-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, HpEuEBln7Y/1eZmG63vUv3UDebZHVO9OeF0Des91jAQlMVGqMEwOWzwLnQ3wg7Dj wIzPw+YpQrE8oDXNQQ0Jig== 0000785813-00-000006.txt : 20000331 0000785813-00-000006.hdr.sgml : 20000331 ACCESSION NUMBER: 0000785813-00-000006 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000330 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CENTURY BANCSHARES INC CENTRAL INDEX KEY: 0000785813 STANDARD INDUSTRIAL CLASSIFICATION: NATIONAL COMMERCIAL BANKS [6021] IRS NUMBER: 521489098 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-16234 FILM NUMBER: 586283 BUSINESS ADDRESS: STREET 1: 1275 PENNSYLVANIA AVE., N.W. CITY: WASHINGTON STATE: DC ZIP: 20004 BUSINESS PHONE: 202-496-40 MAIL ADDRESS: STREET 1: 1275 PENNSYLVANIA AVE NW CITY: WASHINGTON STATE: DC ZIP: 20004 10-K 1 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, 1999 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _______ to _______ Commission File Number 0-16234 CENTURY BANCSHARES, INC. (Exact name of registrant as specified in its charter) Delaware 52-1489098 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 1275 Pennsylvania Avenue, NW, Washington, DC 20004 -------------------------------------------- ----- (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 February 29, 2000, the number of shares of common stock outstanding was 2,722,685. As of such date, the aggregate market value of voting stock held by nonaffiliates was approximately $12,801,000. 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, 1999 are incorporated by reference into Part III.
CENTURY BANCSHARES, INC. ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999 TABLE OF CONTENTS Page PART I Item 1. Business 1 Item 2. Properties 8 Item 3. Legal Proceedings 8 Item 4. Submission of Matters to a Vote of Security Holders 8 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters 9 Item 6. Selected Financial Data 10 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 12 Item 7A. Quantitative and Qualitative Disclosures About Market Risk 29 Item 8. Financial Statements and Supplementary Data 30 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 -i-
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. With the addition of a new Prince William County branch office in Dumfries, Virginia, in October 1999, the Company operates six banking offices, as follows: International Square Branch (Main office of Bank) - 1875 Eye Street, NW, Washington, DC 20006 Pennsylvania Avenue Branch - 1275 Pennsylvania Avenue, NW, Washington, DC 20004 McLean Branch - 6832 Old Dominion Drive, McLean, Virginia 22101 Tysons Corner Branch - 8251 Greensboro Drive, McLean, Virginia 22102 Bethesda Branch - 7625 Wisconsin Avenue, Bethesda, Maryland 20814 Dumfries Branch - 18116 Triangle Shopping Plaza, Dumfries, Virginia 22026 The Company's principal executive offices are located at 1275 Pennsylvania Avenue, NW, 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, 1999, the Company had total assets of $204.8 million, total loans of $138.1 million, total deposits of $153.9 million, and total stockholders' equity of $15.7 million. At December 31, 1999, there were 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. -1- 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, 1999, the Company's ROE was 7.65%. 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, 1999, the Company's ROA was 0.70%. 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 suburban Maryland and Virginia markets around Washington, DC. 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 in January 1998. In October 1999, the Company purchased a full-service branch in Dumfries, Virginia, from One Valley Bancorp ("One Valley"). In February 2000, the Company established a loan production office (LPO) in Rockville, Maryland. 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, responsiveness and creativity in addressing customer needs, 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 service, establishing long-term customer relationships and building customer loyalty, and by providing products and services designed to address the specific needs of its customers. Under the Gramm-Leach-Bliley Act, effective March 11, 2000, securities firms and insurance companies that elect to become financial holding companies may acquire banks and other financial institutions. The Gramm-Leach-Bliley Act may significantly change the competitive environment in which the Company and its subsidiaries conduct business. See "Regulatory Matters." The financial services industry is also likely to become even more competitive as further technological advances enable more companies to provide financial services. These technological advances may diminish the importance of depository institutions and other financial intermediaries in the transfer of funds between parties. -2- 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. 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. -3- Under the BHCA, bank holding companies historically have been generally precluded 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 or from engaging in activities other than those of banking, managing or controlling banks or furnishing services to or performing services for its subsidiaries, except that it may engage in, directly or indirectly, certain activities that the Federal Reserve Board determined to be closely related to banking or managing and controlling banks as to be a proper incident thereto. However, on November 12, 1999, President Clinton signed into law the Gramm-Leach-Bliley Act which eliminated the barriers to affiliations among banks, securities firms, insurance companies and other financial service providers. The Gramm-Leach-Bliley Act will, effective March 11, 2000, permit bank holding companies to become financial holding companies and thereby affiliate with securities firms and insurance companies and engage in other activities that are financial in nature. No regulatory approval will be required for a financial holding company to acquire a company, other than a bank or savings association, engaged in activities that are financial in nature or incidental to activities that are financial in nature, as determined by the Federal Reserve Board. Under the Gramm-Leach-Bliley Act, a bank holding company may become a financial holding company by filing a declaration with the Federal Reserve Board if each of its subsidiary banks is well capitalized under the FDICIA prompt corrective action provisions, is well managed, and has at least a satisfactory rating under the Community Reinvestment Act ("CRA"). The Gramm-Leach-Bliley Act defines "financial in nature" to include securities underwriting, dealing and market making; sponsoring mutual funds and investment companies; insurance underwriting and agency; merchant banking activities; and activities that the Federal Reserve Board has determined to be closely related to banking. While the Federal Reserve Board will serve as the "umbrella" regulator for financial holding companies and has the power to examine banking organizations engaged in new activities, regulation and supervision of activities which are financial in nature or determined to be incidental to such financial activities will be handled along functional lines. Accordingly, activities of subsidiaries of a financial holding company will be regulated by the agency or authorities with the most experience regulating that activity as it is conducted in a financial holding company. 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. -4- Under the Gramm-Leach-Bliley Act, a national bank may establish a financial subsidiary and engage, subject to limitations on investment, in activities that are financial in nature, other than insurance underwriting as principal, insurance company portfolio investment, real estate development and real estate investment and annuity issuance. To do so, a bank must be well capitalized, well managed and have a CRA rating of satisfactory or better. Subsidiary banks of a financial holding company or national banks with financial subsidiaries must remain well capitalized and well managed in order to continue to engage in activities that are financial in nature without regulatory actions or restrictions, which could include divestiture of the financial in nature subsidiary or subsidiaries. In addition, a financial holding company or a bank may not acquire a company that is engaged in activities that are financial in nature unless each of the subsidiary banks of the financial holding company or the bank has CRA rating of satisfactory or better. 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. 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, 1999, 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. -5- 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. The Bank must pay assessments to the FDIC for federal deposit insurance protection. The FDIC has adopted a risk-based assessment system as required by FDICIA. Under this system, FDIC-insured depository institutions pay insurance premiums at rates based on their risk classification. Institutions assigned to higher-risk classifications (that is, institutions that pose a greater risk of loss to their respective deposit insurance funds) pay assessments at higher rates than institutions that pose a lower risk. An institution's risk classification is assigned based on its capital levels and the level of supervisory concern the institution poses to the regulators. In addition, the FDIC can impose special assessments in certain instances. The current range of BIF assessments is between 0% and 0.27% of deposits. The FDIC established a process for raising or lowering all rates for insured institutions semi-annually if conditions warrant a change. Under this new system, the FDIC has the flexibility to adjust the assessment rate schedule twice a year without seeking prior public comment, but only within a range of five cents per $100 above or below the assessment schedule adopted. Changes in the rate schedule outside the five-cent range above or below the current schedule can be made by the FDIC only after a full rulemaking with opportunity for public comment. Insurance Activities. In 1999 the Bank formed a subsidiary, headquartered in Dumfries, Virginia, for the purpose of engaging in insurance agency activities pursuant to the provisions of the National Bank Act which permit national banks to sell insurance in any town with a population of 5,000 or less. The provisions of the Gramm-Leach-Bliley Act concerning the state regulation of insurance activities, which became effective on November 12, 1999, provide that insurance activities of the type proposed to be conducted by the Bank's new subsidiary are to be regulated by the appropriate state insurance commissioner. However, the Gramm-Leach-Bliley Act prohibits national banks and subsidiaries of national banks from underwriting insurance and annuity products, except for certain types of credit related insurance. As of the end of 1999, this subsidiary had not yet commenced active operations. Other Regulatory Matters. 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 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 BIF-rate was required to equal one-fifth of the SAIF rate through year-end 1999, or until the insurance funds merged, whichever occurred first. Thereafter, BIF and SAIF payers will be assessed pro rata for the FICO bond obligations. With regard to the assessment for the FICO obligation, for the fourth quarter 1999 , the BIF rate was .01184% of deposits and the SAIF rate was .05920% of deposits, and for the first quarter of 2000, both the BIF and SAIF rates are .02120% of deposits. 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. -6- Various legislation, such as the recent Gramm-Leach-Bliley Act which expands the powers of banking institutions and bank holding companies, and proposals to overhaul the bank regulatory system and limit the investments that a depository institution may make with insured funds, is from time to time introduced in Congress. Such legislation may change banking statutes and the operating environment of the Company and its banking subsidiaries in substantial and unpredictable ways. The Company cannot determine the ultimate effect that the Gramm-Leach-Bliley Act will have, or the effect that any potential legislation, if enacted, or implementing regulations with respect thereto, would have, upon the financial condition or results of operations of the Company or its subsidiaries. One of the major additional burdens imposed on the banking industry by FDICIA is the increased ability of banking regulators to monitor the activities of banks and their holding companies. In addition, the Federal Reserve Board and OCC possess extensive authority to police unsafe or unsound practices and violations of applicable laws and regulations by depository institutions and their holding companies. For example, the FDIC may terminate the deposit insurance of any institution which it determines has engaged in an unsafe or unsound practice. The agencies can also assess civil money penalties, issue cease and desist or removal orders, seek injunctions, and publicly disclose such actions. FDICIA, FIRREA and other laws have expanded the agencies' authority in recent years, and the agencies have not yet fully tested the limits of their powers. 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, 1999, the Company had 60 employees. -7- 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, NW, 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, NW, 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 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 2003, with one additional five-year renewal option. In 1998, the Company established a new branch location at 7625 Wisconsin Avenue, Bethesda, Maryland. The branch premises consist of 2,022 square feet leased through January 2008. In connection with the acquisition of the Dumfries branch in the fourth quarter of 1999 (see Note 15 of Notes to Consolidated Financial Statements for additional information) , the Bank assumed One Valley's lease for the branch location at 18116 Triangle Shopping Plaza, Dumfries, Virginia. The branch and contiguous premises consist of approximately 7,200 square feet, which are under lease through February 2002, with one additional five-year renewal option. 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, 1999. -8- 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. Continued inclusion of the Common Stock for quotation in this market does not assure, however, an active public market. As of February 29, 2000, the Company estimates that it had approximately 1,000 shareholders. The following table sets forth the high, low and closing sale prices (adjusted to reflect 5% stock dividends in 1999 and 1998) for the Common Stock for each full quarterly period within the two most recent years: Common Stock Price Per Share ---------------------------------------- Quarter ended High Low Closing - ---------------------- -------------- ------------ ------------ March 31, 1998 $ 10.54 $ 9.07 $ 9.86 June 30, 1998 10.09 8.57 9.05 September 30, 1998 10.00 7.86 8.10 December 31, 1998 8.57 5.71 6.43 March 31, 1999 7.14 5.66 5.83 June 30, 1999 6.79 5.00 6.00 September 30, 1999 6.38 5.50 5.88 December 31, 1999 6.50 5.88 6.50 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. Dividends may be paid by the Bank in an amount equal to the Bank's net income for the current year combined with the retained net income for the preceding two years. 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. 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 February 18, 2000, payable on April 17, 2000, to holders of record of shares of Common Stock as of March 15, 2000. The declaration of future stock dividends is at the discretion of the Board of Directors. -9- 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, 1999. 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, 1999 and 1998, and the Consolidated Statements of Operations, Stockholders' Equity and Cash Flows for each of the years in the three year period ended December 31, 1999 and the report thereon of KPMG LLP are included elsewhere in this report. -10-
SELECTED CONSOLIDATED FINANCIAL INFORMATION (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) 1999 1998 1997 1996 1995 ------------- ------------- ------------- ------------ ------------- Income Statement Data: Interest income $13,220 $11,355 $9,209 $7,690 $7,079 Interest expense 4,996 4,537 3,765 2,776 2,562 ------------- ------------- ------------- ------------ ------------- Net interest income 8,224 6,818 5,444 4,914 4,517 Provision for credit losses 640 620 336 160 26 ------------- ------------- ------------- ------------ ------------- Net interest income after provision for credit losses 7,584 6,198 5,108 4,754 4,491 Noninterest income 1,669 1,103 922 720 590 Noninterest expense 7,335 6,309 5,460 4,920 4,157 ------------- ------------- ------------- ------------ ------------- Income before taxes 1,918 992 570 554 924 Income taxes 729 355 234 275 311 ------------- ------------- ------------- ------------ ------------- Net income $ 1,189 $ 637 $ 336 $ 279 $ 613 Common Share Data (1): Net income--basic $ 0.42 $ 0.24 $ 0.20 $ 0.20 $ 0.53 Net income--diluted 0.42 0.24 0.18 0.19 0.50 Book value (2) 5.76 5.40 5.29 4.85 4.68 Common shares outstanding--end of period 2,721,902 2,574,219 2,209,229 1,146,028 1,046,047 Weighted average common shares 2,804,994 2,632,787 1,710,316 1,371,940 1,153,943 Diluted weighted average common shares 2,832,683 2,688,583 1,852,683 1,454,483 1,213,698 Balance Sheet Data: Total assets $204,809 $151,350 $152,640 $107,186 $101,730 Investments (3) 53,144 23,385 46,632 25,631 21,690 Total loans (4) 138,076 115,231 94,171 70,676 69,204 Allowance for credit losses 1,519 1,128 887 826 740 Total deposits 153,900 126,211 129,605 90,985 90,539 Long-term debt 11,301 5,301 6,511 6,850 -- Total stockholders' equity 15,668 15,317 13,536 6,750 6,365 Performance Data: Return on average total assets 0.70% 0.44% 0.29% 0.27% 0.68% Return on average total equity 7.65 4.49 3.83 4.20 11.49 Net interest margin 5.15 5.07 5.17 5.74 5.42 Loans to deposits 89.7 91.3 72.7 77.7 76.4 Asset Quality Ratios: Nonperforming assets to total assets 0.25% 1.02% 0.49% 0.30% 0.49% Nonperforming loans to total loans 0.37 1.34 0.74 0.46 0.45 Net loan charge-offs to average loans 0.21 0.38 0.36 0.10 0.04 Allowance for credit losses to total loans 1.10 0.98 0.94 1.17 1.07 Allowance to nonperforming loans 295 73 127 257 240 Capital Ratios: Tier I risk based capital 9.74% 11.60% 12.27% 8.99% 9.22% Total risk based capital 10.79 12.56 13.19 10.13 10.34 Tier I leverage 7.64 9.46 8.83 6.35 6.80
Notes: (1) Per share data has been adjusted to reflect five percent Common Stock dividends in 1999, 1998, 1997 and 1995, seven percent Common Stock dividends in 1996, and retroactively restated to reflect the five percent Common Stock dividends declared on February 18, 2000. (2) Book value per common share is based on stockholders' equity divided by the number of common shares outstanding, adjusted for stock dividends. (3) Investments include federal funds sold and interest-bearing deposits in other financial institutions. (4) Net of unearned income. -11- 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, 1999, the Company had total assets of $204.8 million, total loans of $138.1 million, total deposits of $153.9 million, and total stockholders' equity of $15.7 million. The Company had net income of $1.2 million for the year ended December 31, 1999, resulting in a return on average total equity of 7.65% and a return on average total assets of 0.70%. 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 1999, 1998 and 1997, and their effects should be considered when reviewing the discussion of the Company's financial condition and results of operations set forth below. In October 1999, the Company purchased a full-service branch in Dumfries, Virginia, from One Valley. In this report, all "per share" amounts have been adjusted to reflect five percent Common Stock dividends in 1999, 1998, 1997 and 1995, seven percent Common Stock dividends in 1996, and retroactively restated to reflect the five percent Common Stock dividends declared on February 18, 2000. Results of Operations Net Income Net income was $1.2 million ($0.42 per diluted common share) for 1999, compared with net income of $637,000 ($0.24 per diluted common share) for 1998, an increase of $552,000 or 87%. The increase in net income for 1999 compared with 1998 resulted principally from a $1.4 million increase in net interest income and a $566,000 increase in noninterest income. These increases were the result of an 18.6% increase in average earning assets and the addition of four new branch offices during the past three years (see "General" above). Partially offsetting these increases during 1999 were a corresponding increase in average interest-bearing liabilities of 18.1%, as well as increases in several noninterest expense categories resulting from the establishment of the four new branch office locations, and a $20,000 increase in the provision for credit losses resulting from increased reserves in relation to loan portfolio growth during the year. -12- Net income was $637,000 ($0.24 per diluted common share) for 1998, compared with net income of $336,000 ($0.18 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 attributable to a 27.8% increase in average earning assets and the addition of three new branch offices during the previous two years. 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 resulting from the establishment of the three new branch office locations, and a $284,000 increase in the provision for credit losses resulting from increased reserves in relation to loan portfolio growth during the year. Net Interest Income Net interest income was $8,224,000 for 1999, an increase of $1,406,000 or 20.6% compared with net interest income of $6,818,000 for 1998. The Company's average total interest-earning assets increased to $159.6 million for 1999 from $134.6 million for 1998, representing an 18.6% increase between the years. The net interest margin of 5.15% for 1999 increased 8 basis points from 5.07% for 1998, the result of a 30 basis point decline in the average cost of interest bearing liabilities, which was partially offset by a 16 basis point decline in the average yield on interest earning assets. 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 a 31 basis point decline in the average yield on interest earning assets that was only partially offset by an 11 basis point decline in the cost of interest bearing liabilities. 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 income and interest expense 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 income or expense on such amounts, and the average rate for the years ended December 31, 1999, 1998 and 1997.
RATE/VOLUME ANALYSIS OF NET INTEREST INCOME/EXPENSE (1) (Dollars In Thousands) 1999 Compared with 1998 1998 Compared with 1997 ----------------------------------------- ----------------------------------------- Due to Due to Total Incr. Due to Due to Total Incr. Volume Rate (Decr.) Volume Rate (Decr.) ------------- ------------- ------------- ------------- ------------- ------------- Interest Earned On: Loans, including fees $ 2,596 $ (446) $ 2,150 $ 2,262 $ (424) $ 1,838 Investment securities (84) (53) (137) 240 17 257 Federal funds sold (88) 1 (87) 116 (23) 93 Interest bearing deposits with banks (27) (35) (62) (43) 2 (41) ------------- ------------- ------------- ------------- ------------- ------------- Total interest income 2,397 (533) 1,864 2,575 (428) 2,147 Interest Paid On: NOW accounts 30 (106) (76) 67 (51) 16 Savings accounts 86 (20) 66 563 44 607 Money market accounts (43) (88) (131) 8 (11) (3) Time deposits 469 (211) 258 190 (21) 169 Borrowings and notes payable 416 (75) 341 (15) (1) (16) ------------- ------------- ------------- ------------- ------------- ------------- Total interest expense 958 (500) 458 813 (40) 773 ------------- ------------- ------------- ------------- ------------- ------------- Net interest income $ 1,439 $ (33) $ 1,406 $ 1,762 $ (388) $ 1,374 ------------- ------------- ------------- ------------- ------------- -------------
(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. -13-
AVERAGE BALANCES AND INTEREST YIELDS/RATES (Dollars in Thousands) Year Ended December 31, -------------------------------------------------------------------------------------------------- 1999 1998 1997 ------------------------------ -------------------------------- ---------------------------------- Interest Average Interest Average Interest Average Average Income/ Yield/ Average Income/ Yield/ Average Income/ Yield/ Balance Expense Rate Balance Expense Rate Balance Expense Rate ---------- --------- --------- ----------- ---------- --------- ----------- --------- ------------ Interest-Earning Assets Loans, net (1) $128,419 $11,543 8.99% $99,724 $9,393 9.42% $75,908 $7,555 9.95% Investment securities (2)(3) 13,737 766 5.58 15,200 903 5.94 11,153 646 5.79 Federal funds sold 5,095 264 5.18 6,801 351 5.16 4,576 258 5.64 Interest bearing deposits with other banks 12,362 647 5.23 12,855 709 5.52 13,628 750 5.50 ---------- --------- ----------- ---------- ----------- --------- Total interest-earning assets(3) 159,613 13,220 8.28% 134,580 11,356 8.44% 105,265 9,209 8.75% Cash and due from banks 6,862 5,667 5,336 Other assets 3,682 4,491 3,860 ---------- ----------- ----------- Total Assets $170,157 $144,738 $114,461 ---------- ----------- ----------- Interest-Bearing Liabilities Interest-Bearing Deposits: NOW accounts $19,700 $ 222 1.13% $17,722 $ 298 1.68% $14,023 $ 282 2.01% Savings accounts 20,241 884 4.37 18,285 818 4.47 5,559 211 3.80 Money market accounts 20,451 640 3.13 21,723 771 3.55 21,491 774 3.60 Time deposits 47,895 2,408 5.03 38,832 2,150 5.54 35,399 1,981 5.60 Borrowings and notes payable 14,653 842 5.75 7,547 501 6.64 7,768 517 6.66 ---------- --------- ----------- ---------- ----------- --------- Total interest-bearing liabilities 122,940 4,996 4.06% 104,109 4,538 4.36% 84,240 3,765 4.47% Non-interest bearing 30,101 24,981 20,272 deposits Other liabilities 1,570 1,459 1,176 ---------- ----------- ----------- Total liabilities 154,611 130,549 105,688 Stockholders' equity 15,546 14,189 8,773 ---------- ----------- ----------- Total liabilities and stockholders' equity $170,157 $144,738 $114,461 ---------- ----------- ----------- --------- ---------- --------- Net interest income and spread $ 8,224 4.22% $6,818 4.08% $5,444 4.28% --------- ---------- --------- Net interest margin (3) 5.15% 5.07% 5.17%
(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: 1999 1998 1997 --------- ---------- ------------ Investment securities 5.58% 5.94% 5.82% Total interest-earning assets 8.28 8.44 8.75 Net interest margin 5.15 5.07 5.18 -14- 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 $640,000 in 1999, compared with $620,000 for 1998, increasing $20,000, or 3.2%. The increase was largely the result of a 19.8% increase in loans, net of unearned income, to $138.1 million at December 31, 1999 from $115.2 million at year-end 1998. Net charge-offs decreased to $249,000 in 1999, from $379,000 in 1998, the result of a $134,000 decrease in charge-offs in the commercial loan portfolio accompanied by reduced charge-offs and recoveries in other loan categories. 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. 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 1999 was $1,669,000, an increase of $566,000 or 51.3% compared with noninterest income of $1,103,000 in 1998. This increase resulted largely from growth of fees earned in the credit card program, increases in service charges on deposit accounts, commissions from a new mortgage loan origination program, as well as other commissions and other fee 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 fees earned in 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 $15,000 in gains from the sale of investment securities and $16,000 from the liquidation of other real estate owned. The following table sets forth the various categories of, and changes in, noninterest income for the years ended December 31, 1999, 1998 and 1997:
NONINTEREST INCOME (Dollars in Thousands) Year Ended December 31, ---------------------------------------------------------------------------- 1999 % Change 1998 % Change 1997 --------------- -------------- --------------- --------------- ------------- Service charges on deposit accounts $ 661 47.8 % $ 447 9.0 % $ 410 Credit card and merchant fees 732 55.4 471 21.1 389 Mortgage loan origination fees 97 - - - - Commission and other fee income 179 ( 3.2) 185 50.4 123 --------------- -------------- --------------- --------------- ------------- Total noninterest income $1,669 51.3 % $1,103 19.6 % $ 922 --------------- -------------- --------------- --------------- -------------
-15- Noninterest Expense Noninterest expense was $7,335,000 in 1999, compared with $6,309,000 in 1998, representing an increase of $1,026,000 or 16.3%. The increase in 1999 was due largely to increases in salaries and employee benefits of $783,000 and data processing services of $422,000. These increases in salaries and employee benefits reflect the opening of the Dumfries branch office in October 1999, a full year of compensation expense for the employees at the branch opened in 1998, the addition of personnel to support growth in the loan portfolio, and a reduction in the amount of loan origination costs deferred in the current year. The increases in the cost of data processing services were primarily attributable to growth in the credit card program, additional transaction volume, and efforts to prepare for and comply with Year 2000 readiness issues. 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. 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, 1999, 1998 and 1997:
NONINTEREST EXPENSE (Dollars in Thousands) Year Ended December 31, ------------------------------------------------------------------------------ 1999 % Change 1998 % Change 1997 --------------- -------------- --------------- --------------- --------------- Salaries and employee benefits $2,859 37.7 % $2,076 (5.7) % $2,201 Professional fees 696 (24.8) 926 33.8 692 Occupancy and equipment expense 842 1.9 826 27.1 650 Depreciation and amortization 643 (2.7) 661 15.8 571 Data processing 1,156 57.5 734 37.5 534 Communications 355 27.2 279 39.5 200 Office and operations expenses 277 (23.1) 360 25.4 287 Marketing and public relations 180 (8.2) 196 24.8 157 Federal deposit insurance premiums 20 11.1 18 28.6 14 Other expenses 307 31.8 233 51.3 154 --------------- -------------- --------------- --------------- --------------- Total noninterest expense $7,335 16.3 % $6,309 15.5 % $5,460 --------------- -------------- --------------- --------------- ---------------
Income Tax Expense The Company's income tax expense includes federal, state and local income taxes. The provision for income taxes was $729,000 in 1999 compared to $355,000 in 1998 and $234,000 in 1997. This reflects effective tax rates of 38.0 percent in 1999, 35.8 percent in 1998, and 41.0 percent in 1997. The effective tax rate was reduced in 1999 and 1998 from previous years due to the increase in interest income derived from US agency securities and short term investments 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. -16- 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 4.99% of total assets at December 31, 1999. 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 1999, the impact of an immediate increase in interest rates of 200 basis points would have resulted in a decrease in net interest income over a 12-month period of 0.71%, with a comparable decrease in interest rates resulting in an increase in net interest income of 1.12%. 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, 1999, which are expected to mature or are subject to repricing in each of the time periods indicated:
INTEREST RATE SENSITIVE ASSETS AND LIABILITIES (Dollars in Thousands) 90 Days 91 to 180 181 Days Over Term To Repricing (At December 31, 1999) or Less Days to 1 Year 1 Year Total - ------------------------------------------------------- ------------- ------------- ------------- ------------- ------------- Interest Earning Assets Loans, net $64,202 $10,181 $16,745 $46,948 $138,076 Investment securities 3,659 236 391 18,175 22,461 Federal funds sold 11,015 - - - 11,015 Interest bearing deposits with banks 16,894 1,200 1,573 - 19,667 ------------- ------------- ------------- ------------- ------------- Total interest earning assets 95,770 11,617 18,709 65,123 191,219 Interest Bearing Liabilities NOW accounts 23,112 - - - 23,112 Savings accounts 20,572 - - - 20,572 Money market accounts 18,657 - - 1,021 19,678 Time deposits 7,335 11,901 28,865 5,865 53,966 Other borrowings 25,162 254 459 7,384 33,259 ------------- ------------- ------------- ------------- ------------- Total interest bearing liabilities 94,838 12,155 29,324 14,270 150,587 ------------- ------------- ------------- ------------- ------------- Interest sensitivity gap per period $ 932 $ (538) $(10,615) $50,853 $ 40,632 Cumulative gap 932 394 (10,221) 40,622 Cumulative gap as a percentage of total assets 0.46% 0.19% (4.99)% 19.84% Cumulative interest earning assets as a percent of interest bearing liabilities 100.98% 100.37% 92.50% 126.98%
-17- 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, 1999 and 1998, approximately $90.0 million (65%) and $73.8 million (64%) 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 $34.7 million (25%) and $34.9 million (30%), 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, DC 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, 1999, loans and commitments outstanding to directors and executive officers of the Company and the Bank, their associates and members of their immediate families totaled $3.3 million (net of participations sold to other banks on a non-recourse basis), which represented approximately 2.4 percent of total loans as of that date. As of December 31, 1999, 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. -18- The following table sets forth the composition of the Company's loan portfolio by type of loan on the dates indicated:
LOAN PORTFOLIO ANALYSIS (Dollars in Thousands) December 31, ------------------------------------------------------------------- 1999 1998 1997 ---------------------- ---------------------- --------------------- Aggregate Principal Amount Type of loan: 1-4 family residential mortgage $ 24,926 $ 27,679 $ 27,502 Home equity loans 9,724 7,185 7,808 Multifamily residential 2,635 1,884 1,859 Construction 4,425 1,205 1,459 Commercial real estate 48,242 35,821 17,999 Commercial loans 37,585 28,906 24,132 Installment and credit card loans 10,612 12,517 13,535 ---------------------- ---------------------- --------------------- Gross loans 138,149 115,197 94,294 Unearned income and deferred costs (73) 34 (123) ---------------------- ---------------------- --------------------- Total loans, net of unearned $138,076 $115,231 $94,171 ---------------------- ---------------------- --------------------- Percentage of Loan Portfolio Type of loan: 1-4 family residential mortgage 18.04% 24.03% 29.17% Home equity loans 7.04 6.24 8.28 Multifamily residential 1.91 1.64 1.97 Construction 3.20 1.05 1.55 Commercial real estate 34.92 31.10 19.09 Commercial loans 27.21 25.09 25.59 Installment and credit card loans 7.68 10.85 14.35 ---------------------- ---------------------- --------------------- Gross loans 100.00% 100.00% 100.00% ---------------------- ---------------------- ---------------------
The following table sets forth the maturities of loans (based upon contractual dates) outstanding as of December 31, 1999. 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) Over 1 Year Through 5 Years Over 5 Years ----------------------------- ---------------------------- One Year Fixed Floating Fixed Floating or Less (1) Rate Rate Rate Rate Total - ------------------------------ -------------- -------------- -------------- ------------- -------------- -------------- Commercial $15,119 $ 8,024 $ 9,603 $ 1,891 $ 2,948 $ 37,585 Commercial real estate 2,424 10,834 4,372 12,486 18,126 48,242 Residential mortgage/home 2,788 6,752 4,302 8,902 14,541 37,285 equity Construction 3,319 - 178 - 928 4,425 Installment/credit card 2,780 2,053 363 114 5,302 10,612 -------------- -------------- -------------- ------------- -------------- -------------- Total $ 26,430 $ 27,663 $ 18,818 $ 23,393 $ 41,845 $ 138,149 -------------- -------------- -------------- ------------- -------------- --------------
(1) Includes demand loans, loans having no stated schedule of repayment or maturity, and overdrafts. -19- 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) December 31, ------------------------------------ 1999 1998 1997 ----------- ------------ ----------- Non-accrual loans $515 $1,163 $624 Accruing past due 90 days or more - 383 76 ----------- ------------ ----------- Total nonperforming loans 515 1,546 700 Other real estate owned - - 52 ----------- ------------ ----------- Total nonperforming assets $515 $1,546 $752 ----------- ------------ ----------- Nonperforming loans to total loans 0.37% 1.34% 0.74% Nonperforming assets to total asset 0.25% 1.02% 0.49% As of December 31, 1999, non-accrual loans consisted of one borrowing relationship. The Company has real property collateral at acceptable margins and has maintained a good working relationship with the borrower. Interest lost on these nonaccrual loans was $23,807 and $19,365 for 1999 and 1998, respectively. The Company received interest payments on these nonaccrual loans amounting to $67,871, $26,686, and $48,613 for 1999, 1998 and 1997, respectively. -20- 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 $1,519,000 (1.10% of total loans), $1,128,000 (0.98% of total loans) and $887,000 (0.94% of total loans) as of December 31, 1999, 1998 and 1997, respectively The allowance for credit losses as a percentage of nonperforming loans was 295%, 73% and 127% as of December 31, 1999, 1998 and 1997, 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) Year Ended December 31, ----------------------------------------------- 1999 1998 1997 ---------------- --------------- -------------- Average net loans outstanding $ 128,419 $ 99,724 $75,908 Loans outstanding at period-end 138,076 115,231 94,171 Total nonperforming loans 515 1,546 700 --------------- --------------- -------------- Beginning balance of allowance $ 1,128 $ 887 $ 826 Loans charged-off: 1-4 family residential mortgage - 18 29 Home equity loans - 26 100 Commercial loans 180 314 25 Installment and credit card loans 90 129 298 ---------------- --------------- -------------- Total loans charged off 270 487 452 Recoveries of previous charge-offs: 1-4 family residential mortgage - - 1 Home equity loans 8 43 - Commercial loans - 36 134 Installment and credit card loans 13 29 42 ---------------- --------------- -------------- Total recoveries 21 108 177 ---------------- --------------- -------------- Net loans charged-off 249 379 275 Provision for credit losses 640 620 336 ---------------- --------------- -------------- Balance at end of period $ 1,519 $ 1,128 $ 887 ---------------- --------------- -------------- Net charge-offs to average loans 0.19% 0.38% 0.36% Allowance as % of total loans 1.10% 0.98% 0.94% Nonperforming loans as % of total loans 0.37% 1.34% 0.74% Allowance as % of nonperforming loans 295% 73% 127% -21- 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. The following table describes the allocation of the allowance for credit losses among various categories of loans and certain other information at December 31, 1999. The allocation is made for analytical purposes and is not necessarily indicative of the categories in which future losses may occur. The total allowance is available to absorb losses from any segment of loans.
ALLOCATION OF ALLOWANCE FOR CREDIT LOSSES (Dollars in Thousands) December 31, 1999 December 31, 1998 ---------------------------- ---------------------------- Percent of Loans Percent of Loans Amount to Total Loans Amount to Total Loans Balance of allowance for credit losses applicable to: Commercial and industrial $ 285 27% $ 319 25% Real estate 20 65% 154 64% Consumer 222 8% 17 11% Unallocated 992 - 638 - --------------------------------------------------------------- Total allowance for credit losses $1,519 100% $1,128 100% ---------------------------------------------------------------
Investment Activities The Company's investment portfolio of $22.5 million as of December 31, 1999 consisted mostly of U.S. government agency obligations. This represented an increase of $13.2 million compared to the investment securities of $9.3 million at December 31, 1998. The Company's investment portfolio of $9.3 million as of December 31, 1998 consisted mostly of U.S. 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 during 1998 were used to fund the $21.1 million increase in loans during that year. 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. -22- 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) December 31, --------------------------------------- 1999 1998 1997 ------------ ------------ ------------- Available-for-sale (fair value): U.S. Treasuries and government agencies $ 13,526 $ 4,060 $ 13,492 Other 2,969 2,751 2,284 ------------ ------------ ------------- Total available-for-sale 16,495 6,811 15,776 Held-to-maturity (amortized cost): U.S. Treasuries and government agencies 5,966 2,164 1,911 State, county and municipal - - 65 Other - 278 1,656 ------------ ------------ ------------- Total held-to-maturity 5,966 2,442 3,632 ------------ ------------ ------------- Total investment securities $ 22,461 $ 9,253 $ 19,408 ------------ ------------ ------------- The following table sets forth the maturity distribution and weighted average yield of the investment portfolio of the Company as of December 31, 1999:
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 - ----------------------------------- -------------- -------------- -------------- -------------- -------------- Maturity Distribution: U.S. Treasuries and government agencies $ 1,999 $ 15,111 - $ 2,382 $ 19,492 Other - - $ 288 2,681 2,969 -------------- -------------- -------------- -------------- -------------- Total $ 1,999 $ 15,111 $ 288 $ 5,063 $ 22,461 -------------- -------------- -------------- -------------- -------------- Weighted Average Yield (1): U.S. Treasuries and government agencies 5.64% 6.07% - 6.27% 6.05% Other - - 5.10% 6.56% 6.42% -------------- -------------- -------------- -------------- -------------- Total 5.64% 6.07% 5.10% 6.42% 6.10% -------------- -------------- -------------- -------------- --------------
(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. -23- Deposit Activities The Company's total deposits at year-end 1999 were $153.9 million, an increase of $27.7 million, or 22.0%, compared to the year-end 1998 balance. Total average deposits were $138.4 million for the year ended December 31, 1999, an increase of $16.8 million, or 13.9% compared with average deposits of $121.5 million for the year ended December 31, 1998. 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. The Company views deposit growth as a significant challenge in its effort to increase its asset size. Thus, the Company continues to focus on its branching program with increased emphasis on commercial accounts, and the offering of competitive interest rates and products to stimulate deposit growth. 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) Year Ended December 31, ------------------------------ -- ------------------------------ -- ----------------------------- 1999 1998 1997 ------------------------------ ------------------------------ ----------------------------- Weighted Weighted Weighted Average Average % of Average Average % of Average Average % of Balance Rate Total Balance Rate Total Balance Rate Total ---------- ---------- -------- ---------- ---------- -------- --------- ---------- -------- Noninterest-Bearing Deposits $ 30,101 0.00% 21.8% $ 24,981 0.00% 20.6% $20,272 0.00% 21.0% Interest-Bearing Deposits: NOW accounts 19,700 1.13 14.2 17,722 1.68 14.6 14,023 2.01 14.5 Savings accounts 20,241 4.37 14.6 18,285 4.47 15.0 5,559 3.80 5.7 Money market accounts 20,451 3.37 14.8 21,723 3.55 17.9 21,491 3.60 22.2 Time deposits 47,895 5.03 34.6 38,832 5.54 31.9 35,399 5.60 36.6 ---------- ---------- -------- ---------- ---------- -------- --------- ---------- -------- Total $138,388 100.0% $121,543 100.0% $96,744 100.0% ---------- -------- ---------- -------- --------- -------- Weighted Average Rate 3.00% 3.32% 3.36% ---------- ---------- ----------
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, 1999, brokered deposits represented $300,000, or 0.2% of the Company's total liabilities. As of December 31, 1999, total time deposits in excess of $100,000 accounted for $26.1 million, or 17.0% of the Company's total deposits. Of this amount, $8.5 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, 1999 and 1998: TIME DEPOSITS OF $100,000 OR MORE (Dollars In Thousands) December 31, ---------------------------- 1999 1998 ------------- -------------- Maturity Period: Three months or less $ 2,501 $ 2,565 Over three months through six months 6,029 4,413 Over six months through twelve months 14,997 7,650 Over twelve months 2,574 2,714 ------------- -------------- Total $26,101 $17,342 ------------- -------------- -24- 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, 1999, 1998 and 1997:
BORROWINGS (Dollars In Thousands) Year Ended December 31, ------------------------------------------------- 1999 1998 1997 ----------------- -------------- ---------------- Federal Home Loan Bank of Atlanta: Ending balance $26,301 $6,513 $7,423 Daily average balance for the period 11,031 6,911 7,397 Maximum outstanding balance at a month-end during the period 38,855 7,222 7,675 Daily average interest rate for the period 6.25% 6.81% 6.75% Average interest rate on period end balance 5.21 6.74 6.73 Treasury Tax and Loan Account: Ending balance $ 599 $ 589 $ 776 Daily average balance for the period 357 361 371 Maximum outstanding balance at a month-end during the period 599 2,101 776 Daily average interest rate for the period 4.27% 4.79% 4.61% Average interest rate on period end balance 4.56 4.45 5.27 Securities sold under repurchase agreements: Ending balance $ 6,359 $ 1,359 - Daily average balance for the period 3,256 264 - Maximum outstanding balance at a month-end during the period 6,359 1,359 - Daily average interest rate for the period 4.23% 4.72% - Average interest rate on period end balance 4.42 4.72 -
The following table shows the details of the Company's fixed and variable rate advances from the FHLBA, with original maturities in excess of one year, as of December 31, 1999:
BORROWINGS (Dollars in Thousands) December 31, 1999 ------------------------------------------------ Advance Amount Outstanding Current Long-Term Interest Maturity Repayment Date Borrowed Balance Portion Portion Rate Date Terms - ------------ ------------ -------------- ----------- --------------- ----------- ------------ --------------- 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 1,000 650 100 550 6.94 6/24/06 semi-annual 10/10/96 300 300 - 300 6.85 10/10/01 due at maturity 10/10/96 2,000 800 400 400 6.57 10/10/01 quarterly 10/10/96 2,400 1,200 400 800 6.66 10/10/02 quarterly 9/25/97 573 551 12 539 6.62 9/25/17 monthly 4/22/99 3,000 3,000 - 3,000 5.01 4/22/04 due at maturity 4/23/99 3,000 3,000 - 3,000 Variable 4/23/04 due at maturity ------------ -------------- ----------- --------------- Total $14,073 $11,301 $ 912 $10,389 ------------ -------------- ----------- ---------------
-25- 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 Year Ended December 31, -------------------------------------------------------- 1999 1998 1997 ----------------- ------------------- ------------------ Return on average assets 0.70% 0.44% 0.29% Return on average equity 7.65 4.49 3.83 Period-end equity to total assets 7.65 10.12 8.87 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, 1999, the Bank had cash and cash equivalents of $20.2 million, an increase of $7.0 million, when compared with the $13.2 million at December 31, 1998. 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 funds secured by a blanket pledge of its portfolio of 1-to-4-family residential mortgage loans and other collateral. The total amount of credit availability, determined periodically by the FHLBA, is generally based on a percentage (currently 20%) of total assets of the Bank. At December 31, 1999, the Company had a total credit availability from the FHLBA of $35.7 million. The most recent update of the Bank's credit availability from the FHLBA was as of June 30, 1999, when total assets of the Bank were $178.3 million. 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 $5.7 million. As of December 31, 1999, there were no federal funds purchased, customer repurchase agreements amounted to $6.4 million, and the Company had outstanding borrowings of $26.3 million from the FHLBA in the form of fixed and variable rate advances with an average interest rate of 5.21%. The Company utilizes fixed rate term credit advances from the FHLBA to manage interest rate risk by match funding 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 $2.9 million for the year ended December 31, 1999. Net cash used in investing activities was $38.3 million for 1999, as a result of the $41.5 million net increase in loans and investment securities which was partially offset by the acquisition of deposits, net of assets acquired of $2.9 million. Net cash provided by financing activities for 1999 of $42.4 million, which resulted from a $18.3 million increase in deposits, an increase of $19.8 million in borrowings, the proceeds of $5.0 million from customer repurchase accounts, and proceeds of $60,760 from the exercise of options for common stock, partially offset by the purchase of 136,500 shares of treasury stock for $789,863. -26- 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. 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 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 $739,944 at the holding company level at December 31, 1999. The Company anticipates using these funds as working capital available to support the future growth of the franchise as well as to pay normal operating expenses. 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, 1999, the Company had no indebtedness outstanding at the holding company level. Capital Resources Total stockholders' equity as of December 31, 1999 was $15.7 million, an increase of $0.4 million in 1999 and $1.8 million in 1998, compared to stockholders' equity of $15.3 million and $13.5 million as of December 31, 1998 and 1997, respectively. In 1999, additional capital was raised from the exercise of stock options amounting to $60,760, and 136,500 treasury shares were acquired at a cost of $789,863. In 1998, additional capital was raised from the exercise of warrants and stock options amounting to $1.1 million. Net income was $1,188,622 in 1999 and $636,884 in 1998. 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, 1999, 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 General. The "Year 2000 problem" arose because many existing computer programs use only the last two digits to refer to a year. Therefore, these computer programs do not properly recognize a year that begins with "20" instead of the familiar "19." If not corrected, many computer applications could fail or create erroneous results. The failure of the Company, its vendors or its borrowers to address these issues could have a material effect on the Company's business, results of operations, or financial condition. State of Readiness. 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 Board of Directors received monthly reports concerning the status of the Y2K Plan, and the Company's progress was also reviewed from time to time by bank regulatory authorities. Testing of mission critical systems was completed in November 1998. Testing methodology included copying the entire customer data base onto a Year 2000 compliant (hardware and software) computer system, and utilizing the key Year 2000 dates defined by the Federal Financial Institutions Examination Counsel (FFIEC) to test date sensitive transactions and calculations. These tests were performed on all mission critical systems and the results revealed compliance only very minor discrepancies; such failed test transactions were tested again in 1999 and minor discrepancies were resolved. Material third party risks also included assessing the Year 2000 preparation status of the bank's customers. The Company completed a risk assessment of Year 2000 preparedness of borrowers within its loan portfolio as of September 30, 1998, the date established by bank regulatory authorities. By September 30, 1999, the Company's Y2K Plan had been completed. The Company continued to monitor Y2K preparedness related to new loans and any borrowers deemed to be at high risk. -27- Costs of Compliance. As part of its Y2K Plan, the Company spent approximately $145,000 for the replacement of outdated computer hardware and software. Much of these expenditures would have been incurred in the ordinary course of business to maintain such computer systems, regardless of Year 2000 problem considerations. The human resources requirement included the time of regular Company employees, a network administration consultant, and approximately $20,000 of additional consulting expenses. The costs to address the Company's Year 2000 issues have not had a significant impact on the financial position or results of operations of the Company. While the Company does not believe that it will incur any additional material expenses related to the Year 2000 issue, there can be no assurance that the Company will not be impacted by a Year 2000 related problem which occurs after the date hereof or by the failure of a third party to achieve proper Year 2000 compliance. Transition Into the Year 2000. The Company suffered no failures in any system or product upon the date change from December 31, 1999 to January 1, 2000. In addition, management is not aware of any vendor used by the Company for data processing or related services which experienced a material failure of its product or service due to a Year 2000 related problem. The Company was also subject to risks associated with Year 2000 noncompliance by customers of the Bank. Management is not aware of any customer which suffered losses related to a Year 2000 problem which would adversely affect that customer's financial condition or its ability to repay any outstanding loan it has from the Bank. Ongoing Plans. Although many of the critical dates related to potential Year 2000 related problems have passed, some experts predict that Year 2000 related failures could occur throughout the year, such as on February 29, 2000 and December 31, 2000. Accordingly, the Company's Year 2000 project team will continue to monitor the Company's IT and non-IT systems and attempt to identify any potential problems during the course of the year. In addition, the Company will continue to monitor the Year 2000 compliance of the third parties, with which the Company transacts business, for delayed effects or future problems. Contingency Plans. The Company continues to maintain its contingency plans with respect to Year 2000 related issues and believes that if its own systems should fail, it could convert to a manual entry system for mission critical business functions for a period of up to six months without significant losses. The Company believes that any mission critical systems could be recovered and operating within seven days. 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. -28- 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. -29- 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, 1999 and 1998, 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, 1999. 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, 1999 and 1998, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1999, in conformity with generally accepted accounting principles. /s/ KPMG LLP McLean, VA February 18, 2000 -30-
CENTURY BANCSHARES, INC. AND SUBSIDIARY Consolidated Statements of Financial Condition December 31, 1999 and 1998 1999 1998 - -------------------------------------------------------------- ------- ------------------- -------- ------------------ ASSETS Cash and due from banks $ 9,222,005 $ 8,950,733 Federal funds sold 11,015,000 4,285,000 Interest bearing deposits in other banks 19,667,075 9,847,315 Investment securities available-for-sale, at fair value 16,495,049 6,811,356 Investment securities held-to-maturity, at cost, fair value of $5,837,867 and $2,449,680 in 1999 and 1998, respectively 5,966,403 2,441,537 Loans, net of unearned income 138,076,486 115,231,298 Less: allowance for credit losses (1,518,911) (1,128,147) ------------------- ------------------ Loans, net 136,557,575 114,103,151 Leasehold improvements, furniture, and equipment, net 1,372,267 1,372,370 Accrued interest receivable 1,034,270 742,721 Loans held for sale 439,600 - Deposit premium, net 1,675,813 1,546,232 Net deferred taxes 767,893 683,113 Other assets 595,948 566,373 ------------------- ------------------ Total Assets $204,808,898 $151,349,901 ------------------- ------------------ LIABILITIES AND STOCKHOLDERS' EQUITY Liabilities: Deposits: Noninterest-bearing $ 36,571,508 $ 31,676,194 Interest-bearing 117,328,222 94,535,082 ------------------- ------------------ Total deposits 153,899,730 126,211,276 Federal funds purchased and securities sold under agreements to repurchase 6,358,654 1,359,330 Other borrowings 26,900,223 7,101,911 Other liabilities 1,982,184 1,360,710 ------------------- ------------------ Total Liabilities 189,140,791 136,033,227 ------------------- ------------------ Stockholders' Equity: Common stock, $1 par value; 5,000,000 shares authorized; 2,858,402 and 2,574,219 shares issued at December 31, 1999 and 1998, respectively 2,858,402 2,574,219 Additional paid in capital 13,700,452 12,343,631 Retained earnings - 392,384 Treasury stock, at cost, 136,500 shares (789,863) - Other comprehensive income (loss), net of tax effect (100,884) 6,440 ------------------- ------------------ Total Stockholders' Equity 15,668,107 15,316,674 Commitments and contingencies ------------------- ------------------ Total Liabilities and Stockholders' Equity $204,808,898 $151,349,901 ------------------- ------------------ See accompanying notes to consolidated financial statements.
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CENTURY BANCSHARES, INC. AND SUBSIDIARY Consolidated Statements of Operations Years ended December 31, 1999, 1998 and 1997 1999 1998 1997 - -------------------------------------------------------------- ---------------- ----------------- ---------------- Interest income: Interest and fees on loans $ 11,542,779 $ 9,393,339 $ 7,554,812 Interest on federal funds sold 264,204 350,846 258,311 Interest on deposits in other banks 646,800 708,431 749,568 Interest on securities available-for-sale 574,836 718,829 529,963 Interest on securities held-to-maturity 191,570 184,035 116,220 ---------------- ----------------- ---------------- Total interest income 13,220,189 11,355,480 9,208,874 Interest expense: Interest on deposits: Savings accounts 884,150 818,417 210,928 NOW accounts 221,816 298,423 282,169 Money market accounts 640,427 771,400 773,799 Certificates under $100,000 1,385,414 1,254,993 1,216,180 Certificates $100,000 and over 1,021,854 894,004 764,576 ---------------- ----------------- ---------------- Total interest on deposits 4,153,661 4,037,237 3,247,652 ---------------- ----------------- ---------------- Interest on other borrowings 842,576 500,335 517,644 ---------------- ----------------- ---------------- Total interest expense 4,996,237 4,537,572 3,765,296 ---------------- ----------------- ---------------- Net interest income 8,223,952 6,817,908 5,443,578 Provision for credit losses 640,000 620,000 336,200 ---------------- ----------------- ---------------- Net interest income after provision for credit losses 7,583,952 6,197,908 5,107,378 Noninterest income: Service charges on deposit accounts 660,942 447,105 409,747 Other operating income 1,008,195 625,745 512,637 Gain on sale of securities - 14,570 - Gain on liquidation of other real estate owned - 15,853 - ---------------- ----------------- ---------------- Total noninterest income 1,669,137 1,103,273 922,384 Noninterest expense: Salaries and employee benefits 2,858,900 2,075,963 2,201,299 Occupancy and equipment expense 842,263 825,839 649,846 Professional fees 696,113 925,664 691,501 Depreciation and amortization 445,381 471,591 502,556 Amortization of deposit premiums 198,052 189,538 68,477 Data processing 1,155,809 733,544 533,794 Communications 355,242 278,611 200,456 Federal deposit insurance premiums 20,124 17,678 13,996 Other operating expenses 763,370 790,978 598,077 ---------------- ----------------- ---------------- Total noninterest expense 7,335,254 6,309,406 5,460,002 ---------------- ----------------- ---------------- Income before income tax expense 1,917,835 991,775 569,760 Income tax expense 729,213 354,891 233,602 ---------------- ----------------- ---------------- Net income $ 1,188,622 $ 636,884 $ 336,158 ---------------- ----------------- ---------------- Basic income per common share $.42 $.24 $.20 Diluted income per common share $.42 $.24 $.18 Weighted average common shares outstanding 2,804,994 2,632,787 1,710,316 Diluted weighted average common shares outstanding 2,832,683 2,688,583 1,852,683 See accompanying notes to consolidated financial statements.
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CENTURY BANCSHARES, INC. AND SUBSIDIARY Consolidated Statements of Stockholders' Equity Years ended December 31, 1999, 1998 and 1997 Other Common Additional Treasury comprehensive Total stock paid in Retained stock, income (loss), Stockholders' $1.00 par capital earnings at cost net of tax effect Equity - --------------------------------- -------------- ---------------- -------------- ------------- ------------------ ----------------- 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 gain 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 gain 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 for 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 - --------------------------------- -------------- ---------------- -------------- ------------- ------------------ ----------------- Comprehensive income: Net income 1,188,622 - 1,188,622 Unrealized gain (loss) on investment securities, net of tax effect (107,324) (107,324) - --------------------------------- -------------- ---------------- -------------- ------------- ------------------ ----------------- Comprehensive income 1,188,622 (107,324) 1,081,298 Common stock dividends: declared March 1999 (5%) 129,333 645,705 (775,038) declared February 2000 (5%) 136,152 669,054 (805,206) Payments for fractional shares (762) (762) Purchase of treasury stock - 136,500 shares $ (789,863) (789,863) Exercise of common stock options- 18,698 shares 18,698 42,062 60,760 - --------------------------------- -------------- ---------------- -------------- ------------- ------------------ ----------------- Balance, December 31, 1999 $2,858,402 $13,700,452 $ - $ (789,863) $( 100,884) $15,668,107 - --------------------------------- -------------- ---------------- -------------- ------------- ------------------ ----------------- See accompanying notes to consolidated financial statements.
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CENTURY BANCSHARES, INC. AND SUBSIDIARY Consolidated Statements of Cash Flows Years ended December 31, 1999, 1998 and 1997 1999 1998 1997 - -------------------------------------------------------------- -------------------- -------------------- -------------------- Cash flows from operating activities: Net income $ 1,188,622 $ 636,884 $ 336,158 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization of premises and equipment 445,381 471,591 502,556 Amortization of deposit premiums 198,052 189,538 68,477 Provision for credit losses 640,000 620,000 336,200 Provision (benefit) for net deferred taxes (26,990) 25,715 (161,370) Gain on sale of securities available-for-sale - (14,570) - Gain on sale of other real estate owned - (15,853) - (Increase) decrease in accrued interest receivable (291,549) 179,606 (412,760) (Increase) decrease in other assets 109,445 (47,062) 48,471 Increase (decrease) in other liabilities 621,475 53,032 315,345 -------------------- -------------------- -------------------- Total adjustments 1,695,814 1,461,997 696,919 -------------------- -------------------- -------------------- Net cash provided by operating activities 2,884,436 2,098,881 1,033,077 Cash flows from investing activities: Net increase in loans (17,517,607) (21,438,747) (14,810,469) Net (increase) decrease in interest bearing deposits in other banks (9,819,760) 12,375,722 (15,399,960) Purchases of securities available-for-sale (10,123,682) (2,872,601) (9,564,799) Purchases of securities held-to-maturity (3,999,062) (2,005,882) (4,411,652) Repayments and maturities of securities available-for-sale 274,875 3,196,421 1,034,208 Repayments and maturities of securities held-to-maturity 474,196 5,358,436 944,471 Proceeds from sale of securities available-for-sale - 6,535,849 - Net purchase of leasehold improvements, furniture and equipment (445,278) (134,976) (596,888) Acquisition of deposits, net of assets acquired 2,901,744 - 17,282,864 Proceeds from sale of other real estate owned - 67,853 - -------------------- -------------------- -------------------- Net cash (used in) provided by investing activities (38,254,574) 1,082,075 (25,522,225) Cash flows from financing activities: Net increase (decrease) in demand, savings, NOW and money market deposit accounts 4,038,562 3,394,503 (620,526) Net increase (decrease) in certificates of deposit 14,265,109 (6,788,259) 11,221,680 Net increase in customer repurchase accounts 4,999,324 1,359,330 - Net increase (decrease) in other borrowings 15,009,426 (186,813) 60,347 Net proceeds from issuance of long-term debt 6,000,000 - 573,000 Repayment of long-term debt (1,211,146) (910,118) (900,381) Purchase of treasury stock (789,863) - - Net proceeds from issuance of common stock 59,998 1,143,150 6,424,256 Other - (26,155) - -------------------- -------------------- -------------------- Net cash provided by (used in) financing activities 42,371,410 (2,014,362) 16,758,376 -------------------- -------------------- -------------------- Net increase (decrease) in cash and cash equivalents 7,001,272 1,166,594 (7,730,772) Cash and cash equivalents, beginning of year 13,235,733 12,069,139 19,799,911 -------------------- -------------------- -------------------- Cash and cash equivalents, end of year $ 20,237,005 $ 13,235,733 $ 12,069,139 -------------------- -------------------- -------------------- Supplemental disclosures of cash flow information: Interest paid on deposits and borrowings $ 4,823,033 $ 4,572,718 $ 3,724,036 Income taxes paid 625,000 300,000 112,500 Transfer of loans to other real estate owned - - 52,000 See accompanying notes to consolidated financial statements.
-34- CENTURY BANCSHARES, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements December 31, 1999 and 1998 - -------------------------------------------------------------- (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. -35- CENTURY BANCSHARES, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements December 31, 1999 and 1998 - -------------------------------------------------------------------------------- (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. -36- CENTURY BANCSHARES, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements December 31, 1999 and 1998 - -------------------------------------------------------------------------------- (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. 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 dilutive potential common stock. SFAS No.128 was implemented on December 31, 1997. 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. On March 28, 1999, the Company declared a 5 percent stock dividend to common stock shareholders of record as of April 28, 1999, resulting in the issuance of 129,333 shares. On February 18, 2000, the Company declared a 5 percent stock dividend to be distributed on April 17, 2000, to shareholders of record as of the close of business on March 15, 2000. Weighted average shares outstanding and all income per common share amounts have been restated for the effect of the stock dividends. Loans Held for Sale Loans held for sale consists mainly of mortgage loans, which are carried at the lower of cost or market, as determined in the aggregate. Market is determined by commitment prices at the date of the financial statements. -37- CENTURY BANCSHARES, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements December 31, 1999 and 1998 - --------------------------------------------------------------------------------
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED New Financial Accounting Standards, Continued The reclassification entries for the three years ended December 31, 1999, 1998, and 1997 are as follows: 1999 1998 1997 ------------- ------------- ------------ Net unrealized holding gains (losses) during the year, net of income taxes of $57,790, $20,220, and $17,422, respectively ($ 107,324) $ 36,303 $ 25,071 Less: reclassification adjustment for gains included in net income, net of income taxes of $5,536 in 1998 - (9,034) - ------------- ------------- ------------ Net unrealized gains (losses) on investment securities during the year, net of income taxes ($ 107,324) $ 27,269 $ 25,071 ------------- ------------- ------------
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, 2000. Earlier application is permitted, but the statement shall not be applied retroactively to financial statements of prior periods. The Company does not anticipate any material impact from the implementation of SFAS No. 133. 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 pro forma impact to compensation expense is detailed in Note 9--"Benefit and Incentive Plans." (2) INVESTMENT SECURITIES
Investment securities available-for-sale, and their contractual maturities, at December 31, 1999 and 1998 are summarized as follows: Amortized Gross unrealized Gross unrealized December 31, 1999 cost gains losses Fair value - ------------------------------------------------ ------------------ ------------------ ------------------- ------------------ Obligations of U.S. government agencies: Within one year $ 1,999,974 $ - $ 612 $ 1,999,362 After one, but within five years 11,241,574 - 129,979 11,111,595 After ten years 427,851 301 12,946 415,206 - ------------------------------------------------ ------------------ ------------------ ------------------- ------------------ Total 13,669,399 301 143,537 13,526,163 Collateralized mortgage obligations: After five, but within ten years 294,482 - 6,068 288,414 After ten years 183,162 - 5,902 177,260 Federal Reserve Bank stock 311,350 - - 311,350 Federal Home Loan Bank stock 1,317,700 - - 1,317,700 Other 874,162 - - 874,162 - ------------------------------------------------ ------------------ ------------------ ------------------- ------------------ Total investment securities available-for-sale $ 16,650,255 $ 301 $ 155,507 $ 16,495,049 - ------------------------------------------------ ------------------ ------------------ ------------------- ------------------
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CENTURY BANCSHARES, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements December 31, 1999 and 1998 - --------------------------------------------------------------------------- -------------------- -------------------- ------------- (2) INVESTMENT SECURITIES, CONTINUED Amortized Gross unrealized Gross unrealized December 31, 1998 cost gains losses Fair value - ------------------------------------------------ ------------------ ------------------ ------------------- ------------------ Obligations of U.S. government agencies: 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 - 5,160 389,531 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 - ------------------------------------------------ ------------------ ------------------ ------------------- ------------------
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. As a member of the Federal Reserve and Federal Home Loan Bank Systems, Century National Bank is required to hold shares of stock in the Federal Reserve Bank of Richmond and the Federal Home Loan Bank of Atlanta. Those shares, which have no stated maturity, are carried at cost since no active trading markets exist. Investment securities totaling $14,278,188 and $3,619,322 at December 31, 1999 and 1998, respectively, were pledged to secure FHLBA borrowing, public deposits, customer repurchase accounts, and other borrowing. 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 in 1998. No investment securities were sold during 1999 or 1997. Investment securities held-to-maturity at December 31, 1999 and 1998 are summarized as follows:
Amortized Gross unrealized Gross unrealized December 31, 1999 cost gains losses Fair value - ----------------------------------------------------- ------------------ ------------------ ------------------- ------------------ Obligations of U.S. Treasury, municipals, and government agencies: Within one year $ 3,999,138 $ - $ 37,572 $ 3,961,566 After ten years 1,967,265 260 91,224 1,876,301 - ----------------------------------------------------- ------------------ ------------------ ------------------- ------------------ - ----------------------------------------------------- ------------------ ------------------ ------------------- ------------------ Total investment securities held-to-maturity $ 5,966,403 $ 260 $ 128,796 $ 5,837,867 - ----------------------------------------------------- ------------------ ------------------ ------------------- ------------------ Amortized Gross unrealized Gross unrealized December 31, 1998 cost gains losses Fair value - ----------------------------------------------------- ------------------ ------------------ ------------------- ------------------ Obligations of U.S. Treasury, municipals, and government agencies: After ten years $ 2,163,449 $ 9,508 $ 1,799 $ 2,171,158 Other securities: After one year, but within five years 278,088 434 - 278,522 - ----------------------------------------------------- ------------------ ------------------ ------------------- ------------------ Total investment securities held-to-maturity $ 2,441,537 $ 9,942 $ 1,799 $ 2,449,680 - ----------------------------------------------------- ------------------ ------------------ ------------------- ------------------
-39- CENTURY BANCSHARES, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements December 31, 1999 and 1998 - -------------------------------------------------------------------------------- (3) LOANS RECEIVABLE The loan portfolio consists of the following: December 31, ------------------------------------- 1999 1998 ------------------ ------------------ Commercial $ 37,584,578 $ 28,905,741 Real estate - residential 27,560,404 29,563,080 Real estate - commercial 48,241,506 35,820,890 Real estate - construction 4,425,278 1,205,397 Consumer 10,612,630 12,517,045 Home equity 9,724,453 7,184,985 ------------------ ------------------ 138,148,849 115,197,138 Unearned income and deferred costs (72,363) 34,160 ------------------ ------------------ 138,076,486 115,231,298 Allowance for credit losses (1,518,911) (1,128,147) ------------------ ------------------ Loans, net $ 136,557,575 $ 114,103,151 ------------------ ------------------ Loans on which the accrual of interest has been discontinued amounted to approximately $515,000, $1,163,000, and $624,000, at December 31, 1999, 1998, and 1997, respectively. Interest lost on nonaccrual loans was $24,000, $26,000, and $17,000 for 1999, 1998, and 1997, respectively. The Company received interest payments on nonaccrual loans amounting to approximately $68,000, $100,000 and $26,000 for 1999, 1998 and 1997, respectively. Analysis of the activity in the allowance for credit losses is as follows: Year Ended December 31, ---------------------------------------------------- 1999 1998 1997 ------------- --------------- ----------------- Balance, beginning of year $ 1,128,147 $ 887,046 $ 825,876 Provision for credit losses 640,000 620,000 336,200 Loans charged off (270,341) (486,916) (451,593) Recoveries 21,105 108,017 176,563 -------------- ---------------- ------------------ Net charge-offs (249,236) (378,899) (275,030) -------------- ---------------- ------------------ Balance, end of year $1,518,911 $1,128,147 $ 887,046 -------------- ---------------- ------------------ -40- CENTURY BANCSHARES, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements December 31, 1999 and 1998 - ------------------------------------------------------------------------------- (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, 1999, 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.
Contractual or notional amount as of December 31, ------------------------------------- 1999 1998 ------------------ ------------------ Financial instruments whose contract amounts represent potential credit risk: Commitments to extend credit $31,873,000 $27,246,000 Standby letters of credit 2,818,000 2,251,000
At December 31, 1999, 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 $24.2 million and $13.2 million, respectively, as of December 31, 1999. The aggregate total of loans to such groups was approximately $19.8 million and $11.6 million, respectively, as of December 31, 1998. The amount of such loans which are past due or considered by management to be potential problem loans is not material. -41- CENTURY BANCSHARES, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements December 31, 1999 and 1998 - -------------------------------------------------------------------------------- (4) RELATED PARTIES An analysis of the activity of loans to directors, officers, and their affiliates during the years ended December 31, 1999 and 1998, is as follows: Year Ended December 31, 1999 1998 ------------------ ------------------ Balance, beginning of year $ 3,390,254 $ 3,510,534 Additions 17,000 1,664,714 Payments (155,614) (1,784,994) ------------------ ------------------ Balance, end of year $ 3,251,640 $ 3,390,254 ------------------ ------------------ 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 $956,000 and $539,000 at December 31, 1999 and 1998, respectively. Also, included in professional fees are legal fees paid to law firms whose partners are directors of the Company or the Bank, totaling $116,907, $270,041, and $282,536 for the years ended December 31, 1999, 1998, and 1997, respectively. (5) LEASEHOLD IMPROVEMENTS, FURNITURE, AND EQUIPMENT Leasehold improvements, furniture, and equipment consist of the following: December 31, 1999 1998 ------------------ ------------------ Leasehold improvements $ 1,497,339 $ 1,485,970 Furniture and equipment 3,371,492 2,937,583 ------------------ ------------------ 4,868,831 4,423,553 Less accumulated depreciation and amortization (3,496,564) (3,051,183) ------------------ ------------------ Balance, end of year $ 1,372,267 $ 1,372,370 ------------------ ------------------ Depreciation and amortization expense for leasehold improvements, furniture and equipment was $445,381, $471,591, and $502,556 for 1999, 1998, and 1997, respectively. -42- CENTURY BANCSHARES, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements December 31, 1999 and 1998 - -------------------------------------------------------------------------------- (6) DEPOSITS Major classifications of deposits consist of the following: December 31, 1999 1998 --------------- -------------- Noninterest-bearing - demand deposits $ 36,571,508 $ 31,676,194 Interest-bearing: NOW accounts 23,112,258 19,345,373 Savings accounts 20,572,494 19,649,757 Money market accounts 19,677,736 17,995,450 Certificates of deposit--less than $100,000 27,864,994 20,202,277 Certificates of deposit--$100,000 and over 26,100,740 17,342,225 ------------- -------------- Total interest-bearing 117,328,222 94,535,082 ------------- -------------- Total deposits $ 153,899,730 $ 126,211,276 ------------- -------------- Certificates of deposit of $43,733,850 have remaining maturities of one year or less as of December 31, 1999. Certificates of deposit with a remaining term of more than one year as of December 31, 1998, are as follows: Year Ending December 31, - ---------------------------------- 2001 $ 8,967,899 2002 1,015,513 2003 147,986 2004 100,486 Thereafter - ---------------------- Total $ 10,231,884 ---------------------- -43- CENTURY BANCSHARES, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements December 31, 1999 and 1998 - -------------------------------------------------------------------------------- (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:
Year Ended December 31, --------------------------------------------------------- 1999 1998 1997 ------------------ ------------------ ------------------- Federal Home Loan Bank: Ending balance $ 26,301,355 $ 6,512,501 $ 7,422,619 Daily average balance for the period 11,031,064 6,911,185 7,397,407 Maximum outstanding balance at a month-end 38,855,191 7,221,812 7,675,000 Daily average interest rate for the period 6.25% 6.81% 6.75% Average interest rate on period end balance 5.21 6.74 6.73 Treasury Tax and Loan Account Ending balance $ 598,868 $ 589,410 $ 776,224 Daily average balance for the period 356,978 360,645 370,944 Maximum outstanding balance at a month-end 598,868 2,101,044 776,224 Daily average interest rate for the period 4.27% 4.79% 4.61% Average interest rate on period end balance 4.56 4.45 5.27 Securities sold under repurchase agreements Ending balance $ 6,358,654 $ 1,359,330 - Daily average balance for the period 3,256,330 264,329 - Maximum outstanding balance at a month-end 6,358,654 1,359,330 - Daily average interest rate for the period 4.23% 4.72% - Average interest rate on period end balance 4.42 4.72 -
The balance of FHLB advances with original maturities in excess of one year are summarized as follows: December 31, ------------------------------------- 1999 1998 ------------------ ------------------ 6.60% fixed rate, due 1999 $ - $ 300,000 6.85% fixed rate, due 2001 300,000 300,000 6.57% fixed rate, due 2001 800,000 1,200,000 6.66% fixed rate, due 2002 1,200,000 1,600,000 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 650,000 750,000 6.62% fixed rate, due 2017 551,355 563,000 5.01% fixed rate, due 2004 3,000,000 - Variable rate, due 2004 3,000,000 - ------------------ ------------------ $ 11,301,355 $ 6,513,000 ------------------ ------------------ As of December 31, 1999, the Bank has been advised by the FHLB that it has a total credit availability of $35.7 million based on 20% of the Bank's total assets of $178.3 million as of June 30, 1999. The Bank is authorized to borrow funds secured by residential mortgage loans and other collateral. The 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, 1999, the balance of advances payable to the FHLB was $26.3 million and the credit available from the FHLB was $9.4 million. -44- CENTURY BANCSHARES, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements December 31, 1999 and 1998 - -------------------------------------------------------------------------------- (7) OTHER BORROWINGS, CONTINUED In connection with its borrowings from the FHLB, the Bank is required to own FHLB stock. At December 31, 1999, the Bank's investment in FHLB stock had a par and carrying value of $1,317,700 and was automatically pledged against FHLB advances. (8) STOCKHOLDERS' EQUITY Common Stock The Company is authorized to issue 5 million shares of Common Stock, par value $1.00. At December 31, 1999, the Company had 2,858,402 shares issued, 2,721,902 shares outstanding, and 136,500 shares of treasury stock. 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 On February 18, 2000, the Board of Directors declared a five percent stock dividend to be distributed on April 17, 2000, to stockholders of record as of the close of business on March 15, 2000. The effect of the stock dividend has been recognized retroactively in the stockholders' equity accounts in the consolidated statements of financial condition as of December 31, 1999, and in all share and per share data in the accompanying consolidated financial statements, notes to consolidated financial statements and supplemental financial data. In accordance with SFAS No. 128, the calculation of basic income per common share and diluted income per common share is detailed below:
Years Ended December 31, ---------------------------------------------------- 1999 1998 1997 ----------------- ---------------- ----------------- Basic Income Per Share: Net income $ 1,188,622 $ 636,884 $ 336,158 Weighted average common shares outstanding 2,804,994 2,632,787 1,710,316 ----------------- ---------------- ----------------- Basic income per share $0.42 $0.24 $0.20 Diluted Income Per Share: Net income $ 1,188,622 $ 636,884 $ 336,158 Weighted average common shares outstanding 2,804,994 2,632,787 1,710,316 Dilutive effect of warrants and stock options 27,689 55,796 142,367 ----------------- ---------------- ----------------- Diluted weighted average common shares outstanding 2,832,683 2,688,583 1,852,683 ----------------- ---------------- ----------------- Diluted income per share $0.42 $0.24 $0.18
-45- CENTURY BANCSHARES, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements December 31, 1999 and 1998 - -------------------------------------------------------------------------------- (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, 1999, the net present value of the deferred compensation liability for all directors totaled approximately $794,000, compared with $674,000 for 1998. Expenses related to the deferred compensation program totaled $120,000 for 1999, $108,000 for 1998, and $84,000 for 1997. 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, 1999, after adjusting for stock dividends and stock option activity, there are 334,362 shares of stock reserved for issuance pursuant to the 1994 Plan, of which 332,366 shares are reserved for outstanding options and 1,996 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, 1999, after adjusting for stock dividends and stock option activity, there are 4,111 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, 1999, all options granted under the Prior Plans are fully exercisable. In connection with the 5 percent stock dividends effective July 31, 1993, March 31, 1994, March 31, 1995, May 7, 1997, June 29, 1998, and May 28, 1999, 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, 1999, 1998, and 1997, are summarized as follows: 1999 1998 1997 --------------------------- --------------------------- --------------------------- Weighted Weighted Weighted average average average exercise exercise exercise Fixed options Shares price Shares price Shares price - ----------------------------------- ------------- ------------- ------------- ------------- ------------- ------------- Outstanding at beginning of year 225,657 $6.04 193,093 $4.24 170,470 $3.47 Granted 143,170 6.22 104,895 7.82 47,735 6.62 Exercised (18,698) 3.25 (63,873) 3.27 (18,584) 2.33 Forfeited (13,652) 6.98 (8,458) 9.04 (6,528) 6.00 - ----------------------------------- ------------- ------------- --- ------------- ------------- --- ------------- ------------- Outstanding at end of year 336,477 $6.24 225,657 $6.04 193,093 $4.24 - ----------------------------------- ------------- ------------- --- ------------- ------------- --- ------------- ------------- Options exercisable at year-end 198,613 $6.06 141,608 $5.50 162,620 $4.19 Weighted average fair value of options granted $3.27 $4.08 $2.92
-46- CENTURY BANCSHARES, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements December 31, 1999 and 1998 - -------------------------------------------------------------------------------- (9) BENEFIT AND INCENTIVE PLANS, CONTINUED Stock Option Plans, Continued
The following table summarizes information about stock options outstanding at December 31, 1999: 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 - ----------------------------------- -------------- ------------- ------------- ------------- ------------- $2.44 to $3.00 7,242 0.5 $ 2.60 7,242 $ 2.60 $3.01 to $4.00 18,325 1.4 3.65 18,325 3.65 $4.01 to $5.00 17,719 2.4 4.64 17,719 4.64 $5.01 to $6.00 23,543 6.5 5.20 22,755 5.19 $6.01 to $7.00 225,522 9.1 6.23 100,219 6.22 $8.01 to $9.00 27,589 8.5 8.86 22,982 8.87 $9.01 to $9.86 16,537 8.2 9.65 9,371 9.65 - ----------------------------------- -------------- ------------- ------------- ------------- ------------- $2.44 to $9.86 336,477 7.8 $ 6.24 198,613 $ 6.06 - ----------------------------------- -------------- ------------- ------------- ------------- -------------
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 1999, 1998 and 1997, respectively: no dividends for any year, expected volatility of 39 percent for 1999, 28 percent for 1998, and 29 percent for 1997, risk free interest rates of 5.9 percent for 1999, 5.4 percent for 1998, and 5.8 percent for 1997, along with expected lives of 7 years for 1999, 1998 and 1997. 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:
1999 1998 1997 ------------------ ------------------ ------------------- Net income, as reported $1,188,622 $636,884 $336,158 Net income, pro forma 1,020,982 519,502 298,320 Diluted earnings per share, as reported .42 .24 .18 Diluted earnings per share, pro forma .36 .19 .16
Pro forma net income reflects only options granted in 1999, 1998 and 1997. 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, 1997 are not considered. Employee Benefit Plan The Company maintains a 401(k) plan which covers substantially all employees. Participants may contribute up to 15 percent of their compensation, subject to certain limitations imposed by the Internal Revenue Service. The Company makes matching contributions of one-half of up to 6 percent of participants' compensation contributed to the Plan. The Company's matching contributions totaled approximately $95,000 for 1999, $38,000 for 1998 and $17,000 for 1997. -47- CENTURY BANCSHARES, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements December 31, 1999 and 1998 - -------------------------------------------------------------------------------- (10) INCOME TAXES The provision for taxes on income for the years ended December 31, 1999, 1998, and 1997, consisted of the following:
1999 1998 1997 ------------------ ------------------ ------------------- Current federal income tax $617,898 $328,429 $304,721 Current state income tax 138,305 747 90,251 ------------------ ------------------ ------------------- Total current income tax 756,203 329,176 394,972 Deferred Federal income tax expense (benefit) (21,696) (15,915) (117,497) Deferred state income tax expense (benefit) (5,294) 41,630 (43,873) ------------------ ------------------ ------------------- Total deferred income tax expense (benefit) (26,990) 25,715 (161,370) ------------------ ------------------ ------------------- Total income tax $729,213 $354,891 $233,602 ------------------ ------------------ -------------------
The difference between the statutory federal income tax rates and the effective income tax rates for 1999, 1998, and 1997, are as follows: 1999 1998 1997 - ----------------------------------------------------- ------------------ ------------------ ------------------- Statutory federal income tax rate 34.0 % 34.0 % 34.0 % State income taxes, net of federal benefit 4.6 2.8 5.4 Nondeductible expenses 0.5 1.1 2.6 Other (1.1) (2.1) (1.0) - ----------------------------------------------------- ------------------ ------------------ ------------------- Effective income tax rate 38.0 % 35.8 % 41.0 % - ----------------------------------------------------- ------------------ ------------------ -------------------
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, 1999 and 1998: 1999 1998 ---------------- ----------------- Assets: Fixed assets $ 120,627 $ 102,797 Bad debts 194,691 218,021 Deferred rent expense 85,288 28,741 Deferred loan fees 24,957 37,460 Vacation pay accrual 15,200 22,800 Directors' deferred compensation 301,884 256,284 Intangibles 68,853 44,847 ---------------- ----------------- Deferred tax assets 811,500 710,950 Liabilities: Federal Home Loan Bank stock dividends (11,484) (11,484) Unrealized (gains)losses on investments designated as available-for-sale charged to stockholders' equity 54,322 (3,468) Other (86,445) (12,885) ---------------- ----------------- Deferred tax liabilities (43,607) (27,837) ---------------- ----------------- Net deferred tax asset $ 767,893 $ 683,113 ---------------- ----------------- Net deferred tax assets of $767,893 and $683,113 at December 31, 1999 and 1998, 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- CENTURY BANCSHARES, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements December 31, 1999 and 1998 - -------------------------------------------------------------------------------- (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 were approximately $1.8 million and $1.0 million at year-end 1999 and 1998, respectively. Funds Restrictions Dividends paid to the Company by Century National Bank are subject to restrictions by regulatory agencies. As of December 31, 1999, approximately $2.1 million was available to be paid to the Company in dividends from Century National 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 $557,000, $548,000, and $399,000, for the years ended December 31, 1999, 1998, and 1997, respectively. Total future minimum rental payments at December 31, 1999, are as follows: Year Ending December 31, - -------------------------------------- 2000 $ 721,000 2001 728,000 2002 426,000 2003 199,000 2004 136,000 Thereafter 130,000 ---------------- Total $2,340,000 ---------------- -49- CENTURY BANCSHARES, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements December 31, 1999 and 1998 - -------------------------------------------------------------------------------- (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, 1999, that the Bank meets all capital adequacy requirements to which it is subject. As of December 31, 1999, the most recent notification from the OCC categorized Century National Bank as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, Century National 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 National Bank:
To be well capitalized under For capital prompt corrective Actual adequacy purposes action provisions -------------------------- ------------------------ ----------------------- Amount Ratio Amount Ratio Amount Ratio - -------------------------------------------- ------------ ------------- ------------ ----------- ----------- ----------- As of December 31, 1999 Total Capital (to Risk Weighted Assets): Century Bancshares, Inc. $15,612,089 10.79% $11,577,857 8.00% n/a n/a Century National Bank 14,851,326 10.27% 11,570,540 8.00% $14,463,176 10.00% Tier 1 Capital (to Risk Weighted Assets): Century Bancshares, Inc. 14,093,178 9.74% 5,788,929 4.00% n/a n/a Century National Bank 13,332,415 9.22% 5,785,270 4.00% 8,677,905 6.00% Tier 1 Capital (to Average Assets): Century Bancshares, Inc. 14,093,178 7.64% 7,378,520 4.00% n/a n/a Century National Bank 14,463,176 7.23% 7,376,440 4.00% 9,220,550 5.00%
-50- CENTURY BANCSHARES, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements December 31, 1999 and 1998 - -------------------------------------------------------------------------------- (12) CAPITAL AND LIQUIDITY, CONTINUED
To be well capitalized under For capital prompt corrective Actual adequacy purposes action provisions ------------------------- ------------------------ ------------------------ Amount Ratio Amount Ratio Amount Ratio - -------------------------------------------- ------------ ------------ ------------ ----------- ------------ ----------- 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%
-51- CENTURY BANCSHARES, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements December 31, 1999 and 1998 - --------------------------------------------------------------------------------
(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, 1999 and 1998 1999 1998 --------------------- -------------------- Assets Cash and cash equivalents $ 739,944 $ 1,958,401 Investment in Century Bank 14,907,344 13,331,118 Other assets 91,462 91,462 --------------------- -------------------- Total Assets $ 15,738,750 $15,380,981 --------------------- -------------------- Liabilities and Stockholders' Equity Liabilities: Other liabilities $ 70,643 $ 64,307 --------------------- -------------------- Total Liabilities 70,643 64,307 Stockholders' Equity: Common stock 2,858,402 2,574,219 Additional paid-in capital 13,700,452 12,343,631 Retained earnings - 392,384 Treasury stock, at cost (789,863) - Accumulated other comprehensive income (loss), net of tax effect (100,884) 6,440 --------------------- -------------------- Total Stockholders' Equity 15,668,107 15,316,674 --------------------- -------------------- Total Liabilities and Stockholders' Equity $ 15,738,750 $15,380,981 --------------------- --------------------
Statements of Operations Years Ended December 31, 1999, 1998 and 1997 1999 1998 1997 -------------------- --------------------- -------------------- Income: Interest income $ 49,539 $ 96,846 $ 35,421 Other income 129 - - -------------------- --------------------- -------------------- Total Income 49,668 96,846 35,421 Expense: Other expenses 41,487 26,657 22,414 -------------------- --------------------- -------------------- Total Expense 41,487 26,657 22,414 -------------------- --------------------- -------------------- Net income before income tax expense (benefit) and equity in undistributed earnings of bank subsidiary 8,181 70,189 13,007 Income tax expense 3,109 26,670 5,333 -------------------- --------------------- -------------------- Net income before equity in undistributed earnings of bank subsidiary 5,072 43,519 7,674 Equity in undistributed earnings of Century Bank 1,183,550 593,365 328,484 -------------------- --------------------- -------------------- Net income $1,188,622 $636,884 $336,158 -------------------- --------------------- --------------------
-52- CENTURY BANCSHARES, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements December 31, 1999 and 1998 - -------------------------------------------------------------------------------- (13) PARENT COMPANY-ONLY FINANCIAL STATEMENTS, CONTINUED
Statements of Cash Flows Years ended December 31, 1999, 1998 and 1997 1999 1998 1997 -------------------- --------------------- -------------------- Cash flows from operating activities: Net income $ 1,188,622 $ 636,884 $ 336,158 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Undistributed earnings of subsidiary (1,183,550) (593,365) (328,484) Decrease in other assets - - 21,203 Increase (decrease) in other liabilities 6,336 (243,526) 59,159 -------------------- --------------------- -------------------- Net cash provided by (used in) operating activities 11,408 (200,007) 88,036 Cash flows from investing activities: Capital contributions to subsidiary bank (500,000) (2,000,000) (3,500,000) -------------------- --------------------- -------------------- Net cash used in investing activities (500,000) (2,000,000) (3,500,000) Cash flows from financing activities: Issuance of common stock 59,998 1,139,853 6,424,256 Purchases of treasury stock (789,863) - - Other - (22,858) - -------------------- --------------------- -------------------- Net cash provided (used) by financing activities (729,865) 1,116,995 6,424,256 -------------------- --------------------- -------------------- Net increase (decrease) in cash and cash equivalents (1,218,457) (1,083,012) 3,012,292 Cash and cash equivalents, beginning of year 1,958,401 3,041,413 29,121 -------------------- --------------------- -------------------- Cash and cash equivalents, end of year $ 739,944 $ 1,958,401 $ 3,041,413 -------------------- --------------------- -------------------- Supplemental disclosures of cash flow information: Interest paid $ - $ - $ - Income taxes paid - - -
-53- CENTURY BANCSHARES, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements December 31, 1999 and 1998 - -------------------------------------------------------------------------------- (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. The estimated fair values of the Company's financial instruments at December 31, 1999 and 1998 are as follows:
1999 1998 ---------------------------------- ---------------------------------- Carrying Fair Carrying Fair Value Value Value Value ---------------- ----------------- ----------------- ---------------- Financial Assets: Cash and due from banks $ 9,222,005 $ 9,222,005 $ 8,950,733 $ 8,950,733 Federal funds sold 11,015,000 11,015,000 4,285,000 4,285,000 Interest bearing deposits with other banks 19,667,075 19,667,075 9,847,315 9,847,315 Investment securities 22,461,452 22,332,916 9,252,893 9,261,036 Loans, net of unearned income 138,076,486 137,971,456 115,231,298 115,919,000 Financial Liabilities: Noninterest-bearing deposits $ 36,571,508 $ 36,571,508 $ 31,676,194 $ 31,676,194 Interest-bearing deposits 117,328,222 116,960,892 94,535,082 94,865,082 Other borrowings 33,258,877 33,283,547 8,461,241 8,864,000
-54- CENTURY BANCSHARES, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements December 31, 1999 and 1998 - -------------------------------------------------------------------------------- (15) ACQUISITIONS AND INTANGIBLES In October 1997, the Company completed the 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. 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. In October 1999, the Company completed the purchase and assumption of the deposits and certain other liabilities of the branch of One Valley Bancorp ("One Valley") located at 18116 Triangle Shopping Plaza, Dumfries, Virginia (the "Dumfries Branch"). As part of the transaction, the Bank assumed approximately $9.4 million in deposits at the Dumfries Branch, and also assumed the obligations under the related lease and acquired approximately $6.0 million in mortgage loans from One Valley's portfolio, in addition to $0.3 million in equipment and other assets. In consideration of the assumption of the deposits and liabilities, One Valley made a cash transfer to the Bank on the closing date of approximately $2.9 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 Dumfries Branch, (ii) the net book value of the leasehold improvements and the personal property located at the Dumfries Branch, (iii) the unpaid balance of the designated mortgage loans and certain overdraft protection loans, (iv) certain proration items, and (v) a deposit premium of $127,633, based on certain percentages of the deposit liabilities assumed and loans acquired as of the closing date. The total acquisition premium intangible recorded amounted to $327,633 (including $127,633 paid and $200,000 deemed to be a fair value adjustment of the lease obligation assumed) and is being amortized over the estimated 8 year life of the deposit account relationship on a straight-line basis. -55- CENTURY BANCSHARES, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements December 31, 1999 and 1998 - --------------------------------------------------------------------------------
(16) QUARTERLY FINANCIAL INFORMATION (Unaudited - in thousands, except per share data): Quarter ended Quarter ended Quarter ended Quarter ended Dec. 31, 1999 Sep. 30, 1999 Jun. 30, 1999 Mar. 31, 1999 - ------------------------------------------- ----------------- ------------------ ------------------- ----------------- Interest income $ 3,701 $ 3,323 $ 3,237 $ 2,959 Net interest income 2,300 2,039 1,990 1,895 Provision for credit losses 205 110 145 180 Total other income 422 411 446 390 Total other expense 1,933 1,820 1,818 1,764 Income before income tax expense 584 520 473 341 Net income 362 323 293 211 Earnings per share: Basic $ 0.13 $ 0.12 $ 0.10 $ 0.07 Diluted 0.13 0.11 0.10 0.07 Weighted average shares outstanding: Basic 2,721,863 2,804,679 2,850,542 2,844,239 Diluted 2,749,551 2,832,251 2,879,305 2,871,334 Quarter ended Quarter ended Quarter ended Quarter ended Dec. 31, 1998 Sep. 30, 1998 Jun. 30, 1998 Mar. 31, 1998 - ------------------------------------------- ----------------- ------------------ ------------------- ----------------- Interest income $ 2,804 $ 2,819 $ 2,769 $ 2,964 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 Income before income tax expense 266 239 263 224 Net income 165 170 170 132 Earnings per share: Basic $ 0.06 $ 0.07 $ 0.07 $ 0.05 Diluted 0.06 0.06 0.06 0.05 Weighted average shares outstanding: Basic 2,748,738 2,619,845 2,597,657 2,563,007 Diluted 2,786,735 2,768,538 2,785,627 2,777,738
-56- 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 1999 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 2000 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 2000 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 2000 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 2000 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 30 Consolidated Statements of Financial Condition 31 Consolidated Statements of Operations 32 Consolidated Statements of Stockholders' Equity 33 Consolidated Statements of Cash Flows 34 Notes to Consolidated Financial Statements 35 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- 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)). 3.4* Certificate of Amendment of Certificate of Incorporation of Century Bancshares, Inc. dated July 24, 1997. 4.1 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)). 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)). -58- 10.8 Amendment dated March 1, 1998, of the employment agreement dated September 1, 1996, between the Company and the Bank and Mr. Joseph S. Bracewell. (Incorporated by reference to Exhibit 10.16 to the Company's Annual Report on Form 10-K for the period ended December 31, 1998.) 10.9 Amendment dated March 31, 1999, of the employment agreement dated September 1, 1996, between the Company and the Bank and Mr. Joseph S. Bracewell. (Incorporated by reference to Exhibit 10.17 to the Company's Quarterly Report on Form 10-Q for the period ended June 30, 1999.) 10.10 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)). 10.11 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)). 10.12 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)). 10.13 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)). 10.14 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). 10.15 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). 10.16 Lease Agreement dated September 30, 1997, by and between The Life Underwriter Training Council and Century National Bank. (Incorporated by reference to Exhibit 10.14 to the Company's Annual Report on Form 10-K for the period ended December 31, 1998.) 10.17 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. (Incorporated by reference to Exhibit 10.15 to the Company's Annual Report on Form 10-K for the period ended December 31, 1998.) 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, 1999. 27* Financial Data Schedule. - ------------------ * Filed herewith. Reports on Form 8-K. There were no reports on Form 8-K filed during the fourth quarter of 1999. -59- 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 27, 2000 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, 2000. /s/ JOSEPH S. BRACEWELL Chairman of the Board, President and Chief Executive - --------------------------------------------- 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 -60- Index to Exhibits Exhibit No. Description - -------------------------------------------------------------------------------- 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)). 3.4* Certificate of Amendment of Certificate of Incorporation of Century Bancshares, Inc. dated July 24, 1997. 4.1 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)). -61- 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 Amendment dated March 1, 1998, of the employment agreement dated September 1, 1996, between the Company and the Bank and Mr. Joseph S. Bracewell. (Incorporated by reference to Exhibit 10.16 to the Company's Annual Report on Form 10-K for the period ended December 31, 1998.) 10.9 Amendment dated March 31, 1999, of the employment agreement dated September 1, 1996, between the Company and the Bank and Mr. Joseph S. Bracewell. (Incorporated by reference to Exhibit 10.17 to the Company's Quarterly Report on Form 10-Q for the period ended June 30, 1999.) 10.10 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)). 10.11 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)). 10.12 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)). 10.13 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)). 10.14 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). 10.15 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). 10.16 Lease Agreement dated September 30, 1997, by and between The Life Underwriter Training Council and Century National Bank. (Incorporated by reference to Exhibit 10.14 to the Company's Annual Report on Form 10-K for the period ended December 31, 1998.) 10.17 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. (Incorporated by reference to Exhibit 10.15 to the Company's Annual Report on Form 10-K for the period ended December 31, 1998.) 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, 1999. 27* Financial Data Schedule. - ----------------- * Filed herewith. -62- EXHIBIT 3.4 Certificate of Amendment of Certificate of Incorporation of Century Bancshares, Inc. dated July 24, 1997. CERTIFICATE OF AMENDMENT OF CERTIFICATE OF INCORPORATION OF CENTURY BANCSHARES, INC. Century Bancshares, Inc., a corporation duly organized and existing under and by virtue of the General Corporation Law of the State of Delaware (the "Company"), does hereby certify: FIRST: That the Board of Directors of the Company, at a meeting duly called and held on April 15, 1997, at which meeting a quorum was present and acting throughout (the "Board Meeting"), adopted a resolution proposing and declaring advisable and in the best interests of the Company that the Company's Certificate of Incorporation be amended by amending the first sentence of Article IV to read in its entirety as follows: "The total number of shares of stock which the corporation shall have authority to issue is 6,000,000 shares, of which 5,000,000 shares of the par value $1.00 each shall be shares of common stock, 1,000,000 shares of the par value of $1.00 each shall be shares of preferred stock." SECOND: That at that Board Meeting, the Board directed that the preceding proposed amendment to the Certificate of Incorporation be presented to the stockholders of the Company entitled to vote thereon for their consideration and recommended the adoption of such amendment by the stockholders of the Company. THIRD: That thereafter, at the annual meeting of the company's stockholders duly called and, upon notice in accordance with Section 222 of the General Corporation Law of the State of Delaware, held on June 6, 1997 the holders of a majority of the outstanding shares of capital stock of the company entitled to vote thereon approved the aforesaid amendment to the Certificate of Incorporation. FOURTH: That the aforesaid amendment was duly adopted in accordance with the provisions of Section 242 of the General Corporation law of the State of Delaware. IN WITNESS WHEREOF, the Company has caused this Certificate of Amendment to be signed by Joseph S. Bracewell III, as President of the Company this 24th day of July, 1997. CENTURY BANCSHARES, INC. By: /s/b/ JOSEPH S. BRACEWELL III Joseph S. Bracewell III, President -63-
CENTURY BANCSHARES, INC. Exhibit 11 Computation of Per Share Earnings Three Years Ended December 31, 1999 Year Ended December 31, ---------------------------------------- 1999 1998 1997 Basic Earnings Per Share: Net income $1,188,622 $ 636,884 $ 336,158 Weighted-average common shares outstanding 2,804,994 2,632,787 1,710,316 ---------------------------------------- Basic earnings per share $0.42 $0.24 $0.20 Diluted Earnings Per Share: Net income $1,188,622 $ 636,884 $ 336,158 Weighted-average common shares outstanding 2,804,994 2,632,787 1,710,316 Dilutive effect of warrants and stock options 27,689 55,796 142,367 ------------------------------------------ Diluted weighted-average common shares outstanding 2,832,683 2,688,583 1,852,683 ------------------------------------------ Diluted earnings per share $0.42 $0.24 $0.18
-64- EXHIBIT 21 SUBSIDIARIES OF THE REGISTRANT Century National Bank, incorporated under the laws of the United States (a 100% owned subsidiary of Century Bancshares, Inc.) Century Insurance Agency, LLC, a Virginia limited liability corporation (a 100% owned subsidiary of Century National Bank) -65- EXHIBIT 24 POWERS OF ATTORNEY Page 1 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that the undersigned officer or director of Century Bancshares, Inc., a Delaware corporation (the "Company"), hereby makes, 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, 1999, 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 14th day of March, 2000. /s/b GEORGE CONTIS, M.D., M.P.H. [Signature of Director Here] George Contis, M.D., M.P.H. [Name of Director Here] -66- EXHIBIT 24 POWERS OF ATTORNEY Page 2 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that the undersigned officer or director of Century Bancshares, Inc., a Delaware corporation (the "Company"), hereby makes, 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, 1999, 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 15th day of March, 2000. ___/s/b/ JOHN R. COPE___ [Signature of Director Here] John R. Cope [Name of Director Here] -67- EXHIBIT 24 POWERS OF ATTORNEY Page 3 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that the undersigned officer or director of Century Bancshares, Inc., a Delaware corporation (the "Company"), hereby makes, 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, 1999, 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 13th day of March, 2000. /s/b/ BERNARD J. CRAVATH [Signature of Director Here] Bernard J. Cravath [Name of Director Here] -68- EXHIBIT 24 POWERS OF ATTORNEY Page 4 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that the undersigned officer or director of Century Bancshares, Inc., a Delaware corporation (the "Company"), hereby makes, 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, 1999, 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 13th day of March, 2000. /s/b/ WILLIAM S. MCKEE [Signature of Director Here] William S. McKee [Name of Director Here] -69- EXHIBIT 24 POWERS OF ATTORNEY Page 5 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that the undersigned officer or director of Century Bancshares, Inc., a Delaware corporation (the "Company"), hereby makes, 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, 1999, 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 13th day of March, 2000. /s/b/ WILLIAM C. OLDAKER [Signature of Director Here] William C. Oldaker [Name of Director Here] -70- EXHIBIT 24 POWERS OF ATTORNEY Page 6 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that the undersigned officer or director of Century Bancshares, Inc., a Delaware corporation (the "Company"), hereby makes, 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, 1999, 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 9th day of March, 2000. /s/b/ NEAL R. GROSS [Signature of Director Here] Neal R. Gross [Name of Director Here] -71- EXHIBIT 27 FINANCIAL DATA SCHEDULE CENTURY BANCSHARES, Inc. Financial Data Schedule [ARTICLE] 9 [CIK] 785813 [NAME] CENTURY BANCSHARES, INC. [MULTIPLIER] 1,000 [PERIOD-TYPE] 12-MOS [FISCAL-YEAR-END] DEC-31-1999 [PERIOD-END] DEC-31-1999 [CASH] 9,222 [INT-BEARING-DEPOSITS] 19,667 [FED-FUNDS-SOLD] 11,015 [TRADING-ASSETS] 0 [INVESTMENTS-HELD-FOR-SALE] 16,495 [INVESTMENTS-CARRYING] 5,966 [INVESTMENTS-MARKET] 5,838 [LOANS] 138,076 [ALLOWANCE] 1,519 [TOTAL-ASSETS] 204,809 [DEPOSITS] 153,900 [SHORT-TERM] 21,958 [LIABILITIES-OTHER] 1,982 [LONG-TERM] 11,301 [COMMON] 2,858 [PREFERRED-MANDATORY] 0 [PREFERRED] 0 [OTHER-SE] 12,810 [TOTAL-LIABILITIES-AND-EQUITY] 204,809 [INTEREST-LOAN] 11,543 [INTEREST-INVEST] 766 [INTEREST-OTHER] 911 [INTEREST-TOTAL] 13,220 [INTEREST-DEPOSIT] 4,154 [INTEREST-EXPENSE] 4,996 [INTEREST-INCOME-NET] 8,224 [LOAN-LOSSES] 640 [SECURITIES-GAINS] 0 [EXPENSE-OTHER] 7,335 [INCOME-PRETAX] 1,918 [INCOME-PRE-EXTRAORDINARY] 1,918 [EXTRAORDINARY] 0 [CHANGES] 0 [NET-INCOME] 1,189 [EPS-BASIC] 0.42 [EPS-DILUTED] 0.42 [YIELD-ACTUAL] 5.15 [LOANS-NON] 515 [LOANS-PAST] 0 [LOANS-TROUBLED] 0 [LOANS-PROBLEM] 0 [ALLOWANCE-OPEN] 1,128 [CHARGE-OFFS] 270 [RECOVERIES] 21 [ALLOWANCE-CLOSE] 1,519 [ALLOWANCE-DOMESTIC] 1,519 [ALLOWANCE-FOREIGN] 0 [ALLOWANCE-UNALLOCATED] 992 -72- -----END PRIVACY-ENHANCED MESSAGE-----