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, 1999
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 10, 1999, there were 2,689,313 shares of the registrant's
Common Stock, par value $1.00 per share outstanding.
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CENTURY BANCSHARES, INC.
QUARTERLY REPORT ON FORM 10-Q
For The Quarter Ended June 30, 1999
TABLE OF CONTENTS
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PART I - FINANCIAL INFORMATION Page
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
Signatures............................................................... 24
Exhibit Index............................................................ 25
Exhibit 10.17
Amendment dated March 31, 1999, of the employment agreement
between the Company and the Bank and Mr. Joseph S. Bracewell.. 26
Exhibit 27
Financial Data Schedule for the quarter ended June 30, 1999... 27
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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, 1999, and December 31, 1998
June 30,
1999 December 31,
(Unaudited) 1998
---------------- ----------------
ASSETS
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Cash and due from banks $ 5,058,255 $ 8,950,733
Federal funds sold 10,000,000 4,285,000
Interest bearing deposits in other banks 18,379,479 9,847,315
Investment securities available-for-sale, at fair value 9,104,036 6,811,356
Investment securities, at cost, fair value of $1,970,115
and $2,449,680 at June 30, 1999
and December 31, 1998, respectively 2,054,782 2,441,537
Loans held for sale 180,000 -
Loans, net of unearned income 130,197,206 115,231,298
Less: allowance for credit losses (1,408,621) (1,128,147)
---------------- ----------------
Loans, net 128,788,585 114,103,151
Premises and equipment, net 1,212,123 1,372,370
Accrued interest receivable 940,203 742,721
Deposit premiums, net 1,451,463 1,546,232
Net deferred taxes 707,616 683,113
Other assets 561,737 566,373
---------------- ----------------
Total Assets $ 178,438,279 $ 151,349,901
---------------- ----------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits:
Noninterest-bearing $ 32,327,729 $ 31,676,194
Interest-bearing 113,471,967 94,535,082
---------------- ----------------
Total deposits 145,799,696 126,211,276
Other borrowings 15,529,410 8,461,241
Other liabilities 1,320,734 1,360,710
---------------- ----------------
Total Liabilities 162,649,840 136,033,227
---------------- ----------------
Stockholders' Equity:
Common stock, $1 par value; 5,000,000 shares authorized;
2,720,956, and 2,574,219 shares issued at June 30, 1999
and December 31, 1998, respectively 2,720,956 2,574,219
Additional paid in capital 13,030,713 12,343,631
Treasury stock, at cost, 5,000 shares at June 30, 1999 (30,303) -
Retained earnings 121,026 392,384
Accumulated other comprehensive income (loss),
net of tax effect (53,953) 6,440
---------------- ----------------
Total Stockholders' Equity 15,788,439 15,316,674
Commitments and contingencies
---------------- ----------------
Total Liabilities and Stockholders' Equity $ 178,438,279 $ 151,349,901
---------------- ----------------
See accompanying condensed notes to consolidated financial statements (unaudited).
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CENTURY BANCSHARES, INC.
QUARTERLY REPORT ON FORM 10-Q
Consolidated Statements of Operations (Unaudited)
Three and Six Months Ended June 30, 1999 and 1998
Three Months Three Months Six Months Six Months
Ended Ended Ended Ended
June 30, 1999 June 30, 1998 June 30, 1999 June 30, 1998
-------------- -------------- -------------- ---------------
Interest income:
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Interest and fees on loans $ 2,860,807 $ 2,285,711 $ 5,510,757 $ 4,619,303
Interest on federal funds sold 69,119 51,145 116,589 124,905
Interest on deposits in other banks 147,562 150,468 271,490 408,750
Interest on securities available-for-sale 125,324 218,968 225,433 434,398
Interest on securities held-to-maturity 34,079 62,602 71,662 145,154
-------------- -------------- -------------- ---------------
Total interest income 3,236,891 2,768,894 6,195,931 5,732,510
Interest expense:
Interest on deposits:
Savings accounts 212,006 203,039 427,127 395,747
NOW accounts 54,835 72,620 115,222 164,844
Money market accounts 163,881 185,488 328,021 418,708
Certificates under $100,000 376,962 303,087 663,330 663,484
Certificates $100,000 and over 252,908 228,148 461,896 450,828
-------------- -------------- -------------- ---------------
Total interest on deposits 1,060,592 992,382 1,995,596 2,093,611
Interest on other borrowings 186,676 124,883 315,339 251,172
-------------- -------------- -------------- ---------------
Total interest expense 1,247,268 1,117,265 2,310,935 2,344,783
-------------- -------------- -------------- ---------------
Net interest income 1,989,623 1,651,629 3,884,996 3,387,727
Provision for credit losses 145,000 190,000 325,000 383,000
-------------- -------------- -------------- ---------------
Net interest income after provision for credit losses 1,844,623 1,461,629 3,559,996 3,004,727
Noninterest income:
Service charges on deposit accounts 175,049 110,158 328,624 208,595
Other operating income 270,977 146,649 507,383 298,855
Gain on sale of available for sale securitites - 14,570 - 14,570
Gain on liquidation of other real estate owned - 15,853 - 15,853
-------------- -------------- -------------- ---------------
Total noninterest income 446,026 287,230 836,007 537,873
-------------- -------------- -------------- ---------------
Noninterest expense:
Salaries and employee benefits 719,486 482,651 1,384,446 1,086,230
Occupancy and equipment expense 214,177 205,247 420,552 411,170
Professional fees 183,966 209,740 348,198 400,429
Depreciation and amortization of premises and equipment 110,031 117,942 227,446 236,309
Amortization of deposit premiums 47,384 47,384 94,768 94,768
Data processing 284,317 169,141 545,486 336,774
Communications 90,936 70,989 169,928 134,506
Federal deposit insurance premiums 4,305 3,376 8,656 9,636
Other operating expenses 163,392 179,774 382,204 346,606
-------------- -------------- -------------- ---------------
-------------- -------------- -------------- ---------------
Total noninterest expense 1,817,994 1,486,244 3,581,684 3,056,428
-------------- -------------- -------------- ---------------
Income before income tax expense 472,655 262,615 814,319 486,172
Income tax expense 179,560 93,078 309,877 184,745
-------------- -------------- -------------- ---------------
Net income $ 293,095 $ 169,537 $ 504,442 $ 301,427
-------------- -------------- -------------- ---------------
Basic income per common share $ 0.11 $ 0.07 $ 0.19 $ 0.12
Diluted income per common share 0.11 0.06 0.18 0.11
Weighted-average common shares outstanding 2,714,802 2,473,959 2,711,818 2,457,550
See accompanying condensed notes to consolidated financial statements (unaudited).
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CENTURY BANCSHARES, INC.
QUARTERLY REPORT ON FORM 10-Q
Consolidated Statements of Stockholders' Equity (Unaudited)
Six Months Ended June 30, 1999 and 1998
Accumulated
Common Additional Other Total
stock paid in Retained Comprehensive Stockholders'
$1.00 par capital Treasury Stock earnings Income (Loss) Equity
-----------------------------------------------------------------------------------------------
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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 investment
securities available-for-sale,
net of tax effect of $4,678 8,687 8,687
-----------------------------------------------------------------------------------------------
Total Comprehensive Income (Loss) - - - 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
------------------------------------------------------------------------------------------------
Balance, December 31, 1998 $ 2,574,219 $ 12,343,631 $ - $ 392,384 $ 6,440 $ 15,316,674
Comprehensive Income
Net income 504,442 504,442
Unrealized gain (loss) on investment
securities available-for-sale,
net of tax effect of $32,519 (60,393) (60,393)
------------------------------------------------------------------------------------------------
Total Comprehensive Income (Loss) 2,574,219 12,343,631 - 896,826 (53,953) 15,760,723
Stock dividend 129,173 shares 129,173 645,865 (775,800) (762)
Purchase of treasury stock, at cost,
5,000 shares (30,303) (30,303)
Exercise of common stock options
17,564 shares 17,564 41,217 58,781
------------------------------------------------------------------------------------------------
Balance, June 30, 1999 $ 2,720,956 $ 13,030,713 $ (30,303) $ 121,026 $ (53,953) $ 15,788,439
------------------------------------------------------------------------------------------------
See accompanying condensed notes to consolidated financial statements (unaudited).
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CENTURY BANCSHARES, INC.
QUARTERLY REPORT ON FORM 10-Q
Consolidated Statements of Cash Flows (Unaudited)
Six Months Ended June 30, 1999 and 1998
Six Months Six Months
Ended Ended
June 30, 1999 June 30, 1998
----------------- -----------------
Cash flows from operating activities:
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Net income $ 504,442 $ 301,427
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization of premises and equipment 227,446 236,309
Amortization of deposit premiums 94,768 94,768
Provision for credit losses 325,000 383,000
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 (197,482) 187,955
(Increase) decrease in other assets 4,636 (70,219)
Increase (decrease) in other liabilities (39,976) 24,876
----------------- -----------------
Total adjustments 414,392 826,266
----------------- -----------------
Net cash provided by operating activities 918,834 1,127,693
----------------- -----------------
Cash flows from investing activities:
Net decrease (increase) in loans (14,965,908) (7,321,997)
Net decrease (increase) in loans held for sale (180,000) -
Net decrease (increase) in interest bearing deposits in other banks (8,532,164) 10,742,158
Purchases of securities available-for-sale (3,170,000) (1,998,440)
Proceeds from sale of securities available-for-sale - 6,527,985
Repayments and maturities of securities available-for-sale 841,320 1,806,310
Repayments and maturities of securities held-to-maturity 386,755 844,624
Proceeds from sale of other real estate owned - 67,853
Purchase of premises and equipment (67,239) (87,847)
----------------- -----------------
Net cash provided by (used in) investing activities (25,687,236) 10,580,646
----------------- -----------------
Cash flows from financing activities:
Net (decrease) increase in demand, savings, NOW and
money market deposit accounts 5,091,227 (8,120,483)
Net (decrease) increase in certificates of deposit 14,497,193 (6,350,327)
Net (decrease) increase in other borrowings 1,522,928 (216,617)
Proceeds from long term borrowing 6,000,000 -
Repayment of long-term debt (454,759) (454,937)
Purchase of treasury stock (30,303) -
Net proceeds from issuance of common stock 58,019 131,681
Other (93,381) (1,858)
----------------- -----------------
Net cash (used in) provided by financing activities 26,590,924 (15,012,541)
----------------- -----------------
Net increase (decrease) in cash and cash equivalents 1,822,522 (3,304,202)
Cash and cash equivalents, beginning of year 13,235,733 12,069,139
----------------- -----------------
Cash and cash equivalents, end of period $ 15,058,255 $ 8,764,937
----------------- -----------------
Supplemental disclosures of cash flow information:
Interest paid on deposits and borrowings $ 2,198,477 $ 2,379,016
Income taxes paid 375,000 27,000
See accompanying condensed notes to consolidated financial statements (unaudited).
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CENTURY BANCSHARES, INC.
QUARTERLY REPORT ON FORM 10-Q
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(1) Basis of Presentation
In the opinion of management the unaudited consolidated financial statements
as of June 30, 1999 and December 31, 1998 and for the three and six months ended
June 30, 1999 and 1998 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 1998 Annual Report on Form 10-K filed with the
Securities and Exchange Commission. The results of operations for the six months
ended June 30, 1999 are not necessarily indicative of the results of operations
that may be expected for the year ending December 31, 1999 or any future
periods. Certain prior period balances have been restated to conform with the
current period.
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(2) Investment Securities
Investment securities available-for-sale, and their contractual maturities,
at June 30, 1999 are summarized as follows:
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
- --------------------------------------------------------------------------------------------------------------------------
Obligations of U.S. treasury and
government agencies:
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Within one year $ 1,999,553 $ 2,125 $ - $ 2,001,678
After one, but within five years 3,168,497 - 59,003 3,109,494
After five, but within ten years 1,265,041 - 4,553 1,260,488
After ten years 497,339 1,091 12,305 486,125
---------------------------------------------------------------
---------------------------------------------------------------
Total 6,930,430 3,216 75,861 6,857,785
---------------------------------------------------------------
Collateralized mortgage obligations:
After one, but within five years 332,850 - 5,629 327,221
After ten years 207,748 - 4,730 203,018
---------------------------------------------------------------
Total 540,598 - 10,359 530,239
---------------------------------------------------------------
Federal Reserve Bank stock 236,350 - - 236,350
Federal Home Loan Bank stock 605,500 - - 605,500
Other 874,162 - - 874,162
---------------------------------------------------------------
Total investment securities available-for-sale $ 9,187,040 $ 3,216 $ 86,220 $ 9,104,036
---------------------------------------------------------------
Investment securities held-to-maturity, and their contractual maturities
at June 30, 1999, are summarized as follows:
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
- --------------------------------------------------------------------------------------------------------------------------
Obligations of U.S. treasury and
government agencies:
After ten years $ 2,054,782 $ 1,066 $ 85,733 $ 1,970,115
---------------------------------------------------------------
Total investment securities held-to-maturity $ 2,054,782 $ 1,066 $ 85,733 $ 1,970,115
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CENTURY BANCSHARES, INC.
QUARTERLY REPORT ON FORM 10-Q
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
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(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 14, 1999, the Company declared a 5 percent stock
dividend payable on May 28, 1999, to common stock shareholders of record as of
April 28, 1999, resulting in the issuance of 129,173 shares and a corresponding
increase in stock options outstanding. On May 19, 1998, the Company declared a
5 percent stock dividend payable on June 29, 1998, to common stock shareholders
f record as of May 29, 1998, resulting in the issuance of 112,665 shares and a
corresponding increase in stock options and warrants ourstanding. Weighted-
average shares outstanding and income per common share have been restated for
the effect of the stock dividends.
Three Months Ended Six Months Ended
June 30, June 30,
----------------------------- -------------------------------
1999 1998 1999 1998
----------------------------- -------------------------------
Basic Income Per Share:
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Net income applicable to common stock $293,095 $169,537 $504,442 $301,427
Weighted-average common shares outstanding 2,714,802 2,473,959 2,711,818 2,457,550
----------------------------- -------------------------------
Basic income per share $0.11 $0.07 $0.19 $0.12
----------------------------- -------------------------------
Diluted Income Per Share:
Net income applicable to common stock $293,095 $169,537 $504,442 $301,427
Weighted-average common shares outstanding 2,714,802 2,473,959 2,711,818 2,457,550
Dilutive effect of warrants and stock options 27,393 179,020 27,393 180,825
----------------------------- -------------------------------
Diluted weighted-average common shares outstanding 2,742,195 2,652,978 2,739,211 2,638,375
Diluted income per share $0.11 $0.06 $0.18 $0.11
----------------------------- -------------------------------
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CENTURY BANCSHARES, INC.
QUARTERLY REPORT ON FORM 10-Q
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(4) New Financial Accounting Standards
Effective January 1, 1998, the Company adopted SFAS No. 130 "Reporting
Comprehensive Income." 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. In
addition, SFAS No. 130 requires restatement of all prior periods presented.
Items applicable to the Company include unrealized gains and losses on
investment securities. Accumulated comprehensive income components are to be
reported in a separate caption in the consolidated statements of stockholders'
equity. The Company did not experience any financial impact from the
implementation of SFAS No. 130.
In June 1998, SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities," was issued. SFAS 133 requires that an entity recognize all
derivatives as either assets or liabilities in the statement of financial
position and measure these instruments at fair value. In certain circumstances
a derivative may be specifically designed as a hedge of the exposure to changes
in the fair values of a recognized asset or liability or an unrecognized firm
commitment, the exposure to variable cash flows of a forecasted transaction, or
the exposure to fluctuations in foreign currency. SFAS No. 133 will be effective
for all periods beginning after June 15, 2000. Earlier application is permitted,
but the statement shall not be applied retroactively to financial statements of
prior periods. The Company does not anticipate any material impact from the
implementation of SFAS No. 133.
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CENTURY BANCSHARES, INC.
QUARTERLY REPORT ON FORM 10-Q
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. Lending services
are concentrated in professional, service, and commercial business sectors
located in the metropolitan Washington, DC area. The Company has contracted to
purchase what will become its sixth branch office and the third in Northern
Virginia. The acquisition of this new branch in Dumfries, Virginia, is expected
to be completed in October 1999 with loans and deposits of approximately
$5.7 million and $9.8 million, respectively. The Company's principal executive
offices are located at 1275 Pennsylvania Avenue, N.W., Washington, DC 20004,
and its phone number at that address is (202) 496-4100.
The Company derives substantially all of its revenue and income from the
operation of the Bank, which provides a full range of commercial and consumer
banking services to small and middle market businesses and individuals in the
Washington, DC metropolitan area. As of June 30, 1999, the Company had total
assets of $178.4 million, total deposits of $145.8 million, and stockholders'
equity of $15.8 million. At June 30, 1999, the Company had approximately
1,000 shareholders of the Company's common stock, par value $1.00 per share
("Common Stock").
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 "may," "intend," "will," "believe," "expect,"
"estimate," "anticipate," "predict" and similar expressions, the negatives of
those words and other variations on those words or comparable terminology, and
similar expressions are intended to identify forward-looking statements. Such
tatements 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. Our actual results may
differ materially from what we expect. 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, 1998 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, DC
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 three months ended June 30, 1999, the Company's net income was
$293 thousand, or $0.11 per diluted share, compared with $170 thousand for the
first three months of 1998, or $0.06 per diluted share. The 73 percent increase
in net income was primarily attributable to a $338 thousand increase in net
interest income resulting from a significant increase in earning assets, and a
$159 thousand increase in noninterest income, partially offset by a
$332 thousand increase in noninterest expense. Service charges on deposit
accounts increased by 59 percent to $175 thousand, and other operating income
increased 85 percent to $271 thousand primarily as a result of an increase in
bank card revenues. Increases in noninterest expenses included 49 percent
increase in of salaries and benefits, and a 68 percent increase in data
processing due largely to the increased costs of bank card processing of
merchant accounts. Return on average assets was 0.70 percent in the second
quarter of 1999 compared to 0.48 percent for the same period in 1998. Return on
average stockholders' equity was 7.50 percent for the three months ended
June 30, 1999, compared with 4.89 percent for the same period in 1998.
Stockholders' equity to total assets was 8.85 percent at June 30, 1999 compared
to 10.13 percent at June 30, 1998.
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CENTURY BANCSHARES, INC.
QUARTERLY REPORT ON FORM 10-Q
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS, CONTINUED
Net Income, continued
For the six months ended June 30, 1999, the Company's net income was
$504 thousand, or $0.18 per diluted share, compared with $301 thousand for the
first six months of 1998, or $0.11 per diluted share. The 67 percent increase
in net income was primarily attributable to a $497 thousand increase in net
interest income resulting from a significant increase in earning assets, and
a $298 thousand increase in noninterest income, partially offset by a
$525 thousand increase in noninterest expense. Service charges on deposit
accounts increased by 58 percent to $329 thousand, and other operating income
increased 70 percent to $507 thousand primarily as a result of an increase in
bank card revenues. Increases in noninterest expenses included 27 percent a
increase in the cost of salaries and benefits, and a 62 percent increase in data
processing due largely to increased costs of bank card processing of merchant
accounts. Return on average assets was 0.63 percent in the first half of 1999
compared to 0.42 percent for the same period in 1998. Return on average
stockholders' equity was 6.54 percent for the first six months ended June 30,
1999, compared with 4.41 percent for the same period in 1998. Stockholders'
equity to total assets was 8.85 percent at June 30, 1999 compared to
10.13 percent at June 30, 1998.
Net Interest Income
For the quarter ended June 30, 1999, net interest income was $2.0 million
compared with $1.7 million for the quarter ended June 30, 1998, an increase of
$338 thousand, or 20 percent. The increase in net interest income between the
periods was due to an increase in the net interest spread as the 0.36 percent
reduction in the cost of funds exceeded the 0.25 percent reduction in the gross
yield on earning assets, and there was a $5.2 million increase in average net
interest earning assets while the net interest margin was unchanged at
5.02 percent during the second quarter of 1999.
For the six months ended June 30, 1999, net interest income was
$3.9 million compared with $3.4 million for the six months ended June 30, 1998,
an increase of $497 thousand, or 15 percent. The increase in net interest
income between the periods was due to an increase in the net interest spread as
the 0.45 percent reduction in the cost of funds exceeded the 0.30 percent
reduction in the gross yield on earning assets, and there was a $6.0 million
increase in average net interest earning assets while the net interest margin
increased by 0.12 percent to 5.19 percent during the first half of 1999.
During the three and six month periods of 1999 compared to 1998, the
reduction in the yields of the components of earning assets was greater than the
reduction in the yield on total average earning assets, because there was a
redeployment of assets from relatively lower yielding securities and short term
investments to relatively higher yielding loans.
The following tables set forth the average yields and rates for interest earned
and paid for significant categories of interest earning assets and interest
bearing liabilities for the three and six month periods ended June 30, 1999 and
1998.
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CENTURY BANCSHARES, INC.
QUARTERLY REPORT ON FORM 10-Q
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS, CONTINUED
Three Months Ended June 30,
-----------------------------------------------------------------------------
1999 1998
-------------------------------------- ------------------------------------
Interest Interest
Average Income/ Average Average Income/ Average
Balance Expense Yield/Rate Balance Expense Yield/Rate
-------------------------------------- ------------------------------------
($ in thousands)
Interest-Earning Assets
<S> <C> <C> <C> <C> <C> <C> <C>
Loans, net (1) $ 129,537 $ 2,861 8.86% $ 97,811 $ 2,286 9.37%
Investment securities (2) 11,410 159 5.59% 19,403 282 5.83%
Federal funds sold 5,762 69 4.80% 3,769 51 5.43%
Interest bearing deposits
with banks 12,236 148 4.85% 10,993 150 5.47%
------------------------------------ --------------------------------
Total interest-earning assets 158,945 3,237 8.17% 131,976 2,769 8.42%
Cash and due from banks 6,461 5,413
Other assets 3,412 4,025
------------- --------------
Total Assets $ 168,818 $ 141,414
------------- --------------
Interest-Bearing Liabilities
Interest-Bearing Deposits:
NOW accounts $ 19,357 $ 55 1.14% $ 17,178 $ 73 1.70%
Savings accounts 20,188 212 4.21% 17,708 203 4.60%
Money market accounts 21,081 164 3.12% 20,658 185 3.59%
Time deposits 49,137 630 5.14% 38,128 531 5.59%
Borrowings and notes payable 13,059 186 5.71% 7,356 125 6.82%
------------------------------------ --------------------------------
Total interest-bearing
liabilities 122,822 1,247 4.07% 101,028 1,117 4.43%
------------------------------------ --------------------------------
Non-interest bearing deposits 28,739 25,007
Other liabilities 1,573 1,484
------------- --------------
Total liabilities 153,134 127,519
Stockholders' equity 15,684 13,895
------------- --------------
Total liabilities and
stockholders' equity $ 168,818 $ 141,414
------------- --------------
Net interest income and spread $ 1,990 4.10% $ 1,652 3.98%
-------------------- -----------------
Net interest margin 5.02% 5.02%
--------- --------
(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.
</TABLE>
- 10 -
<PAGE>
CENTURY BANCSHARES, INC.
QUARTERLY REPORT ON FORM 10-Q
<TABLE>
<CAPTION>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS, CONTINUED
Six Months Ended June 30,
------------------------------------------------------------------------------
1999 1998
-------------------------------------- ---------------------------------------
Interest Interest
Average Income/ Average Average Income/ Average
Balance Expense Yield/Rate Balance Expense Yield/Rate
-------------------------------------- --------------------------------------
($ in thousands)
Interest-Earning Assets
<S> <C> <C> <C> <C> <C> <C> <C>
Loans, net (1) $ 124,227 $ 5,511 8.95% $ 96,046 $ 4,619 9.70%
Investment securities (2) 10,721 297 5.59% 19,311 580 6.06%
Federal funds sold 4,792 117 4.92% 4,589 125 5.49%
Interest bearing deposits
with banks 11,099 271 4.92% 14,834 409 5.56%
----------------------------------- ----------------------------------
Total interest-earning assets 150,839 6,196 8.28% 134,780 5,733 8.58%
Cash and due from banks 6,650 5,348
Other assets 3,589 4,408
------------- --------
Total Assets $ 161,078 $ 144,536
------------- ---------
Interest-Bearing Liabilities
Interest-Bearing Deposits:
NOW accounts $ 19,287 $ 115 1.20% $ 17,927 $ 165 1.86%
Savings accounts 20,433 427 4.21% 17,362 396 4.60%
Money market accounts 21,136 328 3.13% 22,418 419 3.77%
Time deposits 43,800 1,126 5.18% 40,154 1,114 5.59%
Borrowings and
notes payable 10,774 315 5.90% 7,516 251 6.73%
------------------------------------ ----------------------------------
Total interest-bearing
liabilities 115,430 2,311 4.04% 105,377 2,345 4.49%
---------------------------------------- ----------------------------------
Non-interest bearing deposits 28,436 23,974
Other liabilities 1,658 1,404
------------- ---------
Total liabilities 145,524 130,755
Stockholders' equity 15,554 13,781
------------- ---------
Total liabilities and
stockholders' equity $ 161,078 $ 144,536
------------- ---------
Net interest income and spread $ 3,885 4.25% $ 3,388 4.09%
-------------------- ------------------
Net interest margin 5.19% 5.07%
------- --------
(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.
</TABLE>
- 11 -
<PAGE>
CENTURY BANCSHARES, INC.
QUARTERLY REPORT ON FORM 10-Q
<TABLE>
<CAPTION>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS, CONTINUED
Noninterest Income
Noninterest income was $446 thousand in the second quarter of 1999, a
$159 thousand increase when compared with the same quarter of 1998, which was
$287 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, and the new mortgage loan origination program
which began in the second quarter of 1999. Unlike 1998, there were no
nonrecurring gains from the sale of investment securities or foreclosed property
in 1999.
Noninterest Income Three Months Ended
(in thousands) June 30, Change
----------------------------------------------
1999 1998 $ %
----------------------------------------------
<S> <C> <C> <C> <C>
Service charges on deposit accounts $ 175,049 $ 110,158 $ 64,891 58.9%
Credit card and merchant fees 184,981 109,791 75,190 68.5%
Commission and other fee income 80,957 35,006 45,951 131.3%
Other income 5,039 1,852 3,187 172.1%
Gain on sale of investment securities - 14,570 (14,570) -100.0%
Gain on liquidation of other real estate owned - 15,853 (15,853) -100.0%
-----------------------------------------------
Total noninterest income $ 446,026 $ 287,230 $ 158,796 55.3%
-----------------------------------------------
</TABLE>
Noninterest income was $836 thousand in the first six months of 1999,
a $298 thousand increase when compared with the same period of 1998, which was
$538 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, and the new mortgage loan origination program
which began in the second quarter of 1999. Unlike 1998, there were no
nonrecurring gains from the sale of investment securities or foreclosed property
in 1999.
<TABLE>
<CAPTION>
Noninterest Income Six Months Ended
(in thousands) June 30, Change
----------------------------------------------
1999 1998 $ %
----------------------------------------------
<S> <C> <C> <C> <C>
Service charges on deposit accounts $ 328,624 $ 208,595 $ 120,029 57.5%
Credit card and merchant fees 374,616 225,266 149,350 66.3%
Commission and other fee income 113,941 60,158 53,783 89.4%
Other income 18,826 13,431 5,395 40.2%
Gain on sale of investment securities - 14,570 (14,570) -100.0%
Gain on liquidation of other real estate owned - 15,853 (15,853) -100.0%
-----------------------------------------------
Total noninterest income $ 836,007 $ 537,873 $ 298,134 55.4%
-----------------------------------------------
</TABLE>
- 12 -
<PAGE>
CENTURY BANCSHARES, INC.
QUARTERLY REPORT ON FORM 10-Q
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS, CONTINUED
Noninterest Expense
Noninterest expense was $1.8 million in the second quarter of 1999, an
increase of $332 thousand, or 22 percent, when compared to 1998 when total
noninterest expense was $1.5 million. The increase in noninterest expense
included a $115 thousand (68 percent) increase in data processing expense, which
corresponds with the growth in the bank's operations, the increase in the volume
of bank card processing of merchant accounts, and the costs of Y2K preparedness.
A significant increase in the scope of the Company's operations was accompanied
by increases in many of the noninterest expense categories, including salaries
and benefits, which increased by $237 thousand (49 percent) and communications
which increased by $20 thousand (28 percent). The $237 thousand increase in
salaries and benefits during the second quarter is primarily due to increased
personnel costs of $94 thousand (13 percent) consistent with Company growth, and
timing differences of $143 thousand (64 percent) associated with the application
of SFAS No. 91, Accounting for Nonrefundable Fees and Costs Associated with
Originating or Acquiring Loans and Initial Direct Costs of Leases, between year
to date 1999 versus 1998.
<TABLE>
<CAPTION>
Noninterest Expense Three Months Ended
(in thousands) June 30, Change
---------------------------------------------
1999 1998 $ %
---------------------------------------------
<S> <C> <C> <C> <C>
Salaries and employee benefits $ 719,486 $ 482,651 $ 236,835 49.1%
Occupancy and equipment expense 214,177 205,247 8,930 4.4%
Professional fees 183,966 209,740 (25,774) -12.3%
Data processing 284,317 169,141 115,176 68.1%
Depreciation and amortization
of premises and equipment 110,031 117,942 (7,911) -6.7%
Amortization of deposit premiums 47,384 47,384 - 0.0%
Communications 90,936 70,989 19,947 28.1%
Other expenses 167,697 183,150 (15,453) -8.4%
---------------------------------------------
Total noninterest expense $ 1,817,994 $1,486,244 $ 331,750 22.3%
---------------------------------------------
</TABLE>
Noninterest expense was $3.6 million in the first half of 1999, an increase
of $525 thousand, or 17 percent, when compared to 1998 when total noninterest
expense was $3.1 million. The increase in noninterest expense included a
$209 thousand (62 percent) increase in data processing expense, which
corresponds with the growth in the bank's operations, the increase in the volume
of bank card processing of merchant accounts, and the costs of Y2K preparedness.
A significant increase in the scope of the Company's operations was accompanied
by increases in many of the noninterest expense categories, including salaries
and benefits, which increased by $298 thousand (28 percent) and communications
which increased by $35 thousand (26 percent).
<TABLE>
<CAPTION>
Noninterest Expense Six Months Ended
(in thousands) June 30, Change
---------------------------------------------
1999 1998 $ %
---------------------------------------------
<S> <C> <C> <C> <C>
Salaries and employee benefits $ 1,384,446 $ 1,086,230 $ 298,216 27.5%
Occupancy and equipment expense 420,552 411,170 9,382 2.3%
Professional fees 348,198 400,429 (52,231) -13.0%
Data processing 545,486 336,774 208,712 62.0%
Depreciation and amortization
of premises and equipment 227,446 236,309 (8,863) -3.8%
Amortization of deposit premiums 94,768 94,768 - 0.0%
Communications 169,928 134,506 35,422 26.3%
Other expenses 390,860 356,242 34,618 9.7%
---------------------------------------------
Total noninterest expense $ 3,581,684 $3,056,428 $ 525,256 17.2%
---------------------------------------------
</TABLE>
- 13 -
<PAGE>
CENTURY BANCSHARES, INC.
QUARTERLY REPORT ON FORM 10-Q
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS, CONTINUED
Investments
The Company's investment portfolio of $11.2 million as of June 30, 1999,
consisted mostly of U.S. Government Agency obligations. This represented an
increase of $1.8 million, or 19 percent, compared with the investment portfolio
total of $9.3 million at December 31, 1998. The increase during the first half
of 1999 provided additional liquidity and collateral available for borrowing and
customer repurchase agreements. (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, DC 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, 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,
1999 and 1998, approximately $87.1 million (67 percent) and $62.0 million
(61 percent) 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 $34.8 million (27 percent) and
$32.3 million (32 percent), respectively, of the Company's total loan portfolio.
<TABLE>
<CAPTION>
June 30,
-------------------------------------------------------
1999 1998
-------------------------------------------------------
Type of loan ( in thousands): $ % $ %
-------------------------------------------------------
<S> <C> <C> <C> <C>
1-4 family residential mortgage $ 27,509 21.1% $ 23,875 23.6%
Home equity loans 7,260 5.6% 8,428 8.3%
Multifamily residential 2,712 2.1% 2,121 2.1%
Construction 5,088 3.9% 1,039 1.0%
Commercial real estate 44,499 34.2% 26,543 26.2%
Commercial loans 31,955 24.5% 26,793 26.5%
Installment and credit card loans 10,848 8.3% 12,376 12.2%
Other loans 378 0.3% 98 0.1%
-------------------------------------------------------
Gross loans 130,249 100.0% 101,273 100.0%
--------- ----------
Less: Unearned income 52 42
--------- ----------
Total loans, net of unearned $130,197 $ 101,231
--------- ----------
</TABLE>
- 14 -
<PAGE>
CENTURY BANCSHARES, INC.
QUARTERLY REPORT ON FORM 10-Q
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 credit 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 credit 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, 1999,
the allowance for credit losses was $1.4 million, or 1.08 percent of total
loans. This represents an increase in the allowance compared to $1.1 million,
or 0.98 percent of total loans as of December 31, 1998. 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
previous two years. The allowance for credit losses as a percentage of
nonperforming loans 157 percent at June 30, 1999, compared to 72 percent at
December 31, 1998 and 105 percent at June 30, 1998.
Total nonperforming loans were $898 thousand at June 30, 1999, compared
with $1.5 million at December 31, 1998, and $958 thousand at June 30, 1998. At
June 30, 1999, there were 5 nonperforming loans amounting to $898 thousand. One
of these loans, in the amount of $383 thousand, is secured by owner-occupied
commercial real estate with a loan-to-value ratio of 77 percent. A second loan,
in the amount of $223 thousand, is secured by residential rental property with
a loan-to-value ratio of 81 percent. The other loans are secured by business
assets and junior liens on real estate. In each of these cases, the borrowers
and the Company are working together to resolve the loans and, although the
loans are past due, some payments are being made on a regular basis. Where
appropriate, the Company has established reserves which management believes are
sufficient to absorb future losses.
- 15 -
<PAGE>
CENTURY BANCSHARES, INC.
QUARTERLY REPORT ON FORM 10-Q
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS, CONTINUED
Asset Quality, continued
Provisions for credit 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 credit losses during the first
half of 1999 was $325 thousand, while the allowance for credit losses increased
from $1.1 million (0.98 percent of loans) to $1.4 million (1.08 percent of
loans) and net charge-offs were $44 thousand. During the first half of 1998, the
provision for credit losses was $383 thousand, as the allowance for credit
losses increased from $887 thousand (0.94 percent of loans) to $1.0 million
(1.00 percent of loans) and net charge-offs were $262 thousand. The increases in
the valuation allowance for credit losses were largely the result of the
$15.0 million (13 percent) increase in loans outstanding during the first half
of 1999 and the $36.0 million (38 percent) increase in loans during the past
eighteen months. These trends, taken into consideration with other factors in
the Company's internal analysis of the valuation allowance for credit loss, have
led to increased reserve requirements and a resulting provision expense to
maintain the allowance at a level deemed appropriate by management of the
Company (see table on the following page).
- 16 -
<PAGE>
CENTURY BANCSHARES, INC.
QUARTERLY REPORT ON FORM 10-Q
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS, CONTINUED
<TABLE>
<CAPTION>
Nonperforming Loans
(in thousands)
June 30,
---------------------------
1999 1998
---------------------------
<S> <C> <C>
Non-accrual loans $ 675 $ 472
90 days past due 223 486
---------------------------
Total nonperforming loans 898 958
Other real estate owned - -
---------------------------
Total nonperforming assets $ 898 $ 958
---------------------------
Nonperforming assets to total assets 0.50% 0.69%
</TABLE>
<TABLE>
<CAPTION>
Provision and Allowance for Loan Losses
(in thousands)
Three Months Ended Six Months Ended
June 30, June 30,
-------------------------- -------------------------
1999 1998 1999 1998
-------------------------- -------------------------
<S> <C> <C> <C> <C>
Average net loans outstanding $ 129,537 $ 97,811 $ 124,227 $ 96,046
Loans outstanding at period-end 130,197 101,231 130,197 101,231
Total nonperforming loans at period end 898 958 898 958
Beginning balance of allowance $ 1,310 $ 1,023 $ 1,128 $ 887
Loans charged-off:
1-4 family residential mortgage - 18 - 18
Home equity loans - 25 - 26
Commercial loans 14 152 20 162
Installment and credit card loans 36 51 37 133
-------------------------- -------------------------
Total loans charged off 50 246 57 339
Recoveries of previous charge-offs:
1-4 family residential mortgage 2 - 3 1
Home equity loans - 25 - 27
Commercial loans - 11 - 11
Installment and credit card loans 2 5 10 38
-------------------------- -------------------------
Total recoveries 4 41 13 77
-------------------------- -------------------------
Net loans charged-off (recoveries) 46 205 44 262
Provision for credit losses 145 190 325 383
-------------------------- -------------------------
Balance at end of period $ 1,409 $ 1,008 $ 1,409 $ 1,008
-------------------------- -------------------------
</TABLE>
- 17 -
<PAGE>
CENTURY BANCSHARES, INC.
QUARTERLY REPORT ON FORM 10-Q
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS, CONTINUED
Deposits
The Company's total deposits at June 30, 1999 were $145.8 million, an
increase of $30.7 million, or 27 percent, over the balance at June 30, 1998, and
an increase of $19.6 million, or 16 percent, compared to 1998's year-end
balance. Total average deposits were $133.1 million for the six months ended
June 30, 1999, an increase of $11.3 million, or 9 percent, compared to the first
six months of 1998. 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 a relatively higher
cost of funds in addition to lower fee income as many of these commercial
customers may utilize accounts with lower transaction costs and have a lower
number of transactions than retail customers.
<TABLE>
<CAPTION>
Six Months Ended June 30,
---------------------------------------------------------------------
1999 1998
---------------------------------------------------------------------
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 $ 28,436 0.00% 21.4% $ 23,974 0.00% 19.7%
Interest-Bearing Deposits:
NOW accounts 19,287 1.20% 14.5% 17,927 1.86% 14.7%
Savings accounts 20,433 4.21% 15.4% 17,362 4.60% 14.3%
Money market accounts 21,136 3.13% 15.9% 22,418 3.77% 18.4%
Time deposits 43,800 5.18% 32.9% 40,154 5.59% 33.0%
------------- ------- -------- ---------- ------- --------
Total $ 133,092 100.0% $ 121,835 100.0%
------------- -------- ---------- --------
Weighted-Average Rate 3.02% 3.47%
------- ------
</TABLE>
Capital Resources
Total stockholders' equity at June 30, 1999 was $15.8 million, an increase
of $472 thousand, compared to total stockholders' equity of $15.3 million at
December 31, 1998. Stockholders' equity was increased during the first half of
1999 by net income of $504 thousand and by $58 thousand received from the
exercise of stock options, and was reduced by $60 thousand attributable to the
decline in the market value of investment securities available for sale net of
the tax effect and the repurchase of 5,000 shares of common stock held in
treasury at a cost of $30 thousand.
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, 1999, 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.
- 18 -
<PAGE>
CENTURY BANCSHARES, INC.
QUARTERLY REPORT ON FORM 10-Q
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 June 30, 1999 the Company's
estimated percentage of completion on its Y2K Plan was 98 percent, and the
estimated date for 100 percent completion was August 31, 1999. Testing of
mission critical systems was completed in November 1998. Testing methodology
included copying the entire customer data base onto a Year 2000 compliant
(hardware and software) computer system, and utilizing the key Year 2000 dates
defined by the Federal Financial Institutions Examination Council (FFIEC) to
test date sensitive transactions and calculations. These tests were performed
on all mission critical systems and the results revealed compliance or very
minor discrepancies; such failed test transactions were tested again in 1999
and the minor discrepancies have been resolved. Material third party risks also
include assessing the Year 2000 preparation status of bank borrowing customers.
The Company completed a risk assessment of Year 2000 preparedness of borrowers
within its loan portfolio as of the bank regulatory target date, September 30,
1998, and continues to monitor Y2K preparedness related to new loans and any
borrowers deemed to be at high risk.
As part of its Y2K Plan, the Company has spent approximately $145,000 for
the replacement of outdated computer hardware and software. Much of these
expenditures would have been incurred in the ordinary course of business to
maintain such computer systems, regardless of Year 2000 problem considerations.
The human resources requirement includes the 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 is 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.
- 19 -
<PAGE>
CENTURY BANCSHARES, INC.
QUARTERLY REPORT ON FORM 10-Q
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS, CONTINUED
Year 2000 Compliance, continued
The Company believes that the most likely worst case scenarios due to the
Year 2000 problem could include: (1) lack of liquidity caused by customers'
withdrawal of extra cash, (2) increased criminal activity stimulated by public
awareness that banks are holding additional cash to avoid liquidity problems,
and (3) short term electric power interruptions. The Company is taking steps to
establish and renew lines of credit with its correspondent banks and the Federal
Home Loan Bank of Atlanta to assure that adequate liquidity will be available to
meet the needs of customers. Additional security precautions will be taken to
prevent possible crimes due to heightened public awareness of additional cash
reserves. The Company does not believe that long term and widespread electric
power outages are likely, and has planned to address short term interruptions
by training bank management and staff to be ready to provide limited service to
customers. The Company is dependent upon the services of Electronic Data Systems
Corp. (EDS) in Reston, Virginia, to provide access to customer data bases and
other mission critical functions. EDS has informed the Company that EDS has
back-up services sites ready and available to provide services to the Company
should electric power interruptions or other problems occur in the Reston area.
The Company has completed the testing of the mission critical systems provided
by EDS. The Company does not expect any significant loss in revenue to occur
as a result of Year 2000 problems.
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. Training of management and staff
on these procedures and processes was completed in July 1999, and additional
refresher training will be provided during November and December 1999.
- 20 -
<PAGE>
CENTURY BANCSHARES, INC.
QUARTERLY REPORT ON FORM 10-Q
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, 1999, the Company had cash and cash
equivalents of $15.0 million, an increase of $1.8 million, when compared with
the $13.2 million at December 31, 1998.
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 $30.0 million secured by a blanket pledge of its
portfolio of 1-to-4-family residential mortgage loans, investment securities,
and other collateral. The Company also has lines of credit from larger
correspondent banks to borrow excess reserves on an overnight basis (known as
"federal funds purchased") in the amount of $5.7 million, and to borrow on a
secured basis ("repurchase agreements") in the amount of $5.0 million. At
June 30, 1999, the Company had no federal funds purchased, $2.9 million in
customer repurchase agreements, and was utilizing $12.1 million of its available
FHLBA borrowings in the form of fixed-rate ($9.1 million) and variable-rate
($3.0 million) advances with an average cost of 5.81%. The Company utilizes
fixed rate term credit advances from the FHLBA to fund fixed rate real estate
loans of comparable terms and maturities. As of June 30, 1999, the Company had
also obtained a guaranteed $4.0 million Y2K Commitment from the FHLBA under
which funds will be available in November and December 1999, if needed, in the
form of fixed or variable rate advances with 3 to 12 month maturities.
The Company had cash on hand in the amount of $1.5 million at the holding
company level at June 30, 1999. 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. Working capital is further augmented by
dividends available from the Bank, subject to certain regulatory restrictions
generally applicable to national banks. At June 30, 1999, the Company had no
indebtedness outstanding at the holding company level.
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<PAGE>
CENTURY BANCSHARES, INC.
QUARTERLY REPORT ON FORM 10-Q
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 percent and minus 10 percent. 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 4.92 percent of total assets at June 30, 1999.
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 percent (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, and not more than 20 percent (plus or minus) in projected net
income. At June 30, 1999, 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 2.91 percent and
(5.04 percent) respectively, an increase (or decrease) in the market value of
portfolio equity of 2.31 percent and (2.86 percent) respectively, and an
increase (or decrease) in net income over a twelve month period of 10.20 percent
and (17.70 percent) 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, 1999, 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.
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<PAGE>
CENTURY BANCSHARES, INC.
QUARTERLY REPORT ON FORM 10-Q
PART II - OTHER INFORMATION
Items 1 through 5
Management notes that no occurrences have taken place during the
reporting period which require disclosure
under any of the captioned headings.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
The following exhibits are filed with this report:
Exhibit 10.17 -
Amendment dated March 31, 1999,
of the employment agreement between the Company and the Bank
and Mr. Joseph S. Bracewell
Exhibit 27 -
Financial Data Schedule, Quarter Ended June 30, 1999
(b) Reports on Form 8-K
None.
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<PAGE>
CENTURY BANCSHARES, INC.
QUARTERLY REPORT ON FORM 10-Q
For Quarter Ended June 30, 1999
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 12, 1999 By: /s/b/ JOSEPH S. BRACEWELL
- ----------------------- --------------------------
Joseph S. Bracewell
Chairman of the Board,
President and
Chief Executive Officer
Date: August 12, 1999 By: /s/b/ CHARLES V. JOYCE III
- ----------------------- --------------------------
Charles V. Joyce III
Senior Vice President and
Chief Financial Officer
(Principal Financial and
Accounting Officer)
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<PAGE>
CENTURY BANCSHARES, INC.
EXHIBIT INDEX
June 30, 1999
The following exhibit is filed within this report.
Exhibit Number Description
- -------------- -----------------------------------------------------------
10.17 Amendment dated March 31, 1999,
of the employment agreement between the Company and the Bank
and Mr. Joseph S. Bracewell
27 Financial Data Schedule
for the quarter ended June 30, 1999
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<PAGE>
Exhibit 10.17
CENTURY BANCSHARES, INC.
Amendment to Executive Employment Agreement
[Letterhead of Century Bancshares, Inc.]
February 19, 1999
Mr. Joseph S. Bracewell
President
Century Bancshares, Inc.
1275 Pennsylvania Avenue, NW
Washington, DC 20004
RE: Executive Employment Agreement dated September 1, 1996,
as amended ("Agreement")
Dear Mr. Bracewell:
Pursuant to Paragraph 2 of the above-referenced Agreement, this letter
constitutes the Employer's written notice that the term of the Agreement will
be extended for an additional one (1) year term commencing September 1, 1999,
and ending August 31, 2000. Please indicate your consent to such extension
by signing below and returning s copy of this letter within sixty (60) days
of the date of this letter.
Very truly yours,
CENTURY BANCSHARES, INC.
BY: /s/b/ WILLIAM C. OLDAKER
William C. Oldaker, Secretary
I hereby consent to the extension set forth above.
BY: /s/b/ JOSEPH S. BRACEWELL /u/d/ March 31, 1999
Joseph S. Bracewell Date
- 26 -
<PAGE>
<TABLE>
<CAPTION>
Exhibit 27
CENTURY BANCSHARES, INC.
Financial Data Schedule
June 30, 1999
<S> <C>
[ARTICLE] 9
[CIK] 785813
[NAME] CENTURY BANCSHARES, INC.
[MULTIPLIER] 1000
[PERIOD-TYPE] 6-MOS
[FISCAL-YEAR-END] DEC-31-1999
[PERIOD-END] JUN-30-1999
[CASH] 5,058
[INT-BEARING-DEPOSITS] 18,379
[FED-FUNDS-SOLD] 5,000
[TRADING-ASSETS] 0
[INVESTMENTS-HELD-FOR-SALE] 9,104
[INVESTMENTS-CARRYING] 2,055
[INVESTMENTS-MARKET] 1,970
[LOANS] 130,197
[ALLOWANCE] 1,409
[TOTAL-ASSETS] 178,438
[DEPOSITS] 145,800
[SHORT-TERM] 3,471
[LIABILITIES-OTHER] 1,321
[LONG-TERM] 12,058
[COMMON] 2,721
[PREFERRED-MANDATORY] 0
[PREFERRED] 0
[OTHER-SE] 13,067
[TOTAL-LIABILITIES-AND-EQUITY] 178,438
[INTEREST-LOAN] 5,511
[INTEREST-INVEST] 297
[INTEREST-OTHER] 388
[INTEREST-TOTAL] 6,196
[INTEREST-DEPOSIT] 2,094
[INTEREST-EXPENSE] 315
[INTEREST-INCOME-NET] 2,311
[LOAN-LOSSES] 325
[SECURITIES-GAINS] 0
[EXPENSE-OTHER] 3,582
[INCOME-PRETAX] 814
[INCOME-PRE-EXTRAORDINARY] 504
[EXTRAORDINARY] 0
[CHANGES] 0
[NET-INCOME] 504
[EPS-BASIC] 0.19
[EPS-DILUTED] 0.18
[YIELD-ACTUAL] 5.19
[LOANS-NON] 675
[LOANS-PAST] 223
[LOANS-TROUBLED] 0
[LOANS-PROBLEM] 0
[ALLOWANCE-OPEN] 1,128
[CHARGE-OFFS] 57
[RECOVERIES] 13
[ALLOWANCE-CLOSE] 1,409
[ALLOWANCE-DOMESTIC] 1,409
[ALLOWANCE-FOREIGN] 0
[ALLOWANCE-UNALLOCATED] 675
</TABLE>
- 27 -
