UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For The Fiscal Year Ended December 31, 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 incorporation or organization) (I.R.S. Employer
Identification No.)
1275 Pennsylvania Avenue, N.W. Washington, DC 20004
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(Address of principal executive offices) (Zip Code)
(202) 496-4100
(Registrant's Telephone Number, Including Area Code)
Securities Registered Pursuant To Section 12(b) of the Act:
Title of Each Class Name of each exchange on which registered
None None
Securities Registered Pursuant To Section 12(g) of the Act:
Title of Each Class
Common Stock, $1.00 par value
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
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X].
As of March 23, 1999, the number of shares of common stock outstanding
was 2,583,462. As of such date, the aggregate market value of voting stock held
by nonaffiliates was approximately $11,212,000.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's definitive annual proxy statement to be
filed within 120 days of the Registrant's fiscal year ended December 31, 1998
are incorporated by reference into Part III.
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CENTURY BANCSHARES, INC.
ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
TABLE OF CONTENTS
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PART I
Item 1. Business 1
Item 2. Properties 7
Item 3. Legal Proceedings 7
Item 4. Submission of Matters to a Vote of Security Holders 7
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters 8
Item 6. Selected Financial Data 8
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations 11
Item 7A. Quantitative and Qualitative Disclsures About Market Risk 11
Item 8. Financial Statements and Supplementary Data 29
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure 57
PART III
Item 10. Directors and Executive Officers of the Registrant 57
Item 11. Executive Compensation 57
Item 12. Security Ownership of Certain Beneficial Owners and Management 57
Item 13. Certain Relationships and Related Transactions 57
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K 57
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PART I
ITEM 1. BUSINESS.
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, DC, 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 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'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 revenues 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 December 31, 1998, the Company
had total assets of $151.3 million, total loans of $115.2 million, total
deposits of $126.2 million, and total stockholders' equity of $15.3 million. At
December 31, 1998, the Company had approximately 1,000 shareholders of the
Company's common stock, par value $1.00 per share ("Common Stock").
Company Operations
General. The Company holds deposits for individuals, businesses, and
other organizations, and provides certain services related thereto for the
convenience of its depositors. In most cases, the Company pays interest on funds
which it holds on deposit for customers, and it also charges fees for certain
services that it provides. The interest expense paid on deposits, and the
noninterest income earned from service charges, are primarily related to the
volume of deposits handled by the Company. The Company's primary source of
revenue is the interest income and fees which it earns by lending and investing
the funds which are held on deposit. Because loans generally earn higher rates
of interest than investments, the Company seeks to employ as much of its deposit
funds as possible in the form of loans to individuals, businesses and other
organizations. In the interest of liquidity, however, a portion of the Company's
deposits are maintained in cash, government securities, deposits with other
financial institutions, and overnight loans of excess reserves (known as
"federal funds sold") to large correspondent banks. The revenue which the
Company earns (prior to deducting its overhead expenses) is essentially a
function of the amount of the Company's loans and deposits, as well as the
profit margin and fee income which can be generated thereon.
The operating income and net income of the Company depend to a great
extent on "rate differentials," the difference between the income received from
loans, investments and other assets and the interest paid on deposits and other
liabilities. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations." These rates are highly sensitive to many factors
which are beyond the control of the Company, including general economic
conditions such as inflation, recession and unemployment, the supply and demand
for investable funds, interest rates and international economic conditions, as
well as economic conditions affecting the Washington, DC metropolitan area.
Consequently, the Company's success is dependent to a significant extent upon
general economic conditions in the metropolitan Washington, DC area, which is
dependent, among other things, on new business formations, spending by
government agencies and tourism. An economic downturn in the geographic markets
served by the Company could adversely affect its ability to attract and retain
deposits and to collect loans, the value of any collateral securing such loans,
and the financial condition and results of operations of the Company.
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Measures of Performance. The principal measures of the performance of
banking institutions are return on average equity and return on average assets.
Return on average equity ("ROE") is determined by dividing annual net income by
average stockholders' equity and indicates the effectiveness of an institution
in generating net income from the capital invested by its stockholders. For the
year ended December 31, 1998, the Company's ROE was 4.49%. Return on average
assets ("ROA") measures net income in relation to total average assets and
generally indicates an institution's ability to use its assets profitably. For
the year ended December 31, 1998, the Company's ROA was 0.44%.
Growth of Operations. The Company's current strategic plan is directed
toward the enhancement of its franchise value and operating profitability
through a significant increase in its asset size, the development of new
commercial accounts and loans, and expansion into the nearby Maryland and
Virginia markets. The Company plans to acquire or establish banking offices in
high-density commercial districts, and may in some cases open a temporary loan
production office ("LPO") prior to establishing a full service branch. The
Company acquired its first branch office in downtown Washington, DC in 1994 and
in 1996 established an LPO in Tysons Corner, Virginia, which was replaced by a
full service branch in April 1997. In October 1997, the Company purchased a
full-service branch in McLean, Virginia, from Eastern American Bank, FSB
("Eastern American"). In June 1997, the Company established an LPO in Bethesda,
Maryland, which was replaced by a full service branch on January 5, 1998.
The establishment of full service branches in Tysons Corner, Virginia
and Bethesda, Maryland in April 1997 and January 1998, respectively, and the
establishment of a full service branch in McLean, Virginia by means of the
purchase of loans and certain other assets and assumption of the deposits and
certain other liabilities of the branch of Eastern American in October 1997, has
significantly affected the Company's results of operations during 1998 and 1997.
The effects of these transactions should be considered when reviewing the
financial information contained in this report.
The Company believes that its franchise value and operating
profitability would be enhanced by a significant increase in its asset size. For
this reason, the Company in the past has explored, and expects to continue to
explore in the future, merger and acquisition opportunities which would
accelerate the Company's progress toward the achievement of its strategic plan,
including transactions in which the Company would be acquired. There can be no
assurance that any such merger and acquisition opportunities will be realized in
the future.
There can be no assurance that the Company will be successful in
implementing any of the future plans described herein or that, even if
implemented, such actions will produce the desired financial results. The
foregoing strategy should be taken into account, however, when considering the
more specific discussion of the Company's financial performance set forth
herein.
Competition
The Company is subject to vigorous competition in all aspects and areas
of its business from banks and other financial institutions, including savings
and loan associations, savings banks, finance companies, credit unions and other
providers of financial services, such as mutual funds, brokerage firms, consumer
finance companies and insurance companies. The Company also competes with
non-financial institutions that maintain their own credit programs and
governmental agencies that make available low cost or guaranteed loans to
certain borrowers. The principal methods of competition include interest rates
paid on deposits and charged on loans and the availability of other banking
products and services. The Company competes in its market area with a number of
much larger financial institutions that have substantially greater resources,
including larger lending limits, larger branch systems and a wider array of
commercial banking services. The Company believes that it has been able to
compete effectively with other financial institutions by emphasizing customer
services, establishing long-term customer relationships and building customer
loyalty, and by providing products and services designed to address the specific
needs of its customers.
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Regulatory Matters
In addition to the state and federal laws applicable to business and
employers generally, the Company and Bank are further regulated by special
federal and state laws and regulations applicable only to financial institutions
and their parent companies. Virtually all aspects of the operations of the
Company and the Bank are subject to specific requirements or restrictions and
general regulatory oversight, from laws regulating consumer finance
transactions, such as the Truth in Lending Act, the Home Mortgage Disclosure Act
and the Equal Credit Opportunity Act, to laws regulating collections and
confidentiality, such as the Fair Debt Collections Practices Act, the Fair
Credit Reporting Act and the Right to Financial Privacy Act. With few
exceptions, state and federal banking laws have as their principal objective
either the maintenance of the safety and soundness of financial institutions and
the federal deposit insurance system or the protection of consumers or classes
of consumers, rather than the specific protection of stockholders of the
Company. The following discussion sets forth the material statutory and
regulatory provisions governing the Company and the Bank. To the extent such
discussion describes statutory or regulatory provisions, it is qualified in its
entirety by reference to the particular statute or regulation.
Regulation of the Company. The Company is a bank holding company within
the meaning of the BHCA, and therefore is subject to regulation, supervision and
examination by the Federal Reserve Board. The Company is required to file
reports with and to furnish such other information as the Federal Reserve Board
may require pursuant to the BHCA. The Federal Reserve Board has the authority to
issue orders to bank holding companies to cease and desist from unsound banking
practices and violations of conditions imposed by, or violations of agreements
with, the Federal Reserve Board. The Federal Reserve Board is also empowered to
assess civil money penalties against companies or individuals who violate the
BHCA or orders or regulations thereunder, to order termination of non-banking
activities of non-banking subsidiaries of bank holding companies, and to order
termination of ownership and control of a non-banking subsidiary by a bank
holding company. Certain violations may also result in criminal penalties. The
Office of the Comptroller of the Currency ("OCC") is authorized to exercise
comparable authority with respect to the Bank.
The Federal Reserve Board takes the position that a bank holding
company is required to serve as a source of financial and managerial strength to
its subsidiary banks and may not conduct its operations in an unsafe or unsound
manner. Additionally, it is the Federal Reserve Board's position that, in
serving as a source of strength to its subsidiary banks, a bank holding company
should stand ready to use available resources to provide adequate capital to its
subsidiary banks during periods of financial stress or adversity and should
maintain the financial flexibility and capital-raising capacity to obtain
additional resources for assisting its subsidiary banks. If a bank holding
company fails in its obligations to serve as a source of strength to its
subsidiary banks, the Federal Reserve Board will generally consider such action
to be an unsafe and unsound banking practice or a violation of the Federal
Reserve Board regulations or both. This doctrine has become known as the "source
of strength" doctrine. In addition, statutory changes in the Federal Deposit
Insurance Act (the "FDIA") made by the Federal Deposit Insurance Corporation
Improvement Act of 1991 ("FDICIA") now require the holding company parent of an
undercapitalized bank to guarantee, up to certain limits, the bank's compliance
with a capital restoration plan approved by the bank's primary federal
supervisory agency.
The BHCA and the Change in Bank Control Act, together with regulations
promulgated by the Federal Reserve Board, require that, depending on the
particular circumstances, either Federal Reserve Board approval must be obtained
or notice must be furnished to the Federal Reserve Board and not disapproved
prior to any person or company acquiring "control" of a bank holding company,
such as the Company, subject to certain exemptions for certain transactions.
Control is conclusively presumed to exist if an individual or company acquires
25% or more of any class of voting securities of the bank holding company.
Control is rebuttably presumed to exist if a person acquires 10% or more but
less than 25% of any class of voting securities and either the company has
securities registered pursuant to Section 12 of the Securities Exchange Act of
1934, as amended, or no other person will own a greater percentage of that class
of voting securities immediately after the transaction. The regulations provide
a procedure for challenge of the rebuttable control presumption.
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As a bank holding company, the Company is required to obtain prior
approval to merge or consolidate with any other bank holding company, acquire
all or substantially all of the assets of any bank or acquire ownership or
control of shares of a bank or bank holding company if, after the acquisition,
the Company would directly or indirectly own or control 5% or more of the voting
shares of such bank or bank holding company.
The Company is also prohibited from acquiring a direct or indirect
interest in or control of more than 5% of the voting shares of any company that
is not a bank or bank holding company and from engaging directly or indirectly
in activities other than those of banking, managing or controlling banks or
furnishing services to its subsidiary banks, except that it may engage in and
may own shares of companies engaged in certain activities found by the Federal
Reserve Board to be so closely related to banking or managing and controlling
banks as to be a proper incident thereto. These activities include, among
others, operating a mortgage, finance, credit card, or factoring company;
performing certain data processing operations; providing investment and
financial advice; acting as an insurance agent for certain types of
credit-related insurance; leasing personal property on a full-payout,
non-operating basis; providing certain stock brokerage and investment advisory
services; derivatives trading and investment activities; and management
consulting activities. In approving acquisitions or the addition of activities,
the Federal Reserve Board considers whether the acquisition or the additional
activities can reasonably be expected to produce benefits to the public, such as
greater convenience, increased competition, or gains in efficiency, that
outweigh such possible adverse effects as undue concentration of resources,
decreased or unfair competition, conflicts of interest or unsound banking
practices. In considering any application for approval or an acquisition or
merger, the Federal Reserve Board is also required to consider the financial and
managerial resources of the companies and the banks concerned, as well as the
applicant's record of compliance with the Community Reinvestment Act (the
"CRA").
The BHCA generally imposes certain limitations on transactions by and
between banks and non-bank companies in the same holding company structure,
including limitations on extensions of credit (including guarantees of loans) by
the Bank to affiliates, investments in the stock or other securities of the
Company by the Bank, and the nature and amount of Company securities that the
Bank may accept from any affiliate to secure loans extended to the affiliate.
The Company, as an affiliate of the Bank, is also subject to these restrictions.
Under the BHCA and the Federal Reserve Board's regulations, a bank holding
company and its subsidiaries are prohibited from engaging in certain tie-in
arrangements in connection with any extension of credit, lease or sale of
property or furnishing of services.
Regulation of the Bank. The Bank is a national banking association and
is therefore subject to regulation, supervision, and examination by the OCC. The
Bank is also a member of the Federal Reserve System and the Federal Deposit
Insurance Corporation ("FDIC"). Requirements and restrictions under the laws of
the United States include the requirement that reserves be maintained against
deposits, restrictions on the nature and the amount of loans that can be made,
restrictions on the business activities in which a bank may engage, restrictions
on the payment of dividends to stockholders, and minimum capital requirements.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations." The OCC has enforcement authority over the Bank that is similar to
that of the Federal Reserve Board with respect to the Company. In addition, upon
making certain determinations with respect to the condition of any insured
national bank, such as the Bank, the FDIC may initiate the termination of a
bank's federal deposit insurance.
There are certain statutory limitations on the payment of dividends by
national banks. Without approval of the OCC, dividends may not be paid in excess
of a bank's total net profits for that year, plus the bank's profits for the
preceding two years, less any required transfers to capital surplus. However, a
national bank may not pay dividends in excess of total retained profits,
including current year's income. In some cases, the OCC may find a dividend
payment that meets these statutory requirements to be an unsafe or unsound
practice.
Banks are affected by the credit policies of other monetary
authorities, including the Federal Reserve Board, which affect the national
supply of bank credit. Such policies influence overall growth of bank loans,
investments, and deposits and may also affect interest rates charged on loans
and paid on deposits. The monetary policies of the Federal Reserve Board have
had a significant effect on the operating results of commercial banks in the
past and are expected to continue to do so in the future.
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FDICIA requires the OCC to take "prompt corrective action" with respect
to any national bank which does not meet specified minimum capital requirements.
The applicable regulations establish five capital levels, ranging from "well
capitalized" to "critically undercapitalized," which require or permit the OCC
to take supervisory action. Under these regulations, a national bank is
considered well capitalized if it has a total risk-based capital ratio of 10.0%
or greater, a Tier I risk-based capital ratio of 6.0% or greater, and a leverage
ratio of 5.0% or greater, and it is not subject to an order, written agreement,
capital directive, or prompt corrective action directive to meet and maintain a
specific capital level for any capital measure. A national bank is considered
adequately capitalized if it has a total risk-based capital ratio of 8.0% or
greater, a Tier I risk-based capital ratio and leverage capital ratio of 4.0% or
greater (or a leverage ratio of 3.0% or greater if the institution is rated
composite 1 in its most recent report of examination, subject to appropriate
federal banking agency guidelines), and the institution does not meet the
definition of an undercapitalized institution. A national bank is considered
undercapitalized if it has a total risk-based capital ratio that is less than
8.0%, a Tier I risk-based capital ratio that is less than 4.0%, or a leverage
ratio that is less than 4.0%. A significantly undercapitalized institution is
one which has a total risk-based capital ratio that is less than 6.0%, a Tier I
risk-based capital ratio that is less than 3.0%, or a leverage ratio that is
less than 3.0%. A critically undercapitalized institution is one which has a
ratio of tangible equity to total assets that is equal to or less than 2.0%. As
of December 31, 1998, the Bank was classified as "well-capitalized."
The OCC is authorized by the legislation to take various enforcement
actions against any undercapitalized national bank and any national bank that
fails to submit an acceptable capital restoration plan or fails to implement a
plan accepted by the OCC. These powers include, among other things, requiring
the institution to be recapitalized, prohibiting asset growth, restricting
interest rates paid, requiring prior approval of capital distributions by any
bank holding company that controls the institution, requiring divestiture by the
institution of its subsidiaries or by the holding company of the institution
itself, requiring new election of directors, and requiring the dismissal of
directors and officers.
With certain exceptions, national banks are prohibited from making
capital distributions or paying management fees if the payment of such
distributions or fees will cause them to become undercapitalized. Furthermore,
undercapitalized national banks are required to file capital restoration plans
with the OCC. Undercapitalized national banks also are subject to restrictions
on growth, acquisitions, branching and engaging in new lines of business unless
they have an approved capital plan that permits otherwise. The OCC also may,
among other things, require an undercapitalized national bank to issue shares or
obligations, which could be voting stock, to recapitalize the institution or,
under certain circumstances, to divest itself of any subsidiary.
Significantly and critically undercapitalized national banks may be
subject to more extensive control and supervision. The OCC may prohibit any such
institutions from, among other things, entering into any material transaction
not in the ordinary course of business, amending their charter or bylaws, or
engaging in certain transactions with affiliates. In addition, critically
undercapitalized institutions generally will be prohibited from making payments
of principal or interest on outstanding subordinated debt. Within 90 days of a
national bank becoming critically undercapitalized, the OCC must appoint a
receiver or conservator unless certain findings are made with respect to the
prospect for the institution's continued viability.
Recent Regulatory Developments. The Riegle-Neal Interstate Banking and
Branching Efficiency Act of 1994 ("Interstate Banking Act") authorizes the
Federal Reserve Board to permit adequately capitalized and adequately managed
bank holding companies to acquire all or substantially all of the assets of an
out-of-state bank after September 29, 1995, subject to deposit concentration
limits, state law limits on the time period a target bank must be in existence
and consideration of the acquiring bank's compliance with Federal and state
community reinvestment laws. Thus, nationwide interstate banking became
effective on September 29, 1995. The Interstate Banking Act also authorizes
banking subsidiaries of bank holding companies to act as agent for depository
institution affiliates in other states when receiving deposits, renewing time
deposits, closing loans, servicing loans, or receiving payments on loans and
other obligations; and the Interstate Banking Act expressly states that banks
acting in an agency capacity are not branches. With respect to interstate
branching by multi-state bank holding companies, states had two options - for
the period from September 29, 1994 through June 1, 1997, states could enact
legislation that either prohibited interstate merger transactions involving
out-of-state banks ("opt-out") or permitted interstate merger transactions prior
to June 1, 1997 ("opt-in"), so long as the law applied equally to all
out-of-state banks. The Interstate Banking Act also contained provisions
addressing branch retention in interstate merger transactions and de novo
branching by out-of-state banks. Maryland, Virginia, and the District of
Columbia each adopted "opt-in" provisions that permitted de novo branching prior
to June 1, 1997.
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In addition, there are several pieces of legislation relevant to the
banking industry that were recently enacted into law. On August 20, 1996,
President Clinton signed the Small Business Job Protection Act (the "Jobs Act").
The Jobs Act contained several provisions that affect the banking industry.
First, the most significant part of the Jobs Act removed the prohibition against
banks, savings and loans and bank holding companies electing to be treated as S
corporations. This change is effective for tax years beginning after December
31, 1996. Second, the Jobs Act gave qualifying savings associations a tax break
when they change their method of accounting for bad debt reserves. This change
will save the thrift industry approximately $3 billion in tax liability and will
facilitate the conversion of savings associations into banks. Finally, the Jobs
Act increased the IRA deduction from $250 to $2,000 per year for a spouse that
does not work outside the home, subject to income eligibility limits.
On September 30, 1996, President Clinton signed the Economic Growth and
Regulatory Paperwork Reduction Act of 1996 (the "Growth Act"), which contained a
comprehensive approach to recapitalize the FDIC's Savings Association Insurance
Fund and to assure payment of the Financing Corporation ("FICO") obligations.
Most of the Bank's deposits are insured by the FDIC's Bank Insurance Fund
("BIF"). Under the Growth Act, banks insured under the BIF are required to pay a
portion of the interest due on bonds that were issued by FICO in 1987 to help
shore up the ailing Federal Savings and Loan Insurance Corporation. The amount
of FICO debt service to be paid by all BIF-insured institutions is approximately
$320,343,000 per year from 1997 through the year 1999 when the obligation of
BIF-insured institutions increases to approximately $598,500,000 per year
through the year 2019. The Bank's FICO assessment was $2,000 per year for 1997
and 1996. The Growth Act also contained provisions protecting banks from
liability for environmental clean-up costs; prohibiting credit unions sponsored
by Farm Credit System banks; easing application requirements for most bank
holding companies when they acquire a thrift or a permissible nonbank operation;
easing Fair Credit Reporting Act restrictions between bank holding company
affiliates; and reducing regulatory burden under the Real Estate Settlement
Procedures Act, the Truth-in-Savings Act, the Truth-in-Lending Act, and the Home
Mortgage Disclosure Act.
The Bank acquired the deposits of a savings and loan branch in 1994 and
another in 1997. These so-called "Oakar deposits" are insured under the FDIC's
Savings Association Insurance Fund ("SAIF"). Pursuant to a rule promulgated by
the FDIC on October 8, 1996, all institutions holding SAIF insured deposits were
charged a one-time special assessment of 65.7 cents per $100 of SAIF insured
deposits on November 27, 1996. The FDIC has also promulgated a final rule
regarding the amount of premiums payable as of January 1, 1997 by institutions
holding SAIF-insured deposits. See Note 6 of the Notes to Consolidated Financial
Statements for additional disclosure.
Various bills which would affect the operations of commercial banks and
other financial institutions are introduced periodically in Congress. In early
1998, although a compromise was announced regarding conflicting legislation that
was pending in the House of Representatives for the modernization of the
financial services industry, that legislation was not enacted, but similar bills
are now being considered in the current session of Congress. The likelihood of
passage of such legislation, the manner of implementation, or the impact on the
Company and the Bank is unknown.
The policies of regulatory authorities, including the monetary policy
of the Federal Reserve Board, have a significant effect on the operating results
of bank holding companies and their subsidiaries. Among the means available to
the Federal Reserve Board to affect the money supply are open market operations
in U.S. Government securities, changes in the discount rate on member bank
borrowings, and changes in reserve requirements against member bank deposits.
These means are used in varying combinations to influence overall growth and
distribution of bank loans, investment and deposits, and their use may affect
interest rates charged on loans or paid for deposits.
Federal Reserve Board monetary policies have materially affected the
operating results of commercial banks in the past and are expected to continue
to do so in the future. The nature of future monetary policies and the effect of
such policies on the business and income of the Company and the Bank cannot be
predicted.
Employees
At December 31, 1998, the Company had 54 employees.
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ITEM 2. PROPERTIES.
The Company's principal executive offices and all of its banking
offices are leased under agreements expiring at various dates, including renewal
options, through 2012. The Company's principal executive offices, which are
located in the District of Columbia at 1275 Pennsylvania Avenue, N.W., also
serve as a branch location of the Bank. The premises at 1275 Pennsylvania Avenue
consist of 2,750 square feet which are under lease through 2004, with one
additional five-year renewal option. The lease for the Bank's main office,
located in the District at 1875 Eye Street, N.W., extends through 2002, with two
additional five-year renewal options. The lease for the main office includes
3,895 square feet of lobby space, 5,286 square feet of Metro-level basement
space and space for an Automatic Teller Machine ("ATM") in the adjacent
International Square food court. The Company's branch office in Tysons Corner is
located at 8251 Greensboro Drive, McLean, Virginia and consists of 1,801 square
feet of space held under lease through March 31, 2004.
In connection with the acquisition of the McLean branch in the fourth
quarter of 1997 (see Note 15 of Notes to Consolidated Financial Statements for
additional information) , the Bank assumed Eastern American Bank's lease for the
branch location at 6832 Old Dominion Drive, McLean, Virginia. The branch
premises consist of 2,077 square feet which are under lease through September
30, 2003, with one additional five-year renewal option.
In 1997, the Company established a LPO in Bethesda, Maryland. That
office was closed in January 1998 in connection with the establishment of a new
branch location at 7625 Wisconsin Avenue, Bethesda, Maryland. The Bethesda
branch location is in the vicinity of Wisconsin Avenue and Old Georgetown Road.
The branch premises consist of 2,022 square feet leased through January 2008.
See Note 11 of Notes to Consolidated Financial Statements for
additional information concerning the Company's commitments under its lease
agreements.
ITEM 3. LEGAL PROCEEDINGS.
The nature of the business of the Company causes it (and the Bank) to
be involved in routine legal proceedings from time to time. Management of the
Company believes that there are no pending or threatened legal proceedings that
upon resolution would have a material adverse impact on the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
There were no matters submitted to a vote of security holders of the
Company during the quarter ended December 31, 1998.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS.
The Company's Common Stock currently trades on the Nasdaq SmallCap
Market under the symbol "CTRY." Continued inclusion of the Common Stock for
quotation on the Nasdaq SmallCap Market requires that the Company satisfy a
minimum tangible net worth or net income standard, and that the Common Stock
satisfy minimum standards as to public float, bid price and market makers. There
can be no assurance, however, that an active public market can be sustained. As
of March 23, 1999, there were approximately 1,000 shareholders.
Prior to a common stock offering in the fourth quarter of 1997 (see
Notes 8 and 13 to the Consolidated Financial Statements for additional
information), there was no established public trading market in the Company's
Common Stock, with only limited and sporadic quotations available for shares of
the Common Stock in the Washington, DC area.. Based on information available to
the Company from a limited number of sellers and purchasers of Common Stock
prior to the 1997 offering, transactions in shares of Common Stock from January
1, 1997 through September 23, 1997, took place at prices ranging from a low of
$6.25 to a high of $8.50, with a range from $5.50 to $8.00 during 1996. Price
information for transactions reflects inter-dealer prices, exclusive of retail
mark-up, mark-down or commission and may not necessarily represent actual
transactions. From the inception of trading in the Nasdaq SmallCap Market on
September 23, 1997 (conclusion of 1997 stock offering) through December 31,
1998, the high, low and closing sale prices for the Common Stock ranged from
$6.00 to $11.07, as shown by the following table:
<TABLE>
<CAPTION>
Market Price
----------------------------------------
Quarter ended High Low Last
------------------------------ -------------- ------------ ------------
<S> <C> <C> <C>
December 31, 1997 $ 10.75 $ 8.13 $10.11
March 31, 1998 11.07 9.40 10.36
June 30, 1998 10.60 9.00 9.50
September 30, 1998 10.50 8.25 8.50
December 31, 1998 9.00 6.00 6.75
</TABLE>
The Company has not paid cash dividends on its shares of Common Stock
to date and has no present intention to do so in the foreseeable future. The
declaration and payment of future cash dividends will depend on, among other
things, the Company's earnings, the general economic and regulatory climate, the
Company's liquidity and capital requirements, and other factors deemed relevant
by the Company's Board of Directors. The Company's ability to pay dividends
depends mostly upon the dividends received from the Bank. Dividends from the
Bank to the Company are restricted to the extent that no portion of the Bank's
capital stock or capital surplus may be withdrawn for the payment of dividends.
In addition, no dividends may be paid by the bank in an amount greater than the
net retained profits then on hand, less certain deductions for bad debts.
Approval by the OCC is required prior to the payment of dividends by the Bank if
the total of all dividends, including the proposed dividend, declared in any
given calendar year exceeds the Bank's net profits for that year combined with
its retained net profits for the preceding two years. Under the Federal Deposit
Insurance Act, an insured bank is prohibited from paying dividends on its
capital stock while in default on payment of any assessment due to the FDIC,
except in those cases where the amount of the assessment is in dispute and the
insured bank has deposited satisfactory security. The Bank has timely paid all
such notices of assessment. In addition, banks are prohibited from paying
dividends if such dividends would cause them to be less than "adequately
capitalized," as defined by the Federal banking agencies.
-8-
<PAGE>
Given the foregoing restrictions, and the Company's present intention
to accumulate retained earnings to support the Company's future growth, it is
unlikely that the Company will pay cash dividends with respect to the Common
Stock for the foreseeable future. The Company has declared stock dividends from
time to time in the past, but has not adopted a policy with respect to future
stock dividends. The most recent stock dividend declared by the Company was a 5%
stock dividend declared on May 19, 1998, payable on June 29, 1998, to holders of
record of shares of Common Stock as of May 29, 1998. The declaration of future
stock dividends is at the discretion of the Board of Directors.
ITEM 6. SELECTED FINANCIAL DATA.
The following table sets forth selected consolidated financial data for
the Company for each of the five years in the period ended December 31, 1998.
The selected data for these years have been derived from the Company's audited
Consolidated Financial Statements and should be read in conjunction with the
Consolidated Financial Statements of the Company and the Notes thereto and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" appearing elsewhere herein. The Consolidated Statements of Financial
Condition as of December 31, 1998 and 1997, and the Consolidated Statements of
Operations, Stockholders' Equity and Cash Flows for each of the years in the
three year period ended December 31, 1998 and the report thereon of KPMG LLP are
included elsewhere in this report.
-9-
<PAGE>
<TABLE>
<CAPTION>
SELECTED CONSOLIDATED FINANCIAL INFORMATION
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
1998 1997 1996 1995 1994
------------- ------------- ------------- ------------ -------------
<S> <C> <C> <C> <C> <C>
Income Statement Data
Interest income $11,355 $9,209 $7,690 $7,079 $5,712
Interest expense 4,537 3,765 2,776 2,562 1,902
------------- ------------- ------------- ------------ -------------
Net interest income 6,818 5,444 4,914 4,517 3,810
Provision for credit losses 620 336 160 26 19
------------- ------------- ------------- ------------ -------------
Net interest income after provision for credit 6,198 5,108 4,754 4,491 3,791
losses
Noninterest income 1,103 922 720 590 555
Noninterest expense 6,309 5,460 4,920 4,157 3,381
------------- ------------- ------------- ------------ -------------
Income before taxes 992 570 554 924 965
Income taxes 355 234 275 311 374
------------- ------------- ------------- ------------ -------------
Net income $ 637 $ 336 $ 279 $ 613 $ 591
Common Share Data (1)
Net income--basic $ 0.27 $ 0.22 $ 0.22 $ 0.55 $ 0.54
Net income--diluted 0.26 0.20 0.21 0.52 0.52
Book value (2) 5.95 5.84 5.34 5.16 4.27
Common shares outstanding--end of period 2,574,219 2,209,229 1,146,028 1,046,047 823,232
Weighted average common shares 2,388,015 1,551,307 1,244,390 1,046,660 1,017,619
Diluted weighted average common shares 2,438,624 1,680,438 1,319,259 1,100,860 1,057,604
Balance Sheet Data
Total assets $151,350 $152,640 $107,186 $101,730 $90,175
Investments (3) 23,385 46,632 25,631 21,690 22,654
Total loans (4) 115,231 94,171 70,676 69,204 60,663
Allowance for credit losses 1,128 887 826 740 740
Total deposits 126,211 129,605 90,985 90,539 82,081
Long-term debt 5,301 6,511 6,850 -- --
Preferred equity (5) -- -- -- -- 460
Common equity (6) 15,317 13,536 6,750 6,365 4,350
Total stockholders' equity 15,317 13,536 6,750 6,365 4,810
Performance Data
Return on average total assets 0.44% 0.29% 0.27% 0.68% 0.71%
Return on average total equity 4.49 3.83 4.20 11.49 12.38
Net interest margin 5.07 5.17 5.74 5.42 4.90
Loans to deposits 91.3 72.7 77.7 76.4 73.9
Asset Quality Ratios
Nonperforming assets to total assets 1.02% 0.49% 0.30% 0.49% 0.70%
Nonperforming loans to total loans 1.34 0.74 0.46 0.45 1.04
Net loan charge-offs to average loans 0.38 0.36 0.10 0.04 0.02
Allowance for credit losses to total loans 0.98 0.94 1.17 1.07 1.22
Allowance to nonperforming loans 73 127 257 240 118
Capital Ratios
Tier I risk based capital 11.60% 12.27% 8.99% 9.22% 10.12%
Total risk based capital 12.56 13.19 10.13 10.34 11.37
Tier I leverage 9.46 8.83 6.35 6.80 5.74
</TABLE>
Notes:
(1) Per share data has been adjusted to reflect five percent Common Stock
dividends in 1998, 1997, 1995 and 1994, and a seven percent Common Stock
dividend in 1996.
(2) Book value per common share is based on common equity (see footnote (6)
below) divided by the number of common shares outstanding.
(3) Investments include federal funds sold and interest-bearing deposits in
other financial institutions.
(4) Net of unearned income.
(5) Preferred equity is calculated based on liquidation value of $7.50 per
share of Preferred Stock. All shares of Preferred Stock outstanding as of
October 17, 1995 were redeemed by the Company on December 10, 1995.
(6) Common equity is total stockholders' equity less preferred equity.
-10-
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.
Management's Discussion and Analysis of Financial Condition and Results
of Operations of Century Bancshares, Inc. ("Company"), which analyzes the major
elements of the Company's consolidated statements of operations and financial
condition, should be read in conjunction with the detailed information and
consolidated financial statements, and the notes related thereto, included
elsewhere herein. References to the operations of the Company include the
operations of its wholly-owned subsidiary, Century National Bank ("Bank"),
unless the context otherwise requires.
General
The Company derives substantially all of its revenues and income from
the operation of the Bank, which provides a full range of commercial and
consumer banking services to individuals, small and middle market businesses,
and other organizations in the Washington, DC metropolitan area. As of December
31, 1998, the Company had total assets of $151.3 million, total loans of $115.2
million, total deposits of $126.2 million, and total stockholders' equity of
$15.3 million. The Company had net income of $637,000 for the year ended
December 31, 1998, resulting in a return on equity of 4.49% and a return on
assets of 0.44%.
The Company's current strategic plan is directed toward the enhancement
of its franchise value and operating profitability through a significant
increase in its asset size, the development of new commercial accounts and
loans, and continued expansion into the nearby Maryland and Virginia markets.
The Company plans to acquire or establish banking offices in high-density
commercial districts, and may in some cases open a temporary LPO prior to
establishing a full service branch. The Bank acquired its first branch office in
downtown Washington, DC in 1994 and in 1996 established a LPO in Tysons Corner,
Virginia, which was replaced by a full service branch in April 1997. On October
10, 1997, the Company completed the purchase and assumption of the deposits and
certain other liabilities of the branch of Eastern American located at 6832 Old
Dominion Drive, McLean, Virginia. Also, in 1997 the bank established a LPO in
Bethesda, Maryland, which was replaced by a full-service branch in January 1998.
These transactions significantly affected the Company's operations during 1998,
1997 and 1996, and their effects should be considered when reviewing the
discussion of the Company's financial condition and results of operations set
forth below.
In this report, all "per share" amounts have been adjusted to give
effect to the Company's five percent stock dividends which were distributed to
stockholders of record as of May 29, 1998 and May 7, 1997, a seven percent stock
dividend which was distributed to stockholders of record as of March 31, 1996,
and a five percent stock dividend which was distributed to stockholders of
record as of March 31, 1995.
Results of Operations
Net Income
Net income was $637,000 ($0.26 per diluted common share) for 1998,
compared with net income of $336,000 ($0.20 per diluted common share) for 1997,
an increase of $301,000 or 89.6%. The increase in net income for 1998 compared
with 1997 resulted principally from a $1.4 million increase in net interest
income and a $181,000 increase in noninterest income. These increases were the
result of a 27.8% increase in average earning assets and the addition of three
new branch offices during the past two years (see "Properties" above). Partially
offsetting these increases during 1998 were a corresponding increase in average
interest-bearing liabilities of 23.6%, as well as increases in several
noninterest expense categories from the establishment of the three new branch
office locations, and a $284,000 increase in the provision for credit losses the
result of increased reserves in relation to loan portfolio growth during the
year.
-11-
<PAGE>
Net income was $336,000 ($0.20 per diluted common share) for 1997,
compared with net income of $279,000 ($0.21 per diluted common share) for 1996,
an increase of $57,000 or 20.4%. The increase in net income for 1997 compared
with 1996 resulted principally from a $530,000 increase in net interest income
and a $202,000 increase in noninterest income between the years. These increases
are attributed to a 23.2% increase in average earning assets and the addition of
new branch offices during the year. Partially offsetting these increases during
1997 was an increase in average interest-bearing liabilities of 23.2%, as well
as increases in several noninterest expense categories from the establishment of
new branch office locations during the year. Additionally, a $176,000 increase
in the provision for credit losses also partially offset increases in net
interest income and noninterest income in 1997, the result of increased reserves
in relation to loan portfolio growth during the year.
Net Interest Income
Net interest income was $6,818,000 for 1998, an increase of $1,374,000
or 25.2% compared with net interest income of $5,444,000 for 1997. The Company's
average total interest-earning assets increased to $134.6 million for 1998 from
$105.3 million for 1997, representing a 27.8% increase between the years. The
net interest margin of 5.07% for 1998 decreased 10 basis points from 5.17% for
1997, the result of 0.31% decline in the average yield on interest earning
assets that was only partially offset by an 0.11% decline in the cost of
interest bearing liabilities.
Net interest income was $5,444,000 for 1997, an increase of $530,000 or
10.8% compared with net interest income of $4,914,000 for 1996. The Company's
average total interest-earning assets increased from $85.5 million for 1996 to
$105.3 million for 1997, representing a 23.2% increase between the years. The
net interest margin of 5.17% for 1997 decreased 57 basis points from 5.74% for
1996, the result of reduced growth in average loans and increases in lower
yielding securities and deposits with banks from funds received from the 1997
acquisition of the Virginia branch.
Changes in interest income and interest expense can result from changes
in both volume and rate. The Company has an asset and liability management
policy designed to provide a proper balance between rate sensitive assets and
rate sensitive liabilities, to attempt to maximize interest margins and to
provide adequate liquidity for anticipated needs. The table below sets forth for
the periods indicated a summary of the changes in interest earned and interest
paid resulting from changes in volume and rate. The table on the following page
sets forth for each category of interest-earning assets and interest-bearing
liabilities, the average amounts outstanding, the interest earned or paid on
such amounts, and the average rate earned or paid for the years ended December
31, 1998, 1997 and 1996.
RATE/VOLUME ANALYSIS OF NET INTEREST INCOME (1)
(Dollars In Thousands)
<TABLE>
<CAPTION>
1998 Compared with 1997 1997 Compared with 1996
----------------------------------------- -----------------------------------------
Due to Due to Total Incr. Due to Due to Total Incr.
Volume Rate (Decr.) Volume Rate (Decr.)
------------- ------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Interest Earned On:
Loans, including fees $ 2,262 $ (424) $ 1,838 $ 534 $ 133 $ 667
Investment securities 240 17 257 33 58 91
Federal funds sold 116 (23) 93 242 (19) 223
Interest bearing deposits with banks (43) 2 (41) 524 14 538
------------- ------------- ------------- ------------- ------------- -------------
Total interest income 2,575 (428) 2,147 1,333 186 1,519
Interest Paid On:
NOW accounts 67 (51) 16 30 7 37
Savings accounts 563 44 607 116 39 155
Money market accounts 8 (11) (3) (56) 46 (10)
Time deposits 190 (21) 169 548 33 581
Borrowings and notes payable (15) (1) (16) 183 43 226
------------- ------------- -------------
------------- ------------- -------------
Total interest expense 813 (40) 773 821 168 989
------------- ------------- ------------- ------------- ------------- -------------
Net interest income $ 1,762 $ (388) $ 1,374 $ 512 $ 18 $ 530
------------- ------------- ------------- ------------- ------------- -------------
</TABLE>
(1)--The dollar amount of changes in interest income and interest expense
attributable to changes in rate/volume (change in rate multiplied by change in
volume) has been allocated between rate and volume variances based on the
percentage relationship of such variances to each other.
-12-
<PAGE>
AVERAGE BALANCES AND INTEREST RATES
(Dollars in Thousands)
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------------------------------------------------------------------
------------------------------- -- ------------------------------- -- -------------------------------
1998 1997 1996
------------------------------- ------------------------------- -------------------------------
Interest Interest Interest
Average Income/ Average Average Income/ Average Average Income/ Average
Balance Expense Rate Balance Expense Rate Balance Expense Rate
---------- --------- ---------- ----------- --------- --------- --------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-Earning Assets
Loans, net (1) $99,724 $9,393 9.42% $75,908 $7,555 9.95% $70,523 $6,888 9.77%
Investment securities 15,200 903 5.94 11,153 646 5.79 10,540 555 5.27
(2)(3)
Federal funds sold 6,801 351 5.16 4,576 258 5.64 380 35 9.21
Interest bearing deposits
with banks 12,855 709 5.52 13,628 750 5.50 4,091 212 5.18
---------- --------- ---------- ----------- --------- --------- --------- ---------- ----------
Total interest-earning 134,580 11,356 8.44% 105,265 9,209 8.75% 85,534 7,690 8.99%
assets (3)
Cash and due from banks 5,667 5,336 4,361
Other assets 4,491 3,860 4,189
---------- ----------- ---------
Total Assets $144,738 $114,461 $94,084
---------- ----------- ---------
Interest-Bearing Liabilities
Interest-Bearing Deposits:
NOW accounts $17,722 $ 298 1.68% $14,023 $ 282 2.01% $12,522 $ 245 1.96%
Savings accounts 18,285 818 4.47 5,559 211 3.80 2,217 56 2.53
Money market accounts 21,723 771 3.55 21,491 774 3.60 23,072 784 3.40
Time deposits 38,832 2,150 5.54 35,399 1,981 5.60 25,596 1,400 5.47
Borrowings and
notes payable 7,547 501 6.64 7,768 517 6.66 4,952 291 5.88
---------- --------- ---------- ----------- --------- --------- --------- ---------- ----------
Total interest-bearing
liabilities 104,109 4,538 4.36% 84,240 3,765 4.47% 68,359 2,776 4.06%
Non-interest bearing 24,981 20,272 17,525
deposits
Other liabilities 1,459 1,176 1,642
---------- ----------- ---------
Total liabilities 130,549 105,688 87,526
Stockholders' equity 14,189 8,773 6,558
---------- ----------- ---------
Total liabilities and
stockholders' equity $144,738 $114,461 $94,084
---------- ----------- ---------
--------- ---------- --------- --------- ---------- ----------
Net interest income and $6,818 4.08% $5,444 4.28% $4,914 4.93%
spread
--------- ---------- --------- --------- ---------- ----------
Net interest margin (3) 5.07% 5.17% 5.74%
---------- --------- ----------
(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.
(3) Average rates on a fully taxable equivalent basis for affected portfolios
are as follows:
1998 1997 1996
--------- --------- ---------
Investment securities 5.94% 5.82% 6.84%
Total interest-earning assets 8.44 8.75 9.00
Net interest margin 5.07 5.18 5.75
</TABLE>
-13-
<PAGE>
Provision for Credit Losses
Provisions for credit losses are charged to income to bring the total
allowance for credit losses to a level deemed appropriate by management based on
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 portfolio.
The provision for credit losses was $620,000 in 1998, compared with
$336,000 for 1997, increasing $284,000, or 84.5%. The increase was largely the
result of a 22.3% increase in loans, net of unearned income to $115.2 million at
December 31, 1998 from $94.2 million at year-end 1997. Net charge-offs increased
to $379,000 in 1998, from $275,000 in 1997, the result of a $289,000 increase in
charge-offs in the commercial loan portfolios accompanied by reduced charge-offs
in other loan categories.
The provision for credit losses was $336,000 for 1997, compared with
$160,000 for 1996, increasing $176,000, or 110.0%. The increase was the result
of an increase in loans, net of unearned income from $70.7 million at year-end
1996 to $94.2 million at year-end 1997, or a 33.2% increase year-to-year. In
addition, net charge-offs increased to $275,000 for 1997, from $74,000 in 1996,
primarily the result of a $146,000 increase in net charge-offs in the
installment and credit card loan portfolios.
Management believes the allowance is adequate to absorb losses inherent
in the loan portfolio. In view of the Company's plans to continue its loan
growth with increased emphasis on commercial loans (which are generally
considered to be more risky than loans secured by real estate), it is likely
that the Company will continue to maintain an adequate allowance for credit
losses through future provisions charged to income. Management will continue to
closely monitor the performance of the loan portfolio and make additional
provisions as considered necessary. No assurance can be given that such
provisions will not have a material adverse impact on the Company's results of
operations in future periods.
Noninterest Income
Noninterest income for 1998 was $1,103,000, an increase of $181,000 or
19.6% compared with noninterest income of $922,000 in 1997. This increase
resulted largely from growth of the credit card program, increases in service
charges on deposit accounts, as well as commissions and other fee income.
Noninterest income in 1998 also included gains from the sale of investment
securities ($15,000) and the liquidation of other real estate owned ($16,000).
Noninterest income was $922,000 for 1997, compared with $720,000 for
1996, an increase of $202,000 or 28.1%. This increase was primarily the result
of increased fee income from the Company's Mastercard/Visa credit card program,
which increased $152,000, or 64.1% in 1997. In addition, commission and other
fee income increased $54,000, or 110.2%, due to increased ATM transactions and
other miscellaneous fee income in 1997.
The following table sets forth the various categories of, and changes
in, noninterest income for the years ended December 31, 1998, 1997 and 1996:
<TABLE>
<CAPTION>
NONINTEREST INCOME
(Dollars in Thousands)
Year Ended December 31,
------------------------------------------------------------------------------
1998 % Change 1997 % Change 1996
--------------- -------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C> <C>
Service charges on deposit accounts $ 447 9.0 % $410 (1.4)% $416
Credit card and merchant fees 471 21.1 389 64.1 237
Commission and other fee income 134 30.1 103 110.2 49
Other income 51 155.0 20 11.1 18
--------------- -------------- --------------- --------------- ---------------
Total noninterest income $1,103 19.6 % $922 28.1 % $720
--------------- -------------- --------------- --------------- ---------------
</TABLE>
-14-
<PAGE>
Noninterest Expense
Noninterest expense was $6,309,000 in 1998, compared with $5,460,000 in
1997, representing an increase of $849,000 or 15.5%. The increase in 1998 was
attributable to increased occupancy and equipment expenses of $176,000,
professional fees of $234,000, data processing services of $200,000 and other
operating expenses of $197,000. These increases were primarily attributable to
the opening of three new branch offices in Maryland and Virginia in 1997 and
1998, the corresponding growth in the loan portfolio, and efforts to prepare for
and comply with Year 2000 readiness issues.
Noninterest expense was $5,460,000 for 1997, compared with $4,920,000
for 1996, representing an increase of $540,000 or 11.0%. The increase from 1996
to 1997 was primarily attributable to increased personnel and occupancy-related
expenses associated with the addition of two new branches in Virginia in 1997,
and other increased expenses from the establishment of the Company's LPO in
Maryland.
The Company's noninterest expense has been consistently higher in
relation to its asset size than the average for small community banks. The
Company's strategy is to increase its asset size significantly so that its level
of noninterest expense in relation to its assets is more in line with those of
comparable institutions. No assurance may be given, however, that the
anticipated asset growth or branch expansions will occur.
The following table sets forth the various categories of, and changes
in, noninterest expense for the years ended December 31, 1998, 1997 and 1996:
NONINTEREST EXPENSE
(Dollars in Thousands)
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------------------------------------------
1998 % Change 1997 % Change 1996
--------------- -------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C> <C>
Salaries and employee benefits $2,076 (5.7) % $2,201 10.7 % $ 1,988
Professional fees 926 33.8 692 10.2 628
Occupancy and equipment expense 826 27.1 650 22.4 531
Depreciation and amortization 661 15.8 571 26.0 453
Data processing 734 37.5 534 13.9 469
Communications 279 39.5 200 (2.9) 206
Office and operations expenses 360 25.4 287 (9.5) 317
Marketing and public relations 196 24.8 157 (9.8) 174
Federal deposit insurance premiums 18 28.6 14 (53.3) 30
Other real estate owned -- -- -- (100.0) 7
Other expenses 233 51.3 154 31.6 117
--------------- -------------- --------------- --------------- ---------------
Total noninterest expense $6,309 15.5 % $5,460 11.0 % $ 4,920
--------------- -------------- --------------- --------------- ---------------
</TABLE>
Income Tax Expense
The Company's income tax expense includes federal, state and local
income taxes. The provision for income taxes was $355 thousand in 1998 compared
to $234 thousand in 1997 and $275 thousand in 1996. This reflects effective tax
rates of 35.8 percent in 1998, 41.0 percent in 1997, and 49.6 percent in 1996.
The higher effective rate in 1996 was primarily due to nondeductible expenses of
$112,000 incurred in connection with the registration of shares of the Company's
Common Stock, as well as other nondeductible expenses. The effective tax rate
has been further reduced in 1998 due to the increase in interest income derived
from US agency securities which are not fully taxable for state and local
purposes, and a greater portion of earnings derived from Virginia and Maryland
where the local income tax rates are lower than in Washington, DC.
-15-
<PAGE>
Interest Rate Sensitivity and Management of Market Risk
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 ("ALCO") which reviews, on a
regular basis, the maturity and repricing of the assets and liabilities of the
Company. 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%.
On a consolidated basis, the Company's one year cumulative gap was a negative
8.86% of total assets at December 31, 1998. In addition, ALCO monitors potential
changes in net interest income, net income and the market value of portfolio
equity under various interest rate scenarios. 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 loan and investment portfolios, which can
significantly impact the Company's profitability. Net interest income can be
adversely impacted where assets and liabilities do not react the same to changes
in interest rates. At year-end 1998, the impact of an immediate increase in
interest rates of 100 basis points and 200 basis points would have resulted in a
decrease in net interest income over a 12-month period of 1.71% and 3.41%,
respectively, with a comparable decrease in interest rates resulting in an
increase in net interest income of 1.65% and 1.28%. Management finds the above
methodologies meaningful for evaluating market risk sensitivity; however, other
factors can affect net interest income, such as levels of non-earning assets and
changes in portfolio composition. The following table sets forth the
interest-rate sensitive assets and liabilities of the Company at December 31,
1998, which are expected to mature or are subject to repricing in each of the
time periods indicated:
<TABLE>
<CAPTION>
INTEREST RATE SENSITIVE ASSETS AND LIABILITIES
(Dollars in Thousands)
90 Days 91 to 180 181 Days Over
Term To Repricing (At December 31, 1998) or Less Days to 1 Year 1 Year Total
- ------------------------------------------------------- ------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Interest-Earning Assets
Loans, net $48,937 $5,981 $10,998 $49,281 $115,197
Investment securities 409 328 - 8,516 9,253
Federal funds sold 4,285 - - - 4,285
Interest bearing deposits with banks 4,692 594 1,788 2,773 9,847
------------- ------------- ------------- ------------- -------------
Total interest-earning assets 58,323 6,903 12,786 60,570 138,582
Interest-Bearing Liabilities
NOW accounts 19,345 - - - 19,345
Savings accounts 19,650 - - - 19,650
Money market accounts 17,995 - - - 17,995
Time deposits 7,611 7,936 15,729 6,269 37,545
Other borrowings 2,151 253 756 5,301 8,461
------------- ------------- ------------- ------------- -------------
Total interest-bearing liabilities 66,752 8,189 16,485 11,570 102,996
------------- ------------- ------------- ------------- -------------
Interest sensitivity gap per period $(8,429) $(1,286) $(3,699) $49,000 $35,586
Cumulative gap (8,429) (9,715) (13,414) 35,586
Cumulative gap as a percentage of total assets (5.57)% (6.42)% (8.86)% 23.51%
Cumulative int.-earning assets as % of int.-bearing 87.37 87.04 85.33 134.55
liabilities
</TABLE>
-16-
<PAGE>
Analysis of Financial Condition
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. As of December 31, 1998 and
1997, approximately $73.8 million (64 percent) and $56.6 million (60 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 $34.9 million (30 percent) and $35.3 million
(37 percent), respectively, of the Company's total loan portfolio.
Loan concentrations are defined as aggregate credits extended to a
number of borrowers engaged in similar activities or resident in the same
geographic region, which would cause them to be similarly affected by economic
or other conditions. The Company, on a routine basis, evaluates these
concentrations for purposes of policing its concentrations and making necessary
adjustments in its lending practices to reflect current economic conditions,
loan to deposit ratios, and industry trends. As a result of the Company's
existing branch locations, the Company has significant concentrations of
customers and assets in the Washington, DC metropolitan area.
The primary types of loans in the Company's portfolio are residential
mortgages and home equity loans, commercial real estate loans, commercial loans,
and consumer installment and credit card loans. Generally, the Company
underwrites loans based upon the borrower's debt service capacity or cash flow,
a consideration of past performance on loans from other creditors as well as an
evaluation of the collateral securing the loan. With some exceptions, the
Company's general policy is to require conservative underwriting policies,
primarily in the analysis of borrowers' debt service coverage capabilities for
commercial and commercial real estate loans, while emphasizing lower gross debt
ratios for consumer loans and lower loan-to-value ratios for all types of real
estate loans. Most of the Company's commercial real estate loans consist of
owner-occupied properties financed for the Company's regular commercial
customers, rather than speculative or investor-owned properties. Most of the
Company's commercial and commercial real estate loans are personally guaranteed
by the owners of the business, the primary exceptions to this requirement being
loans to non-profit and membership organizations. Given the localized nature of
the Company's lending activities, the primary risk factor affecting the
portfolio as a whole is the health of the local economy in the Washington
metropolitan area and its effects on the value of local real estate and the
incomes of local professionals and business firms. To mitigate this risk, the
Company's underwriting policy provides that each loan should be supported by an
economically independent secondary source of repayment. Any exceptions to the
general loan policy must be approved by the Executive Loan Committee.
Loans to directors, executive officers and principal stockholders of
the Company and to directors and officers of the Bank are subject to limitations
contained in the Federal Reserve Act, the principal effect of which is to
require that extensions of credit by the Bank to executive officers, directors,
and ten percent stockholders satisfy certain standards. The Bank routinely makes
loans in the ordinary course of business to certain directors and executive
officers of the Company and the Bank, their associates, and members of their
immediate families. In accordance with Federal Reserve Act guidelines, these
loans are made on substantially the same terms, including interest rates and
collateral, as those prevailing for comparable transactions with others and do
not involve more than normal risk of collectibility or present other unfavorable
features. As of December 31, 1998, loans and commitments outstanding to
directors and executive officers of the Company and the Bank, their associates
and members of their immediate families totaled $3.4 million (net of
participations sold to other banks on a non-recourse basis), which represented
approximately 2.9 percent of total loans as of that date. As of December 31,
1998, none of these loans outstanding from the Bank to related parties were on
non-accrual, past due, restructured or considered by management to be a
potential problem loan.
-17-
<PAGE>
The following table sets forth the composition of the Company's loan portfolio
by type of loan on the dates indicated:
<TABLE>
<CAPTION>
LOAN PORTFOLIO ANALYSIS
(Dollars in Thousands)
December 31, 1998 1997 1996
- ----------------------------------------------------- ---------------------- ---------------------- ---------------------
<S> <C> <C> <C>
Aggregate Principal Amount
Type of loan:
1-4 family residential mortgage $27,679 $27,502 $18,970
Home equity loans 7,185 7,808 6,431
Multifamily residential 1,884 1,859 1,963
Construction 1,205 1,459 463
Commercial real estate 35,821 17,999 14,001
Commercial loans 28,906 24,132 17,400
Installment and credit card loans 12,517 13,535 11,510
Other loans - - -
---------------------- ---------------------- ---------------------
Gross loans 115,197 94,294 70,738
Unearned income and deferred costs 34 (123) (62)
---------------------- ---------------------- ---------------------
Total loans, net of unearned $115,231 $94,171 $70,676
---------------------- ---------------------- ---------------------
Percentage of Loan Portfolio
Type of loan:
1-4 family residential mortgage 24.03% 29.17% 26.82%
Home equity loans 6.24 8.28 9.09
Multifamily residential 1.64 1.97 2.78
Construction 1.05 1.55 0.65
Commercial real estate 31.10 19.09 19.79
Commercial loans 25.09 25.59 24.60
Installment and credit card loans 10.85 14.35 16.27
Other loans - - -
---------------------- ---------------------- ---------------------
Gross loans 100.00% 100.00% 100.00%
---------------------- ---------------------- ---------------------
</TABLE>
The following table sets forth the maturities of loans (based upon
contractual dates) outstanding as of December 31, 1998. Loans, primarily as a
result of maturities, monthly payments and repayments, are an important source
of liquidity. The Company's portfolio of adjustable rate home mortgages consists
of loans to customers in the local market area. Such loans generally have
balloon maturities within ten years or less, with two percent annual and six
percent lifetime "caps" on interest rate changes. Borrowers have the right to
prepay such loans without penalty.
MATURITIES AND RATE SENSITIVITY OF LOANS
(Dollars in Thousands)
<TABLE>
<CAPTION>
Over 1 Year Through 5 Years Over 5 Years
----------------------------- ----------------------------
One Year Fixed Floating Fixed Floating
or Less (1) Rate Rate Rate Rate Total
- ------------------------------ -------------- -------------- -------------- ------------- -------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Commercial $ 11,825 $ 7,002 $8,188 $ 281 $ 1,610 $ 28,906
Commercial real estate 3,849 7,405 2,875 12,721 8,971 35,821
Residential mortgage/home 1,924 7,731 4,380 10,928 11,785 36,748
equity
Construction 190 - - 240 775 1,205
Installment/credit card 3,526 1,581 974 882 5,554 12,517
-------------- -------------- -------------- ------------- -------------- --------------
Total $ 21,314 $ 23,719 $ 16,417 $ 25,052 $ 28,695 $ 115,197
-------------- -------------- -------------- ------------- -------------- --------------
</TABLE>
(1) Includes demand loans, loans having no stated schedule of repayment or
maturity, and overdrafts.
-18-
<PAGE>
Asset Quality
Nonperforming Assets
Generally, interest on loans is accrued and credited to income based
upon the principal balance outstanding. It is the Company's policy to
discontinue the accrual of interest income and classify a loan as non-accrual
when principal or interest is past due 90 days or more and the loan is not well
secured and in the process of collection, or when, in the opinion of management,
principal or interest is not likely to be paid in accordance with the terms of
the obligation. The Company will generally charge-off loans after 120 days of
delinquency unless adequately collateralized and in the process of collection. A
loan is considered in the process of collection if, based on a probable specific
event, management believes that the loan will be repaid or brought current
within a reasonable period of time. Loans will not be returned to accrual status
until the loan has been brought current and future payments of principal and
interest appear certain. Interest accrued and unpaid at the time a loan is
placed on non-accrual status is charged against interest income. Subsequent
payments received are applied to the outstanding principal balance until the
status of the loan has changed.
Real estate acquired by the Company as a result of foreclosure is
classified as other real estate owned ("OREO"). Such loans are reclassified to
OREO and recorded at the lower of cost or fair market value less estimated
selling costs, and the estimated loss, if any, is charged to the allowance for
credit losses at that time. Further allowances for losses are recorded as
charges to other expenses at the time management believes additional
deterioration in value has occurred.
The following table sets forth certain information with respect to the
Company's non-accrual loans, OREO, and accruing loans which are contractually
past due 90 days or more as to principal or interest, for the periods indicated:
NONPERFORMING ASSETS
(Dollars in Thousands)
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------------------------------
1998 1997 1996
-------------------- -------------------- --------------------
<S> <C> <C> <C>
Non-accrual loans $1,163 $624 $272
Accruing past due 90 days or more 383 76 50
-------------------- -------------------- --------------------
Total nonperforming loans 1,546 700 322
Other real estate owned - 52 -
-------------------- -------------------- --------------------
Total nonperforming assets $1,546 $752 $322
-------------------- -------------------- --------------------
Nonperforming to total assets 1.02% 0.49% 0.30%
</TABLE>
As of December 31, 1998, non-accrual loans consisted of 3 relationship
borrowings. One is a loan expected to be paid by an SBA guaranty/liquidation.
The second is a borrowing relationship which has gone through internal
reorganization of company principals. There is one major loan secured by the
owner-occupied mortgage on a medical practice as well as other assets. The
Company expects this relationship to return to accrual status in March of 1999
once consistent payment performance is achieved. No material losses are
anticipated for the Company on these two loans. The last relationship is
comprised of a real estate secured loan which was on accrual at 90 or more days
past due. The Company has significant real property collateral at acceptable
margins and has maintained a good working relationship with the borrower.
Interest lost on these nonaccrual loans was approximately $100,000, $26,000, and
$17,000, for 1998, 1997, and 1996, respectively. The Company did not receive any
interest paid on these nonaccrual loans in 1997 and received approximately
$20,944 and $19,581 for 1998 and 1996, respectively.
-19-
<PAGE>
Allowance for Credit Losses
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
portfolio. 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 such factors and conditions differ from the
assumptions used in making the initial determinations. Based upon criteria
consistently applied during the periods, the Company's allowance for credit
losses was $1,128,000 (0.98% of total loans) as of December 31, 1998, $887,000
(0.94% of total loans) as of December 31, 1997, and $826,000 (1.17% of total
loans) as of December 31, 1996. The allowance for credit losses as a percentage
of nonperforming loans was 73%, 127% and 257% as of December 31, 1998, 1997 and
1996, respectively.
The following table sets forth an analysis of the Company's allowance
for credit losses for the periods indicated:
ALLOWANCE FOR CREDIT LOSSES
(Dollars in Thousands)
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------------------------------
1998 1997 1996
-------------------- -------------------- --------------------
<S> <C> <C> <C>
Average net loans outstanding $ 99,724 $75,908 $70,523
Loans outstanding at period-end 115,231 94,171 70,676
Total nonperforming loans 1,546 700 322
-------------------- -------------------- --------------------
Beginning balance of allowance $ 887 $ 826 $ 740
Loans charged-off:
1-4 family residential mortgage 18 29 -
Home equity loans 26 100 -
Commercial loans 314 25 126
Installment and credit card loans 129 298 129
-------------------- -------------------- --------------------
Total loans charged off 487 452 255
Recoveries of previous charge-offs:
1-4 family residential mortgage - 1 37
Home equity loans 43 - -
Commercial loans 36 134 125
Installment and credit card loans 29 42 19
-------------------- -------------------- --------------------
Total recoveries 108 177 181
-------------------- -------------------- --------------------
Net loans charged-off 379 275 74
Provision for credit losses 620 336 160
-------------------- -------------------- --------------------
Balance at end of period $ 1,128 $ 887 $ 826
-------------------- -------------------- --------------------
Net charge-offs to average loans 0.38% 0.36% 0.10%
Allowance as % of total loans 0.98% 0.94% 1.17%
Nonperforming loans as % of total loans 1.34% 0.74% 0.46%
Allowance as % of nonperforming loans 73% 127% 257%
</TABLE>
-20-
<PAGE>
The Company considers the composition of its loan portfolio and the
loss potential associated with different types of loans in determining the level
of the allowance for credit losses. In considering the loss potential associated
with different types of loans, the Company considers its own historical loss
experience with each type of loan, together with any internal or external
changes which might suggest that future losses will be higher or lower than the
historical loss experience. Such additional factors include changes in national
or local economic conditions which affect the repayment capacity of borrowers
and/or the market value of collateral, trends in past due payments, changes in
underwriting standards, changes in loan originating and servicing personnel,
changes in the types of credit offered, and other factors. For a description of
the Company's accounting policy for the allowance for credit losses, see Note 1
of Notes to Consolidated Financial Statements.
Investment Activities
The Company's investment portfolio of $9.3 million as of December 31,
1998 consisted mostly of U.S. Treasury and government agency obligations. This
represented a decrease of $10.1 million compared to the investment securities of
$19.4 million at December 31, 1997. The reductions in investment securities and
interest bearing deposits were used to fund the $21.1 million increase in loans
during 1998. The Company's investment portfolio of $19.4 million as of December
31, 1997 consisted mostly of U.S. Treasury and government agency obligations.
This represented an increase of $12.0 million compared to the investment
portfolio total of $7.4 million at December 31, 1996. This substantial increase
was the result of liquidity obtained from the purchase of a retail banking
branch in Virginia in the fourth quarter of 1997.
Investment securities available-for-sale are stated at fair value.
These securities may be sold, retained until maturity, or pledged as collateral
for liquidity and borrowing in response to changing interest rates, changes in
prepayment risk, and other factors as a part of the Company's overall asset
liability management strategy.
Investment securities held-to-maturity are stated at amortized cost.
The Company has the intent and ability to hold these securities until maturity,
and they are also available to be pledged as collateral for liquidity and
borrowing needs if and when such needs may occur.
The following table sets forth the carrying value of the Company's
investment portfolio as of the dates indicated:
INVESTMENT PORTFOLIO COMPOSITION
(Dollars In Thousands)
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------------------------------
1998 1997 1996
-------------------- -------------------- --------------------
<S> <C> <C> <C>
Available-for-sale:
U.S. Treasuries and government agencies $ 4,060 $ 13,492 $ 4,899
Other 2,751 2,284 2,308
-------------------- -------------------- --------------------
Total available-for-sale 6,811 15,776 7,207
Held-to-maturity:
U.S. Treasuries and government agencies 2,164 1,911 --
State, county and municipal - 65 165
Other 278 1,656 --
-------------------- -------------------- --------------------
Total held-to-maturity 2,442 3,632 165
-------------------- -------------------- --------------------
Total investment securities $ 9,253 $ 19,408 $ 7,372
-------------------- -------------------- --------------------
</TABLE>
-21-
<PAGE>
The following table sets forth the maturity distribution and weighted
average yield of the investment portfolio of the Company as of December 31,
1998:
<TABLE>
<CAPTION>
INVESTMENT PORTFOLIO--MATURITIES AND YIELDS
(Dollars In Thousands)
Over 1 Year Over 5 Years
One Year Through 5 Through 10 After
or Less Years Years 10 Years Total
- ----------------------------------- -------------- -------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
Maturity Distribution:
U.S. Treasuries and government
agencies - $ 2,014 $ 1,471 $ 2,739 $ 6,224
State, county and municipal - - - - -
Other - 278 - 2,751 3,029
-------------- -------------- -------------- -------------- --------------
Total - $ 2,292 $ 1,471 $ 5,490 $ 9,253
-------------- -------------- -------------- -------------- --------------
Weighted Average Yield (1):
U.S. Treasuries and government
agencies - 5.64% 6.23% 6.15% 6.00%
State, county and municipal - - - - -
Other - 6.38 - 5.11 5.23
-------------- -------------- -------------- -------------- --------------
Total - 5.73% 6.23% 5.63% 5.75%
-------------- -------------- -------------- -------------- --------------
</TABLE>
(1) The calculation of the weighted average yields is based on yield, weighted
by the respective book value of the securities, using cost basis in the
case of securities available-for-sale.
Deposit Activities
The Company's total deposits at year-end 1998 were $126.2 million, a
decrease of $3.4 million, or 2.6%, compared to the year-end 1997 balance. Total
average deposits were $121.5 million for the year ended December 31, 1998, an
increase of $24.8 million, or 25.6% compared with average deposits of $96.7
million for the year ended December 31, 1997. In 1997, total deposits at
year-end 1997 were $129.6 million, an increase of $38.6 million, or 42.4%, over
1996's year-end balance. Total average deposits were $96.7 million for the year
ended December 31, 1997, an increase of $15.8 million, or 19.5% compared with
average deposits of $80.9 million for the year ended December 31, 1996. 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.
-22-
<PAGE>
The following table sets forth the average balances and weighted
average rates for the Company's categories of deposits for the periods
indicated:
AVERAGE DEPOSITS
(Dollars In Thousands)
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------ -- ------------------------------ - ------------------------------
1998 1997 1996
------------------------------ ------------------------------ ------------------------------
Weighted Weighted Weighted
Average Average % of Average Average % of Average Average % of
Balance Rate Total Balance Rate Total Balance Rate Total
---------- ---------- -------- --------- ---------- --------- ---------- ---------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Noninterest-Bearing Deposits $ 24,981 -% 20.6% $20,272 --% 21.0% $17,525 --% 21.7%
Interest-Bearing Deposits:
NOW accounts 17,722 1.68 14.6 14,023 2.01 14.5 12,522 1.96 15.5
Savings accounts 18,285 4.47 15.0 5,559 3.80 5.7 2,217 2.53 2.7
Money market accounts 21,723 3.55 17.9 21,491 3.60 22.2 23,072 3.40 28.5
Time deposits 38,832 5.54 31.9 35,399 5.60 36.6 25,596 5.47 31.6
---------- ---------- -------- --------- ---------- --------- ---------- ---------- --------
Total $121,543 100.0% $96,744 100.0% $80,932 100.0%
---------- -------- --------- --------- ---------- --------
Weighted Average Rate 3.32% 3.36% 3.07%
---------- ---------- ----------
</TABLE>
The Company seeks to rely primarily on regular customer relationships
to provide a stable and cost-effective source of funding to support asset
growth. The Company's Asset/Liability Management Policy limits total brokered
deposits to ten percent (10%) of the Bank's total liabilities. As of December
31, 1998, brokered deposits represented $496,000, or 0.4% of the Company's total
liabilities.
As of December 31, 1998, total time deposits in excess of $100,000
accounted for $17.3 million, or 13.7% of the Company's total deposits. Of this
amount, $7.0 million had a remaining term of six months or less. The following
table sets forth the amount of the Company's certificates of deposit of $100,000
or more, by time remaining until maturity, as of December 31, 1998 and 1997:
TIME DEPOSITS OF $100,000 OR MORE
(Dollars In Thousands)
<TABLE>
<CAPTION>
December 31,
-----------------------------------------
1998 1997
-------------------- --------------------
<S> <C> <C>
Maturity Period:
Three months or less $ 2,565 $ 2,783
Over three months through six months 4,413 3,897
Over six months through twelve months 7,650 7,587
Over twelve months 2,714 2,185
-------------------- --------------------
Total $17,342 $16,452
-------------------- --------------------
</TABLE>
-23-
<PAGE>
Borrowings
Borrowings consist of advances from the Federal Home Loan Bank of
Atlanta ("FHLBA"), deposits received in the Company's U.S. Treasury Tax and Loan
Account, and securities sold under repurchase agreements. Balances outstanding
and effective rates of interest are shown in the tables below for the years
ending December 31, 1998, 1997 and 1996:
BORROWINGS
(Dollars In Thousands)
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------------------------------------
1998 1997 1996
-------------------- -- --------------------- -- --------------------
<S> <C> <C> <C>
Federal Home Loan Bank of Atlanta:
Ending balance $6,513 $7,423 $7,750
Daily average balance for the period 6,911 7,397 4,559
Maximum outstanding balance at
a month-end during the period 7,222 7,675 7,800
Daily average interest rate for the period 6.81% 6.75% 5.99%
Average interest rate on period end balance 6.74 6.73 6.73
Treasury Tax and Loan Account:
Ending balance $ 589 $ 776 $ 716
Daily average balance for the period 361 371 393
Maximum outstanding balance at
a month-end during the period 2,101 776 829
Daily average interest rate for the period 4.79% 4.61% 4.64%
Average interest rate on period end balance 4.45 5.27 5.16
Securities sold under repurchase agreements:
Ending balance $ 1,359
Daily average balance for the period 264
Maximum outstanding balance at
a month-end during the period 1,359
Daily average interest rate for the period 4.72%
Average interest rate on period end balance 4.72
</TABLE>
The following table shows the details of the Company's fixed rate
advances from the FHLBA, with original maturities in excess of one year, as of
December 31, 1998:
BORROWINGS
(Dollars in Thousands)
<TABLE>
<CAPTION>
December 31, 1998
------------------------------------------------
Advance Amount Outstanding Current Long-Term Interest Maturity Repayment
Date Borrowed Balance Portion Portion Rate Date Terms
- ------------ ------------ -------------- ----------- --------------- ----------- ------------ ---------------
<S> <C> <C> <C> <C> <C> <C> <C>
2/08/96 $ 800 $ 800 $ - $ 800 6.30% 2/08/06 due at
maturity
5/16/96 1,000 1,000 - 1,000 7.34 5/16/06 due at
maturity
6/24/96 1,000 750 100 650 6.94 6/24/06 semi-annual
10/10/96 300 300 300 - 6.60 10/10/99 due at
maturity
10/10/96 300 300 - 300 6.85 10/10/01 due at
maturity
10/10/96 2,000 1,200 400 800 6.57 10/10/01 quarterly
10/10/96 2,400 1,600 400 1,200 6.66 10/10/02 quarterly
9/25/97 573 563 12 551 6.65 9/25/17 monthly
------------ -------------- ----------- ---------------
Total $8,373 $6,513 $1,212 $5,301
------------ -------------- ----------- ---------------
</TABLE>
-24-
<PAGE>
Return on Equity and Assets
Return on average assets ("ROA") measures net income in relation to
total average assets and generally indicates an institution's ability to use its
assets profitably. Return on average equity ("ROE") is determined by dividing
annual net income by average stockholders' equity and indicates the
effectiveness of an institution in generating net income from the capital
invested by its stockholders. The following table sets forth the Company's ROA
and ROE for the periods indicated:
RETURN ON EQUITY AND ASSETS
<TABLE>
<CAPTION>
December 31,
---------------------------------------------------------------
1998 1997 1996
----------------- --- ------------------ -- -------------------
<S> <C> <C> <C>
Return on average assets 0.44% 0.29% 0.27%
Return on average equity 4.49 3.83 4.20
Period-end equity to total assets 10.12 8.87 6.30
</TABLE>
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. As of December 31, 1998, the Bank had cash
and cash equivalents of $13.2 million, an increase of $1.1 million, when
compared with the $12.1 million at December 31, 1997.
Liability liquidity is provided by access to core funding sources,
principally various 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 $16.1 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. As of December 31, 1998, the Company
had no federal funds purchased or repurchase agreements, and was utilizing $6.5
million of its available FHLBA borrowings in the form of fixed-rate term credit
advances with an average interest rate of 6.74%. The Company utilizes fixed rate
term credit advances from the FHLBA to fund fixed rate real estate loans of
comparable terms and maturities.
The Company's cash flows are composed of three classifications: cash
flows from operating activities, cash flows from investing activities, and cash
flows from financing activities. Net cash provided by operating activities was
$2.1 million for the year ended December 31, 1998. Net cash provided by
investing activities was $1.1 million for 1998, as the $21.4 million net
increase in loans was funded largely by decreases in investment securities and
interest bearing deposits in other banks. Net cash used in financing activities
for 1998 of $2.0 million resulted from a $3.4 million decrease in deposits,
reduction of $1.1 million in borrowings, the proceeds of $1.4 million from
customer repurchase accounts, and proceeds of $1.1 million from the exercise of
options and warrants for common stock.
-25-
<PAGE>
Net cash provided by operating activities was $1.0 million for the year
ended December 31, 1997. Net cash used in investing activities was $25.5 million
for 1997, as net increases in loans and investments exceeded net deposits
acquired and repayments from loans and investments during the year. Net cash
provided by financing activities for 1997 was $16.8 million and was related
mostly to net increases in certificates of deposit and the issuance of Common
Stock in 1997.
In the ordinary course of business, the Company enters into commitments
to make loans and fund letters of credit, and the Company is also a party to
four operating leases with respect to its banking quarters. Details of these
commitments may be found in the accompanying Notes to Consolidated Financial
Statements.
The Company had cash on hand in the amount of $2.0 million at the
holding company level at December 31, 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 supported by dividends available from the Bank, subject to certain
regulatory restrictions generally applicable to national banks. As of December
31, 1998, the Company had no indebtedness outstanding at the holding company
level.
Capital Resources
Total stockholders' equity as of December 31, 1998 was $15.3 million,
an increase of $1.8 million in 1998 and $6.8 million in 1997, compared to
stockholders' equity of $13.5 million and $6.7 million as of December 31, 1997
and 1996, respectively. In 1998, additional capital was raised from the exercise
of warrants and stock options amounting to $1.1 million, whereas in the third
quarter of 1997 the Company issued 977,500 shares of Common Stock, at a price of
$7.25 per share. In 1997, the net proceeds from sale of Common Stock and the
exercise of warrants and options was approximately $6.4 million. Net income was
$636,884 in 1998 and $336,158 in 1997.
The OCC 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 December 31, 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. See Note 12
of the Notes to Consolidated Financial Statements.
Year 2000
The "Year 2000" problem arose because many computer programs were
designed to use only the last two digits to refer to a year. Therefore, these
computer programs did 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 reviewed
from time to time by bank regulatory authorities.
-26-
<PAGE>
The Company believes that it is presently on schedule with respect to
its Y2K Plan, and outside reviews to date found the Company's Year 2000
compliance efforts to be satisfactory. As of December 31, 1998, the Company's
estimated percentage of completion of its Y2K Plan was 96%, and the estimated
date for 100% 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 FFIEC to
test date sensitive transactions and calculations. These tests were performed on
all mission critical systems and results revealed compliance or very minor
discrepancies which have been traced. Failed test transactions will be tested
again in 1999. Material third party risks principally include assessing the Year
2000 preparation status of bank borrowing customers. The Company completed an
assessment of Year 2000 risk within its loan portfolio as of the September 30,
1998, regulatory target date, and will continue to monitor the progress of any
borrowers deemed to be at high risk.
As part of its Y2K Plan, the Company expects to spend 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 will include the time of regular
Company employees, a network administration consultant, and approximately
$20,000 of additional consulting expenses. No significant computer systems
projects have been delayed as a result of Year 2000 preparations. Because most
of the Company's data processing services are provided by outside vendors on a
contract basis, management does not currently anticipate that the costs to
address the Company's Year 2000 issues will have a significant impact on the
financial position or results of operations of the Company.
The Company believes that the most likely worst case scenarios due to
the Year 2000 problem could include liquidity issues due to customers'
withdrawal of extra cash, security preparations, or 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 EDS in Reston, Virginia, to provide access to
customer data bases and other mission critical functions. EDS has back-up
service sites available and ready to provide services to the Company should
electric power interruptions or other problems occur in the Reston location. 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 that computer systems fail to perform in accordance
with plans and expectations. For the most part, these contingency plans involve
a change 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. Management and staff will be trained on these procedures and
processes prior to July 1999, and additional refresher training will be provided
during November and December 1999.
-27-
<PAGE>
Impact of Inflation, Changing Prices and Monetary Policies
The primary effect of inflation on the operations of the Company is
reflected in increased operating costs. Unlike industrial companies, virtually
all of the assets and liabilities of a financial institution are monetary in
nature. As a result, changes in interest rates have a more significant effect on
the performance of a financial institution than do the effects of changes in the
general rate of inflation and changes in prices. Interest rates do not
necessarily move in the same direction or in the same magnitude as the prices of
goods and services. Interest rates are highly sensitive to many factors which
are beyond the control of the Company, including the influence of domestic and
foreign economic conditions and the monetary and fiscal policies of the United
States government and federal agencies, particularly the Federal Reserve Board.
The Federal Reserve Board implements national monetary policy such as seeking to
curb inflation and combat recession by its open market operations in United
States government securities, control of the discount rate applicable to
borrowing by banks, and establishment of reserve requirements against bank
deposits. The actions of the Federal Reserve Board in these areas influence the
growth of bank loans, investments and deposits, and affect the interest rates
charged on loans and paid on deposits. The nature, timing and impact of any
future changes in federal monetary and fiscal policies on the Company and its
results of operations are not predictable.
Disclosure Regarding Forward Looking Statements
Statements and financial discussion and analysis contained in Items 1,
7 and 7A of this report that are not historical facts are forward looking
statements made pursuant to the safe harbor provisions of Section 27A of the
Securities Act of 1933, as amended, and Section 21E of the Securities Exchange
Act of 1934, as amended. Although the Company believes that the expectations
reflected in such forward looking statements are based upon reasonable
assumptions, forward looking statements involve a number of risks and
uncertainties and no assurance may be given that the Company's expectations will
be achieved. Among the important factors that could cause actual results to
differ materially from the Company's expectations are the Company's exposure to
local economic conditions; changes in interest rate risks and the Company's net
interest margin; the Company's ability to increase deposits; the Company's
ability to make acquisitions of other depository institutions, their assets or
their liabilities and the Company's successful integration of any such
acquisitions; changes in applicable statutes and regulations or their
interpretation; changes in the ability of the Bank or the Company to pay
dividends on its Common Stock; competition; and the loss of senior management or
operating personnel.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
For information regarding the market risk of the Company's financial
instruments, see "Management's Discussion and Analysis of Financial Condition
and Results of Operation--Interest Rate Sensitivity and Management of Market
Risk." The Company's principal market risk exposure is to interest rates.
-28-
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Century Bancshares, Inc.:
We have audited the accompanying consolidated statements of financial condition
of Century Bancshares, Inc. and subsidiary as of December 31, 1998 and 1997, and
the related consolidated statements of operations, stockholders' equity, and
cash flows for each of the years in the three-year period ended December 31,
1998. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Century Bancshares,
Inc. and subsidiary as of December 31, 1998 and 1997, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1998, in conformity with generally accepted accounting
principles.
/s/ KPMG LLP
Washington, DC
February 10, 1999
-29-
<PAGE>
CENTURY BANCSHARES, INC. AND SUBSIDIARY
Consolidated Statements of Financial Condition
December 31, 1998 and 1997
<TABLE>
<CAPTION>
1998 1997
- -------------------------------------------------------------- ------- ------------------- -------- ------------------
<S> <C> <C>
ASSETS
Cash and due from banks $ 8,950,733 $ 7,069,139
Federal funds sold 4,285,000 5,000,000
Interest bearing deposits in other banks 9,847,315 22,223,037
Investment securities available-for-sale, at fair value 6,811,356 15,776,517
Investment securities, at cost, fair value of $2,449,680 and
$3,634,867 in 1998 and 1997, respectively 2,441,537 3,632,076
Loans, net of unearned income 115,231,298 94,171,450
Less: allowance for credit losses (1,128,147) (887,046)
------------------- ------------------
Loans, net 114,103,151 93,284,404
Leasehold improvements, furniture, and equipment, net 1,372,370 1,708,987
Accrued interest receivable 742,721 922,327
Other real estate owned - 52,000
Deposit premium 1,546,232 1,735,768
Net deferred taxes 683,113 704,577
Other assets 566,373 530,795
------------------- ------------------
Total Assets $151,349,901 $152,639,627
------------------- ------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits:
Noninterest-bearing $ 31,676,194 $ 26,225,119
Interest-bearing 94,535,082 103,379,913
------------------- ------------------
Total deposits 126,211,276 129,605,032
Other borrowings 8,461,241 8,198,843
Other liabilities 1,360,710 1,300,226
------------------- ------------------
Total Liabilities 136,033,227 139,104,101
------------------- ------------------
Stockholders' Equity:
Common stock, $1 par value; 5,000,000 shares authorized; 2,574,219 and 2,209,229
shares issued and outstanding
at December 31, 1998 and 1997, respectively 2,574,219 2,209,229
Additional paid in capital 12,343,631 10,695,480
Retained earnings 392,384 651,646
Accumulated other comprehensive income,
net of tax effect 6,440 (20,829)
------------------- ------------------
Total Stockholders' Equity 15,316,674 13,535,526
Commitments and Contingencies
------------------- ------------------
Total Liabilities and Stockholders' Equity $151,349,901 $152,639,627
------------------- ------------------
See accompanying notes to consolidated financial statements.
</TABLE>
-30-
<PAGE>
CENTURY BANCSHARES, INC. AND SUBSIDIARY
Consolidated Statements of Operations
Years ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
1998 1997 1996
- -------------------------------------------------------------- ---------------- ----------------- ----------------
<S> <C> <C> <C>
Interest income:
Interest and fees on loans $ 9,393,339 $ 7,554,812 $ 6,887,424
Interest on federal funds sold 350,846 258,311 34,732
Interest on deposits in other banks 708,431 749,568 211,563
Interest on securities available-for-sale 718,829 529,963 545,481
Interest on securities held-to-maturity 184,035 116,220 10,296
---------------- ----------------- ----------------
Total interest income 11,355,480 9,208,874 7,689,496
Interest expense:
Interest on deposits:
Savings accounts 818,417 210,928 56,075
NOW accounts 298,423 282,169 245,473
Money market accounts 771,400 773,799 783,466
Certificates under $100,000 1,254,993 1,216,180 630,875
Certificates $100,000 and over 894,004 764,576 768,603
---------------- ----------------- ----------------
Total interest on deposits 4,037,237 3,247,652 2,484,492
---------------- ----------------- ----------------
Interest on other borrowings 500,335 517,644 291,494
---------------- ----------------- ----------------
Total interest expense 4,537,572 3,765,296 2,775,986
---------------- ----------------- ----------------
Net interest income 6,817,908 5,443,578 4,913,510
Provision for credit losses 620,000 336,200 160,000
---------------- ----------------- ----------------
Net interest income after provision for credit losses 6,197,908 5,107,378 4,753,510
Noninterest income:
Service charges on deposit accounts 447,105 409,747 416,357
Other operating income 625,745 512,637 303,902
Gain on sale of securities 14,570 - -
Gain on liquidation of other real estate owned 15,853 - -
---------------- ----------------- ----------------
Total noninterest income 1,103,273 922,384 720,259
Noninterest expense:
Salaries and employee benefits 2,075,963 2,201,299 1,987,989
Occupancy and equipment expense 825,839 649,846 531,336
Professional fees 925,664 691,501 628,244
Depreciation and amortization 661,129 571,033 452,949
Data processing 733,544 533,794 468,743
Communications 278,611 200,456 206,404
Federal deposit insurance premiums 17,678 13,996 30,238
Other real estate owned - - 6,775
Other operating expenses 790,978 598,077 607,813
---------------- ----------------- ----------------
Total noninterest expense 6,309,406 5,460,002 4,920,491
---------------- ----------------- ----------------
Income before income tax expense 991,775 569,760 553,278
Income tax expense 354,891 233,602 274,699
---------------- ----------------- ----------------
Net income $ 636,884 $ 336,158 $ 278,579
---------------- ----------------- ----------------
Basic income per common share $.27 $.22 $.22
Diluted income per common share $.26 $.20 $.21
Weighted average common shares outstanding 2,388,015 1,551,307 1,244,390
See accompanying notes to consolidated financial statements.
</TABLE>
-31-
<PAGE>
CENTURY BANCSHARES, INC. AND SUBSIDIARY
Consolidated Statements of Stockholders' Equity
Years ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
Accumulated
Other
Common Additional Comprehensive Total
stock paid in Retained Income, Stockholders'
$1.00 par capital earnings net of tax Equity
effect
- --------------------------------- ----------------- ---------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1995 1,046,047 4,410,876 976,161 (68,064) 6,365,020
Comprehensive income:
Net income - - 278,579 - 278,579
Unrealized gains on
investment securities,
net of tax effect - - - 22,164 22,164
- --------------------------------- ----------------- ---------------- ----------------- ----------------- -----------------
Comprehensive income 278,579 22,164 300,743
Common stock dividend
(7% of shares outstanding)-
73,047 shares 73,047 401,758 (475,683) - (878)
Exercise of common stock
options- 26,934 shares 26,934 58,222 - - 85,156
- --------------------------------- ----------------- ---------------- ----------------- ----------------- -----------------
Balance, December 31, 1996 1,146,028 4,870,856 779,057 (45,900) 6,750,041
Comprehensive income:
Net income - - 336,158 - 336,158
Unrealized gains on
investment securities,
net of tax effect - - - 25,071 25,071
- --------------------------------- ----------------- ---------------- ----------------- ----------------- -----------------
Comprehensive income 336,158 25,071 361,229
Common stock dividend
(5% of shares outstanding)-
57,793 shares 57,793 404,551 (463,569) - (1,225)
Issuance of common stock-
977,500 shares 977,500 5,352,127 - - 6,329,627
Exercise of common stock
options- 17,699 shares 17,699 25,590 - - 43,289
Exercise of warrants-
10,209 shares 10,209 42,356 - - 52,565
- --------------------------------- ----------------- ---------------- ----------------- ----------------- -----------------
Balance, December 31, 1997 $2,209,229 $10,695,480 $ 651,646 $ (20,829) $13,535,526
Comprehensive income:
Net income - - 636,884 - 636,884
Unrealized gains on
investment securities,
net of tax effect - - - 27,269 27,269
- --------------------------------- ----------------- ---------------- ----------------- ----------------- -----------------
Comprehensive income 636,884 27,269 664,153
Common stock dividend
(5% of shares outstanding)-
112,665 shares 112,665 781,623 (894,288) - -
Payments in lieu of fractional
shares - - (1,858) - (1,858)
Exercise of common stock
options- 60,831 shares 60,831 146,546 - - 207,377
Exercise of warrants-
191,494 shares 191,494 742,840 - - 934,334
Other - (22,858) - - (22,858)
- --------------------------------- ----------------- ---------------- ----------------- ----------------- -----------------
Balance, December 31, 1998 $2,574,219 $12,343,631 $392,384 $ 6,440 $15,316,674
- --------------------------------- ----------------- ---------------- ----------------- ----------------- -----------------
See accompanying notes to consolidated financial statements.
</TABLE>
-32-
<PAGE>
CENTURY BANCSHARES, INC. AND SUBSIDIARY
Consolidated Statements of Cash Flows
Years ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
1998 1997 1996
- -------------------------------------------------------------- -------------------- -------------------- --------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 636,884 $ 336,158 $ 278,579
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 661,130 571,033 452,959
Provision for credit losses 620,000 336,200 160,000
Provision for losses on other real estate owned - - 10,000
Provision (benefit) for net deferred taxes 25,715 (161,370) (88,133)
Gain on sale of securities available-for-sale (14,570) - -
Gain on sale of other real estate owned (15,853) - (21,328)
(Increase) decrease in accrued interest receivable 179,606 (412,760) 79,563
(Increase) decrease in other assets (47,062) 48,471 64,259
Increase (decrease) in other liabilities 53,031 315,345 (32,883)
-------------------- -------------------- --------------------
Total adjustments 1,461,997 696,919 624,437
-------------------- -------------------- --------------------
Net cash provided by operating activities 2,098,881 1,033,077 903,016
Cash flows from investing activities:
Net increase in loans (21,438,747) (14,810,469) (1,547,403)
Net (increase) decrease in interest bearing deposits in 12,375,722 (15,399,960) (791,377)
other banks
Purchases of securities available-for-sale (2,872,601) (9,564,799) (3,092,717)
Purchases of securities held-to-maturity (2,005,882) (4,411,652) (326,366)
Repayments and maturities of securities available-for-sale 3,196,421 1,034,208 9,662,605
Repayments and maturities of securities held-to-maturity 5,358,436 944,471 85,000
Proceeds from sale of securities available-for-sale 6,535,849 - -
Net purchase of leasehold improv., furn. and equipment (134,976) (596,888) (511,366)
Acquisition of deposits, net of assets acquired - 17,282,864 -
Proceeds from sale of other real estate owned 67,853 - 203,986
-------------------- -------------------- --------------------
Net cash (used in) provided by investing activities 1,082,075 (25,522,225) 3,682,362
Cash flows from financing activities:
Net increase (decrease) in demand, savings, NOW and
money market deposit accounts 3,394,503 (620,526) 183,315
Net increase (decrease) in certificates of deposit (6,788,259) 11,221,680 262,533
Net increase in customer repurchase accounts 1,359,330
Net increase (decrease) in other borrowings (186,813) 60,347 (1,092,032)
Net proceeds from issuance of long-term debt - 573,000 5,800,000
Repayment of long-term debt (910,118) (900,381) (50,000)
Repurchase of preferred stock - - -
Net proceeds from issuance of common stock 1,143,150 6,424,256 85,156
Other (26,155) - -
-------------------- -------------------- --------------------
Net cash provided by (used in) financing activities (2,014,362) 16,758,376 5,188,972
-------------------- -------------------- --------------------
Net increase (decrease) in cash and cash equivalents 1,166,594 (7,730,772) 9,774,350
Cash and cash equivalents, beginning of year 12,069,139 19,799,911 10,025,561
-------------------- -------------------- --------------------
Cash and cash equivalents, end of year $ 13,235,733 $ 12,069,139 $19,799,911
-------------------- -------------------- --------------------
Supplemental disclosures of cash flow information:
Interest paid on deposits and borrowings $ 4,572,718 $ 3,724,036 $ 2,743,631
Income taxes paid 300,000 112,500 626,079
Transfer of loans to other real estate owned - 52,000 -
See accompanying notes to consolidated financial statements.
</TABLE>
-33-
<PAGE>
CENTURY BANCSHARES, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
- -------------------------------------------------------------- ----------------
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business
The primary business of Century Bancshares, Inc. (the "Company") and its
subsidiary, Century National Bank ("Century Bank" or the "Bank") is to attract
deposits from individual and corporate customers and to originate loans secured
by residential and commercial real estate, business assets, and other personal
property. The Company operates primarily in the metropolitan Washington, DC
area, and is managed as a single business segment. The Company targets
individuals and businesses in professional services as its clientele. The
Company is subject to competition from other financial institutions in
attracting and retaining deposits and in originating and purchasing loans. The
Company and Century Bank are subject to the regulations of certain agencies of
the federal government and undergo periodic examinations by those agencies.
Basis of Financial Statement Presentation
The financial statements have been prepared on the accrual basis and in
conformity with generally accepted accounting principles. In preparing the
financial statements, management is required to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities as of the date of the financial statements and
the reported amounts of revenues and expenses during the reported period. Actual
results could differ from those estimates.
The consolidated financial statements include the accounts of the
Company and Century Bank. All significant intercompany accounts and transactions
have been eliminated in consolidation. For purposes of reporting cash flows, the
Company has defined cash and cash equivalents as those amounts included in cash
and due from banks and federal funds sold.
Investment Securities
The Company classifies its debt and marketable equity securities in one of three
categories: trading, available-for-sale, or held-to-maturity. Trading securities
are bought and held principally for the purpose of selling them in the near
term. Held-to-maturity securities are those securities that the Company has the
ability and intent to hold until maturity. All other securities not classified
as trading or held-to-maturity are classified as available-for-sale. The Company
does not engage in trading activities and, accordingly, has no trading
portfolio.
Available-for-sale and trading securities are recorded at fair value.
Held-to-maturity securities are recorded at amortized cost. Unrealized holding
gains and losses, net of the related tax effect, on available-for-sale
securities are excluded from earnings and are reported as other comprehensive
income which is a separate component of stockholders' equity.
A decline in the market value of any available-for-sale or
held-to-maturity security below cost that is deemed other than temporary is
charged to earnings, resulting in the establishment of a new cost basis for the
security.
Premiums and discounts are amortized or accreted over the life of the
related security as an adjustment to yield using the effective interest method.
Dividend and interest income are recognized when earned. Realized gains and
losses for securities classified as available-for-sale and held-to-maturity are
included in earnings and are derived using the specific identification method
for determining the cost of securities sold.
Prepayment of the mortgages securing the collateralized mortgage
obligations may affect the maturity date and yield to maturity. The Company uses
actual principal prepayment experience and estimates of future principal
prepayments in calculating the yield necessary to apply the effective interest
method.
-34-
<PAGE>
CENTURY BANCSHARES, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
- -------------------------------------------------------------- ---------------
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
Income Recognition on Loans
Interest on loans is credited to income as earned from the principal balance
outstanding. When, in management's judgment, the full collectibility of
principal or interest on a loan becomes uncertain, that loan is placed on a cash
basis (nonaccrual) for purposes of income recognition, which is generally when a
loan is delinquent in either principal or interest for 90 days or more. Accrued
but uncollected interest on nonaccrual loans is charged against current income.
Interest accruals are resumed on such loans only when they are brought fully
current with respect to principal and interest and when, in the judgment of
management, the loans have demonstrated a new period of performance and are
estimated to be fully collectible as to both principal and interest. Loan
origination fees and direct loan origination costs are deferred and recognized
either upon the sale of a loan or amortized as an adjustment to yield over the
life of the loan.
Allowance for Credit Losses
The allowance for credit losses is a valuation allowance available for losses
incurred on loans. It is established through charges to earnings in the form of
provisions for credit losses. Credit losses are charged to the allowance for
credit losses when a determination is made that collection is unlikely to occur.
Recoveries are credited to the allowance at the time of recovery.
It is the Company's policy to discontinue the accrual of interest
income and classify a loan as non-accrual when principal or interest is past due
90 days or more and the loan is not well secured and in the process of
collection, or when, in the opinion of management, principal or interest is not
likely to be paid in accordance with the terms of the obligation. The Company
will generally charge-off loans after 120 days of delinquency unless adequately
collateralized and in the process of collection. A loan is considered in the
process of collection if, based on a probable specific event, management
believes that the loan will be repaid or brought current within a reasonable
period of time. Loans will not be returned to accrual status until the loan has
been brought current and future payments of principal and interest appear
certain. Interest accrued and unpaid at the time a loan is placed on non-accrual
status is charged against interest income. Subsequent payments received are
applied to the outstanding principal balance until the status of the loan has
changed.
Prior to the beginning of each year, and quarterly during the year,
management estimates whether the allowance for credit losses is adequate to
absorb losses that are inherent in the existing portfolio. Based on these
estimates, an amount is charged to the provision for credit losses to adjust the
allowance to a level determined to be adequate to absorb these inherent losses.
Management's judgment as to the level of future losses on existing
loans involves management's internal review of the loan portfolio, including an
analysis of the borrowers' current financial position, the consideration of
current and anticipated economic conditions and their potential effects on
specific borrowers; an evaluation of the existing relationships among loans,
potential credit losses, and the present level of the loan loss allowance; and
in certain circumstances, results of examinations by independent consultants. In
determining the collectibility of certain loans, management also considers the
fair value of any underlying collateral. In addition, various regulatory
agencies, as an integral part of their examination process, periodically review
the Company's allowances for losses on loans and other real estate owned. Such
agencies may require the Company to recognize additions to the allowances based
on their judgments about information available to them at the time of their
examination.
The Company measures impaired loans at the present value of expected
future cash flows discounted at the loan's effective interest rate, or at the
loan's observable market price or the fair value of the collateral if the loan
is collateral dependent. A loan is considered impaired when, based on current
information and events, the Company determines that it is probable that it will
be unable to collect all amounts due according to the contractual terms of the
original loan agreement. Restructured loans are impaired loans in the year of
restructuring and thereafter, such loans are subject to management's evaluation
of impairment based on the restructured terms. The Company's charge-off policy
for impaired loans is consistent with its policy for all loan charge-offs.
Impaired loans are charged-off when all or a portion thereof is considered
uncollectible or transferred to foreclosed properties. Consistent with the
Company's method for nonaccrual loans, interest receipts on impaired loans are
applied to principal.
-35-
<PAGE>
CENTURY BANCSHARES, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
- -------------------------------------------------------------- ----------------
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
Leasehold Improvements, Furniture, and Equipment
Leasehold improvements, furniture, and equipment are stated at cost, less
accumulated depreciation and amortization. Amortization of leasehold
improvements is computed using the straight-line method over the estimated
useful lives of the improvements or the lease term, whichever is shorter.
Depreciation of furniture and equipment is computed using the straight-line
method over their estimated useful lives, ranging from 3 to 10 years. During
1998, the Company made certain changes in accounting estimates regarding the
estimated useful lives of furniture and equipment which had the effect of
reducing depreciation expense in 1998 by $99,000 ($61,000 after tax, $0.03 per
diluted common share).
Other Real Estate Owned
Real estate acquired through foreclosure is recorded at the lower of cost or
fair value less estimated selling costs. Management periodically evaluates the
recoverability of the carrying value of other real estate owned. Costs relating
to property improvements are capitalized, and costs relating to holding
properties are charged to expense. Gains or losses on the sale of other real
estate owned are recognized upon disposition of the property.
Income Taxes
The Company accounts for income taxes based upon the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date.
Income per Common Share
In March 1997, SFAS No. 128, "Earnings Per Common Share" was issued. SFAS No.
128 requires income per share to be presented under two computations: basic and
diluted income per 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 addition of weighted
average common shares and potential common stock. SFAS No. 128 was implemented
on December 31, 1997, with 1996 per share computations restated to reflect the
new pronouncement. Total weighted average shares outstanding at December 31,
1998, 1997 and 1996 were 2,388,015, 1,551,307 and 1,244,390, respectively.
On March 19, 1996, the Company declared a 7 percent stock dividend to
common stock shareholders of record as of March 31, 1996, resulting in the
issuance of 73,047 shares. 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 19, 1998, the Company
declared a 5 percent stock dividend to common stock shareholders of record as of
May 29, 1998, resulting in the issuance of 112,665 shares. Weighted average
shares outstanding and all income per common share amounts have been restated
for the effect of the stock dividends.
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 generally applicable to the Company include unrealized gains and losses on
investment securities available for sale. 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.
-36-
<PAGE>
CENTURY BANCSHARES, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
- -------------------------------------------------------------- ----------------
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
New Financial Accounting Standards, Continued
The reclassification entries for the three years ended December 31, 1998, 1997,
and 1996 are as follows:
<TABLE>
<CAPTION>
1998 1997 1996
------------- ------------- ------------
<S> <C> <C> <C>
Net unrealized holding gains during the year, net of income taxes
of $20,220, $17,422, and $15,402, respectively $ 36,303 $ 25,071 $ 22,164
Less: reclassification adjustment for gains included in net income,
net of income taxes of $5,536 (9,034) 0 0
------------- ------------- ------------
Net unrealized gains on investment securities, net of income taxes $ 27,269 $ 25,071 $ 22,164
------------- ------------- ------------
</TABLE>
In June 1998, SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities" was issued. SFAS No. 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 designated 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, 1999. 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.
Stock Options
The Company accounts for its stock option plans under the provisions of APB
Opinion No. 25 and related interpretations. Accordingly, no compensation expense
has been recognized for the plans under SFAS No. 123, "Accounting for
Stock-Based Compensation," and the proforma impact to compensation expense is
detailed in Note 9--"Benefit and Incentive Plans."
Reclassifications
Certain amounts have been reclassified to conform to the presentation for 1998.
-37-
<PAGE>
CENTURY BANCSHARES, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
- -------------------------------------------------------------- ----------------
(2) INVESTMENT SECURITIES
Investment securities available-for-sale, and their contractual maturities, at
December 31, 1998 and 1997 are summarized as follows:
<TABLE>
<CAPTION>
1998
----------------------------------------------------------------------------
Gross Gross
Amortized unrealized unrealized
cost gains losses Fair value
- ------------------------------------------------ ------------------ ------------------ ------------------- ------------------
<S> <C> <C> <C> <C>
Obligations of U.S. Treasury and
government agencies:
Within one year $ - $ - $ - $ -
After one, but within five years 1,999,133 14,460 - 2,013,593
After five, but within ten years 1,461,012 10,502 - 1,471,514
After ten years 581,371 - 6,180 575,191
- ------------------------------------------------ ------------------ ------------------ ------------------- ------------------
Total 4,041,516 24,962 6,180 4,060,298
Collateralized mortgage obligations:
After five, but within ten years 394,691 - 5,160 389,532
After ten years 432,929 - 3,714 429,215
Federal Reserve Bank stock 236,350 - - 236,350
Federal Home Loan Bank stock 821,800 - - 821,800
Other 874,162 - - 874,162
- ------------------------------------------------ ------------------ ------------------ ------------------- ------------------
Total investment securities available-for-sale $ 6,801,448 $ 24,962 $ 15,054 $ 6,811,356
- ------------------------------------------------ ------------------ ------------------ ------------------- ------------------
1997
----------------------------------------------------------------------------
Gross Gross
Amortized unrealized unrealized
cost gains losses Fair value
- ------------------------------------------------ ------------------ ------------------ ------------------- ------------------
Obligations of U.S. Treasury and
government agencies:
Within one year $ 3,878,954 $ 978 $ 3,839 $ 3,876,093
After one, but within five years 7,030,507 17,768 671 7,047,604
After five, but within ten years 1,807,032 - 2,558 1,804,474
After ten years 771,756 4,070 11,616 764,210
- ------------------------------------------------ ------------------ ------------------ ------------------- ------------------
Total 13,488,249 22,816 18,684 13,492,381
Collateralized mortgage obligations:
After ten years 1,262,163 - 36,177 1,225,986
Federal Reserve Bank stock 236,350 - - 236,350
Federal Home Loan Bank stock 821,800 - - 821,800
- ------------------------------------------------ ------------------ ------------------ ------------------- ------------------
Total investment securities available-for-sale $15,808,562 $22,816 $54,861 $15,776,517
- ------------------------------------------------ ------------------ ------------------ ------------------- ------------------
</TABLE>
Expected maturities may differ from contractual maturities of
mortgage-backed securities and collateralized mortgage obligations because
borrowers have the right to prepay their obligations at any time.
Investment securities totaling $3,619,322 and $3,212,794 at December
31, 1998 and 1997, respectively, were pledged to secure public deposits and
customer repurchase accounts. During 1998, there was a net decrease of $10.2
million in investment securities from maturities, principal payments and sales
in order to fund a portion of the growth in the loan portfolio; investment
securities available for sale with an amortized cost of $6,617,084 were sold for
gross proceeds of $6,631,654 resulting in gains of $14,570. No investment
securities were sold during 1997 or 1996.
-38-
<PAGE>
CENTURY BANCSHARES, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
- -------------------------------------------------------------- ----------------
(2) INVESTMENT SECURITIES, CONTINUED
Investment securities held-to-maturity at December 31, 1998 and 1997 are
summarized as follows:
<TABLE>
<CAPTION>
1998
----------------------------------------------------------------------------
Gross Gross
Amortized unrealized unrealized
cost gains losses Fair value
- ----------------------------------------------------- ------------------ ------------------ ------------------- ------------------
<S> <C> <C> <C> <C>
Obligations of U.S. Treasury, municipals, and
government agencies:
Within one year $ - $ - $ - $ -
After one year, but within five years - - - -
After ten years 2,163,449 9,508 1,799 2,171,158
- ----------------------------------------------------- ------------------ ------------------ ------------------- ------------------
Total 2,163,449 9,508 1,799 2,171,158
Other securities:
After one year, but within five years 278,088 434 - 278,522
After ten years - - - -
- ----------------------------------------------------- ------------------ ------------------ ------------------- ------------------
Total investment securities held-to-maturity $ 2,441,537 $ 9,942 $ 1,799 $ 2,449,680
- ----------------------------------------------------- ------------------ ------------------ ------------------- ------------------
1997
----------------------------------------------------------------------------
Gross Gross
Amortized unrealized unrealized
cost gains losses Fair value
- ----------------------------------------------------- ------------------ ------------------ ------------------- ------------------
Obligations of U.S. Treasury, municipals, and
government agencies:
Within one year $ 64,973 $ 161 $ - $ 65,134
After one year, but within five years 1,499,692 798 - 1,500,490
After ten years 411,434 1,719 - 413,153
- ----------------------------------------------------- ------------------ ------------------ ------------------- ------------------
Total 1,976,099 2,678 - 1,978,777
Other securities:
After one year, but within five years 656,253 2,337 - 658,590
After ten years 999,724 - 2,224 997,500
- ----------------------------------------------------- ------------------ ------------------ ------------------- ------------------
Total investment securities held-to-maturity $3,632,076 $5,015 $2,224 $3,634,867
- ----------------------------------------------------- ------------------ ------------------ ------------------- ------------------
</TABLE>
As a member of the Federal Reserve and Federal Home Loan Bank Systems,
Century Bank is required to hold stock in the Federal Reserve Bank of Richmond
and the Federal Home Loan Bank of Atlanta. These stocks, which have no stated
maturity, are carried at cost since no active trading markets exist.
-39-
<PAGE>
CENTURY BANCSHARES, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
- -------------------------------------------------------------- ----------------
(3) LOANS RECEIVABLE
The loan portfolio consists of the following:
<TABLE>
<CAPTION>
December 31,
-------------------------------------
1998 1997
------------------ ------------------
<S> <C> <C>
Commercial $ 28,905,741 $24,132,290
Real estate - residential 29,563,080 29,360,709
Real estate - commercial 35,820,890 17,999,360
Real estate - construction 1,205,397 1,458,520
Consumer 12,517,045 13,535,702
Home equity 7,184,985 7,808,051
------------------ ------------------
115,197,138 94,294,632
Unearned income and deferred costs 34,160 (123,182)
------------------ ------------------
115,231,298 94,171,450
Allowance for credit losses (1,128,147) (887,046)
------------------ ------------------
Loans, net $ 114,103,151 $93,284,404
------------------ ------------------
</TABLE>
Loans on which the accrual of interest has been discontinued amounted
to approximately $1,163,000, $624,000, and $272,000, at December 31, 1998, 1997,
and 1996, respectively. Interest lost on these nonaccrual loans was
approximately $100,000, $26,000, and $17,000, for 1998, 1997, and 1996,
respectively. The Company did not receive any interest paid on these nonaccrual
loans in 1997 and received approximately $21,000 and $20,000 for 1998 and 1996,
respectively.
Analysis of the activity in the allowance for credit losses is as
follows:
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------------------------
1998 1997 1996
------------------ ------------------ -------------------
<S> <C> <C> <C>
Balance, beginning of year $ 887,046 $ 825,876 $ 740,000
Provision for credit losses 620,000 336,200 160,000
Loans charged off (486,916) (451,593) (256,245)
Recoveries 108,017 176,563 182,121
------------------ ------------------ -------------------
Net charge-offs (378,899) (275,030) (74,124)
------------------ ------------------ -------------------
Balance, end of year $1,128,147 $ 887,046 $ 825,876
------------------ ------------------ -------------------
</TABLE>
-40-
<PAGE>
CENTURY BANCSHARES, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
- -------------------------------------------------------------- ----------------
(3) LOANS RECEIVABLE, CONTINUED
The Company is a party to financial instruments with off-balance-sheet
risk in the normal course of business to meet the financing needs of its
customers. These financial instruments include commitments to extend credit and
standby letters of credit and financial guarantees. Commitments to extend credit
are agreements to lend to a customer so long as there is no violation of any
condition established in the contract. Commitments usually have fixed expiration
dates or other termination clauses and may require payment of a fee. Since many
of the commitments are expected to expire without being drawn upon, the total
commitment amounts do not necessarily represent future cash requirements.
Standby letters of credit are conditional commitments issued by the
Company to guarantee the performance of the contractual obligations by a
customer to a third party. The majority of these guarantees extend until
satisfactory completion of the customer's contractual obligations. All standby
letters of credit outstanding at December 31, 1998, are collateralized.
Those instruments may involve, to varying degrees, elements of credit
and interest rate risk in excess of the amount recognized in the consolidated
statements of financial condition. Credit risk is defined as the possibility of
sustaining a loss because the other parties to a financial instrument failed to
perform in accordance with the terms of the contract. The Company's maximum
exposure to credit loss under standby letters of credit and commitments to
extend credit is represented by the contractual amounts of those instruments.
<TABLE>
<CAPTION>
Contractual or
notional amount
as of
December 31,
-------------------------------------
1998 1997
------------------ ------------------
<S> <C> <C>
Financial instruments whose contract amounts
represent potential credit risk:
Commitments to extend credit $27,246,000 $25,261,000
Standby letters of credit 2,251,000 1,777,000
</TABLE>
At December 31, 1998, the Company did not have any financial
instruments whose notional or contractual amounts exceed the amount of credit
risk. The Company uses the same credit policies in making commitments and
conditional obligations as it does for on-balance-sheet instruments. The Company
evaluates each customer's creditworthiness on a case-by-case basis and requires
collateral to support financial instruments when deemed necessary. The amount of
collateral obtained upon extension of credit is based on management's evaluation
of the counterparty. Collateral held varies but may include deposits held by the
Company; marketable securities; accounts receivable; inventory; property, plant
and equipment; and income-producing commercial properties.
Most of the Company's business activity is with customers located in
the District of Columbia, Maryland, and Northern Virginia. Accordingly, the
ultimate collectibility of a substantial portion of the Company's loan portfolio
is susceptible to changes in conditions in these markets. Industry
concentrations in excess of 10 percent of total loans where the borrowers as a
group might be affected similarly by economic changes consist of loans to
members of the legal profession and the health care profession. Century Bank
offers lines of credit, home equity lines, and mortgage loans to these groups.
The aggregate total of loans to such groups was approximately $19.8 million and
$11.6 million, respectively, as of December 31, 1998. The aggregate total of
loans to such groups was approximately $17.8 million and $11.5 million,
respectively, as of December 31, 1997. The amount of such loans which are past
due or considered by management to be potential problem loans is not material.
-41-
<PAGE>
CENTURY BANCSHARES, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
- -------------------------------------------------------------- ----------------
(4) RELATED PARTIES
An analysis of the activity of loans to directors, officers, and their
affiliates during the years ended December 31, 1998 and 1997, is as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
1998 1997
------------------ ------------------
<S> <C> <C>
Balance, beginning of year $ 3,510,534 $ 2,661,708
Additions 1,664,714 939,478
Payments (1,784,994) (90,652)
------------------ ------------------
Balance, end of year $ 3,390,254 $ 3,510,534
------------------ ------------------
</TABLE>
In the opinion of management, all transactions entered into between the
Company and such related parties have been and are in the ordinary course of
business and made on the same terms and conditions as similar transactions with
unaffiliated persons. Unfunded commitments to related parties totaled
approximately $539,000 and $282,000 at December 31, 1998 and 1997, respectively.
Also, included in professional fees are legal fees paid to law firms
whose partners are directors of the Company or the Bank, totaling $270,041,
$282,536, and $139,611 for the years ended December 31, 1998, 1997, and 1996,
respectively.
(5) LEASEHOLD IMPROVEMENTS, FURNITURE, AND EQUIPMENT
Leasehold improvements, furniture, and equipment consist of the following:
<TABLE>
<CAPTION>
December 31,
1998 1997
------------------ ------------------
<S> <C> <C>
Leasehold improvements $ 1,485,970 $ 1,459,696
Furniture and equipment 2,937,583 2,828,881
------------------ ------------------
4,423,553 4,288,577
Less accumulated depreciation and amortization (3,051,183) (2,579,590)
------------------ ------------------
Balance, end of year $ 1,372,370 $ 1,708,987
------------------ ------------------
</TABLE>
Depreciation and amortization expense for leasehold improvements,
furniture, and equipment was $471,592, $502,556, and $407,175 for 1998, 1997,
and 1996, respectively.
-42-
<PAGE>
CENTURY BANCSHARES, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
- -------------------------------------------------------------- ----------------
(6) DEPOSITS
Major classifications of deposits consist of the following:
<TABLE>
<CAPTION>
December 31,
1998 1997
------------------ ------------------
<S> <C> <C>
Noninterest-bearing - demand deposits $ 31,676,194 $ 26,225,119
Interest-bearing:
NOW accounts 19,345,373 18,505,617
Savings accounts 19,649,757 16,357,774
Money market accounts 17,995,450 24,999,539
Certificates of deposit--less than $100,000 20,202,277 27,065,335
Certificates of deposit--$100,000 and over 17,342,225 16,451,648
------------------ ------------------
Total interest-bearing 94,535,082 103,379,913
------------------ ------------------
Total deposits $ 126,211,276 $ 129,605,032
------------------ ------------------
</TABLE>
Certificates of deposit of $31,275,068 have remaining maturities of one
year or less as of December 31, 1998. Certificates of deposit with a remaining
term of more than one year as of December 31, 1998, are as follows:
<TABLE>
<CAPTION>
Year Ending December 31,
- ----------------------------------
<S> <C>
2000 $ 2,900,290
2001 862,246
2002 1,035,329
2003 1,435,705
2004 35,864
Thereafter -
----------------------
Total $ 6,269,434
----------------------
</TABLE>
In October 1997, Century Bank acquired deposit accounts totaling
approximately $28.0 million. This acquisition included a premium of $1.5 million
to be amortized over an estimated life of ten years on a straight-line basis.
Also, in September 1994, Century Bank acquired deposit accounts of approximately
$9.1 million, for which it paid a premium of $366 thousand. Total amortization
expense for such deposit premiums was $190 thousand in 1998, $68 thousand in
1997, and $48 thousand in 1996.
-43-
<PAGE>
CENTURY BANCSHARES, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
- -------------------------------------------------------------- ----------------
(7) OTHER BORROWINGS
Other borrowings consist of advances from the Federal Home Loan Bank of Atlanta
(FHLB), deposits received in the Bank's U.S. Treasury Tax and Loan Account, and
securities sold under repurchase agreements. Balances outstanding are shown
below:
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------------------------
1998 1997 1996
------------------ ------------------ -------------------
<S> <C> <C> <C>
Federal Home Loan Bank:
Ending balance $ 6,512,501 $ 7,422,619 $ 7,750,000
Daily average balance for the period 6,911,185 7,397,407 4,559,202
Maximum outstanding balance at a month-end 7,221,812 7,675,000 7,800,000
Daily average interest rate for the period 6.81% 6.75% 5.99%
Average interest rate on period end balance 6.74 6.73 6.73
Treasury Tax and Loan Account
Ending balance $ 589,411 $ 776,224 $ 715,877
Daily average balance for the period 360,645 370,944 392,740
Maximum outstanding balance at a month-end 2,101,044 776,224 829,352
Daily average interest rate for the period 4.79% 4.61% 4.64%
Average interest rate on period end balance 4.45 5.27 5.16
Securities sold under repurchase agreements
Ending balance $ 1,359,329
Daily average balance for the period 264,329
Maximum outstanding balance at a month-end 1,359,329
Daily average interest rate for the period 4.72%
Average interest rate on period end balance 4.72
</TABLE>
The current balance of FHLB advances with original maturities in excess
of one year are summarized as follows:
<TABLE>
<CAPTION>
December 31,
-------------------------------------
1998 1997
------------------ ------------------
<S> <C> <C>
6.60% fixed rate, due 1999 $ 300,000 $ 300,000
6.85% fixed rate, due 2001 300,000 300,000
6.57% fixed rate, due 2001 1,200,000 1,600,000
6.66% fixed rate, due 2002 1,600,000 2,000,000
6.30% fixed rate, due 2006 800,000 800,000
7.34% fixed rate, due 2006 1,000,000 1,000,000
6.94% fixed rate, due 2006 750,000 850,000
6.65% fixed rate, due 2017 563,000 573,000
------------------ ------------------
$ 6,513,000 $ 7,423,000
------------------ ------------------
</TABLE>
The Bank has been advised by the FHLB that it has a total credit
availability of $16.1 million. The FHLB credit availability does not represent a
firm commitment by the FHLB. Rather, it is the FHLB's assessment of what the
Bank could borrow given the Bank's current financial condition. The credit
availability is subject to change at any time based upon the Bank's financial
condition and that of the FHLB, as well as changes in FHLB policies or
Congressional mandates. At December 31, 1998, the balance of advances payable to
the FHLB was $6.5 million and the credit available from the FHLB was $9.6
million.
-44-
<PAGE>
CENTURY BANCSHARES, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
- -------------------------------------------------------------- ----------------
(7) OTHER BORROWINGS, CONTINUED
In connection with its borrowings from the FHLB, the Bank is required
to own FHLB stock. At December 31, 1998, the Bank's investment in FHLB stock had
a par and carrying value of $821,800 and was automatically pledged against FHLB
advances. Advances from the FHLB are secured by a blanket floating lien on the
Bank's residential, one-to-four family first mortgage loans.
(8) STOCKHOLDERS' EQUITY
Common Stock
The Company is authorized to issue 5 million shares of Common Stock, par value
$1.00. At December 31, 1998, the Company had 2,574,219 shares outstanding.
In September 1997, the Company issued 977,500 shares of Common Stock,
at a price of $7.25 per share. The net proceeds from the sale of Common Stock
totaled approximately $6.3 million.
In November 1995, the Company issued 173,912 Units pursuant to an
Offering made in September 1995, to existing holders of the Company's Common and
Preferred Stock (see below). Each Unit consisted of one share of Common Stock
and one Warrant. The offering price was $5.75 per Unit. Of the 173,912 Units
issued, 35,814 Units were exchanged for 27,449 shares of the Company' Series A
Cumulative Convertible Preferred Stock. The remaining 138,098 Units were sold
for cash, with net proceeds totaling $711,187.
Each Warrant entitled the holder thereof to purchase one share of
Common Stock at a price of $5.75 per share, subject to adjustment. As a result
of stock dividends declared in 1998, 1997 and 1996, the terms of the Warrants
were adjusted to the effect that each Warrant entitled the holder to purchase
1.179675 shares of Common Stock at an adjusted price of $4.874 per share at any
time through November 16, 1998. Prior to the November 16, 1998 expiration date,
the exercise of warrants during 1998 generated additional proceeds of $934,334
from the issuance of shares of common stock.
Income Per Common Share
In accordance with SFAS No. 128, the calculation of basic income per common
share and diluted income per common share is detailed below:
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------------------------------
1998 1997 1996
----------------- ---------------- -----------------
<S> <C> <C> <C>
Basic Income Per Share:
Net income $ 636,884 $ 336,158 $ 278,579
Weighted average common shares outstanding 2,388,015 1,551,307 1,244,390
----------------- ---------------- -----------------
Basic income per share $0.27 $0.22 $0.22
Diluted Income Per Share:
Net income $ 636,884 $ 336,158 $ 278,579
Weighted average common shares outstanding 2,388,015 1,551,307 1,244,390
Dilutive effect of warrants and stock options 50,609 129,131 74,869
----------------- ---------------- -----------------
Diluted weighted average
common shares outstanding 2,438,624 1,680,438 1,319,259
----------------- ---------------- -----------------
Diluted income per share $0.26 $0.20 $0.21
</TABLE>
-45-
<PAGE>
CENTURY BANCSHARES, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
- -------------------------------------------------------------- ----------------
(9) BENEFIT AND INCENTIVE PLANS
Deferred Compensation Plan
The Company has a deferred compensation plan for its board of directors and
Century Bank's board of directors, with certain limitations. Each director may
elect to enter into an agreement in lieu of receiving director's fees in cash.
The agreements generally provide for the purchase of life insurance for each
participating director and the payment of a retirement benefit for 15 years
after retirement, with certain death provisions. The retirement benefit granted
under the agreement vests pursuant to a schedule, with 20% of the benefit
vesting each year over a five-year period. As of December 31, 1998, the net
present value of the deferred compensation liability for all directors totaled
approximately $674,000, compared with $544,000 for 1997. Expenses related to the
deferred compensation program totaled $108,000 for 1998, $84,000 for 1997, and
$112,000 for 1996.
Stock Option Plans
Pursuant to the Century Bancshares, Inc. 1994 Stock Option Plan ("1994 Plan")
the Company reserved 350,000 shares of its common stock for the issuance of
incentive stock options and nonqualified stock options to directors and key
employees. As of December 31, 1998, after adjusting for stock dividends and
stock option activity, there are 329,317 shares of stock reserved for issuance
pursuant to the 1994 Plan, of which 202,546 shares are reserved for outstanding
options and 126,771 shares are reserved for future option grants. These options
are granted for terms of 7 to 10 years, with directors having immediate vesting
and employees vesting 25 percent (of the original grant) after each six,
eighteen, thirty and forty-two month periods of continued service.
In addition, there remain outstanding certain options granted to
directors and key employees under two prior option plans ("Prior Plans") which
expired in 1992 and 1993. As of December 31, 1998, after adjusting for stock
dividends and stock option activity, there are 12,364 shares of stock reserved
for issuance pursuant to options granted under the Prior Plans, which options
are still valid and were not affected by the Plans' expiration. As of December
31, 1998, all options granted under the Prior Plans are fully exercisable.
In connection with the 5 percent stock dividend effective July 31,
1993, March 31, 1994, March 31, 1995, May 7, 1997, and June 29, 1998, in
addition to the 7 percent stock dividend effective March 31, 1996, the number of
shares subject to any outstanding options, the exercise price per share, and the
number of shares reserved for the issuance of future options have been
appropriately and equitably adjusted, pursuant to the stock option plans, so as
to maintain the proportionate number of shares without changing the aggregate
option price. In the tables below, the shares and prices per share have been
adjusted to reflect the stock dividends.
Stock option transactions for the years ended December 31, 1998, 1997,
and 1996, are summarized as follows:
<TABLE>
<CAPTION>
1998 1997 1996
--------------------------- --------------------------- ---------------------------
Weighted Weighted Weighted
average average average
exercise exercise exercise
Fixed options Shares price Shares price Shares price
- ----------------------------------- ------------- ------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year 183,898 $4.45 162,352 $3.64 166,285 $3.15
Granted 99,900 8.21 45,462 6.95 33,985 6.00
Exercised (60,831) 3.43 (17,699) 2.45 (26,934) 3.16
Forfeited (8,056) 9.49 (6,217) 6.30 (10,984) 5.18
- ----------------------------------- ------------- ------------- --- ------------- ------------- --- ------------- -------------
Outstanding at end of year 214,911 $6.34 183,898 $4.45 162,352 $3.64
- ----------------------------------- ------------- ------------- --- ------------- ------------- --- ------------- -------------
Options exercisable at year-end 134,865 $5.78 154,876 $4.40 141,582 $3.68
Weighted average fair value of
options granted $4.28 $3.07 $2.09
</TABLE>
-46-
<PAGE>
CENTURY BANCSHARES, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
- -------------------------------------------------------------- ----------------
(9) BENEFIT AND INCENTIVE PLANS, CONTINUED
Stock Option Plans, Continued
The following table summarizes information about stock options
outstanding at December 31, 1998:
<TABLE>
<CAPTION>
Options outstanding Options exercisable
--------------------------- ---------------------------
Weighted
average Weighted Weighted
Number remaining average average
of options contractual exercise Number exercise
Range of exercise prices outstanding (years) price exercisable price
- ----------------------------------- -------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
$1.46 to $2.00 2,821 0.4 $ 1.66 2,821 $ 1.66
$2.01 to $3.00 11,370 0.8 2.36 11,370 2.36
$3.01 to $4.00 23,403 2.1 3.76 23,403 3.76
$4.01 to $5.00 20,414 3.1 4.87 20,414 4.87
$5.01 to $6.00 23,073 6.9 5.44 21,027 5.44
$6.01 to $7.00 82,830 9.1 6.51 28,321 6.55
$7.01 to $8.00 4,750 9.9 7.37 - -
$8.01 to $9.00 - - - - -
$9.01 to $10.00 30,500 9.0 9.30 22,000 9.31
$10.01 to $10.36 15,750 9.2 10.13 5,509 10.13
- ----------------------------------- -------------- ------------- ------------- ------------- -------------
$1.46 to $10.36 214,911 7.0 $ 6.34 134,865 $ 5.78
- ----------------------------------- -------------- ------------- ------------- ------------- -------------
</TABLE>
The fair value of each option grant is estimated on the date of grant
using the Black Scholes option-pricing model with the following weighted average
assumptions used for grants in 1998, 1997 and 1996, respectively: no dividends
for any year, expected volatility of 28 percent for 1998, 29 percent for 1997,
and 20 percent for 1996, risk free interest rates of 5.4 percent for 1998, 5.8
percent for 1997, and 6.3 percent for 1996, along with expected lives of 7 years
for 1998, 1997 and 1996.
As the Company continues to apply APB Opinion No. 25 in accounting for
its stock options, no compensation cost has been recognized for its stock
options in the financial statements. Had the Company determined compensation
cost based on the fair value at the grant date for its stock options under SFAS
No. 123, the Company's net income would have been reduced to the pro forma
amounts indicated below:
<TABLE>
<CAPTION>
1998 1997 1996
------------------ ------------------ -------------------
<S> <C> <C> <C>
Net income, as reported $636,884 $336,158 $278,579
Net income, pro forma 519,502 298,320 244,585
Diluted earnings per share, as reported .26 .21 .22
Diluted earnings per share, pro forma .21 .19 .19
</TABLE>
Pro forma net income reflects only options granted in 1998, 1997 and
1996. Therefore, the full impact of calculating compensation cost for stock
options under SFAS No. 123 is not reflected in the pro forma net income amounts
presented above because compensation cost is reflected over the options vesting
period and compensation costs for options granted prior to January 1, 1995 are
not considered.
Employee Benefit Plan
The Company maintains a 401(k) plan which covers substantially all employees.
Participants may contribute up to 6 percent of their compensation. The Company
matches 50 percent of participant contributions to the Plan. This matching
contribution totaled approximately $38,000 for 1998, $17,000 for 1997 and
$21,000 for 1996.
-47-
<PAGE>
CENTURY BANCSHARES, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
- -------------------------------------------------------------- ----------------
(10) INCOME TAXES
The provision for taxes on income for the years ended December 31, 1998, 1997,
and 1996, consisted of the following:
<TABLE>
<CAPTION>
1998 1997 1996
------------------ ------------------ -------------------
<S> <C> <C> <C>
Current federal income tax $328,429 $304,721 $289,329
Current state income tax 747 90,251 73,503
------------------ ------------------ -------------------
Total current income tax 329,176 394,972 362,832
Deferred Federal income tax expense (benefit) (15,915) (117,497) (68,715)
Deferred state income tax expense (benefit) 41,630 (43,873) (19,418)
------------------ ------------------ -------------------
Total deferred income tax expense (benefit) 25,715 (161,370) (88,133)
------------------ ------------------ -------------------
Total income tax $354,891 $233,602 $274,699
------------------ ------------------ -------------------
</TABLE>
The difference between the statutory federal income tax rates and the
effective income tax rates for 1998, 1997, and 1996, are as follows:
<TABLE>
<CAPTION>
1998 1997 1996
- ----------------------------------------------------- ------------------ ------------------ -------------------
<S> <C> <C> <C>
Statutory federal income tax rate 34.0 % 34.0 % 34.0%
State income taxes, net of federal benefit 2.8 5.4 6.4
Nondeductible expenses 1.1 2.6 8.1
Other (2.1) (1.0) 1.1
- ----------------------------------------------------- ------------------ ------------------ -------------------
Effective income tax rate 35.8 % 41.0 % 49.6%
- ----------------------------------------------------- ------------------ ------------------ -------------------
</TABLE>
The following is a summary of the tax effects of temporary differences
that give rise to significant portions of the deferred tax assets and deferred
tax liabilities at December 31, 1998 and 1997:
<TABLE>
<CAPTION>
1998 1997
---------------- -----------------
<S> <C> <C>
Assets:
Fixed assets $ 102,797 $ 84,289
Bad debts 218,021 318,827
Deferred rent expense 28,741 44,703
Deferred loan fees 37,460 49,987
Vacation pay accrual 22,800 20,479
Directors' deferred compensation 256,284 220,749
Intangibles 44,847 22,254
---------------- -----------------
Deferred tax assets 710,950 761,288
Liabilities:
Federal Home Loan Bank stock dividends (11,484) (11,484)
Unrealized (gains) losses on investments designated as
available-for-sale recognized for tax purposes (3,468) 11,217
Other (12,885) (56,444)
---------------- -----------------
Deferred tax liabilities (27,837) (56,711)
---------------- -----------------
Net deferred tax asset $ 683,113 $ 704,577
---------------- -----------------
</TABLE>
Net deferred tax assets of $683,113 and $704,577 at December 31, 1998
and 1997, respectively, are included in other assets. The Company has not
established a valuation allowance for deferred tax assets. In assessing the
realizability of deferred tax assets, management considers whether it is more
likely than not some portion or all of the deferred tax assets will not be
realized. Based on the level of historical taxable income during the carryback
period and the reversal of certain deferred tax liabilities, management believes
it is more likely than not the Company will realize the benefits of these
deductible differences.
-48-
<PAGE>
CENTURY BANCSHARES, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
- -------------------------------------------------------------- ----------------
(11) RESERVE BALANCES, FUNDS RESTRICTION, COMMITMENTS AND CONTINGENCIES
Reserve Balances
Under Federal Reserve Board regulations, banks are required to maintain cash
reserves against certain categories of deposit liabilities. Cash balances
qualified to meet these reserve requirements consist of vault cash and balances
on deposit with the Federal Reserve Bank. Such restricted cash balances are
included in "Cash and due from banks" in the consolidated statements of
financial condition and amount to approximately $1.0 million at year-end 1998
and 1997.
Funds Restrictions
Dividends paid to the Company by Century Bank are subject to restrictions by
regulatory agencies. As of December 31, 1998, approximately $1.3 million was
available to be paid to the Company in dividends from Century Bank, pursuant to
such regulatory restrictions. As described in Note 12--Capital and Liquidity,
regulatory agencies have established laws and guidelines with respect to the
maintenance of appropriate levels of bank capital that could further limit the
amount available for payment of dividends by Century Bank under regulatory
restrictions if applied in the future.
Commitments and Contingencies
The Company leases its banking facilities under operating leases providing for
payment of fixed rentals and providing for pass-through of certain landlord
expenses, with options to renew. Rental expense was approximately $548,000,
$399,000, and $327,000, for the years ended December 31, 1998, 1997, and 1996,
respectively. Total future minimum rental payments at December 31, 1998, are as
follows:
<TABLE>
<CAPTION>
Year Ending December 31,
- --------------------------------------
<S> <C>
1999 $ 564,000
2000 581,000
2001 591,000
2002 403,000
2003 199,000
Thereafter 266,000
----------------
Total $2,604,000
----------------
</TABLE>
-49-
<PAGE>
CENTURY BANCSHARES, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
- -------------------------------------------------------------- ----------------
(12) CAPITAL AND LIQUIDITY
The Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA)
requires regulators to classify insured depository institutions into one of five
tiers based upon their relative capital strengths and to increase progressively
the degree of regulation over the weaker ones, limits the pass-through deposit
insurance treatment of certain types of accounts, adopts a "Truth in Savings"
program, calls for the adoption of risk-based premiums on deposit insurance, and
requires banks to observe insider credit underwriting procedures no less strict
than those applied to comparable non-insider transactions.
The Financial Institutions Reform, Recovery and Enforcement Act
(FIRREA) of 1989 requires depository institutions to maintain minimum capital
levels. In addition to its capital requirements, FIRREA includes provisions for
changes in the federal regulatory structure for institutions, including a new
deposit insurance system, increased deposit insurance premiums, and restricted
investment activities with respect to noninvestment grade corporate debt and
certain other investments.
Failure to meet minimum capital requirements can initiate certain
mandatory--and possibly additional discretionary--actions by regulators that, if
undertaken, could have a direct material effect on the Bank's financial
statements. Under capital adequacy guidelines and the regulatory framework for
prompt corrective action, the Bank must meet specific capital guidelines that
involve quantitative measures of the Bank's assets, liabilities, and certain
off-balance-sheet items as calculated under regulatory accounting practices. The
Bank's capital amounts and classification are also subject to qualitative
judgments by the regulators about components, risk weightings, and other
factors.
Quantitative measures established by regulation to ensure capital
adequacy require the Company and Century Bank to maintain minimum amounts and
ratios (set forth in the table below) of total and Tier 1 capital (as defined in
the regulations) to risk-weighted assets (as defined), and of Tier 1 capital (as
defined) to average assets (as defined). Management believes, as of December 31,
1998, that the Bank meets all capital adequacy requirements to which it is
subject.
As of December 31, 1998, the most recent notification from the OCC
categorized Century Bank as well capitalized under the regulatory framework for
prompt corrective action. To be categorized as well capitalized, Century Bank
must maintain minimum total risk-based, Tier 1 risk-based, and Tier 1 leverage
ratios as set forth in the table. There are no conditions or events since that
notification that management believes have changed the Company's category.
The following tables present the actual and required capital
information for the Company and Century Bank:
<TABLE>
<CAPTION>
To be well
capitalized under
For capital prompt corrective
Actual adequacy purposes action provisions
------------------------- ------------------------ ------------------------
Amount Ratio Amount Ratio Amount Ratio
- -------------------------------------------- ------------ ------------ ------------ ----------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1998
Total Capital (to Risk Weighted Assets):
Century Bancshares, Inc. $14,892,149 12.56% $9,489,120 8.00% n/a n/a
Century National Bank 12,906,593 10.93% 9,449,360 8.00% $11,811,700 10.00%
Tier 1 Capital (to Risk Weighted Assets):
Century Bancshares, Inc. 13,764,002 11,60% 4,744,560 4.00% n/a n/a
Century National Bank 11,778,446 9.97% 4,724,680 4.00% 7,087,020 6.00%
Tier 1 Capital (to Average Assets):
Century Bancshares, Inc. 13,764,002 9.46% 5,818,840 4.00% n/a n/a
Century National Bank 11,778,446 8.17% 5,769,440 4.00% 7,211,800 5.00%
</TABLE>
-50-
<PAGE>
CENTURY BANCSHARES, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
- -------------------------------------------------------------- ----------------
(12) CAPITAL AND LIQUIDITY, CONTINUED
<TABLE>
<CAPTION>
To be well
capitalized under
For capital prompt corrective
Actual adequacy purposes action provisions
------------------------- ----------------------- -----------------------
Amount Ratio Amount Ratio Amount Ratio
- -------------------------------------------- ------------ ------------ ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1997
Total Capital (to Risk Weighted Assets):
Century Bancshares, Inc. $12,686,803 13.19% $7,693,644 8.00% n/a n/a
Century National Bank 9,861,672 10.26% 7,686,055 8.00% $9,607,569 10.00%
Tier 1 Capital (to Risk Weighted Assets):
Century Bancshares, Inc. 11,799,757 12.27% 3,846,822 4.00% n/a n/a
Century National Bank 8,974,716 9.34% 3,843,028 4.00% 5,764,541 6.00%
Tier 1 Capital (to Average Assets):
Century Bancshares, Inc. 11,799,757 8.83% 5,346,792 4.00% n/a n/a
Century National Bank 8,974,716 6.44% 5,572560 4.00% 6,965,700 5.00%
</TABLE>
-51-
<PAGE>
CENTURY BANCSHARES, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
- -------------------------------------------------------------- ----------------
(13) PARENT COMPANY-ONLY FINANCIAL STATEMENTS
The Century Bancshares, Inc. (parent company-only) condensed financial
statements are as follows:
Statements of Financial Condition
December 31, 1998 and 1997
<TABLE>
<CAPTION>
1998 1997
--------------------- --------------------
<S> <C> <C>
Assets
Cash and cash equivalents $ 1,958,401 $ 3,041,413
Investment in Century Bank 13,331,118 10,710,484
Other assets 91,462 91,462
--------------------- --------------------
Total Assets $15,380,981 $13,843,359
--------------------- --------------------
Liabilities and Stockholders' Equity
Liabilities:
Other liabilities $ 64,307 $ 307,833
--------------------- --------------------
Total Liabilities 64,307 307,833
Stockholders' Equity:
Common stock 2,574,219 2,209,229
Additional paid-in capital 12,343,631 10,695,480
Retained earnings 392,384 651,646
Accumulated other comprehensive income, net of tax effect 6,440 (20,829)
--------------------- --------------------
Total Stockholders' Equity 15,316,674 13,535,526
--------------------- --------------------
Total Liabilities and Stockholders' Equity $15,380,981 $13,843,359
--------------------- --------------------
</TABLE>
Statements of Operations
Years Ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
1998 1997 1996
-------------------- --------------------- --------------------
<S> <C> <C> <C>
Income:
Interest income $ 96,846 $ 35,421 $ -
Other income - - 1,659
-------------------- --------------------- --------------------
Total Income 96,846 35,421 1,659
Expense:
Professional fees - - 111,754
Other expenses 26,657 22,414 15,914
-------------------- --------------------- --------------------
Total Expense 26,657 22,414 127,668
-------------------- --------------------- --------------------
Net income (loss) before income tax benefit and
equity in undistributed earnings of bank subsidiary 70,189 13,007 (126,009)
Income tax expense (benefit) 26,670 5,333 -
-------------------- --------------------- --------------------
Net income (loss) before equity in undistributed
earnings of bank subsidiary 43,519 7,674 (126,009)
Equity in undistributed earnings of Century Bank 593,365 328,484 404,588
-------------------- --------------------- --------------------
Net income $636,884 $336,158 $ 278,579
-------------------- --------------------- --------------------
</TABLE>
-52-
<PAGE>
CENTURY BANCSHARES, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
- -------------------------------------------------------------- ----------------
(13) PARENT COMPANY-ONLY FINANCIAL STATEMENTS, CONTINUED
Statements of Cash Flows
Years ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
1998 1997 1996
-------------------- --------------------- --------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 636,884 $ 336,158 $ 278,579
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Undistributed earnings of subsidiary (593,365) (328,484) (404,588)
Decrease in other assets - 21,203 -
Increase (decrease) in other liabilities (243,526) 59,159 14,083
-------------------- --------------------- --------------------
Net cash provided by (used in) operating activities (200,007) 88,036 (111,926)
Cash flows from investing activities:
Capital contributions to subsidiary (2,000,000) (3,500,000) -
-------------------- --------------------- --------------------
Net cash used in investing activities (2,000,000) (3,500,000) -
Cash flows from financing activities:
Issuance of common stock 1,139,853 6,424,256 85,156
Preferred stock dividends paid - - (878)
Other (22,858) - -
-------------------- --------------------- --------------------
Net cash provided by financing activities 1,116,995 6,424,256 84,278
-------------------- --------------------- --------------------
Net increase (decrease) in cash and cash equivalents (1,083,012) 3,012,292 (27,648)
Cash and cash equivalents, beginning of year 3,041,413 29,121 56,769
-------------------- --------------------- --------------------
Cash and cash equivalents, end of year $ 1,958,401 $ 3,041,413 $ 29,121
-------------------- --------------------- --------------------
Supplemental disclosures of cash flow information:
Interest paid $ - $ - $ -
Income taxes paid - - -
</TABLE>
-53-
<PAGE>
CENTURY BANCSHARES, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
- -------------------------------------------------------------- -----------------
(14) FAIR VALUES OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107, "Disclosures about Fair
Value of Financial Instruments" (SFAS No. 107), requires the disclosure of
estimated fair values for financial instruments. Quoted market prices, if
available, are utilized as an estimate of the fair value of financial
instruments. Because no quoted market prices exist for a portion of the
Company's financial instruments, the fair value of such instruments has been
derived based on management's assumptions with respect to future economic
conditions, the amount and timing of future cash flows and estimated discount
rates. Different assumptions could significantly affect these estimates.
Accordingly, the net realizable value could be materially different from the
estimates presented below. In addition, the estimates are only indicative of
individual financial instruments' values and should not be considered an
indication of the fair value of the Company taken as a whole.
Cash, Interest Bearing Deposits with Other Banks, and Federal Funds Sold: For
cash and due from banks, interest-bearing deposits with other banks, and federal
funds sold; the carrying amount approximates fair value.
Investment Securities: For these instruments, fair values are based on
published market or dealer quotes.
Loans, Net of Unearned Income: For variable rate loans that reprice on a
scheduled basis, fair values are based on carrying values. The fair value of the
remaining loans are estimated by discounting the future cash flows using the
current rates at which similar loans would be made to borrowers with similar
credit ratings and for the same remaining maturities.
Noninterest-Bearing Deposits: The fair value of these deposits is the
amount payable on demand at the reporting date.
Interest-Bearing Deposits: The fair value of demand deposits, savings accounts,
and money market deposits with no defined maturity is the amount payable on
demand at the reporting date. The fair value of certificates of deposit is
estimated by discounting the future cash flows using the current rates at which
similar deposits would be accepted.
Other Borrowings: The carrying amount for variable rate borrowings approximate
the fair values at the reporting date. The fair values of the fixed rate
borrowings are estimated by discounting the future cash flows using interest
rates currently available for borrowings with similar terms and remaining
maturities.
Off-Balance Sheet Items: Century Bank has reviewed the unfunded portion of
commitments to extend credit, as well as standby and other letters of credit,
and has determined that the fair value of such instruments are not material.
-54-
<PAGE>
CENTURY BANCSHARES, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
- -------------------------------------------------------------- ----------------
(14) FAIR VALUES OF FINANCIAL INSTRUMENTS, CONTINUED
The estimated fair values of the Company's financial instruments at December 31,
1998 and 1997 are as follows:
<TABLE>
<CAPTION>
1998 1997
---------------------------------- ----------------------------------
Carrying Fair Carrying Fair
Value Value Value Value
---------------- ----------------- ----------------- ----------------
<S> <C> <C> <C> <C>
Financial Assets:
Cash and due from banks $ 8,950,733 $ 8,950,733 $ 7,069,139 $ 7,069,139
Federal funds sold 4,285,000 4,285,000 5,000,000 5,000,000
Interest bearing deposits with other banks 9,847,315 9,847,315 22,223,037 22,223,037
Investment securities 9,252,893 9,261,036 19,408,593 19,411,384
Loans, net of unearned income 115,231,298 115,919,000 94,171,450 93,381,358
Financial Liabilities:
Noninterest-bearing deposits $ 31,676,194 $ 31,676,194 $ 26,225,119 $ 26,225,119
Interest-bearing deposits 94,535,082 94,865,082 103,379,913 103,448,942
Other borrowings 8,461,241 8,864,000 8,198,843 8,318,962
</TABLE>
(15) ACQUISITIONS AND INTANGIBLES
On October 10, 1997, the Company completed the previously announced purchase and
assumption of the deposits and certain other liabilities of the branch of
Eastern American Bank, FSB ("Eastern American") located at 6832 Old Dominion
Drive, McLean Virginia (the "McLean Branch"). As part of the transaction, the
Company's wholly-owned subsidiary, Century National Bank assumed approximately
$28.0 million in deposits at the McLean Branch, and also assumed the obligations
under the related lease and acquired approximately $9.0 million in mortgage
loans from Eastern American's portfolio, in addition to $0.2 million in
equipment and other assets.
The assumption of the deposits and other liabilities by the Bank was
made pursuant to a Purchase and Assumption Agreement between the Bank and
Eastern American dated July 24, 1997, as amended August 15, 1997 and October 10,
1997. In consideration of the assumption of the deposits and liabilities,
Eastern American made a cash transfer to the Bank on the closing date of
approximately $17.3 million, representing the total amount of the liabilities
assumed, less the sum on the closing date of (i) the value of the vault cash at
the McLean Branch, (ii) the net book value of the leasehold improvements and the
personal property located at the McLean Branch, (iii) the amount of the security
deposit related to the lease of the McLean Branch, (iv) the unpaid balance of
the designated mortgage loans and certain overdraft protection loans, (v)
certain proration items, and (vi) a deposit premium of approximately $1.5
million, equal to 5.6% of the balance of the deposits assumed as of the closing
date, excluding deposits of affiliates of Eastern American and certain other
types of deposits. The acquisition premium of $1.5 million is being amortized
over the estimated 10 year life of the deposit account relationship on a
straight-line basis. Total accumulated amortization at December 31, 1998 was
approximately $185,000, as the amount of amortization expense was $153,000 in
1998 and $32,000 in 1997.
-55-
<PAGE>
CENTURY BANCSHARES, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
- -------------------------------------------------------------- ---------------
(16) QUARTERLY FINANCIAL INFORMATION (Unaudited - in thousands, except per
share data):
<TABLE>
<CAPTION>
Quarter ended Quarter ended Quarter ended Quarter ended
Dec. 31, 1998 Sep. 30, 1998 Jun. 30, 1998 Mar. 31, 1998
- ------------------------------------------- ----------------- ------------------ ------------------- -----------------
<S> <C> <C> <C> <C>
Net interest income $ 1,732 $ 1,698 $ 1,652 $ 1,736
Provision for credit losses 83 154 190 193
Total other income 296 270 287 251
Total other expense 1,679 1,574 1,486 1,570
Net income 165 170 170 132
Earnings per share:
Basic $ 0.07 $ 0.07 $ 0.07 $ 0.06
Diluted 0.07 0.07 0.06 0.06
Weighted average shares outstanding:
Basic 2,493,187 2,376,276 2,356,151 2,324,723
Diluted 2,527,650 2,511,146 2,526,646 2,519,490
Quarter ended Quarter ended Quarter ended Quarter ended
Dec. 31, 1997 Sep. 30, 1997 Jun. 30, 1997 Mar. 31, 1997
- ------------------------------------------- ----------------- ------------------ ------------------- -----------------
Net interest income $ 1,554 $ 1,401 $ 1,273 $ 1,216
Provision for credit losses 220 44 51 21
Total other income 182 226 241 272
Total other expense 1,602 1,396 1,271 1,191
Net income (61) 109 118 170
Earnings per share:
Basic $ (0.03) $ 0.08 $ 0.09 $ 0.13
Diluted (0.03) 0.07 0.08 0.12
Weighted average shares outstanding:
Basic 2,316,264 1,334,082 1,275,562 1,270,243
Diluted 2,470,614 1,501,391 1,435,064 1,381,363
</TABLE>
-56-
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
There was no reported disagreement on any matter of accounting
principles or procedures of financial statement disclosure during 1998 with the
Company's independent public accountants.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information regarding directors and executive officers of the
Company contained under the captions "Election of Directors," Executive
Officers" and "Section 16(a) Beneficial Ownership Reporting Compliance"
contained in the Company's definitive Proxy Statement relating to the 1999
Annual Meeting of Stockholders, prepared pursuant to Regulation 14A of the
Securities Exchange Act of 1934 and to be filed not later than 120 days after
the close of the Company's fiscal year, is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION.
The information concerning executive compensation contained under the
captions "Compensation," and "Stock Performance Graph" contained in the
Company's definitive Proxy Statement relating to the 1999 Annual Meeting of
Stockholders, prepared pursuant to Regulation 14A of the Securities Exchange Act
of 1934 and to be filed not later than 120 days after the close of the Company's
fiscal year, is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information concerning the beneficial ownership of the Company's
voting securities by each director and all officers as a group, and by any
person known to the Company to be the beneficial owner of more than 5% of the
voting securities of the Company contained under the caption "Voting Securities
and Principal Holders Thereof" contained in the Company's definitive Proxy
Statement relating to the 1999 Annual Meeting of Stockholders, prepared pursuant
to Regulation 14A of the Securities Exchange Act of 1934 and to be filed not
later than 120 days after the close of the Company's fiscal year, is
incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information concerning certain relationships and related
transactions contained under the caption "Certain Relationships and
Transactions" contained in the Company's definitive Proxy Statement relating to
the 1999 Annual Meeting of Stockholders, prepared pursuant to Regulation 14A of
the Securities Exchange Act of 1934 and to be filed not later than 120 days
after the close of the Company's fiscal year, is incorporated herein by
reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) The Following Documents are Filed as Part of this Report:
1. Financial Statements Page
----
Independent Auditors' Report 29
Consolidated Statements of Financial Condition 30
Consolidated Statements of Operations 31
Consolidated Statements of Stockholders' Equity 32
Consolidated Statements of Cash Flows 33
Notes to Consolidated Financial Statements 34
2. Financial Statement Schedules
No schedules are included because either they are not
applicable or the required information is shown in the
financial statements or notes thereto.
-57-
<PAGE>
3. Exhibits
2.1 Purchase and Assumption Agreement dated July 24, 1997 by and
between Century Bancshares, Inc. and Eastern American Bank,
FSB (incorporated by reference to Exhibit No. 10.12 filed as
part of the Registration Statement on Form S-1 (Registration
No. 333-34057) of Century Bancshares, Inc.)
2.2 Amendment No. 1 dated August 14, 1997 to Purchase and
Assumption Agreement dated July 24, 1997 between Century
Bancshares, Inc. and Eastern American Bank, FSB (incorporated
by reference to Exhibit No. 10.13 filed as part of the
Registration Statement on Form S-1 (Registration No.
333-34057) of Century Bancshares, Inc.)
2.3 Amendment No. 2 dated October 10, 1997 to Purchase and
Assumption Agreement dated July 24, 1997 between Century
Bancshares, Inc. and Eastern American Bank, FSB (incorporated
by reference to Exhibit No. 2.3 filed as part of the Current
Report on Form 8-K dated October 10, 1997 of Century
Bancshares, Inc.)
3.1 Certificate of Incorporation, as amended of the Company.
(Incorporated by reference from Exhibit 3.1 of the
Registrant's Registration Statement on Form S-1 (Registration
No. 333-14417)).
3.2 Bylaws of the Company. (Incorporated by reference from Exhibit
3.2 of the Registrant's Registration Statement on Form S-1
(Registration No. 333-14417)).
3.3 Articles of Association of the Bank. (Incorporated by
reference from Exhibit 3.3 of the Registrant's Registration
Statement on Form S-1 (Registration No. 333-14417)).
4.1 Form of Warrant to Purchase Common Stock of Century
Bancshares, Inc. (Incorporated by reference from Exhibit 4.1
of the Registrant's Registration Statement on Form S-1
(Registration No.
333-14417)).
4.2 Form of Common Stock certificate. (Incorporated by reference
from Exhibit 4.2 of the Registrant's Registration Statement on
Form S-1 (Registration No. 333-14417)).
10.1 Century Bancshares, Inc. 1994 Stock Option Plan.(Incorporated
by reference from Exhibit 10.1 of the Registrant's
Registration Statement on Form S-1 (Registration No.
333-14417)).
10.2 Incentive Stock Option Plan for Key Employees, as amended.
(Incorporated by reference from Exhibit 10.2 of the
Registrant's Registration Statement on Form S-1 (Registration
No. 333-14417)).
10.3 Nonqualified Stock Option Plan for Key Employees, as amended.
(Incorporated by reference from Exhibit 10.3 of the
Registrant's Registration Statement on Form S-1 (Registration
No. 333-14417)).
10.4 Nonqualified Stock Option Plan for Directors, as amended.
(Incorporated by reference from Exhibit 10.4 of the
Registrant's Registration Statement on Form S-1
(Registration No. 333-14417)).
10.5 Form of Director Compensation Agreement between the Company
and its directors. (Incorporated by reference from Exhibit
10.5 of the Registrant's Registration Statement on Form S-1
(Registration No. 333-14417)).
10.6 Form of Indemnity Agreement between Company and the persons
named therein. (Incorporated by reference from Exhibit 10.6
of the Registrant's Registration Statement on Form S-1
(Registration No. 333-14417)).
-58-
<PAGE>
10.7 Employment Agreement dated September 1, 1996, between the
Company and Mr. Joseph S. Bracewell. (Incorporated by
reference from Exhibit 10.7 of the Registrant's Registration
Statement on Form S-1 (Registration No. 333-14417)).
10.8 Lease Agreement dated January 3, 1995, between the Bank and
Pennsylvania Building Associates. (Incorporated by reference
from Exhibit 10.8 of the Registrant's Registration Statement
on Form S-1 (Registration No. 333-14417)).
10.9 Lease and Services Agreement dated November 17, 1995, between
ALLIANCE Greensboro, L.P., a Delaware limited partnership
d/b/a/ ALLIANCE Business Centers, and the Bank. (Incorporated
by reference from Exhibit 10.9 of the Registrant's
Registration Statement on Form S-1 (Registration No.
333-14417)).
10.10 Retail Lease dated January 14, 1982, between the Square 106
Associates and the Bank, as amended on March 14, 1984,
December 18, 1991, February 12, 1992, October 27, 1995, and
June 1, 1996. (Incorporated by reference from Exhibit 10.10 of
the Registrant's Registration Statement on Form S-1
(Registration No. 333-14417)).
10.11 Sublease Agreement, dated May 1, 1992, between the Company and
the Bank. (Incorporated by reference from Exhibit 10.11 of the
Registrant's Registration Statement on Form S-1 (Registration
No. 333-14417)).
10.12 Sublease Agreement dated November 1996, effective as of
February 1, 1997, by and between Chevy Chase Bank, F.S.B., and
Century National Bank. (Incorporated by reference to the
Registrant's Annual Report on Form 10-K for the year ended
December 31, 1996 (SEC File No.--0-16234)).
10.13* Lease Agreement dated July 23, 1993, by and between McLean
Poplar Partners and Eastern American Bank, F.S.B which was
assumed by Century National Bank under the Purchase and
Assumption Agreement (dated July 24, 1997 and noted in 2.1
above).
10.14* Lease Agreement dated September 30, 1997, by and between The
Life Underwriter Training Council and Century National Bank.
10.15* Century Directors' Trust established June 24, 1998, by the
Company and the Bank for the benefit of the directors of the
Company and the Bank.
10.16* Amendment dated March 1, 1998, of the employment agreement
between the Company and the Bank and Mr.Joseph S. Bracewell.
11* Statement regarding computation of per share earnings.
21* Subsidiaries of the Registrant.
24* Powers of Attorney from certain of the directors of Century
Bancshares, Inc. whose signatures are to be affixed to this
Form 10-K for the year ended December 31, 1998.
27* Financial Data Schedule.
- ---------------
* Filed herewith.
-59-
<PAGE>
(b) Reports on Form 8-K.
There were no reports on Form 8-K filed during the fourth quarter of
1998.
-60-
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the Registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized.
CENTURY BANCSHARES, INC.
(Registrant)
By: /s/ JOSEPH S. BRACEWELL
-----------------------------
Joseph S. Bracewell
Chairman of the Board, President and
Chief Executive Officer
By: /s/ CHARLES V. JOYCE III
-----------------------------
Charles V. Joyce III
Senior Vice President and
Chief Financial Officer
(Principal Financial and
Accounting Officer)
Dated: March 29, 1999.
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, this report has been signed below by the
following persons on behalf of the Registrant in the capacities indicated, on
the 29th day of March, 1999.
<TABLE>
<CAPTION>
<S> <C>
/s/ JOSEPH S. BRACEWELL Chairman of the Board, President and
- -----------------------------------------------------
Joseph S. Bracewell Chief Executive Officer
* Director
- -----------------------------------------------------
*George Contis
* Director
- -----------------------------------------------------
*John R. Cope
* Director
- -----------------------------------------------------
*Bernard J. Cravath
* Director
- -----------------------------------------------------
*Neal R. Gross
Director
- -----------------------------------------------------
William McKee
* Director
- -----------------------------------------------------
*William C. Oldaker
*By: /s/ Joseph S. Bracewell
- -----------------------------------------------------
Attorney-in-Fact
</TABLE>
-61-
<PAGE>
Index to Exhibits
Exhibit No. Description
- -------------------------------------------------------------------------------
10.13 Lease Agreement dated July 23, 1993, by and between McLean
Poplar Partners and Eastern American Bank, F.S.B which was
assumed by Century National Bank under the Purchase and
Assumption Agreement (dated July 24, 1997 and noted in 2.1
above).
10.14 Lease Agreement dated September 30, 1997, by and between The
Life Underwriter Training Council and Century National Bank.
10.15 Century Directors' Trust established June 24, 1998, by the
Company and the Bank for the benefit of the directors of the
Company and the Bank.
10.16 Amendment dated March 1, 1998, of the employment agreement
between the Company and the Bank and Mr.Joseph S. Bracewell.
11 Earnings per share computation.
21 List of Subsidiaries.
24 Power of Attorney.
27 Financial Data Schedule.
[TYPE] EX-11
CENTURY BANCSHARES, INC. Exhibit 11
Computation of Per Share Earnings
Three Years Ended December 31, 1998
<TABLE>
<CAPTION>
Year Ended
December 31,
----------------------------------------
1998 1997 1996
<S> <C> <C> <C>
Basic Earnings Per Share:
Net income $636,884 $336,158 $278,579
Less: Dividends paid on
preferred stock -- -- --
----------------------------------------
Net income applicable to
common stock $636,884 $336,158 $278,579
Weighted-average common
shares outstanding 2,388,015 1,477,435 1,128,698
----------------------------------------
Basic earnings per share $0.27 $0.23 $0.25
Diluted Earnings Per Share:
Net income applicable to
common stock $636,884 $336,158 $278,579
Weighted-average common
shares outstanding 2,388,015 1,477,435 1,128,698
Dilutive effect of warrants
and stock options 50,609 122,982 67,909
----------------------------------------
Diluted weighted-average
common shares outstanding 2,438,624 1,600,417 1,196,607
----------------------------------------
Diluted earnings per share $0.26 $0.21 $0.23
</TABLE>
[TYPE] EX-21
<PAGE> 1
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
Century National Bank, incorporated under the laws of the United States.
[TYPE] EX-24
<PAGE> 1
EXHIBIT 24
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned director of
Century Bancshares, Inc. a Delaware corporation (the "Company"), hereby
constitutes and appoints Joseph S. Bracewell, the undersigned's true and lawful
attorney-in-fact and agent, for the undersigned and on the undersigned's behalf
and in the undersigned's name, place and stead, in any and all capacities, to
sign, execute and file with the Securities and Exchange Commission the
Company's Annual Report on Form 10-K for the year ended December 31, 1998,
together with all amendments thereto, with all exhibits and any and all
documents required to be filed with respect thereto with any regulatory
authority, granting unto said attorney, full power and authority to do and
perform each and every act and thing requisite and necessary to be done in and
about the premises in order to effectuate the same as fully to all intents and
purposes as the undersigned might or could do if personally present, hereby
ratifying and confirming all that said attorney-in-fact and agent, may lawfully
do or cause to be done by virtue thereof.
IN WITNESS WHEREOF, the undersigned has hereto signed this power of
attorney this 22nd day of March, 1999.
_______________________
/s/ JOHN R. COPE
- - --------------------
- -------------------------------------------------------------------------------
<PAGE> 2
EXHIBIT 24
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned director of
Century Bancshares, Inc. a Delaware corporation (the "Company"), hereby
constitutes and appoints Joseph S. Bracewell, the undersigned's true and lawful
attorney-in-fact and agent, for the undersigned and on the undersigned's behalf
and in the undersigned's name, place and stead, in any and all capacities, to
sign, execute and file with the Securities and Exchange Commission the
Company's Annual Report on Form 10-K for the year ended December 31, 1998,
together with all amendments thereto, with all exhibits and any and all
documents required to be filed with respect thereto with any regulatory
authority, granting unto said attorney, full power and authority to do and
perform each and every act and thing requisite and necessary to be done in and
about the premises in order to effectuate the same as fully to all intents and
purposes as the undersigned might or could do if personally present, hereby
ratifying and confirming all that said attorney-in-fact and agent, may lawfully
do or cause to be done by virtue thereof.
IN WITNESS WHEREOF, the undersigned has hereto signed this power of attorney
this 22nd day of March, 1999.
_____________________________
/s/ BERNARD J. CRAVATH
- - ----------------------------------
- -------------------------------------------------------------------------------
<PAGE> 3
EXHIBIT 24
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned director of
Century Bancshares, Inc. a Delaware corporation (the "Company"), hereby
constitutes and appoints Joseph S. Bracewell, the undersigned's true and lawful
attorney-in-fact and agent, for the undersigned and on the undersigned's behalf
and in the undersigned's name, place and stead, in any and all capacities, to
sign, execute and file with the Securities and Exchange Commission the
Company's Annual Report on Form 10-K for the year ended December 31, 1998,
together with all amendments thereto, with all exhibits and any and all
documents required to be filed with respect thereto with any regulatory
authority, granting unto said attorney, full power and authority to do and
perform each and every act and thing requisite and necessary to be done in and
about the premises in order to effectuate the same as fully to all intents and
purposes as the undersigned might or could do if personally present, hereby
ratifying and confirming all that said attorney-in-fact and agent, may lawfully
do or cause to be done by virtue thereof.
IN WITNESS WHEREOF, the undersigned has hereto signed this power of
attorney this 19th day of March, 1999.
_____________________________
/s/ GEORGE CONTIS
- - ------------------------------------
- -------------------------------------------------------------------------------
<PAGE> 4
EXHIBIT 24
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned director of
Century Bancshares, Inc. a Delaware corporation (the "Company"), hereby
constitutes and appoints Joseph S. Bracewell, the undersigned's true and lawful
attorney-in-fact and agent, for the undersigned and on the undersigned's behalf
and in the undersigned's name, place and stead, in any and all capacities, to
sign, execute and file with the Securities and Exchange Commission the
Company's Annual Report on Form 10-K for the year ended December 31, 1998,
together with all amendments thereto, with all exhibits and any and all
documents required to be filed with respect thereto with any regulatory
authority, granting unto said attorney, full power and authority to do and
perform each and every act and thing requisite and necessary to be done in and
about the premises in order to effectuate the same as fully to all intents and
purposes as the undersigned might or could do if personally present, hereby
ratifying and confirming all that said attorney-in-fact and agent, may lawfully
do or cause to be done by virtue thereof.
IN WITNESS WHEREOF, the undersigned has hereto signed this power of
attorney this 22nd day of March, 1999.
_________________________
/s/ NEAL R. GROSS
- - ---------------------------
- -------------------------------------------------------------------------------
<PAGE> 5
EXHIBIT 24
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned director of
Century Bancshares, Inc. a Delaware corporation (the "Company"), hereby
constitutes and appoints Joseph S. Bracewell, the undersigned's true and lawful
attorney-in-fact and agent, for the undersigned and on the undersigned's behalf
and in the undersigned's name, place and stead, in any and all capacities, to
sign, execute and file with the Securities and Exchange Commission the
Company's Annual Report on Form 10-K for the year ended December 31, 1998,
together with all amendments thereto, with all exhibits and any and all
documents required to be filed with respect thereto with any regulatory
authority, granting unto said attorney, full power and authority to do and
perform each and every act and thing requisite and necessary to be done in and
about the premises in order to effectuate the same as fully to all intents and
purposes as the undersigned might or could do if personally present, hereby
ratifying and confirming all that said attorney-in-fact and agent, may lawfully
do or cause to be done by virtue thereof.
IN WITNESS WHEREOF, the undersigned has hereto signed this power of
attorney this 22nd day of March, 1999.
__________________________
/s/ WILLIAM S. MCKEE
- -----------------------------------
- -------------------------------------------------------------------------------
<PAGE> 6
EXHIBIT 24
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned director of
Century Bancshares, Inc. a Delaware corporation (the "Company"), hereby
constitutes and appoints Joseph S. Bracewell, the undersigned's true and lawful
attorney-in-fact and agent, for the undersigned and on the undersigned's behalf
and in the undersigned's name, place and stead, in any and all capacities, to
sign, execute and file with the Securities and Exchange Commission the
Company's Annual Report on Form 10-K for the year ended December 31, 1998,
together with all amendments thereto, with all exhibits and any and all
documents required to be filed with respect thereto with any regulatory
authority, granting unto said attorney, full power and authority to do and
perform each and every act and thing requisite and necessary to be done in and
about the premises in order to effectuate the same as fully to all intents and
purposes as the undersigned might or could do if personally present, hereby
ratifying and confirming all that said attorney-in-fact and agent, may lawfully
do or cause to be done by virtue thereof.
IN WITNESS WHEREOF, the undersigned has hereto signed this power of
attorney this 22nd day of March, 1999.
__________________________
/s/ WILLIAM C. OLDAKER
- -----------------------------------
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCVIAL INFORMATION FROM THE CONSOLIDATED
FINANCIAL STATEMENTS OF CENTURY BANCSHARES, INC. AND SUBSIDIARY AS OF
DECEMBER 31, 1998 ANDIS QUALIFIED IN ITS ENTIRIETY TO SUCH CONSOLIDATED
FINANCIAL STATEMENTS APPEARING IN THE FORM 10-K FOR THE FISCAL YEAR ENDED
DECEMBER 31, 1998.
</LEGEND>
<CIK> 785813
<NAME> CENTURY BANCSHARES, INC.
<MULTIPLIER> 1,000
<S> <C> <C> <C>
<PERIOD-TYPE> 12-MOS 12-MOS 12-MOS
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1997 DEC-31-1996
<PERIOD-END> DEC-31-1998 DEC-31-1997 DEC-31-1996
<CASH> 8,951
<INT-BEARING-DEPOSITS> 9,847
<FED-FUNDS-SOLD> 4,285
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 6,811
<INVESTMENTS-CARRYING> 2,442
<INVESTMENTS-MARKET> 2,450
<LOANS> 115,231
<ALLOWANCE> 1,128
<TOTAL-ASSETS> 151,350
<DEPOSITS> 126,211
<SHORT-TERM> 3,160
<LIABILITIES-OTHER> 1,361
<LONG-TERM> 5,301
0
0
<COMMON> 2,574
<OTHER-SE> 12,743
<TOTAL-LIABILITIES-AND-EQUITY> 151,350
<INTEREST-LOAN> 9,393
<INTEREST-INVEST> 903
<INTEREST-OTHER> 1,059
<INTEREST-TOTAL> 11,355
<INTEREST-DEPOSIT> 4,037
<INTEREST-EXPENSE> 4,538
<INTEREST-INCOME-NET> 6,818
<LOAN-LOSSES> 620
<SECURITIES-GAINS> 15
<EXPENSE-OTHER> 6,309
<INCOME-PRETAX> 992
<INCOME-PRE-EXTRAORDINARY> 992
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 637
<EPS-PRIMARY> 0.27 0.22 0.22
<EPS-DILUTED> 0.26 0.20 0.21
<YIELD-ACTUAL> 5.07
<LOANS-NON> 1,163
<LOANS-PAST> 383
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</TABLE>
