<PAGE> 1
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 JUNE 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 August 13, 1998, there were 2,378,215 shares of the registrant's Common
Stock, par value $1.00 per share outstanding.
<PAGE> 2
CENTURY BANCSHARES, INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 1998
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
PART I - FINANCIAL INFORMATION
<S> <C>
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 22
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 23
Item 2. Changes in Securities and Use of Proceeds 23
Item 3. Defaults Upon Senior Securities 23
Item 4. Submission of Matters to a Vote of Security Holders 23
Item 5. Other Information 23
Item 6. Exhibits and Reports on Form 8-K 23
</TABLE>
(a) The following exhibits are filed with this report:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- ------ ----------------------
<S> <C>
11 Statement re: Computation of Per Share Earnings
27 Financial Data Schedule
</TABLE>
(b) No Reports on Form 8-K were filed by the Company
during the three months ended June 30, 1998.
-i-
<PAGE> 3
PART I - FINANCIAL INFORMATION
ITEM 1. CONDENSED FINANCIAL INFORMATION
CENTURY BANCSHARES, INC.
QUARTERLY REPORT ON FORM 10-Q
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
JUNE 30, 1998 AND DECEMBER 31, 1997
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
(Unaudited)
================= =================
<S> <C> <C>
ASSETS
Cash and due from banks $ 8,764,937 $ 7,069,139
Federal funds sold - 5,000,000
Interest bearing deposits in other banks 11,480,879 22,223,037
Investment securities available-for-sale, at fair value 9,482,012 15,776,517
Investment securities, at cost, fair value of $2,813,819
and $3,634,867 at June 30, 1998
and December 31, 1997, respectively 2,787,452 3,632,076
Loans, net of unearned income 101,231,394 94,171,450
Less: allowance for loan losses (1,007,993) (887,046)
----------------- -----------------
Loans, net 100,223,401 93,284,404
Leasehold improvements, furniture, and equipment, net 1,560,525 1,708,987
Accrued interest receivable 734,372 922,327
Other real estate owned - 52,000
Deposit premium 1,641,000 1,735,768
Net deferred taxes 694,016 693,360
Other assets 593,482 542,012
----------------- -----------------
TOTAL ASSETS $ 137,962,076 $ 152,639,627
================= =================
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Deposits:
Noninterest-bearing $ 25,049,913 $ 26,225,119
Interest-bearing 90,084,309 103,379,913
----------------- -----------------
Total deposits 115,134,222 129,605,032
Other borrowings 7,527,289 8,198,843
Other liabilities 1,325,102 1,300,226
----------------- -----------------
TOTAL LIABILITIES 123,986,613 139,104,101
STOCKHOLDERS' EQUITY:
Common stock, $1 par value; 5,000,000 shares authorized;
2,368,810, and 2,209,229 shares issued and
outstanding at June 30, 1998, and 2,368,810 2,209,229
December 31, 1997, respectively
Additional paid in capital 11,560,010 10,695,480
Retained earnings 58,785 651,646
Accumulated Other Comprehensive Income:
Unrealized (loss) on investment securities
available-for-sale, net of tax effect (12,142) (20,829)
----------------- -----------------
TOTAL STOCKHOLDERS' EQUITY 13,975,463 13,535,526
----------------- -----------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 137,962,076 $ 152,639,627
================= =================
</TABLE>
See accompanying notes to consolidated financial statements.
-1-
<PAGE> 4
CENTURY BANCSHARES, INC.
QUARTERLY REPORT ON FORM 10-Q
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
THREE AND SIX MONTHS ENDED JUNE 30, 1998 AND 1997
<TABLE>
<CAPTION>
Three Months Three Months Six Months Six Months
Ended Ended Ended Ended
June 30, 1998 June 30, 1997 June 30, 1998 June 30, 1997
============= ============= ============= =============
<S> <C> <C> <C> <C>
INTEREST INCOME:
Interest and fees on loans $ 2,285,711 $ 1,775,673 $ 4,619,303 $ 3,456,912
Interest on federal funds sold 51,145 14,746 124,905 83,488
Interest on deposits in other banks 150,468 211,981 408,750 315,225
Interest on securities available-for-sale 218,968 147,181 434,398 271,116
Interest on securities held-to-maturity 62,602 1,892 145,154 3,812
------------- ------------- ------------- -------------
Total interest income 2,768,894 2,151,473 5,732,510 4,130,553
INTEREST EXPENSE:
Interest on deposits:
Savings accounts 203,039 13,951 395,747 28,396
NOW accounts 72,620 67,589 164,844 134,589
Money market accounts 185,488 199,726 418,708 384,646
Certificates under $100,000 303,087 300,779 663,484 478,202
Certificates $100,000 and over 228,148 165,095 450,828 353,136
------------- ------------- ------------- -------------
Total interest on deposits 992,382 747,140 2,093,611 1,378,969
Interest on other borrowings 124,883 130,976 251,172 261,958
------------- ------------- ------------- -------------
Total interest expense 1,117,265 878,116 2,344,783 1,640,927
------------- ------------- ------------- -------------
NET INTEREST INCOME 1,651,629 1,273,357 3,387,727 2,489,626
Provision for loan losses 190,000 51,400 383,000 72,400
------------- ------------- ------------- -------------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 1,461,629 1,221,957 3,004,727 2,417,226
NONINTEREST INCOME:
Service charges on deposit accounts 110,158 122,318 208,595 240,819
Other operating income 146,649 119,157 298,855 273,066
Gain on sale of available-for-sale securities 14,570 - 14,570 -
Gain on liquidation of other real estate owned 15,853 - 15,853 -
------------- ------------- ------------- -------------
Total noninterest income 287,230 241,475 537,873 513,885
NONINTEREST EXPENSE:
Salaries and employee benefits 482,651 528,119 1,086,230 1,016,229
Occupancy and equipment expense 205,247 156,012 411,170 294,958
Professional fees 209,740 143,958 400,429 248,874
Data processing 169,141 117,954 336,774 253,119
Depreciation and amortization 165,326 129,551 331,077 254,500
Communications 70,989 52,944 134,506 99,151
Other operating expenses 183,150 142,655 356,242 295,776
------------- ------------- ------------- -------------
Total noninterest expense 1,486,244 1,271,193 3,056,428 2,462,607
------------- ------------- ------------- -------------
Income before income tax expense 262,615 192,239 486,172 468,504
Income tax expense 93,078 74,023 184,745 180,384
------------- ------------- ------------- -------------
NET INCOME $ 169,537 $ 118,216 $ 301,427 $ 288,120
============= ============= ============= =============
Basic income per common share $ 0.07 $ 0.09 $ 0.13 $ 0.23
Diluted income per common share $ 0.07 0.08 0.12 0.20
Weighted-average common shares outstanding 2,356,151 1,275,562 2,340,524 1,272,902
</TABLE>
See accompanying notes to consolidated financial statements.
-2-
<PAGE> 5
CENTURY BANCSHARES, INC.
QUARTERLY REPORT ON FORM 10-Q
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (UNAUDITED)
SIX MONTHS ENDED JUNE 30, 1998 AND 1997
<TABLE>
<CAPTION>
Accumulated
Other
Comprehensive
Income
------------------------
Unrealized gain (loss)
on investment
Common Additional securities Total
stock paid in Retained available-for-sale, Stockholders'
$1.00 par capital earnings net of tax effect 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 288,120 288,120
Unrealized loss on invest.
securities available-for-sale,
net of tax effect 1,565 1,565
---------------------------------------------------------------------------------------------
Total Comprehensive Income - - 288,120 1,565 289,685
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, JUNE 30, 1997 $ 1,217,429 $ 5,300,802 $ 603,608 $ (44,335.00) $ 7,077,504
=============================================================================================
Balance, December 31, 1997 $ 2,209,229 $ 10,695,480 $ 651,646 $ (20,829) $ 13,535,526
Comprehensive Income
Net income 301,427 301,427
Unrealized gain on invest.
securities available-for-sale,
net of tax effect 8,687 8,687
---------------------------------------------------------------------------------------------
Total Comprehensive Income - - 301,427 8,687 310,114
Stock Dividend 112,665 shares 112,665 779,765 (894,288) (1,858)
Exercise of common stock
options- 43,099 shares 43,099 91,896 134,995
Exercise of warrants-
3,817 shares 3,817 15,727 19,544
Other (22,858) (22,858)
BALANCE, JUNE 30, 1998 $ 2,368,810 $ 11,560,010 $ 58,785 $ (12,142) $ 13,975,463
=============================================================================================
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
-3-
<PAGE> 6
CENTURY BANCSHARES, INC.
QUARTERLY REPORT ON FORM 10-Q
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
SIX MONTHS ENDED JUNE 30, 1998 AND 1997
<TABLE>
<CAPTION>
Six Months Six Months
Ended Ended
June 30, 1998 June 30, 1997
============= =============
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 301,427 $ 288,120
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 331,077 236,190
Provision for loan losses 383,000 72,400
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 187,955 (103,296)
(Increase) decrease in other assets (70,219) 37,900
Increase (decrease) in other liabilities 24,876 109,449
------------- -------------
Total adjustments 826,266 352,643
------------- -------------
Net cash provided by operating activities 1,127,693 640,763
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net increase in loans (7,321,997) (3,858,621)
Net decrease (increase) in interest bearing deposits in other banks 10,742,158 (4,390,351)
Purchases of securities available-for-sale (1,998,440) (2,059,125)
Purchases of securities held-to-maturity - (9,021,377)
Proceeds from sale of securities available-for-sale 6,527,985
Repayments and maturities of securities available-for-sale 1,806,310 628,371
Repayments and maturities of securities held-to-maturity 844,624 -
Proceeds from sale of OREO Properties 67,853
Net purchase of leasehold improv., furn. and equipment (87,847) (214,954)
------------- -------------
Net cash provided by (used in) investing activities 10,580,646 (18,916,057)
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net decrease in demand, savings, NOW and
money market deposit accounts (8,120,483) (7,571,745)
Net (decrease) increase in certificates of deposit (6,350,327) 11,293,984
Net decrease in other borrowings (216,617) 6,583
Repayment of long-term debt (454,937) (450,000)
Net proceeds from issuance of common stock 131,681 37,778
Other (1,858)
------------- -------------
Net cash (used in) provided by financing activities (15,012,541) 3,316,600
------------- -------------
Net increase (decrease) in cash and cash equivalents (3,304,202) (14,958,694)
Cash and cash equivalents, beginning of year 12,069,139 19,799,911
------------- -------------
Cash and cash equivalents, end of period $ 8,764,937 $ 4,841,217
============= =============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Interest paid on deposits and borrowings $ 2,379,016 $ 1,573,122
Income taxes paid 27,000 39,000
</TABLE>
See accompanying notes to consolidated financial statements.
-4-
<PAGE> 7
CENTURY BANCSHARES, INC.
QUARTERLY REPORT ON FORM 10-Q
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
JUNE 30, 1998 AND 1997
(1) BASIS OF PRESENTATION
The unaudited consolidated financial statements as of and for the six
months ended June 30, 1998 and 1997 have not been audited but in the opinion of
management, 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 six months ended June 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
June 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 $ 2,998,317 $ 1,878 $ 1,369 $ 2,998,826
After one, but within five years 1,998,711 665 - 1,999,376
After five, but within ten years - - - -
After ten years 2,366,070 1,970 8,158 2,359,882
-----------------------------------------------------------
Total 7,363,098 4,513 9,527 7,358,084
Collateralized mortgage obligations:
After ten years 1,079,444 - 13,666 1,065,778
Federal Reserve Bank stock 236,350 - - 236,350
Federal Home Loan Bank stock 821,800 - - 821,800
-----------------------------------------------------------
Total investment securities available-for-sale $ 9,500,692 $ 4,513 $ 23,193 $ 9,482,012
===========================================================
</TABLE>
Investment securities held-to-maturity at June 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, municipals, and
government agencies:
Within one year $ 64,991 $ 109 $ - $ 65,100
After one, but within five years 499,747 1,057 - 500,804
After ten years 222,829 - 3,412 219,417
-----------------------------------------------------------
Total 787,567 1,166 3,412 785,321
Other securities:
After one, but within five years 1,000,000 26,935 - 1,026,935
After five, but within ten years 999,885 1,678 - 1,001,563
-----------------------------------------------------------
Total investment securities held-to-maturity $ 2,787,452 $ 29,779 $ 3,412 $ 2,813,819
===========================================================
</TABLE>
During the quarter the company sold available-for-sale securities with a book
value of $6.5 million, for a pre-tax gain of approximately $15 thousand. The
proceeds were used for general liquidity purposes and to fund loan growth and
decline in non-interest bearing deposits.
-5-
<PAGE> 8
CENTURY BANCSHARES, INC.
QUARTERLY REPORT ON FORM 10-Q
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
JUNE 30, 1998 AND 1997
(3) INCOME PER COMMON SHARE
Basic income per share is calculated by dividing net income (after deduction of
preferred dividends), by the weighted-average common shares outstanding. Diluted
income per share is calculated by dividing net income (after deduction of
preferred dividends) by the sum of weighted-average common shares and common
stock equivalents. On April 22, 1997, the Company declared a 5 percent stock
dividend to common stock shareholders of record as of May 7, 1997, resulting in
the issuance of 57,793 shares. On May 29, 1998, the Company declared a 5 percent
stock dividend to common stock shareholders of record as of May 1, 1998,
resulting in the issuance of 112,807 shares. Weighted-average shares outstanding
and income per common share have been restated for the effect of the stock
dividends.
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
--------------------------------- ----------------------------
1998 1997 1998 1997
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
BASIC INCOME PER SHARE:
Net income applicable to common stock $169,537 $118,216 $301,427 $288,120
Weighted-average common shares outstanding 2,356,151 1,275,562 2,340,524 1,272,902
Basic income per share $0.07 $0.09 $0.13 $0.23
DILUTED INCOME PER SHARE:
Net income applicable to common stock $169,537 $118,216 $301,427 $288,120
Weighted-average common shares outstanding 2,356,151 1,275,562 2,340,524 1,272,902
Dilutive effect of warrants and stock options 170,495 159,502 172,214 135,311
----------- ----------- ----------- -----------
Diluted weighted-average common shares outstanding 2,526,646 1,435,064 2,512,738 1,408,213
Diluted income per share $0.07 $0.08 $0.12 $0.20
</TABLE>
(4) STOCK OPTION PLANS
Stock option transactions for the six months ended June 30, 1998 and 1997 are
summarized as follows:
<TABLE>
<CAPTION>
1998 1997
------------------------------------------------
Weighted- Weighted-
Average Average
Exercise Exercise
Shares Price Shares Price
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Outstanding at beginning of year 185,385 $ 4.46 162,821 $ 3.81
Granted 48,950 9.64 45,898 6.55
Exercised (43,099) 3.17 (13,617) 2.57
Forfeited (7,043) 9.56 (2,810) 5.44
------------------------------------------------
Outstanding at end of period 184,193 $ 6.55 192,292 $ 3.90
================================================
</TABLE>
-6-
<PAGE> 9
CENTURY BANCSHARES, INC.
QUARTERLY REPORT ON FORM 10-Q
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
JUNE 30, 1998 AND 1997
(5) 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, which did not have any financial impact on the Company or its
operations for the six months ended June 30, 1998. The Company chose to disclose
comprehensive income under an alternative presentation, thus comprehensive
income is disclosed, net of taxes, in the 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 weather 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.
-7-
<PAGE> 10
CENTURY BANCSHARES, INC.
QUARTERLY REPORT ON FORM 10-Q
JUNE 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 branch offices in Northern Virginia at 8251 Greensboro Drive
and 6832 Old Dominion Drive, McLean, Virginia, and a branch office at 4625
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 such 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 are 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 materalize, or should underlying
assumptions prove incorrect, actual outcomes may vary materially from those
indicated.
NET INCOME
For the six months ended June 30, 1998, the Company's net income was $301
thousand, or $0.12 per diluted share, compared with $288 thousand for the first
six months of 1997, or $0.20 per diluted share. The 4.5% increase in net income
was primarily attributable to a 36.1% increase in net interest income resulting
from a significant increase in the Company's earning assets. This increase in
the net interest income was partially offset by a 24.1% increase in noninterest
expense and a 429% increase in the provision for loan losses. The increase in
the provision for loan losses resulted from a higher volume of loans
outstanding, a rising trend in Company's historical loan charge-off experience,
and an increasing volume of nonperforming loans. For similar reasons, net income
for the three months ended June 30, 1998 increased to $169 thousand from $118
thousand, an increase of 43%. Return on average assets was 0.48% for the second
quarter of 1998, compared with 0.44% for the same period in 1997. Return on
average common equity was 4.89% for the quarter ended June 30, 1998, compared
with 6.72% for the same period in 1997. Total stockholder's equity was 10.13% of
total assets at June 30, 1998, as compared to 6.38% at June 30, 1997.
-8-
<PAGE> 11
CENTURY BANCSHARES, INC.
QUARTERLY REPORT ON FORM 10-Q
JUNE 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 before provision for loan losses was $1.7 million for
the quarter ended June 30, 1998, compared with net interest income of $1.3
million for the quarter ended June 30, 1997, an increase of $379 thousand, or
31%. The increase in net interest income between the periods is attributable to
an increase in average earning assets to $132.0 million during the quarter,
compared to total average earning assets of $98.8 million for the same period in
1997. Additionally, average interest-bearing liabilities increased to $101.0
million during the second quarter of 1998, compared with $79.2 million in 1997.
Thus, average interest-earning assets increased $33.2 million, or 33.6%, between
the periods, partially offset by an increase in average interest-bearing
liabilities of $21.8 million, or 27.5%. 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 $28.0 million, respectively. The additional
growth was primarily the result of internal loan and deposit growth between the
periods (see the "Average Balances and Interest Rates" table) .
The Company's net interest income is affected by changes in the amount and
mix of interest-earning assets and interest-bearing liabilities, while also
being affected by changes in yields earned on interest-earning assets and rates
paid on deposits and other interest-bearing funds. The net interest margin for
the quarter ended June 30, 1998 was 5.02%, a decrease of 15 basis points from
5.17% for the second quarter of 1997. This decrease was primarily the result of
lower interest yields on loans and investment securities, together with higher
interest costs on savings accounts, time deposits, and other borrowings.
The following table sets forth the averages of interest earned or paid by
significant categories of interest earning assets and interest bearing
liabilities for the three and six month periods ended June 30, 1998 and 1997.
-9-
<PAGE> 12
CENTURY BANCSHARES, INC.
QUARTERLY REPORT ON FORM 10-Q
JUNE 30, 1998 AND 1997
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS, CONTINUED
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30,
------------------------------------------------------------------------------------
1998 1997
--------------------------------------- ----------------------------------------
Interest Interest
Average Income/ Average Average Income/ Average
Balance Expense Yield/Rate Balance Expense Yield/Rate
-------------------------------------- ----------------------------------------
($ IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Interest-Earning Assets
Loans, net (1) $ 97,811 $ 2,286 9.37% $ 72,096 $ 1,776 9.88%
Investment securities (2) 19,403 282 5.83% 9,771 149 6.12%
Federal funds sold 3,769 51 5.43% 994 15 6.06%
Interest bearing deposits
with banks 10,993 150 5.47% 15,981 212 5.32%
------------------------------------ ----------------------------------------
Total interest-earning assets 131,976 2,769 8.42% 98,842 2,152 8.73%
Cash and due from banks 5,413 4,937
Other assets 4,025 2,675
----------- ----------
Total Assets $ 141,414 $ 106,454
=========== ==========
Interest-Bearing Liabilities
Interest-Bearing Deposits:
NOW accounts $ 17,178 $ 73 1.70% $ 13,399 $ 68 2.04%
Savings accounts 17,708 203 4.60% 2,250 14 2.50%
Money market accounts 20,658 185 3.59% 21,967 200 3.65%
Time deposits 38,128 531 5.59% 33,780 466 5.53%
Borrowings and
notes payable 7,356 125 6.82% 7,777 131 6.76%
------------------------------------ -----------------------------------------
Total interest-bearing
liabilities 101,028 1,117 4.43% 79,173 879 4.45%
------------------------------------ -----------------------------------------
Non-interest bearing deposits 25,007 19,077
Other liabilities 1,484 1,177
----------- ----------
Total liabilities 127,519 99,427
Stockholders' equity 13,895 7,027
----------- ----------
Total liabilities and
stockholders' equity $ 141,414 $ 106,454
=========== ==========
Net interest income and spread $ 1,652 3.99% $ 1,273 4.28%
==================== =========================
Net interest margin 5.02% 5.17%
============ ============
</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.
-10-
<PAGE> 13
CENTURY BANCSHARES, INC.
QUARTERLY REPORT ON FORM 10-Q
JUNE 30, 1998 AND 1997
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS, CONTINUED
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
------------------------------------------------------------------------------------
1998 1997
--------------------------------------- ----------------------------------------
Interest Interest
Average Income/ Average Average Income/ Average
Balance Expense Yield/Rate Balance Expense Yield/Rate
-------------------------------------- ----------------------------------------
($ IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Interest-Earning Assets
Loans, net (1) $ 96,046 $ 4,619 9.70% $ 70,690 $ 3,457 9.78%
Investment securities (2) 19,311 580 6.05% 9,508 275 5.80%
Federal funds sold 4,589 125 5.49% 2,904 83 5.72%
Interest bearing deposits
with banks 14,834 409 5.56% 11,726 315 5.37%
----------------------------------- ------------------------------------
Total interest-earning assets 134,780 5,733 8.58% 94,828 4,130 8.71%
Cash and due from banks 5,348 4,887
Other assets 4,408 3,134
---------- ---------
Total Assets $ 144,536 $ 102,849
========== =========
Interest-Bearing Liabilities
Interest-Bearing Deposits:
NOW accounts $ 17,927 $ 165 1.86% $ 13,778 $ 135 1.96%
Savings accounts 17,362 396 4.60% 2,301 28 2.43%
Money market accounts 22,418 419 3.77% 21,546 385 3.57%
Time deposits 40,154 1,114 5.59% 30,470 831 5.45%
Borrowings and -
notes payable 7,516 251 6.73% 7,882 262 6.65%
----------------------------------- ------------------------------------
Total interest-bearing
liabilities 105,377 2,345 4.49% 75,977 1,641 4.32%
----------------------------------- ------------------------------------
Non-interest bearing deposits 23,974 18,979
Other liabilities 1,404 838
---------- ---------
Total liabilities 130,755 95,794
Stockholders' equity 13,781 7,055
---------- ---------
Total liabilities and
stockholders' equity $ 144,536 $ 102,849
========== =========
Net interest income and spread $ 3,388 4.09% $ 2,489 4.39%
==================== ====================
Net interest margin 5.07% 5.25%
========== ==========
</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.
-11-
<PAGE> 14
CENTURY BANCSHARES, INC.
QUARTERLY REPORT ON FORM 10-Q
JUNE 30, 1998 AND 1997
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS, CONTINUED
NONINTEREST INCOME
Noninterest income totaled $287 thousand for the second quarter in 1998, a
$46 thousand increase when compared with the same quarter of 1997, which
totaled $241 thousand (see table below). The increase between the periods was
primarily due to increases in credit card and merchant fees caused by increased
volumes. Gains on sale of available-for-sale securities and liquidation of
other real estate owned totaling $30 thousand also contributed to the increase.
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 THREE MONTHS ENDED
(IN THOUSANDS) JUNE 30, Change
----------------------------------------------------
1998 1997 $ %
----------------------------------------------------
<S> <C> <C> <C> <C>
Service charges on deposit accounts $ 110,158 $ 122,318 $(12,160) -9.9%
Credit card and merchant fees 109,791 80,803 28,988 35.9%
Commission and other fee income 35,006 36,759 (1,753) -4.8%
Other income 1,852 1,595 257 16.1%
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 $ 287,230 $ 241,475 $ 45,755 18.9%
====================================================
</TABLE>
Noninterest income totaled $538 thousand for the first six months in 1998,
a $24 thousand increase when compared with the first six months of 1997, which
totaled $514 thousand (see table below). The increase between the periods
resulted from factors similar to those affecting second quarter results, with
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 SIX MONTHS ENDED
(IN THOUSANDS) JUNE 30, Change
----------------------------------------------------
1998 1997 $ %
----------------------------------------------------
<S> <C> <C> <C> <C>
Service charges on deposit accounts $ 208,595 $ 240,819 $(32,224) -13.4%
Credit card and merchant fees 225,266 214,544 10,722 5.0%
Commission and other fee income 60,158 46,431 13,727 29.6%
Other income 13,431 12,091 1,341 11.1%
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 $ 537,873 $ 513,885 $ 23,988 4.7%
====================================================
</TABLE>
-12-
<PAGE> 15
CENTURY BANCSHARES, INC.
QUARTERLY REPORT ON FORM 10-Q
JUNE 30, 1998 AND 1997
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS, CONTINUED
NONINTEREST EXPENSE
Noninterest expense totaled $1.5 million for the second quarter of 1998,
an increase of $215 thousand, or 16.9%, when compared with 1997's total
noninterest expense of $1.3 million. This increase was principally the result
of expenses in 1998, not incurred during the comparable period of 1997, in
connection with the two new retail banking locations opened during the last six
months of 1997. 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 $45 thousand, or
(8.6%). Professional fees, data processing and occupancy-related expenses,
increased $66 thousand, $51 thousand and $49 thousand, respectively.
<TABLE>
<CAPTION>
NONINTEREST EXPENSE THREE MONTHS ENDED
(IN THOUSANDS) JUNE 30, Change
-----------------------------------------------------
1998 1997 $ %
-----------------------------------------------------
<S> <C> <C> <C> <C>
Salaries and employee benefits $ 482,651 $ 528,119 $(45,468) -8.6%
Occupancy and equipment expense 205,247 156,012 49,235 31.6%
Professional fees 209,740 143,958 65,782 45.7%
Data Processing 169,141 117,954 51,187 43.4%
Depreciation and amortization 165,326 129,551 35,775 27.6%
Communications 70,989 52,944 18,045 34.1%
Other expenses 183,150 142,655 40,495 28.4%
-----------------------------------------------------
Total noninterest expense $1,486,244 $1,271,193 $215,051 16.9%
=====================================================
</TABLE>
Noninterest expense totaled $3.1 million for the six months in 1998, an
increase of $594 thousand or 24.1%, when compared with 1997's total noninterest
expense of $2.5 million. This increase is comparable to the trends in the
current quarter and was the result of three new retail banking locations opened
during the last nine months of 1997, with increases in most of the operating
expense categories. During the six month period ended June 30, 1998, salaries
and benefits increased $70 thousand, or 6.9%, and professional fees and
occupancy-related expenses increased $152 thousand and $116 thousand
respectively, as compared to the same period in 1997.
<TABLE>
<CAPTION>
NONINTEREST EXPENSE SIX MONTHS ENDED
(IN THOUSANDS) JUNE 30, Change
-----------------------------------------------------
1998 1997 $ %
-----------------------------------------------------
<S> <C> <C> <C> <C>
Salaries and employee benefits $1,086,230 $1,016,229 $ 70,001 6.9%
Occupancy and equipment expense 411,170 294,958 116,212 39.4%
Professional fees 400,429 248,874 151,555 60.9%
Data Processing 336,774 253,119 83,655 33.0%
Depreciation and amortization 331,077 254,500 76,577 30.1%
Communications 134,506 99,151 35,355 35.7%
Other expenses 356,242 295,776 60,466 20.4%
-----------------------------------------------------
Total noninterest expense $3,056,428 $2,462,607 $593,821 24.1%
=====================================================
</TABLE>
-13-
<PAGE> 16
CENTURY BANCSHARES, INC.
QUARTERLY REPORT ON FORM 10-Q
JUNE 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 $12.3 million as of June 30, 1998
consisted mostly of U.S. Government Agency obligations. This represented a
decrease of $5.5 million, or 31%, compared with the investment portfolio total
of $17.8 million at June 30, 1997. This decrease was primarily due to paydowns,
maturities and sales of available-for-sale securities. The company's portfolio
at June 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 June 30, 1998 and 1997,
approximately $62 million (61.2%) and $43.2 million (58.1%) 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 $32.3 million (31.9%) and $26.1 million (35.1%),
respectively, of the Company's total loan portfolio.
<TABLE>
<CAPTION>
JUNE 30,
------------------------------------------------------
1998 1997
------------------------------------------------------
TYPE OF LOAN ( IN THOUSANDS): $ % $ %
------------------------------------------------------
<S> <C> <C> <C> <C>
1-4 family residential mortgage $ 23,875 23.6% $ 19,063 25.6%
Home equity loans 8,428 8.3% 7,052 9.5%
Multifamily residential 2,121 2.1% 1,947 2.6%
Construction 1,039 1.0% 490 0.7%
Commercial real estate 26,543 26.2% 14,693 19.7%
Commercial loans 26,793 26.5% 19,685 26.4%
Installment and credit card loans 12,376 12.2% 11,125 14.9%
Other loans 98 0.1% 382 0.5%
------------------------------------------------------
Gross loans 101,273 100.0% 74,437 100.0%
============ ===========
Less: Unearned income 42 91
---------- ----------
Total loans, net of unearned $ 101,231 $ 74,346
========== ==========
</TABLE>
-14-
<PAGE> 17
CENTURY BANCSHARES, INC.
QUARTERLY REPORT ON FORM 10-Q
JUNE 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
June 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. 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 105% at
June 30, 1998, compared at 127% at December 31, 1997.
Total nonperforming loans were $958 thousand, compared with $1.2 million
at March 31, 1998 and $700 thousand at December 31, 1997. The increase in
nonperforming assets from year-end 1997 was the result of two commercial
borrowers being placed on nonaccrual status during the first quarter of 1998
totaling $472 thousand and one well secured commercial loan more than 90 days
delinquent status but still accruing at June 30, 1998, for a total of $394
thousand. These increases were partially offset by a $624 thousand residential
loan returning to accrual status during the second quarter. Of the $958
thousand in nonperforming loans as of June 30, 1998, approximately $394
thousand was secured by a first lien on commercial real estate and $74 thousand
was guaranteed by the Small Business Administration. The remaining $490
thousand in nonperforming 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 $215 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 nonperforning status reflects
business and/or personal circumstances unique to each situation, rather than
the result of any discernible trend or change in underwriting standards.
-15-
<PAGE> 18
CENTURY BANCSHARES, INC.
QUARTERLY REPORT ON FORM 10-Q
JUNE 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 second
quarter of 1998 was $190 thousand, representing an increase of $139 thousand or
273% compared to the second quarter of 1997. This increase was the result of
the 36% 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).
-16-
<PAGE> 19
CENTURY BANCSHARES, INC.
QUARTERLY REPORT ON FORM 10-Q
JUNE 30, 1998 AND 1997
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS, CONTINUED
NONPERFORMING LOANS
(IN THOUSANDS)
<TABLE>
<CAPTION>
JUNE 30, DEC 31,
----------------------------
1998 1997
----------------------------
<S> <C> <C>
Non-accrual loans $ 472 $ 624
Accruing past due 90 days or more 486 76
----------------------------
Total nonperforming loans 958 700
Other real estate owned - 52
----------------------------
Total nonperforming assets $ 958 $ 752
============================
Nonperforming to total assets 0.69% 0.49%
</TABLE>
PROVISION AND ALLOWANCE FOR LOAN LOSSES
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------------ ----------------------------
1998 1997 1998 1997
------------------------------ ----------------------------
<S> <C> <C> <C> <C>
Average net loans outstanding $ 97,811 $ 72,096 $ 96,046 $ 71,387
Loans outstanding at period-end 101,231 74,346 101,231 74,346
Total nonperforming loans 958 700 958 700
BEGINNING BALANCE OF ALLOWANCE $ 1,023 $ 620 $ 887 $ 826
LOANS CHARGED-OFF:
1-4 family residential mortgage 18 - 18 109
Home equity loans 25 - 26 24
Commercial loans 152 - 162 -
Installment and credit card loans 51 - 133 118
------------------------------ ---------------------------
TOTAL LOANS CHARGED OFF 246 - 339 251
RECOVERIES OF PREVIOUS CHARGE-OFFS:
1-4 family residential mortgage - - 1 -
Home equity loans 25 - 27 -
Commercial loans 11 39 11 62
Installment and credit card loans 5 - 38 1
------------------------------ ----------------------------
TOTAL RECOVERIES 41 39 77 63
------------------------------ ----------------------------
NET LOANS CHARGED-OFF 205 (39) 262 188
PROVISION FOR LOAN LOSSES 190 51 383 72
------------------------------ ----------------------------
BALANCE AT END OF PERIOD $ 1,008 $ 710 $ 1,008 $ 710
============================== ============================
</TABLE>
-17-
<PAGE> 20
CENTURY BANCSHARES, INC.
QUARTERLY REPORT ON FORM 10-Q
JUNE 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 June 30, 1998 were $115.1 million, an
increase of $20.4 million, or 21.5%, over 1997's second quarter balance. Total
average deposits were $121.8 million for the six months ended June 30, 1998, an
increase of $34.8 million, or 40% compared with average deposits of $87.0
million for the first six months of 1997. The increase in deposits at June 30,
1998, as compared to June 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 to 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>
SIX MONTHS ENDED JUNE 30,
1998 1997
----------------------------------------------------------------------------------------
WEIGHTED- WEIGHTED-
VERAGE AVERAGE % OF AVERAGE AVERAGE % OF
ALANCE RATE TOTAL BALANCE RATE TOTAL
----------------------------------------------------------------------------------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Noninterest-Bearing Deposits $ 23,974 0.00% 19.7% $ 18,979 0.00% 21.8%
Interest-Bearing Deposits:
NOW accounts $ 17,927 1.86% 14.7% $ 13,778 1.96% 15.8%
Savings accounts $ 17,362 4.60% 14.3% $ 2,301 2.43% 2.6%
Money market accounts $ 22,418 3.77% 18.4% $ 21,546 3.57% 24.7%
Time deposits $ 40,154 5.59% 33.0% $ 30,470 5.45% 35.0%
------------------------------------------ ---------------------------------------
Total $ 121,835 100.0% $ 87,074 100.0%
============ ==================================== =============
Weighted-Average Rate 3.47% 3.16%
=========== =============
</TABLE>
-18-
<PAGE> 21
CENTURY BANCSHARES, INC.
QUARTERLY REPORT ON FORM 10-Q
JUNE 30, 1998 AND 1997
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS, CONTINUED
CAPITAL RESOURCES
Total stockholders' equity at June 30, 1998 was $14.0 million, an increase
of $6.9 million, almost double the balance of total stockholders' equity of $7.1
million at June 30, 1997. This significant increase was the result of the
Company issuing 977,500 shares of Common Stock, at a price of $7.25 per share,
in the third quarter of 1997. The net proceeds from the sale of Common Stock
totaled approximately $6.3 million. Net income for the first six months of 1998
was $301 thousand. In addition to retained earnings, stockholders' equity was
also augmented by a $8 thousand increase in the market value of investment
securities available -for-sale, net of tax effect, and $132 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 June 30, 1998, the 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.
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 it
Y2K Plan, and outside reviews to date have found the Company's year 2000
compliance efforts to be satisfactory. As of June 30, 1998 the Company's
estimated percentage of completion on its Y2K Plan was 73%, and the estimated
date for 100% completion was August 31, 1999.
-19-
<PAGE> 22
CENTURY BANCSHARES, INC.
QUARTERLY REPORT ON FORM 10-Q
JUNE 30, 1998 AND 1997
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS, CONTINUED
YEAR 2000 COMPLIANCE (CONTINUED)
As part of its Y2K Plan, the Company expects to spend approximately
$145,000 for the replacement of outdated computer hardware and software.
Additionally, the human resources requirement will include time of regular
Company employees together with its network administration consultant. Because
most of the Company's data processing services are provided by outside vendors
(principally EDS) on a contract basis, management does currently anticipate that
the costs to address the Company's year 2000 issues will not 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 processes for all "mission
critical" business functions, which the Company believes is practical in view of
the relative size and scope of its operations.
-20-
<PAGE> 23
CENTURY BANCSHARES, INC.
QUARTERLY REPORT ON FORM 10-Q
JUNE 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 June 30, 1998,
the Company had cash and cash equivalents of $8.8 million, an increase of $4.0
million, when compared with the $4.8 million at June 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 $19.9 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 June 30, 1998, the Company had no
federal funds purchased or repurchase agreements, and was utilizing $7.4 million
of its available FHLBA borrowings in the form of fixed-rate term credit advances
with an average cost of 6.73%. 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 $2.2 million at the holding
company level at June 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 June 30, 1998, the
Company had no indebtedness outstanding at the holding company level.
-21-
<PAGE> 24
CENTURY BANCSHARES, INC.
QUARTERLY REPORT ON FORM 10-Q
JUNE 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 one of the principal sources 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
and market value of equity under various interest rate scenarios. On a
consolidated basis, the Company's one year cumulative gap was a positive 9.2% of
total assets at June 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
rates 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. At June 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 12 month
period of 8.6% and (8.4%) respectively, and an increase (or decrease) in market
value of portfolio equity of (7.7%) and 9.1% 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 June 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
time-lag basis consistent with the company's historical experience for various
types of deposit accounts.
-22-
<PAGE> 25
CENTURY BANCSHARES, INC.
QUARTERLY REPORT ON FORM 10-Q
JUNE 30, 1998 AND 1997
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Not applicable.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
(a) Not applicable.
(b) Not applicable.
(c) Not applicable.
(d) Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
a) On June 9, 1998 the Registrant held its annual meeting of
stockholders to (i) elect a board of eight directors to
serve until the 1999 annual meeting of stockholders, (ii)
approve amendment to the 1994 Stock Option Plan,
and (iii) transact such other business as may properly come
before the meeting.
(b), (c) With respect to the election of directors, the voting
was as follows:
<TABLE>
<CAPTION>
Nominee For Against Withheld
------------------------ ------------ --------------------------
<S> <C> <C> <C>
Joseph S. Bracewell 1,709,390 24,782 -0-
George Contis, M.D. 1,709,390 24,782 -0-
John R. Cope 1,709,390 24,782 -0-
Bernard J. Cravath 1,709,390 24,782 -0-
Neal R. Gross 1,709,390 24,782 -0-
Joseph H. Koonz 1,709,390 24,782 -0-
William S. McKee 1,709,390 24,782 -0-
William C. Oldaker 1,709,390 24,782 -0-
</TABLE>
With respect to the amendment to the 1994 Stock option Plan, the vote
was: 1,135,740 for, 249,197against, and 1,106 abstentions. There
were no Broker Nonvotes.
(d) Not applicable
ITEM 5. OTHER INFORMATION
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following exhibits are filed with this report:
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
------------- -----------------------------
11 Statement Re: Computation of Per Share
Earnings
27 Financial Data Schedule
(b) No Reports on Form 8-K were filed by the Company during the
three months ended June 30, 1998.
-23-
<PAGE> 26
CENTURY BANCSHARES, INC.
QUARTERLY REPORT ON FORM 10-Q
JUNE 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: August 17, 1998 By: JOSEPH S. BRACEWELL
--------------------- -------------------------------------
Joseph S. Bracewell
President and Chief Executive Officer
(for the registrant and as its
principal financial officer)
-24-
<PAGE> 1
EXHIBIT 11
CENTURY BANCSHARES, INC.
STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS
THREE AND SIX MONTHS ENDED JUNE 30, 1998 AND 1997
FAS 128
<TABLE>
<CAPTION>
Three Months Ended June 30 Six Months Ended June 30
--------------------------------- ---------------------------------
1998 1997 1998 1997
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
BASIC:
Weighted average common shares outstanding (actual) 2,356,151 1,214,821 2,340,524 1,212,288
Adjustment for 5% stock dividend in 1998 100% 105% 100% 105%
-------------- -------------- -------------- --------------
Weighted average common shares outstanding (adjusted) 2,356,151 1,275,562 2,340,524 1,272,902
============== ============== ============== ==============
Net income $ 169,537 $ 118,216 $ 301,427 $ 288,120
Preferred dividends paid - - - -
-------------- -------------- -------------- --------------
Net income applicable to common stock $ 169,537 $ 118,216 $ 301,427 $ 288,120
============== ============== ============== ==============
Basic earnings per share $ 0.07 $ 0.09 $ 0.13 $ 0.23
============== ============== ============== ==============
DILUTED:
Weighted average common shares outstanding (actual) 2,356,151 1,214,821 2,340,524 1,212,288
Dilutive effect of stock options 72,485 79,129 73,421 79,129
Dilutive effect of stock warrants 98,011 72,778 98,793 49,740
-------------- -------------- -------------- --------------
Diluted weighted average common shares and common
stock equivalents outstanding (as originally reported) 2,526,646 1,366,728 2,512,738 1,341,156
Adjustment for 5% stock dividend in 1998 100% 105% 100% 105%
-------------- -------------- -------------- --------------
Diluted weighted average common shares and common
stock equivalents outstanding (adjusted) 2,526,646 1,435,064 2,512,738 1,408,213
============== ============== ============== ==============
Net income applicable to common stock $ 169,537 $ 118,216 $ 301,427 $ 288,120
============== ============== ============== ==============
Diluted earnings per share $ 0.07 $ 0.08 $ 0.12 $ 0.20
============== ============== ============== ==============
</TABLE>
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> JUN-30-1998
<CASH> 8,765
<INT-BEARING-DEPOSITS> 11,480
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 9,482
<INVESTMENTS-CARRYING> 2,787
<INVESTMENTS-MARKET> 2,814
<LOANS> 101,231
<ALLOWANCE> 1,008
<TOTAL-ASSETS> 137,962
<DEPOSITS> 115,134
<SHORT-TERM> 1,422
<LIABILITIES-OTHER> 1,325
<LONG-TERM> 6,105
0
0
<COMMON> 2,369
<OTHER-SE> 11,606
<TOTAL-LIABILITIES-AND-EQUITY> 137,962
<INTEREST-LOAN> 4,619
<INTEREST-INVEST> 580
<INTEREST-OTHER> 534
<INTEREST-TOTAL> 5,733
<INTEREST-DEPOSIT> 2,094
<INTEREST-EXPENSE> 2,345
<INTEREST-INCOME-NET> 3,388
<LOAN-LOSSES> 383
<SECURITIES-GAINS> 15
<EXPENSE-OTHER> 3,056
<INCOME-PRETAX> 486
<INCOME-PRE-EXTRAORDINARY> 486
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 301
<EPS-PRIMARY> 0.13
<EPS-DILUTED> 0.12
<YIELD-ACTUAL> 5.07
<LOANS-NON> 472
<LOANS-PAST> 486
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 887
<CHARGE-OFFS> 339
<RECOVERIES> 77
<ALLOWANCE-CLOSE> 1,008
<ALLOWANCE-DOMESTIC> 1,008
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 652
-25-
</TABLE>
