284,404
Leasehold improvements, furniture, and equipment, net 1,445,819 1,708,987
Accrued interest receivable 703,278 922,327
Other real estate owned - 52,000
Deposit premium 1,593,616 1,735,768
Net deferred taxes 664,526 693,360
Other assets 696,598 542,012
----------------- -----------------
Total Assets $ 159,557,583 $ 152,639,627
----------------- -----------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits:
Noninterest-bearing $ 28,652,442 $ 26,225,119
Interest-bearing 107,408,469 103,379,913
----------------- -----------------
Total deposits 136,060,911 129,605,032
Other borrowings 7,791,345 8,198,843
Other liabilities 1,381,939 1,300,226
----------------- -----------------
Total Liabilities 145,234,195 139,104,101
----------------- -----------------
Stockholders' Equity:
Common stock, $1 par value; 5,000,000 shares authorized;
2,403,171, and 2,209,229 shares issued and
outstanding at September 30, 1998, and 2,403,171 2,209,229
December 31, 1997, respectively
Additional paid in capital 11,682,347 10,695,480
Retained earnings 229,185 651,646
Accumulated Other Comprehensive Income:
Net unrealized gain (loss) on securities
available-for-sale 8,685 (20,829)
----------------- -----------------
Total Stockholders' Equity 14,323,388 13,535,526
----------------- -----------------
Total Liabilities and Stockholders' Equity $ 159,557,583 $ 152,639,627
----------------- -----------------
</TABLE>
See accompanying condensed notes to consolidated financial statements
(unaudited).
<PAGE>
CENTURY BANCSHARES, INC.
QUARTERLY REPORT ON FORM 10-Q
Consolidated Statements of Operations (Unaudited)
Three and Nine Months Ended September 30, 1998 and 1997
<TABLE>
<CAPTION>
Three Months Three Months Nine Months Nine Months
Ended Ended Ended Ended
Sep 30, 1998 Sep 30, 1997 Sep 30, 1998 Sep 30, 1997
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Interest income:
Interest and fees on loans $ 2,364,953 $ 1,949,522 $ 6,984,256 $ 5,406,434
Interest on federal funds sold 143,922 90,162 268,827 173,650
Interest on deposits in other banks 133,917 118,480 542,667 433,705
Interest on securities available-for-sale 128,341 136,788 562,739 375,962
Interest on securities held-to-maturity 47,607 39,700 192,761 75,454
--------------- --------------- --------------- ---------------
Total interest income 2,818,740 2,334,652 8,551,250 6,465,205
Interest expense:
Interest on deposits:
Savings accounts 216,052 13,926 611,799 42,322
NOW accounts 75,862 70,192 240,706 204,781
Money market accounts 186,634 192,894 605,342 577,540
Certificates under $100,000 293,668 328,195 957,152 806,397
Certificates $100,000 and over 222,819 203,056 673,647 556,192
--------------- --------------- --------------- ---------------
Total interest on deposits 995,035 808,263 3,088,646 2,187,232
Interest on other borrowings 125,864 125,822 377,036 387,780
--------------- --------------- --------------- ---------------
Total interest expense 1,120,899 934,085 3,465,682 2,575,012
--------------- --------------- --------------- ---------------
Net interest income 1,697,841 1,400,567 5,085,568 3,890,193
Provision for loan losses 154,000 43,800 537,000 116,200
--------------- --------------- --------------- ---------------
Net interest income after provision for loan losses 1,543,841 1,356,767 4,548,568 3,773,993
Noninterest income:
Service charges on deposit accounts 114,415 104,636 323,010 345,456
Other operating income 155,277 121,725 454,134 394,790
Gain on sale of available-for-sale securities - - 14,570 -
Gain on liquidation of other real estate owned - - 15,853 -
--------------- --------------- --------------- ---------------
Total noninterest income 269,692 226,361 807,567 740,246
Noninterest expense:
Salaries and employee benefits 537,197 579,030 1,623,426 1,595,259
Occupancy and equipment expense 200,257 164,373 611,427 459,331
Professional fees 231,104 183,064 631,533 427,053
Data processing 174,985 125,302 511,759 378,421
Depreciation and amortization 165,111 132,078 496,188 386,578
Communications 71,295 49,881 205,801 149,032
Other operating expenses 194,202 162,151 550,446 462,812
-----------------------------------------------------------------
Total noninterest expense 1,574,151 1,395,879 4,630,580 3,858,486
--------------- --------------- --------------- ---------------
Income before income tax expense 239,382 187,249 725,555 655,753
Income tax expense 68,982 78,022 253,728 258,406
--------------- --------------- --------------- ---------------
Net income $ 170,400 $ 109,227 $ 471,827 $ 397,347
--------------- --------------- --------------- ---------------
Basic income per common share $ 0.07 $ 0.08 $ 0.20 $ 0.31
Diluted income per common share $ 0.07 0.07 0.19 0.27
Weighted-average common shares outstanding 2,376,276 1,334,082 2,352,572 1,293,519
</TABLE>
See accompanying condensed notes to consolidated financial statements
(unaudited).
<PAGE>
CENTURY BANCSHARES, INC.
QUARTERLY REPORT ON FORM 10-Q
Consolidated Statements of Stockholders' Equity (Unaudited)
Nine Months Ended September 30, 1998 and 1997
<TABLE>
<CAPTION>
Accumulated
Other
Comprehensive
Income
---------------------
Net unrealized
Common Additional gain (loss) Total
stock paid in Retained on securities Stockholders'
$1.00 par capital earnings available-for-sale Equity
----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1996 $ 1,146,028 $ 4,870,856 $ 779,057 $ (45,900) $ 6,750,041
Comprehensive Income:
Net income 397,347 397,347
Unrealized gain on invest.
securities available-for-sale,
net of tax effect 17,815 17,815
----------------------------------------------------------------------------------
Total Comprehensive Income - - 397,347 17,815 415,162
Issuance of Common Stock-
977,500 shares 977,500 5,352,127 6,329,627
Stock Dividend 57,793 shares 57,793 405,776 (463,569) -
Exercise of common stock
options- 13,608 shares 13,608 24,170 37,778
----------------------------------------------------------------------------------
Balance, September 30, 1997 $ 2,194,929 $ 10,652,929 $ 712,835 $ (28,085) $ 13,532,608
----------------------------------------------------------------------------------
Balance, December 31, 1997 $ 2,209,229 $ 10,695,480 $ 651,646 $ (20,829) $ 13,535,526
Comprehensive Income
Net income 471,827 471,827
Unrealized gain on invest.
securities available-for-sale,
net of tax effect 29,514 29,514
----------------------------------------------------------------------------------
Total Comprehensive Income - - 471,827 29,514 501,341
Stock Dividend 112,665 shares 112,665 779,765 (894,288) (1,858)
Exercise of common stock
options- 56,178 shares 56,178 131,773 187,951
Exercise of warrants-
25,099 shares 25,099 98,186 123,285
Other (22,858) (22,858)
----------------------------------------------------------------------------------
Balance, September 30, 1998 $ 2,403,171 $ 11,682,347 $ 229,185 $ 8,685 $ 14,323,388
----------------------------------------------------------------------------------
</TABLE>
See accompanying condensed notes to consolidated financial statements
(unaudited).
CENTURY BANCSHARES, INC.
QUARTERLY REPORT ON FORM 10-Q
Consolidated Statements of Cash Flows (Unaudited)
Nine Months Ended September 30, 1998 and 1997
<TABLE>
<CAPTION>
Nine Months Nine Months
Ended Ended
Sep 30, 1998 Sep 30, 1997
---------------- ----------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 471,827 $ 397,347
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 496,188 386,578
Provision for loan losses 537,000 116,200
Gain on sale of available-for-sale securities (14,570) -
Gain on liquidation of other real estate owned (15,853) -
(Increase) decrease in accrued interest receivable 219,049 (121,163)
(Increase) decrease in other assets (141,645) (161,038)
Increase (decrease) in other liabilities 81,715 322,901
---------------- ----------------
Total adjustments 1,161,884 543,478
---------------- ----------------
Net cash provided by operating activities 1,633,711 940,825
---------------- ----------------
Cash flows from investing activities:
Net decrease (increase) in loans (9,655,641) (9,017,542)
Net decrease (increase) in interest bearing deposits in other banks 8,498,738 (745,859)
Purchases of securities available-for-sale (2,872,601) (4,040,018)
Purchases of securities held-to-maturity - (10,570,606)
Proceeds from sale of securities available-or-sale 6,535,849 -
Repayments and maturities of securities available-for-sale 2,749,172 749,302
Repayments and maturities of securities held-to-maturity 1,256,146 7,218,722
Proceeds from sale of OREO Properties 67,853 -
Net purchase of leasehold improve., furn. and equipment (90,866) (321,918)
---------------- ----------------
Net cash provided by (used in) investing activities 6,488,650 (16,727,919)
---------------- ----------------
Cash flows from financing activities:
Net decrease in demand, savings, NOW and
money market deposit accounts 11,788,797 (7,474,390)
Net (decrease) increase in certificates of deposit (5,332,918) 10,323,464
Net (decrease) increase in other borrowings 249,995 (121,083)
Repayment of long-term debt (657,497) (75,000)
Net proceeds from issuance of common stock 286,522 6,367,370
---------------- ----------------
Net cash (used in) provided by financing activities 6,334,899 9,020,361
---------------- ----------------
Net increase (decrease) in cash and cash equivalents 14,457,260 (6,766,733)
Cash and cash equivalents, beginning of year 12,069,139 19,799,911
---------------- ----------------
Cash and cash equivalents, end of period $ 26,526,399 $ 13,033,178
---------------- ----------------
Supplemental disclosures of cash flow information:
Interest paid on deposits and borrowings $ 3,489,299 $ 2,500,647
Income taxes paid 175,000 128,769
Transfer of loans to other real estate owned - 52,000
</TABLE>
See accompanying condensed notes to consolidated financial statements
(unaudited).
<PAGE>
CENTURY BANCSHARES, INC.
QUARTERLY REPORT ON FORM 10-Q
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
September 30, 1998 and 1997
(1) Basis of Presentation
In the opinion of management the unaudited consolidated financial
statements as of September 30, 1998 and December 31, 1997 and for the three and
nine months ended September 30, 1998 and 1997 contain all adjustments
(consisting only of normal recurring adjustments) necessary to present fairly
the financial position and results of operations of the Company as of such dates
and for such periods. The unaudited consolidated financial statements should be
read in conjunction with the Consolidated Financial Statements of the Company
and the Notes thereto appearing in the Company's 1997 Annual Report on Form 10-K
filed with the Securities and Exchange Commission. The results of operations for
the nine months ended September 30, 1998 are not necessarily indicative of the
results of operations that may be expected for the year ending December 31, 1998
or any future periods. Certain prior period balances have been restated to
conform with the current period.
(2) Investment Securities
Investment securities available-for-sale, and their contractual maturities, at
September 30, 1998 are summarized as follows:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
- - --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Obligations of U.S. treasury and
government agencies:
Within one year $ 2,249,341 $ 1,448 $ 262 $ 2,250,527
After one, but within five years 1,998,922 13,922 - 2,012,844
After five, but within ten years 1,614,640 15,283 - 1,629,923
After ten years 623,046 - 6,464 616,582
------------------------------------------------------------
Total 6,485,949 30,653 6,726 6,509,876
Collateralized mortgage obligations:
After ten years 992,452 - 10,566 981,885
Federal Reserve Bank stock 236,350 - - 236,350
Federal Home Loan Bank stock 821,800 - - 821,800
Other 874,162 - - 874,162
------------------------------------------------------------
Total investment securities available-for-sale $ 9,410,713 $ 30,653 $ 17,292 $ 9,424,073
------------------------------------------------------------
Investment securities held-to-maturity, and their contractual maturities at September 30, 1998, are summarized as follows:
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
- - --------------------------------------------------------------------------------------------------------------------
Obligations of U.S. treasury, municipals, and
government agencies:
Within one year $ 65,000 $ - $ - $ 65,000
After one, but within five years 1,499,775 11,788 - 500,314
After ten years 211,986 301 - 212,287
------------------------------------------------------------
Total 1,776,761 12,089 - 777,601
Collateralized mortgage obligations:
After one, but within five years 599,169 563 - 1,610,982
After five, but within ten years - - - -
------------------------------------------------------------
Total investment securities held-to-maturity $ 2,375,930 $ 12,652 $ - $ 2,388,582
------------------------------------------------------------
</TABLE>
<PAGE>
CENTURY BANCSHARES, INC.
QUARTERLY REPORT ON FORM 10-Q
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
September 30, 1998 and 1997
(3) Income per Common Share
Basic income per share is calculated by dividing net income by the
weighted-average common shares outstanding. Diluted income per share is
calculated by dividing net income by the sum of weighted-average common shares
and common stock equivalents. On April 22, 1997, the Company declared a 5
percent stock dividend payable on May 23, 1997 to common stock shareholders of
record as of May 7, 1997, resulting in the issuance of 57,793 shares and a
corresponding increase in stock options and warrants outstanding. On May 19,
1998, the Company declared a 5 percent stock dividend payable on June 29, 1998
to common stock shareholders of record as of May 29, 1998 resulting in the
issuance of 112,665 shares and a corresponding increase in stock options and
warrants outstanding. Weighted-average shares outstanding and income per common
share have been restated for the effect of the stock dividends.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
-----------------------------------------------------------
1998 1997 1998 1997
-----------------------------------------------------------
<S> <C> <C> <C> <C>
Basic Income Per Share:
Net income applicable to common stock $170,400 $109,227 $471,827 $397,347
Weighted-average common shares outstanding 2,376,276 1,334,082 2,352,572 1,293,519
Basic income per share $0.07 $0.08 $0.20 $0.31
Diluted Income Per Share:
Net income applicable to common stock $170,400 $109,227 $471,827 $397,347
Weighted-average common shares outstanding 2,376,276 1,334,082 2,352,572 1,293,519
Dilutive effect of warrants and stock options 134,870 167,409 164,293 167,409
-----------------------------------------------------------
Diluted weighted-average common shares outstanding 2,511,146 1,501,491 2,516,865 1,460,928
Diluted income per share $0.07 $0.07 $0.19 $0.27
-----------------------------------------------------------
</TABLE>
<PAGE>
CENTURY BANCSHARES, INC.
QUARTERLY REPORT ON FORM 10-Q
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
September 30, 1998 and 1997
(4) New Financial Accounting Standards
In June 1997, SFAS No. 130 "Reporting Comprehensive Income," and No. 131
"Disclosures about Segments of an Enterprise and Related Information" were
issued. SFAS No. 130 requires that certain financial activity normally disclosed
in stockholders' equity be reported in the statement of operations as an
adjustment to net income in computing comprehensive income. Items applicable to
the Company would be gain/loss on investment securities and preferred stock
dividends. Accumulated comprehensive income components should be reported under
a separate caption in the statements of condition and stockholders' equity. SFAS
No. 130 is effective January 1, 1998, including restatement of prior periods in
conformity with this new presentation. The Company implemented SFAS No. 130 in
January 1998. Such implementation did not have any impact on the Company or its
operations for the nine months ended September 30, 1998. The Company chose to
disclose comprehensive income under an alternative presentation, thus
comprehensive income is disclosed, net of taxes, Statements of Condition and as
a separate component in the Statements of Changes in Stockholders' Equity.
SFAS No. 131 requires the reporting of selected segment information in
quarterly and annual financial reporting. Information from operating segments is
derived from methods used by the Company's management to measure performance and
allocate resources. The Company is required to disclose the basis for
identifying segments and the services and products offered in each segment.
Additionally, the Company should disclose the earnings, revenues and assets of
each segment. SFAS No. 131 is effective January 1, 1998, including the
restatement of prior periods reported consistent with SFAS No. 131, if
practical. The Company does not have any reportable segments as defined in SFAS
No. 131, and thus has not made any additional segment disclosures in this
report.
In February 1998, SFAS No. 132 "Employers' Disclosures about Pensions and
Other Postretirement Benefits-- an amendment of FASB Statements No. 87, 88, and
106" was issued. SFAS No. 132 revises employers' disclosures about pensions and
other postretirement benefit plans. Overall, this statement does not change
measurement or recognition for such plans, however, it does standardize the
disclosure requirements for benefit plans to the extent practicable as well as
requiring additional disclosures regarding benefit changes and the fair value of
plan assets. This statement is effective for fiscal years beginning after
December 15, 1997, with earlier adoption encouraged. The Company is reviewing
the impact of this new pronouncement and will report additional information on
its adoption in subsequent reports.
On June 15, 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting standard No. 133, "Accounting for Derivative Instruments
and Hedging Activities" (SFAS 133). SFAS 133 requires that all derivative
instruments be recorded on the balance sheet at their fair value. Changes in the
fair value of derivatives are recorded each period in current earnings or other
comprehensive income depending on whether the derivative is designated as part
of a hedge transaction and, if it is, the type of hedge transaction. SFAS 133
becomes effective for the company on January 1, 2000. Management anticipates
that the adoption of SFAS 133 will not have a significant impact on the
financial position or results of operations of the company.
CENTURY BANCSHARES, INC.
QUARTERLY REPORT ON FORM 10-Q
September 30, 1998 and 1997
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Overview
Century Bancshares, Inc., a Delaware corporation ("Company"), and a
registered bank holding company under the Bank Holding Company Act of 1956, as
amended ("BHCA"), was incorporated and organized in 1985. The Company began
active operations in 1986 with the acquisition of its subsidiary, Century
National Bank ("Bank"), a full service bank which opened for business in 1982.
The Bank provides a broad line of financial products and services to small and
medium sized businesses and consumers, through its main office located at 1875
Eye Street, N.W., Washington, D.C., a branch office located at 1275 Pennsylvania
Avenue, N.W., two offices in Northern Virginia at 8251 Greensboro Drive and 6832
Old Dominion Drive, McLean, Virginia, and a branch office at 7625 Wisconsin
Avenue, Bethesda, Maryland. The Company's principal executive offices are
located at 1275 Pennsylvania Avenue, N.W., Washington, D.C. 20004.
Items 2 and 3 of this report contain certain forward-looking statements
regarding future financial condition and results of operations and the company's
business operations. The words "expect," "estimate," "anticipate," "predict" and
similar expressions are intended to identify forward-looking statements. Such
statements involve risks, uncertainties and assumptions and, although the
company believes that assumptions are reasonable, it can give no assurance that
its expectations regarding these matters will be achieved. The important factors
that could cause actual results to differ materially from the forward-looking
statements include, without limitation, the factors discussed in the Company's
Form 10-K for the year ended December 31, 1997 under the caption "Management's
Discussion and Analysis of Financial Condition and Results of Operations" as
well as the following factors: general economic conditions in the Washington,
D.C. metropolitan area; changes in interest rates; changes in asset quality; the
effect on the Company of the extensive scheme of regulation by several federal
agencies; the departure of certain key executives; the year 2000 problem; and
competition from other providers of financial services. Should one or more of
these risks or uncertainties materialize, or should underlying assumptions prove
incorrect, such actual outcomes may vary materially from those indicated.
Net Income
For the nine months ended September 30, 1998, the Company's net income was
$472 thousand, or $0.19 per diluted share, compared with $397 thousand for the
first nine months of 1997, or $0.27 per diluted share. The 19% increase in net
income was primarily attributable to a 31% increase in net interest income
resulting from a significant increase in the Company's earning assets. This
increase in net interest income was off-set by a 20% increase in noninterest
expense and a 362% increase in the provision for loan losses resulting from a
higher volume of loans outstanding, a rising trend in the Company's historical
loan charge-off experience, and an increasing volume of nonperforming loans.
Return on average assets was 0.47% for the third quarter of 1998, compared with
0.44% for the same period in 1997. Return on average common equity was 4.77% for
the quarter ended September 30, 1998, compared with 4.69% for the same period in
1997. Total stockholder's equity to total assets at September 30, 1998, was
8.98% compared to 11.57% at September 30, 1997.
CENTURY BANCSHARES, INC.
QUARTERLY REPORT ON FORM 10-Q
September 30, 1998 and 1997
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS, CONTINUED
Net Interest Income
Net interest income was $1.7 million for the quarter ended September 30,
1998, compared with $1.4 million for the quarter ended September 30, 1997, an
increase of $297 thousand, or 21%. The increase in net interest income between
the periods is attributable to an increase in average-earning assets to $132.9
million during the quarter, compared to total average-earning assets of $102.3
million for the same period in 1997. Additionally, average interest-bearing
liabilities increased to $102.1 million during the third quarter of 1998,
compared with $80.5 million in 1997. Thus, average interest-earning assets
increased $30.6 million, or 30%, between the periods, partially offset by an
increase in average interest-bearing liabilities of $21.6 million, or 27%. The
increases in both average earning assets and interest-bearing liabilities
resulted primarily from the purchase of a branch in Virginia during the fourth
quarter of 1997, which increased loans and deposits by $9.0 million and $28.0
million, respectively. The additional growth was primarily the result of
internal loan and deposit growth between the periods (see the "Average Balances
and Interest Rates" table).
The Company's net interest income is affected by changes in the amount and
mix of interest-earning assets and interest-bearing liabilities, while also
being affected by changes in yields earned on interest-earning assets and rates
paid on deposits and other interest-bearing funds. The net interest margin for
the quarter ended September 30, 1998 was 5.07%, a decrease of 36 basis points
from 5.43% for the third quarter of 1997. This decrease was primarily the result
of lower interest earned on a high volume of interest earning assets, as well as
high cost deposits in the McLean branch which had previously been a branch of a
thrift institution.
The following table sets forth the averages of interest earned or paid by
significant categories of interest earning assets and interest bearing
liabilities for the three and six month periods ending September 30, 1998 and
1997.
CENTURY BANCSHARES, INC.
QUARTERLY REPORT ON FORM 10-Q
September 30, 1998 and 1997
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS, CONTINUED
<TABLE>
<CAPTION>
Three Months Ended September 30,
------------------------------------------------------------------------------------
1998 1997
---------------------------------------- -----------------------------------------
Interest Interest
Average Income/ Average Average Income/ Average
Balance Expense Rate Balance Expense Rate
---------------------------------------- -----------------------------------------
($ in thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-Earning Assets
Loans, net (1) $ 101,249 $ 2,365 9.27% $ 75,767 $ 1,950 10.21%
Investment securities (2) 11,724 176 5.96% 11,492 177 6.11%
Federal funds sold 10,269 144 5.56% 6,485 90 5.51%
Interest bearing deposits
with banks 9,627 134 5.52% 8,547 118 5.48%
---------------------------------------- -----------------------------------------
Total interest-earning assets 132,869 2,819 8.42% 102,291 2,335 9.06%
Cash and due from banks 5,812 5,463
Other assets 4,171 3,819
------------- --------------
Total Assets $ 142,852 $ 111,573
------------- --------------
Interest-Bearing Liabilities
Interest-Bearing Deposits:
NOW accounts $ 17,794 $ 76 1.69% $ 13,716 $ 70 2.02%
Savings accounts 18,454 216 4.64% 2,209 14 2.51%
Money market accounts 20,684 187 3.59% 19,384 193 3.95%
Time deposits 37,568 517 5.46% 37,758 531 5.58%
Borrowings and
notes payable 7,591 126 6.59% 7,452 126 6.71%
---------------------------------------- -----------------------------------------
Total interest-bearing
liabilities 102,091 1,122 4.36% 80,519 934 4.60%
---------------------------------------- -----------------------------------------
Non-interest bearing deposits 25,056 20,136
Other liabilities 1,522 1,687
------------- --------------
Total liabilities 128,669 102,342
Stockholders' equity 14,183 9,231
------------- --------------
Total liabilities and
stockholders' equity $ 142,852 $ 111,573
------------- --------------
Net interest income and spread $ 1,697 4.06% $ 1,401 4.46%
--------------------------- ---------------------------
Net interest margin 5.07% 5.43%
------------- --------------
</TABLE>
(1) Non-accrual loan balances are included in the calculation of Average
Balances - Loans, Net. Interest income on non-accrual loan balances is included
in interest income to the extent that it has been collected.
(2) Average balance and average rate for investment securities are computed
based on book value of securities held-to-maturity and cost basis of securities
available-for-sale.
<PAGE>
CENTURY BANCSHARES, INC.
QUARTERLY REPORT ON FORM 10-Q
September 30, 1998 and 1997
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS, CONTINUED
<TABLE>
<CAPTION>
Nine Months Ended September 30,
----------------------------------------------------------------------------------
1998 1997
---------------------------------------- ---------------------------------------
Interest Interest
Average Income/ Average Average Income/ Average
Balance Expense Rate Balance Expense Rate
---------------------------------------- -----------------------------------------
($ in thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-Earning Assets
Loans, net (1) $ 97,800 $ 6,984 9.55% $ 72,142 $ 5,406 10.02%
Investment securities (2) 16,754 756 6.03% 9,381 421 6.02%
Federal funds sold 6,503 269 5.53% 4,111 174 5.66%
Interest bearing deposits
with banks 13,079 543 5.55% 11,351 464 5.47%
---------------------------------------- -----------------------------------------
Total interest-earning assets 134,136 8,552 8.52% 96,985 6,465 8.91%
Cash and due from banks 5,504 5,081
Other assets 4,328 3,490
------------- --------------
Total Assets $ 143,968 $ 105,556
------------- --------------
Interest-Bearing Liabilities
Interest-Bearing Deposits:
NOW accounts $ 17,883 $ 241 1.80% $ 13,757 $ 205 1.99%
Savings accounts 17,730 612 4.62% 2,270 42 2.47%
Money market accounts 21,834 605 3.70% 21,240 578 3.64%
Time deposits 39,283 1,631 5.55% 32,926 1,362 5.53%
Borrowings and -
notes payable 7,541 377 6.68% 7,738 388 6.70%
---------------------------------------- -----------------------------------------
Total interest-bearing
liabilities 104,271 3,466 4.44% 77,931 2,575 4.42%
---------------------------------------- -----------------------------------------
Non-interest bearing deposits 24,338 19,368
Other liabilities 1,442 1,083
------------- --------------
Total liabilities 130,051 98,382
Stockholders' equity 13,917 7,174
------------- --------------
Total liabilities and
stockholders' equity $ 143,968 $ 105,556
------------- --------------
Net interest income and spread $ 5,086 4.08% $ 3,890 4.49%
--------------------------- ---------------------------
Net interest margin 5.07% 5.36%
------------- --------------
</TABLE>
(1) Non-accrual loan balances are included in the calculation of Average
Balances - Loans, Net. Interest income on non-accrual loan balances is included
in interest income to the extent that it has been collected.
(2) Average balance and average rate for investment securities are computed
based on book value of securities held-to-maturity and cost basis of securities
available-for-sale.
CENTURY BANCSHARES, INC.
QUARTERLY REPORT ON FORM 10-Q
September 30, 1998 and 1997
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS, CONTINUED
Noninterest Income
Noninterest income totaled $270 thousand for the third quarter in 1998, a
$44 thousand increase when compared with the same quarter of 1997, which totaled
$226 thousand (see table below). The increase between the periods was primarily
due to increases in deposit service charges, credit card and merchant fees
caused by increased volumes.
<TABLE>
<CAPTION>
Noninterest Income Three Months Ended
(in thousands) September 30, Change
------------------------------------------------------
1998 1997 $ %
------------------------------------------------------
<S> <C> <C> <C> <C>
Service charges on deposit accounts $ 114,415 $ 104,637 $ 9,778 9.3%
Credit card and merchant fees 112,265 90,392 21,872 24.2%
Commission and other fee income 37,645 29,176 8,469 29.0%
Other income 5,367 2,156 3,211 148.9%
------------------------------------------------------
Total noninterest income $ 269,692 $ 226,36 $ 43,330 19.1%
------------------------------------------------------
</TABLE>
Noninterest income totaled $808 thousand for the first nine months in 1998,
a $68 thousand increase when compared with the first nine months of 1997, which
totaled $740 thousand (see table below). The increase between the periods was
primarily due to increases in credit card and merchant fees caused by increased
volumes, combined with gain on sale of available-for-sale securities and
liquidation of other real estate owned. These increases were partially offset by
decreases in deposit service charges, caused by decreases in transaction-based
accounts between the periods.
<TABLE>
<CAPTION>
Noninterest Income Nine Months Ended
(in thousands) September 30, Change
------------------------------------------------------
1998 1997 $ %
------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Service charges on deposit accounts $ 323,010 $ 345,456 $ (22,446) -6.5%
Credit card and merchant fees 337,532 304,937 32,595 10.7%
Commission and other fee income 97,804 85,860 11,944 13.9%
Other income 18,798 3,994 14,805 370.7%
Gain on Sale of AFS Securities 14,570 - 14,570 100.0%
Gain on Sale of OREO 15,853 - 15,853 100.0%
------------------------------------------------------
Total noninterest income $ 807,567 $ 740,24 $ 67,321 9.1%
------------------------------------------------------
</TABLE>
<PAGE>
CENTURY BANCSHARES, INC.
QUARTERLY REPORT ON FORM 10-Q
September 30, 1998 and 1997
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS, CONTINUED
Noninterest Expense
Noninterest expense totaled $1.6 million for the third quarter of 1998, an
increase of $178 thousand, or 13%, when compared with 1997's total noninterest
expense of $1.4 million. This increase was principally the result of expenses in
1998, not incurred during the comparable period of 1997, in connection with the
new retail banking locations opened during the fourth quarter of 1997 and the
first quarter of 1998. This significant increase in the scope of the Company's
operations was accompanied by increases in most of the operating expense
categories, excluding salaries and benefits, which decreased $42 thousand or
(7%). Professional fees, data processing and occupancy-related expenses,
increased $48 thousand, $50 thousand and $36 thousand, respectively.
<TABLE>
<CAPTION>
Noninterest Expense Three Months Ended
(in thousands) September 30, Change
------------------------------------------------------
1998 1997 $ %
------------------------------------------------------
<S> <C> <C> <C> <C>
Salaries and employee benefits $ 537,197 $ 579,030 $ (41,833) -7.2%
Occupancy and equipment expense 200,257 164,373 35,884 21.8%
Professional fees 231,104 183,064 48,040 26.2%
Data Processing 174,985 125,302 49,683 39.7%
Depreciation and amortization 165,111 132,078 33,033 25.0%
Communications 71,295 49,881 21,414 42.9%
Other expenses 194,202 162,151 32,051 19.8%
------------------------------------------------------
Total noninterest expense $1,574,151 $1,395,879 $ 178,272 12.8%
------------------------------------------------------
</TABLE>
Noninterest expense totaled $4.6 million for the nine months in 1998, an
increase of $772 thousand or 20%, when compared with 1997's total noninterest
expense of $3.9 million. This increase is comparable to the trends in the
current quarter and relates to the new retail banking locations opened during
1997 and 1998, with increases in most of the operating expense categories,
including salaries and benefits, which increased $28 thousand, or 2%, and
professional fees and occupancy-related expenses, which increased $204 thousand
and $152 thousand respectively.
<TABLE>
<CAPTION>
Noninterest Expense Nine Months Ended
(in thousands) September 30, Change
------------------------------------------------------
1998 1997 $ %
------------------------------------------------------
<S> <C> <C> <C> <C>
Salaries and employee benefits $ 1,623,426 $1,595,259 $ 28,167 1.8%
Occupancy and equipment expense 611,427 459,331 152,096 33.1%
Professional fees 631,533 427,053 204,480 47.9%
Data Processing 511,759 378,421 133,338 35.2%
Depreciation and amortization 496,188 386,578 109,610 28.4%
Communications 205,801 149,032 56,769 38.1%
Other expenses 550,446 462,812 87,634 18.9%
------------------------------------------------------
Total noninterest expense $ 4,630,580 $3,858,486 $772,094 20.0%
------------------------------------------------------
</TABLE>
CENTURY BANCSHARES, INC.
QUARTERLY REPORT ON FORM 10-Q
September 30, 1998 and 1997
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS, CONTINUED
Investments
The Company's investment portfolio of $11.8 million as of September 30,
1998 consisted mostly of U.S. Government Agency obligations. This represented a
decrease of $2.3 million, or 16%, compared with the investment portfolio total
of $14.1 million at September 30, 1997. This decrease is primarily due to
paydowns, maturities and sales of available-for-sale securities. The company's
portfolio at September 30, 1997 consisted primarily of U.S. Government agency
obligations and mortgage-backed securities. (see Note 2-- "Investment
Securities").
Investment securities held-to-maturity are stated at cost, adjusted for
amortization of premium and accretion of discount. Investment securities
available-for-sale are stated at fair value.
Loans
The Company presently is, and in the future expects to remain, a middle
market banking organization serving professionals and businesses with interests
in and around the Washington, D.C., metropolitan area. Most of the Company's
loan portfolio is collateralized by first mortgages and home equity lines of
credit on residential real estate. Although residential real estate loans
increased over the past twelve months as a result of the mortgage loan portfolio
acquired in connection with the Virginia branch acquisition, the Company
anticipates that this concentration will decline, as the Company continues its
emphasis on the development of new commercial loan business, including
commercial real estate loans. Most of the Company's commercial real estate loans
are secured by owner-occupied properties with borrowers that are also banking
customers of the Company. As of September 30, 1998 and 1997, approximately $63
million (61%) and $45.2 million (57%) of the Company's total loan portfolio,
respectively, consisted of loans secured by real estate, of which one-to-four
family residential mortgage loans and home equity lines of credit represented
$33.8 million (33%) and $26.6 million (33%), respectively, of the Company's
total loan portfolio.
<TABLE>
<CAPTION>
September 30,
------------------------------------------------------
1998 1997
------------------------------------------------------
Type of loan ( in thousands): $ % $ %
------------------------------------------------------
<S> <C> <C> <C> <C>
1-4 family residential mortgage $ 26,577 25.7% $ 18,795 23.6%
Home equity loans 7,209 7.0% 7,842 9.9%
Multifamily residential 2,272 2.2% 1,867 2.3%
Construction 122 0.1% 1,112 1.4%
Commercial real estate 26,848 25.9% 15,564 19.6%
Commercial loans 27,617 26.7% 22,651 28.5%
Installment and credit card loans 12,369 12.0% 11,693 14.7%
Other loans 468 0.5% 17 0.0%
------------------------------------------------------
Gross loans 103,482 100.0% 79,541 100.0%
------------- -------------
Less: Unearned income 49 91
-------------- --------------
Total loans, net of unearned $ 103,433 $ 79,450
-------------- --------------
</TABLE>
<PAGE>
CENTURY BANCSHARES, INC.
QUARTERLY REPORT ON FORM 10-Q
September 30, 1998 and 1997
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS, CONTINUED
Asset Quality
In originating loans, the Company recognizes that credit losses will be
experienced and the risk of loss will vary with, among other things, general
economic conditions, the type of loan being made, the creditworthiness of the
borrower over the term of the loan and, in the case of a collateralized loan,
the quality of the collateral for such loan. The Company maintains an allowance
for loan losses based upon, among other things, such factors as historical
experience, the volume and type of lending conducted by the Company, the amount
of nonperforming assets, regulatory policies, generally accepted accounting
principles, general economic conditions, and other factors related to the
collectibility of loans in the Company's portfolios. In addition to unallocated
allowances, specific allowances are provided for individual loans when ultimate
collection is considered questionable by management after reviewing the current
status of loans which are contractually past due and after considering the net
realizable value of the collateral for the loan.
Management actively monitors the Company's asset quality in a continuing
effort to charge-off loans against the allowance for loan losses when
appropriate and to provide specific loss allowances when necessary. Although
management believes it uses the best information available to make
determinations with respect to the allowance for loan losses, future adjustments
may be necessary if actual economic conditions and other assumptions differ from
those used in making the initial determinations. At September 30, 1998, the
allowance for loan losses amounted to $1.0 million, or 1.0% of total loans. This
represents an increase in the allowance compared to $887 thousand, or 0.94% of
total loans as of December 31, 1997, and $750 thousand, or 0.94% of total loans
as of September 30, 1997. The Company has increased the allowance, as a
percentage of total loans outstanding, to reflect the upward trend in loan
charge-offs experienced by the Company over the past two years, as well as an
increase in the volume of nonperforming loans. The allowance for loan losses as
a percentage of nonperforming loans was 81% at September 30, 1998, compared to
127% at December 31, 1997 and 431% at September 30, 1997.
Total nonperforming loans were $1.3 million, compared with $958 thousand at
June 30, 1998 and $700 thousand at December 31, 1997. Of the $ 1.3 million in
nonperforming loans as of September 30, 1998, approximately $125 thousand was
guaranteed by the Small Business Administration, and $500 thousand was secured
by real estate. The remaining $700 thousand in non-performing loans were either
unsecured, secured by various business assets, or secured by junior liens on
real estate. Within its analysis of the allowance for loan losses, the Company
estimated loss exposure of approximately $270 thousand attributable to this
latter group of loans. The commercial loans which are currently nonperforming
were originated, for the most part during or prior to 1996, and their
nonperforming status reflects business and/or personal circumstances unique to
each situation, rather than the result of any discernible change in underwriting
standards.
CENTURY BANCSHARES, INC.
QUARTERLY REPORT ON FORM 10-Q
September 30, 1998 and 1997
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS, CONTINUED
Asset Quality , Continued
Provisions for loan losses are charged to income to bring the total
allowance for loan losses to a level deemed appropriate by management, based on
the factors identified above. The provision for loan losses during the third
quarter of 1998 was $154 thousand, representing an increase of $110 thousand or
250% compared to the third quarter of 1997. This increase was the result of the
30% increase in loans outstanding during the past twelve months and the increase
in nonperforming loans. These trends, taken into consideration with other
factors in the Company's internal analysis of the allowance for loan loss, have
led to increased reserve requirements and a resulting increase in the provision
expense necessary to maintain the allowance at a level deemed appropriate by
management of the Company (see the table on the following page).
CENTURY BANCSHARES, INC.
QUARTERLY REPORT ON FORM 10-Q
September 30, 1998 and 1997
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS, CONTINUED
<TABLE>
<CAPTION>
Nonperforming Loans
(in thousands)
September 30,
--------------------------
1998 1997
--------------------------
<S> <C> <C>
Non-accrual loans $ 1,257 $ 174
Accruing past due 90 days or more 8 -
--------------------------
Total nonperforming loans 1,265 174
Other real estate owned - -
--------------------------
Total nonperforming assets $ 1,265 $ 174
--------------------------
Nonperforming assets to total assets 0.79% 0.15%
Provision and Allowance for Loan Losses
(in thousands)
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------------- --------------------------
1998 1997 1998 1997
-------------------------- --------------------------
<S> <C> <C> <C> <C>
Average net loans outstanding $ 101,249 $ 75,767 $ 97,800 $ 72,928
Loans outstanding at period-end 103,433 79,541 103,433 79,541
Total nonperforming loans 1,265 174 1,265 174
Beginning balance of allowance $ 1,008 $ 710 $ 887 $ 826
Loans charged-off:
1-4 family residential mortgage - - 18 109
Home equity loans - 5 26 29
Commercial loans 150 24 312 24
Installment and credit card loans 9 62 142 180
-------------------------- --------------------------
Total loans charged off 159 91 498 342
Recoveries of previous charge-offs:
1-4 family residential mortgage - - 1 -
Home equity loans 14 - 42 -
Commercial loans - 70 12 133
Installment and credit card loans 13 17 49 17
-------------------------- --------------------------
Total recoveries 27 87 104 150
-------------------------- --------------------------
Net loans charged-off 132 4 394 192
Provision for loan losses 154 44 537 116
-------------------------- --------------------------
Balance at end of period $ 1,030 750 1,030 750
-------------------------- --------------------------
</TABLE>
<PAGE>
CENTURY BANCSHARES, INC.
QUARTERLY REPORT ON FORM 10-Q
September 30, 1998 and 1997
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS, CONTINUED
Deposits
The Company's total deposits at September 30, 1998 were $136 million, an
increase of $42.2 million, or 45%, over 1997's third quarter balance. Total
average deposits were $121 million for the nine months ended September 30, 1998,
an increase of $31.5 million, or 35% compared with average deposits of $89.6
million for the first nine months of 1997. The increase in deposits at September
30, 1998, as compared to September 30, 1997, is primarily attributable to the
purchase of the McLean, Virginia branch during the fourth quarter of 1997. The
Company views deposit growth as a significant challenge in its effort to
increase its asset size. Thus, the Company is focusing on its branching program
with increased emphasis on commercial accounts, and the offering of more
competitive interest rates and products to stimulate deposit growth. This
strategy has and will continue to result in higher cost of funds when compared
with prior year's results in addition to lower fee income as many of these
commercial customers utilize accounts with lower transaction costs as well as a
lower number of transactions.
<TABLE>
<CAPTION>
Nine Months Ended September 30,
---------------------------------------------------------------------------------
1998 1997
---------------------------------------------------------------------------------
Weighted- Weighted-
Average Average % of Average Average % of
Balance Rate Total Balance Rate Total
---------------------------------------------------------------------------------
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
Noninterest-Bearing Deposits $ 24,338 0.00% 20.1% $ 19,368 0.00% 21.6%
Interest-Bearing Deposits:
NOW accounts 17,883 1.80% 14.8% 13,757 1.99% 15.4%
Savings accounts 17,730 4.62% 14.6% 2,270 2.47% 2.5%
Money market accounts 21,834 3.70% 18.0% 21,240 3.64% 23.7%
Time deposits 39,283 5.55% 32.4% 32,926 5.53% 36.8%
------------- --------------------------- --------------
Total $ 121,068 100.0% $ 89,561 100.0%
------------- --------------------------- --------------
Weighted-Average Rate 3.41% 3.26%
-------------- -------------
</TABLE>
Capital Resources
Total stockholders' equity at September 30, 1998 was $14.3 million, an
increase of $800 thousand, compared to total stockholders' equity of $13.5
million at September 30, 1997. Net income for the first nine months of 1998 was
$472 thousand. In addition to retained earnings, stockholders' equity was also
augmented by a $29 thousand increase in the market value of investment
securities available-for-sale, net of tax effect, and $287 thousand received
from the exercise of warrants and stock options.
The Office of the Comptroller of the Currency has established certain
minimum risk-based capital standards that apply to national banks, and the
Company is subject to certain capital requirements imposed by the Federal
Reserve Board. At September 30, 1998, the Century National Bank exceeded all
applicable regulatory capital requirements for classification as a "well
capitalized" bank, and the Company satisfied all applicable regulatory
requirements imposed on it by the Federal Reserve Board.
CENTURY BANCSHARES, INC.
QUARTERLY REPORT ON FORM 10-Q
September 30, 1998 and 1997
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS, CONTINUED
Year 2000 Compliance
The "Year 2000 problem" arose because many existing computer programs use
only the last two digits to refer to a year. Therefore, these computer programs
do not properly recognize a year that begins with "20" instead of the familiar
"19". If not corrected, many computer applications could fail or create
erroneous results. The extent of the potential impact of the year 2000 problem
is not yet known; however, the consequences of the year 2000 problem could have
a material effect on the Company's business, results of operations, or financial
condition.
In December 1997, the Company adopted a year 2000 compliance plan ("Y2K
Plan") for the assessment of its exposure to the year 2000 problem, completion
of any required remediation, and testing of systems compliance. A specific
timetable was established, and a senior officer of the Company was assigned
leadership responsibility. The officer reports monthly to the Board of Directors
concerning the status of the Y2K Plan, and the Company's progress is also
reviewed from time to time by bank regulatory authorities.
The Company believes that it is presently on schedule with respect to its
Y2K Plan, and outside reviews to date have found the Company's year 2000
compliance efforts to be satisfactory. As of September 30, 1998 the Company's
estimated percentage of completion on its Y2K Plan was 80%, and the estimated
date for 100% completion was August 31, 1999.
As part of its Y2K Plan, the Company expects to spend approximately
$145,000 for the replacement of outdated computer hardware and software. The
human resources requirement will include time of regular Company employees, a
network administration consultant, and approximately $20,000 of additional
consulting expenses. Because most of the Company's data processing services are
provided by outside vendors on a contract basis, management does not currently
anticipate that the costs to address the Company's year 2000 issues will have a
significant impact on the financial position or results of operations of the
Company.
The Company's Y2K Plan includes certain contingency plans to be implemented
in the event compliance benchmarks are not met on a timely basis and/or systems
fail to perform in accordance with plans and expectations. For the most part,
these contingency plans involve a reversion to manual process for all "mission
critical" business functions, which the Company believes is practical in view of
the relative size and scope of its operations.
CENTURY BANCSHARES, INC.
QUARTERLY REPORT ON FORM 10-Q
September 30, 1998 and 1997
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS, CONTINUED
Liquidity
The Company's Asset/Liability Management Policy is intended to maintain
adequate liquidity for the Company and thereby enhance its ability to raise
funds to support asset growth, meet deposit withdrawals and lending needs,
maintain reserve requirements and otherwise sustain operations. The Company
accomplishes this primarily through management of the maturities of its
interest-earning assets and interest-bearing liabilities. The Company believes
that its present liquidity position is adequate to meet its current and future
needs.
Asset liquidity is provided by cash and assets which are readily
marketable, or which can be pledged, or which will mature in the near future.
The asset liquidity of the Bank is maintained in the form of vault cash, demand
deposits with commercial banks, federal funds sold, interest bearing deposits
with other financial institutions, short-term investment securities, other
investment securities available-for-sale, and short-term loans. The Company has
defined "cash and cash equivalents" as those amounts included in cash and due
from banks and federal funds sold. At September 30, 1998, the Company had cash
and cash equivalents of $26.5 million, an increase of $13.5 million, when
compared with the $13 million at September 30, 1997, which resulted primarily
from liquidity received from the Virginia branch acquisition in 1997, partially
offset by increases in the loan portfolio between the periods.
Liability liquidity is provided by access to core funding sources,
principally customers' deposit accounts in the Company's market area. As a
member of the Federal Home Loan Bank of Atlanta ("FHLBA"), the Company is
authorized to borrow up to $15.9 million secured by a blanket pledge of its
portfolio of 1-to-4-family residential mortgage loans. The Company also has
approved lines of credit from larger correspondent banks to borrow excess
reserves on an overnight basis (known as "federal funds purchased") in the
amount of $1.0 million and to borrow on a secured basis ("repurchase
agreements") in the amount of $5.0 million. At September 30, 1998, the Company
had no federal funds purchased, $749 thousand in repurchase agreements, and was
utilizing $6.7 million of its available FHLBA borrowings in the form of
fixed-rate term credit advances with an average cost of 6.74%. The Company
utilizes fixed rate term credit advances from the FHLBA to fund fixed rate real
estate loans of comparable terms and maturities.
The Company had cash on hand in the amount of $2.1 million at the holding
company level at September 30, 1998. The Company anticipates using these funds
as working capital available to support the future growth of the franchise as
well as to pay normal operating expenses. Additionally, working capital is
further augmented by dividends available from the Bank, subject to certain
regulatory restrictions generally applicable to national banks. At September 30,
1998, the Company had no indebtedness outstanding at the holding company level.
CENTURY BANCSHARES, INC.
QUARTERLY REPORT ON FORM 10-Q
September 30, 1998 and 1997
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's principal market risk exposure is to interest rates.
Net interest income, which constitutes the principal source of income for
the Company, represents the difference between interest income on
interest-earning assets and interest expense on interest-bearing liabilities.
The difference between the Company's interest-rate sensitive assets and
interest-rate sensitive liabilities for a specified time-frame is referred to as
an interest sensitive "gap." Interest rate sensitivity reflects the potential
effect on net interest income of a movement in interest rates. A financial
institution is considered to be asset sensitive, or having a positive gap, when
the amount of its interest-earning assets maturing or repricing exceeds the
amount of its interest-bearing liabilities also maturing or repricing within
that time period. Conversely, a financial institution is considered to be
liability sensitive, or having a negative gap, when the amount of its
interest-bearing liabilities maturing or repricing exceeds the amount of its
interest-earning assets. During a period of rising (falling) interest rates, a
positive gap would tend to increase (decrease) net interest income, while a
negative gap would tend to decrease (increase) net interest income.
Management seeks to maintain a balanced interest rate risk position to
protect its net interest margin from market fluctuations. Toward this end, the
Company maintains an Asset/Liability Committee (the "ALCO") which reviews, on a
regular basis, the maturity and repricing of the assets and liabilities of the
Company. The ALCO has adopted the objective of achieving and maintaining a
one-year cumulative GAP, as a percent of total assets, of between plus 10% and
minus 10%. In addition, ALCO monitors potential changes in net interest income
under various interest rate scenarios. On a consolidated basis, the Company's
one year cumulative gap was a positive 3.5% of total assets at September 30,
1998. Market risk is the risk of loss from adverse changes in market prices and
rates, arising primarily from interest rate risk in the Company's portfolios,
which can significantly impact the Company's profitability and market value of
equity. The ALCO has adopted the objective that an immediate increase or
decrease of 200 basis points in market interest rate should not result in a
change of more than 10% (plus or minus) in the Company's projected net interest
income over the next twelve months, or in the Company's market value of
portfolio equity. The Company is in the process of establishing a policy with
regard to the maximum change in projected net income resulting from a 200 basis
point change in interest rates; however, such policy is not expected to be
finalized until December 31, 1998. At September 30, 1998 the forecasted impact
of an immediate increase (or decrease) of 200 basis points would have resulted
in an increase (or decrease) in net interest income over a twelve month period
of 1.6% and (2.5%) respectively, an increase (or decrease) in market value of
portfolio equity of 0.7% and (0.2%) respectively, and an increase (or decrease)
in net income over a twelve month period of 8.8% and (13.8%) respectively.
Since there are limitations inherent in any methodology used to estimate
the exposure to changes in market interest rates, the analysis included herein
is not intended to be a forecast of the actual effect of a change in market
interest rates on the Company. The analysis is based on the Company's assets and
liabilities as of September 30, 1998 and does not contemplate any actions the
company might undertake in response to changes in market interest rates, which
could change the anticipated results. The analysis assumes repricing and/or
repayment of all assets and liabilities in accordance with their contractual
terms with the exception of (a) mortgage-backed securities, which are assumed to
prepay at a rate based on consensus market expectations, and (b) non-maturity
customer deposits, which are assumed to respond to interest rate changes on a
three-month time-lag basis consistent with the company's historical experience
for various types of deposit accounts.
CENTURY BANCSHARES, INC.
QUARTERLY REPORT ON FORM 10-Q
September 30, 1998 and 1997
PART II - OTHER INFORMATION
Items 1 through 6 (b)
Management notes that no occurrences have taken place during the reporting
period which require disclosure . under any of the captioned headings.
================================================================================
This report contains forward looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. Although the Company believes that
the expectations reflected in such forward looking statements are based upon
reasonable assumptions, it can give no assurance that its expectations will be
achieved. Important factors that could cause actual results to differ materially
from the Company's expectations are disclosed in its Form 10-K dated March 27,
1998, filed with the Securities and Exchange Commission and is incorporated by
reference herein (Cautionary Disclosures). Subsequent written and oral forward
looking statements attributable to the Company or persons acting on its behalf
are expressly qualified in their entirety by the Cautionary Disclosures.
CENTURY BANCSHARES, INC.
QUARTERLY REPORT ON FORM 10-Q
September 30, 1998 and 1997
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CENTURY BANCSHARES, INC.
Date: November 12, 1998 By: JOSEPH S. BRACEWELL
- - ------------------------------------ --------------------------------
Joseph S. Bracewell
Chairman of the Board, President and
Chief Executive Officer
(for the registrant and as its
principal financial officer)
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
CENTURY BANCSHARES, Inc.
Financial Data Schedule
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<NAME> CENTURY BANCSHARES, INC.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
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<INT-BEARING-DEPOSITS> 13,724
<FED-FUNDS-SOLD> 19,000
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<INVESTMENTS-HELD-FOR-SALE> 9,424
<INVESTMENTS-CARRYING> 2,376
<INVESTMENTS-MARKET> 2,389
<LOANS> 103,433
<ALLOWANCE> 1,030
<TOTAL-ASSETS> 159,558
<DEPOSITS> 136,060
<SHORT-TERM> 1,938
<LIABILITIES-OTHER> 1,382
<LONG-TERM> 5,853
<COMMON> 2,403
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<INTEREST-TOTAL> 8,551
<INTEREST-DEPOSIT> 3,089
<INTEREST-EXPENSE> 3,465
<INTEREST-INCOME-NET> 5,086
<LOAN-LOSSES> 537
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<EXPENSE-OTHER> 4,631
<INCOME-PRETAX> 726
<INCOME-PRE-EXTRAORDINARY> 726
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 472
<EPS-PRIMARY> 0.20
<EPS-DILUTED> 0.19
<YIELD-ACTUAL> 5.07
<LOANS-NON> 1,256
<LOANS-PAST> 572
<LOANS-TROUBLED> 0
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<ALLOWANCE-OPEN> 887
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