-----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, NFqAAWAV8eN7KW6bhf9dh7zyndk8lKyKekXOIPXol0stR0b4nLqJn8/LxzP/2f2i peMVNU44FyjpHYcJr+2NSw== 0000785813-98-000005.txt : 19980330 0000785813-98-000005.hdr.sgml : 19980330 ACCESSION NUMBER: 0000785813-98-000005 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980327 SROS: NASD 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: 98576248 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, D.C. 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, 1997 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 (I.R.S. Employer of incorporation or organization) Identification No.) 1275 Pennsylvania Avenue, N.W. Washington, D.C. 20004 ---------------------------------------------- ----- (Address of principal executive offices) (Zip Code) (202) 496-4100 --------------- (Registrant's Telephone Number, Including Area Code) Securities Registered Pursuant To Section 12(b) of the Act: Title of Each Class Name of each exchange on which registered ------------------- ----------------------------------------- None None Securities Registered Pursuant To Section 12(g) of the Act: Title of Each Class Common Stock, $1.00 par value Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X]. As of March 24, 1998, the number of shares of common stock outstanding was 2,223,716. As of such date, the aggregate market value of voting stock held by nonaffiliates, based upon recent "bid" and "ask" prices for the Company's Common Stock was approximately $18,593,000. 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, 1997 are incorporated by reference into Part III. CENTURY BANCSHARES, INC. ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997 TABLE OF CONTENTS
Page PART I Item 1. Business 1 Item 2. Properties 7 Item 3. Legal Proceedings 7 Item 4. Submission of Matters to a Vote of Security Holders 7 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters 8 Item 6. Selected Financial Data 8 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 10 Item 8. Financial Statements and Supplementary Data 27 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 54 PART III Item 10. Directors and Executive Officers of the Registrant 54 Item 11. Executive Compensation 54 Item 12. Security Ownership of Certain Beneficial Owners and Management 54 Item 13. Certain Relationships and Related Transactions 54 PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K 54
-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. The Bank provides a broad line of financial products and services to small and medium sized businesses and consumers, through its main office located at 1875 Eye Street, N.W., Washington, D.C., a branch office located at 1275 Pennsylvania Avenue, N.W., and two offices in Northern Virginia at 8251 Greensboro Drive and 6832 Old Dominion Drive, McLean, Virginia. Lending services are concentrated in professional, service, and commercial business sectors located in the metropolitan Washington, D.C. area. Effective January 5, 1998, the Company established a full service branch at 4625 Wisconsin Avenue, Bethesda, Maryland. The Company's principal executive offices are located at 1275 Pennsylvania Avenue, N.W., Washington, D.C. 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, D.C. metropolitan area. As of December 31, 1997, the Company had total assets of $152.6 million, total loans of $94.2 million, total deposits of $129.6 million, and total stockholders' equity of $13.5 million. At December 31, 1997, the Company had approximately 272 holders of record 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 will 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, D.C. metropolitan area. Consequently, the Company's success is dependent to a significant extent upon general economic conditions in the metropolitan Washington, D.C. area, which is dependent, among other things, on its ability to attract new business to the area, spending on 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, 1997, the Company's ROE was 3.83%. 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, 1997, the Company's ROA was 0.29%. GROWTH OF OPERATIONS. The Company's current strategic plan is directed toward the enhancement of its franchise value and operating profitability through a significant increase in its asset size, the development of new commercial accounts and loans, and expansion into the nearby Maryland and Virginia markets. The Company plans to acquire or establish banking offices in high-density commercial districts, and may in some cases open a temporary loan production office ("LPO") prior to establishing a full service branch. The Company acquired its first branch office in downtown Washington in 1994 and in 1996 established an LPO in Tysons Corner, Virginia, which was replaced by a full service branch in April 1997. Also, in October 1997, the Company purchased a full-service branch in McLean, Virginia, from Eastern American Bank, FSB ("Eastern American"). In June 1997, the Company established an LPO in Bethesda, Maryland, which was replaced by a full service branch on January 5, 1998. The establishment of full service branches in McLean, Virginia and Bethesda, Maryland in April 1997 and January 1998, respectively, and the establishment of a full service branch in McLean, Virginia by means of the purchase and assumption of the deposits and certain other liabilities of the branch of Eastern American in October 1997, has significantly affected the Company's results of operations during 1996 and 1997. The effects of these transactions should be considered when reviewing the financial information contained in this report. The Company has not sought out opportunities to be acquired by larger financial institutions, primarily because of its view that the long-term value of an independent banking franchise in the nation's capital will increase, rather than diminish, as consolidation trends continue. The Company does believe, however, 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. Additionally, there can be no assurance that the Company will be successful in implementing any of the future plans described herein or that, even if implemented, such actions will produce the desired financial results. The foregoing strategy should be taken into account however when considering the more specific discussion of the Company's financial performance set forth herein. COMPETITION The Company is subject to vigorous competition in all aspects and areas of its business from banks and other financial institutions, including savings and loan associations, savings banks, finance companies, credit unions and other providers of financial services, such as mutual funds, brokerage firms, consumer finance companies and insurance companies. The Company also competes with non-financial institutions that maintain their own credit programs and governmental agencies that make available low cost or guaranteed loans to certain borrowers. The principal methods of competition include interest rates paid on deposits and charged on loans and the availability of other banking products and services. The Company competes in its market area with a number of much larger financial institutions that have substantially greater resources, including larger lending limits, larger branch systems and a wider array of commercial banking services. The Company believes that it has been able to compete effectively with other financial institutions by emphasizing customer services, establishing long-term customer relationships and building customer loyalty, and by providing products and services designed to address the specific needs of its customers. -2- REGULATORY MATTERS In addition to the generally applicable state and federal laws governing business and employers, 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. As such, 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. In addition, 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 funds 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. A bank holding company's failure to meet its obligations to serve as a source of strength to its subsidiary banks will generally be considered by the Federal Reserve Board 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. -3- As a bank holding company, the Company is required to obtain prior approval to merge or consolidate with any other bank holding company, acquire all or substantially all of the assets of any bank or acquire ownership or control of shares of a bank or bank holding company if, after the acquisition, the Company would directly or indirectly own or control 5% or more of the voting shares of such bank or bank holding company. The Company is also prohibited from acquiring a direct or indirect interest in or control of more than 5% of the voting shares of any company that is not a bank or bank holding company and from engaging directly or indirectly in activities other than those of banking, managing or controlling banks or furnishing services to its subsidiary banks, except that it may engage in and may own shares of companies engaged in certain activities found by the Federal Reserve Board to be so closely related to banking or managing and controlling banks as to be a proper incident thereto. These activities include, among others, operating a mortgage, finance, credit card, or factoring company; performing certain data processing operations; providing investment and financial advice; acting as an insurance agent for certain types of credit-related insurance; leasing personal property on a full-payout, non-operating basis; providing certain stock brokerage and investment advisory services; derivatives trading and investment activities; and management consulting activities. In approving acquisitions or the addition of activities, the Federal Reserve Board considers whether the acquisition or the additional activities can reasonably be expected to produce benefits to the public, such as greater convenience, increased competition, or gains in efficiency, that outweigh such possible adverse effects as undue concentration of resources, decreased or unfair competition, conflicts of interest or unsound banking practices. In considering any application for approval or an acquisition or merger, the Federal Reserve Board is also required to consider the financial and managerial resources of the companies and the banks concerned, as well as the applicant's record of compliance with the Community Reinvestment Act (the "CRA"). The BHCA generally imposes certain limitations on transactions by and between banks and non-bank companies in the same holding company structure, including limitations on extensions of credit (including guarantees of loans) by the Bank to affiliates, investments in the stock or other securities of the Company by the Bank, and the nature and amount of Company securities that the Bank may accept from any affiliate to secure loans extended to the affiliate. The Company, as an affiliate of the Bank, is also subject to these restrictions. Under the BHCA and the Federal Reserve Board's regulations, a bank holding company and its subsidiaries are prohibited from engaging in certain tie-in arrangements in connection with any extension of credit, lease or sale of property or furnishing of services. REGULATION OF THE BANK. The Bank is a national banking association and is therefore subject to regulation, supervision, and examination by the OCC. The Bank is also a member of the Federal Reserve System and the Federal Deposit Insurance Corporation ("FDIC"). Requirements and restrictions under the laws of the United States include the requirement that reserves be maintained against deposits, restrictions on the nature and the amount of loans which can be made, restrictions on the business activities in which a bank may engage, restrictions on the payment of dividends to stockholders, and minimum capital requirements. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." The OCC has enforcement authority over the Bank that is similar to that of the Federal Reserve Board with respect to the Company. In addition, upon making certain determinations with respect to the condition of any insured national bank, such as the Bank, the FDIC may initiate the termination of a bank's federal deposit insurance. There are certain statutory limitations on the payment of dividends by national banks. Without approval of the OCC, dividends may not be paid in excess of a bank's total net profits for that year, plus its retained 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. -4- 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, 1997, 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 which controls the institution, requiring divestiture by the institution of its subsidiaries or by the holding company of the institution itself, requiring new election of directors, and requiring the dismissal of directors and officers. With certain exceptions, national banks will be 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 will be required to file capital restoration plans with the OCC. Undercapitalized national banks also will be subject to restrictions on growth, acquisitions, branching and engaging in new lines of business unless they have an approved capital plan that permits otherwise. The OCC also may, among other things, require an undercapitalized national bank to issue shares or obligations, which could be voting stock, to recapitalize the institution or, under certain circumstances, to divest itself of any subsidiary. Significantly and critically undercapitalized national banks may be subject to more extensive control and supervision. The OCC may prohibit any such institutions from, among other things, entering into any material transaction not in the ordinary course of business, amending their charter or bylaws, or engaging in certain transactions with affiliates. In addition, critically undercapitalized institutions generally will be prohibited from making payments of principal or interest on outstanding subordinated debt. Within 90 days of a national bank becoming critically undercapitalized, the OCC must appoint a receiver or conservator unless certain findings are made with respect to the prospect for the institution's continued viability. RECENT REGULATORY DEVELOPMENTS. The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 ("Interstate Banking Act") authorizes the Federal Reserve Board to permit adequately capitalized and adequately managed bank holding companies to acquire all or substantially all of the assets of an out-of-state bank after September 29, 1995, subject to deposit concentration limits, state law limits on the time period a target bank must be in existence and consideration of the acquiring bank's compliance with Federal and state community reinvestment laws. Thus, nationwide interstate banking became effective on September 29, 1995. The Interstate Banking Act also authorizes banking subsidiaries of bank holding companies to act as agent for depository institution affiliates in other states when receiving deposits, renewing time deposits, closing loans, servicing loans, or receiving payments on loans and other obligations; and the Interstate Banking Act expressly states that banks acting in an agency capacity are not branches. With respect to interstate branching by multi-state bank holding companies, states have two options - for the period from September 29, 1994 through June 1, 1997, states may enact legislation that either prohibits interstate merger transactions involving out-of-state banks ("opt-out") or permits interstate merger transactions prior to June 1, 1997 ("opt-in"), so long as the law applies equally to all out-of-state banks. The Interstate Banking Act also contained provisions addressing branch retention in interstate merger transactions and de novo branching by out-of-state banks. Maryland, Virginia, and the District of Columbia have each adopted "opt-in" provisions permitting de novo branching prior to June 1, 1997. -5- In addition, there are several pieces of legislation relevant to the banking industry that were recently enacted into law. On August 20, 1996, President Clinton signed the Small Business Job Protection Act (the "Jobs Act"). The Jobs Act contained several provisions that affect the banking industry. First, the most significant part of the Jobs Act removed the prohibition against banks, savings and loans and bank holding companies electing to be treated as S corporations. This change is effective for tax years beginning after December 31, 1996. Second, the Jobs Act gave qualifying savings associations a tax break when they change their method of accounting for bad debt reserves. This change will save the thrift industry approximately $3 billion in tax liability and will facilitate the conversion of savings associations into banks. Finally, the Jobs Act increased the IRA deduction from $250 to $2,000 per year for a spouse that does not work outside the home, subject to income eligibility limits. On September 30, 1996, President Clinton signed the Economic Growth and Regulatory Paperwork Reduction Act of 1996 (the "Growth Act"), which contained a comprehensive approach to recapitalize the FDIC's Savings Association Insurance Fund and to assure payment of the Financing Corporation ("FICO") obligations. Most of the Bank's deposits are insured by the FDIC's Bank Insurance Fund ("BIF"). Under the Growth Act, banks insured under the BIF are required to pay a portion of the interest due on bonds that were issued by FICO to help shore up the ailing Federal Savings and Loan Insurance Corporation in 1987. The amount of FICO debt service to be paid by all BIF-insured institutions is approximately $320,343,000 per year from 1997 through the year 1999 when the obligation of BIF-insured institutions increases to approximately $598,500,000 per year through the year 2019. The Bank's FICO assessment was $2 thousand per year for 1997 and 1996. The Growth Act also contained provisions protecting banks from liability for environmental clean-up costs; prohibiting credit unions sponsored by Farm Credit System banks; easing application requirements for most bank holding companies when they acquire a thrift or a permissible nonbank operation; easing Fair Credit Reporting Act restrictions between bank holding company affiliates; and reducing regulatory burden under the Real Estate Settlement Procedures Act, the Truth-in-Savings Act, the Truth-in-Lending Act, and the Home Mortgage Disclosure Act. In 1994, the Bank acquired the deposits of a savings and loan branch. These so-called "Oakar deposits" are insured under the FDIC's Savings Association Insurance Fund ("SAIF"). Pursuant to a rule promulgated by the FDIC on October 8, 1996, all institutions holding SAIF insured deposits were charged a one-time special assessment of 65.7 cents per $100 of SAIF insured deposits on November 27, 1996. The FDIC has also promulgated a final rule regarding the amount of premiums payable as of January 1, 1997 by institutions holding SAIF-insured deposits. The Company's 1997 assessment was $2,000. Under the proposed rule, which is subject to final comments and could change, institutions will be assessed with respect to SAIF-insured deposits anywhere from zero for most safe and sound institutions to 27 cents per $100 of deposits for the least safe and sound institutions. See Note 6 of the Notes to Consolidated Financial Statements for additional disclosure. Various bills which would affect the operations of commercial banks and other financial institutions are introduced periodically in Congress. In early March 1998, a compromise was announced regarding conflicting legislation currently pending in the House of Representatives for the modernization of the financial services industry. However, the likelihood of passage of any such legislation, its final form, manner of implementation or impact on the Company and the Bank is unknown. The policies of regulatory authorities, including the monetary policy of the Federal Reserve Board, have a significant effect on the operating results of bank holding companies and their subsidiaries. Among the means available to the Federal Reserve Board to affect the money supply are open market operations in U.S. Government securities, changes in the discount rate on member bank borrowings, and changes in reserve requirements against member bank deposits. These means are used in varying combinations to influence overall growth and distribution of bank loans, investment and deposits, and their use may affect interest rates charged on loans or paid for deposits. Federal Reserve Board monetary policies have materially affected the operating results of commercial banks in the past and are expected to continue to do so in the future. The nature of future monetary policies and the effect of such policies on the business and income of the Company and the Bank cannot be predicted. EMPLOYEES At December 31, 1997, the Company employed 49 employees, including its four branches, one LPO and its operations staff. -6- ITEM 2. PROPERTIES. The Company's principal executive offices and all of its banking offices are leased under agreements expiring at various dates, including renewal options, through 2012. The Company's principal executive offices, which are located in the District of Columbia at 1275 Pennsylvania Avenue, N.W., also serve as a branch location of the Bank. The premises at 1275 Pennsylvania Avenue consist of 2,750 square feet which are under lease through 2004, with one additional five-year renewal option. The lease for the Company's main office, located in the District at 1875 Eye Street, N.W., extends through 2002, with two additional five-year renewal options. The lease for the main office includes 3,895 square feet of lobby space, 5,286 square feet of Metro-level basement space and space for an Automatic Teller Machine ("ATM") in the adjacent International Square food court. The Company's branch office in Tysons Corner is located at 8251 Greensboro Drive, McLean, Virginia and consists of 1,801 square feet of space held under lease through March 31, 1999. The Company is currently negotiating with the landlord to extend the lease term for an additional seven years on the terms and conditions similar to the existing lease arrangement. See Note 11 of Notes to Consolidated Financial Statements for additional information concerning the Company's commitments under its lease agreements. In connection with an acquisition with Eastern American in the fourth quarter of 1997 (see Note 15 of Notes to Consolidated Financial Statements for additional information) , the Bank assumed Eastern American's lease for the branch location at 6832 Old Dominion Drive, McLean, Virginia. The branch premises consist of 2,077 square feet which are under lease through September 30, 2003, with one additional five-year renewal option. In 1997, the Company established a LPO in Bethesda, Maryland, which was closed in January 1998, in connection with the establishment of a branch location at 7625 Wisconsin Avenue, Bethesda, Maryland. The branch location is in the vicinity of Wisconsin Avenue and Old Georgetown Road. The branch premises consist of 2,022 square feet leased through January 2008. 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, 1997. -7- PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. The Company's Common Stock currently trades on the Nasdaq SmallCap Market under the symbol "CTRY." Continued inclusion of the Common Stock for quotation on the Nasdaq SmallCap Market requires that the Company satisfy a minimum tangible net worth or net income standard, and that the Common Stock satisfy minimum standards as to public float, bid price and market makers. There can be no assurance, however, that an active public market can be sustained. As of March 24, 1998, there were 273 holders of record of Common Stock. Prior to a common stock offering in the fourth quarter of 1997 (see Notes 8 and 13 to the Consolidated Financial Statements for additional information), the Company's Common Stock was quoted in the "pink sheets" of the National Association of Securities Dealers, Inc. (which set forth the most recent "bid" and "ask" prices), with only limited and sporadic quotations available for shares of the Common Stock in the Washington D.C. area, after which the Common Stock began trading on the Nasdaq SmallCap Market. Based on information available to the Company from a limited number of sellers and purchasers of Common Stock prior to the 1997 offering, transactions in shares of Common Stock from January 1, 1997 through September 23, 1997, took place at prices ranging from a low of $6.25 to a high of $8.50, with a range from $5.50 to $8.00 during 1996. From the inception of trading in the Nasdaq SmallCap Market on September 23, 1997 (conclusion of 1997 stock offering) through December 31, 1997, the high and low bid prices for the Common Stock ranged from $8.125 to $10.75. Price information for transactions in the "Pink sheets" and in the Nasdaq SmallCap Market reflects inter-dealer prices, exclusive of retail mark-up, mark-down or commission and may not necessarily represent actual transactions. The Company has not paid cash dividends on its shares of Common Stock to date and has no present intention to do so in the foreseeable future. The declaration and payment of future cash dividends will depend on, among other things, the Company's earnings, the general economic and regulatory climate, the Company's liquidity and capital requirements, and other factors deemed relevant by the Company's Board of Directors. The Company's ability to pay dividends depends mostly upon the dividends received from the Bank. Dividends from the Bank to the Company are restricted to the extent that no portion of the Bank's capital stock or capital surplus may be withdrawn for the payment of dividends. In addition, no dividends may be paid by the bank in an amount greater than the net retained profits then on hand, less certain deductions for bad debts. Approval by the OCC is required prior to the payment of dividends by the Bank if the total of all dividends, including the proposed dividend, declared in any given calendar year exceeds the Bank's net profits for that year combined with its retained net profits for the preceding two years. Under the Federal Deposit Insurance Act, an insured bank is prohibited from paying dividends on its capital stock while in default on payment of any assessment due to the FDIC, except in those cases where the amount of the assessment is in dispute and the insured bank has deposited satisfactory security. The Bank has timely paid all such notices of assessment. In addition, banks are prohibited from paying dividends if such dividends would cause them to be less than "adequately capitalized," as defined by the Federal banking agencies. 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 April 22, 1997, payable on May 23, 1997, to holders of record of shares of Common Stock as of May 7, 1997. The declaration of future stock dividends is at the discretion of the Board of Directors. ITEM 6. SELECTED FINANCIAL DATA. The following table sets forth selected consolidated financial data for the Company for each of the five years in the period ended December 31, 1997. 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, 1997 and 1996, and the Consolidated Statements of Operations, Stockholders' Equity and Cash Flows for each of the years in the three year period ended December 31, 1997 and the report thereon of KPMG Peat Marwick LLP are included elsewhere in this report. -8-
SELECTED CONSOLIDATED FINANCIAL INFORMATION (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) 1997 1996 1995 1994 1993 ------------- ------------- ------------- ------------- ------------- INCOME STATEMENT DATA Interest income $9,209 $7,690 $7,079 $5,712 $5,455 Interest expense 3,765 2,776 2,562 1,902 1,987 ------------- ------------- ------------- ------------- ------------- Net interest income 5,444 4,914 4,517 3,810 3,468 Provision for loan losses 336 160 26 19 310 ------------- ------------- ------------- ------------- ------------- Net interest income after provision for loan losses 5,108 4,754 4,491 3,791 3,158 Noninterest income 922 720 590 555 572 Noninterest expense 5,460 4,920 4,157 3,381 3,071 ------------- ------------- ------------- ------------- ------------- Income before taxes 570 554 924 965 659 Income taxes 234 275 311 374 240 ------------- ------------- ------------- ------------- ------------- NET INCOME $336 $279 $613 $591 $419 COMMON SHARE DATA (1) Net income--basic $0.23 $0.24 $0.57 $0.58 $0.41 Net income--diluted 0.21 0.22 0.55 0.55 0.41 Book value (2) 6.13 5.61 5.42 4.48 4.48 Common shares outstanding--end of period 2,209,229 1,203,329 1,175,234 971,146 969,023 Weighted-average common shares 1,477,435 1,185,133 996,819 969,161 922,105 Diluted weighted-average common shares 1,600,417 1,256,437 1,048,438 1,007,242 968,210 BALANCE SHEET DATA Total assets $152,640 $107,186 $101,730 $90,175 $86,332 Investments (3) 46,632 25,631 21,690 22,654 25,902 Total loans (4) 94,171 70,676 69,204 60,663 56,644 Allowance for loan losses 887 826 740 740 730 Total deposits 129,605 90,985 90,539 82,081 79,982 Long-term debt 6,511 6,850 -- -- 207 Preferred equity (5) -- -- -- 460 468 Common equity (6) 13,536 6,750 6,365 4,350 4,336 Total stockholders' equity 13,536 6,750 6,365 4,810 4,804 PERFORMANCE DATA Return on average total assets 0.29% 0.27% 0.68% 0.71% 0.56% Return on average total equity 3.83 4.20 11.49 12.38 9.84 Net interest margin 5.17 5.74 5.42 4.90 4.55 Loans to deposits 72.7 77.7 76.4 73.9 70.8 ASSET QUALITY RATIOS Nonperforming assets to total assets 0.49% 0.30% 0.49% 0.70% 0.37% Nonperforming loans to total loans 0.74 0.46 0.45 1.04 0.57 Net loan charge-offs to average loans 0.36 0.10 0.04 0.02 0.59 Allowance for loan losses to total loans 0.94 1.17 1.07 1.22 1.29 Allowance to nonperforming loans 127 257 240 118 227 CAPITAL RATIOS Tier I risk based capital 12.27% 8.99% 9.22% 10.12% 10.22% Total risk based capital 13.19 10.13 10.34 11.37 11.48 Tier I leverage 8.83 6.35 6.80 5.74 5.24
[FN] Notes: (1) All common share data has been adjusted for five percent Common Stock dividends declared to stockholders of record as of July 31, 1993, March 31, 1994, March 31, 1995, and May 7, 1997, and for a seven percent Common Stock dividend declared to stockholders of record as of March 31, 1996. (2) Book value per common share is based on common equity (see footnote (6) below) divided by the number of common shares outstanding. (3) Investments include federal funds sold and interest-bearing deposits in other financial institutions. (4) Net of unearned income. (5) Preferred equity is calculated based on liquidation value of $7.50 per share of Preferred Stock. All shares of Preferred Stock outstanding as of October 17, 1995 were redeemed by the Company on December 10, 1995. (6) Common equity is total stockholders' equity less preferred equity. -9- 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, D.C. metropolitan area. As of December 31, 1997, the Company had total assets of $152.6 million, total loans of $94.2 million, total deposits of $129.6 million, and total stockholders' equity of $13.5 million. The Company had net income of $336,000 for the year ended December 31, 1997, resulting in a return on equity of 3.83% and a return on assets of 0.29%. 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 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 have significantly affected the Company's operations during 1997 and 1996, and their effects should be considered when reviewing the discussion of the Company's financial condition and results of operations set forth below. In this report, all "per share" amounts have been adjusted to give effect to the Company's five percent stock dividend which was distributed to stockholders of record as of May 7, 1997, seven percent stock dividend which was distributed to stockholders of record as of March 31, 1996, and five percent stock dividend which was distributed to stockholders of record as of March 31, 1995. RESULTS OF OPERATIONS NET INCOME Net income was $336,000 ($0.21 per diluted common share) for 1997, compared with net income of $279,000 ($0.22 per diluted common share) for 1996, an increase of $57,000 or 20.4%. The increase in net income for 1997 compared with 1996 resulted principally from a $530,000 increase in net interest income and a $202,000 increase in noninterest income between the years. These increases are attributed to a 23.1% increase in average earning assets and the addition of new branch offices during the year (see "Properties" above). Partially offsetting these increases during 1997 was an increase in average interest-bearing liabilities of 23.2%, as well as increases in several noninterest expenses categories from the establishment of three new branch office locations during the year. Additionally, a $176,000 increase in the provision for loan losses also partially offset increases in net interest income and noninterest income in 1997, the result of increased reserves in relationship to loan portfolio growth during the year. -10- Net income was $279,000 ($0.22 per diluted common share) for 1996, compared with net income of $613,000 ($0.55 per diluted common share) for 1995, a decrease of $334,000 or 54.5%. The decrease in net income for 1996 compared with 1995 resulted principally from a $763,000 increase in noninterest expenses primarily attributable to costs associated with new telephone and computer systems, processing costs in support of new fee-generating products and services, and expenses relating to the registration of the Company's Common Stock with the Securities and Exchange Commission ("SEC"). A $134,000 increase in the provision for loan losses also contributed to the decrease in net income for 1996 compared with 1995. These increased expenses were partially offset by a $396,000 increase in net interest income and a $130,000 increase in noninterest income. NET INTEREST INCOME Net interest income was $5,444,000 for 1997, an increase of $530,000 or 10.8% compared with net interest income of $4,914,000 for 1996. The Company's average total interest-earning assets increased from $85.5 million for 1996 to $105.3 million for 1997, representing a 23.2% increase between the years. The net interest margin of 5.17% for 1997 decreased 57 basis points from 5.74% for 1996, the result of reduced growth in average loans and increases in lower yielding securities and deposits with banks from funds received from the 1997 acquisition of the Virginia branch. Net interest income was $4,914,000 for 1996, an increase of $397,000 or 8.8% compared with 1995. This increase resulted from an increase in average total interest earning assets of $2,186,000, and an increase in the Company's net interest margin from 5.42% in 1995 to 5.74% in 1996, an increase of 32 basis points. The improvement in net interest margin resulted from the Company's increased emphasis on commercial loans, which has increased the overall yield of the loan portfolio, together with loans constituting a higher percentage of the Company's total earning assets in 1996 than in 1995. Changes in interest income and interest expense can result from changes in both volume and rate. The Company has an asset and liability management policy designed to provide a proper balance between rate sensitive assets and rate sensitive liabilities, to attempt to maximize interest margins and to provide adequate liquidity for anticipated needs. The table below sets forth for the periods indicated a summary of the changes in interest earned and interest paid resulting from changes in volume and rate. The table on the following page sets forth for each category of interest-earning assets and interest-bearing liabilities, the average amounts outstanding, the interest earned or paid on such amounts, and the average rate earned or paid for the years ended December 31, 1997, 1996 and 1995. RATE/VOLUME ANALYSIS OF NET INTEREST INCOME (1) (Dollars in Thousands)
1997 Compared with 1996 1996 Compared with 1995 ----------------------------------------- ----------------------------------------- Due to Due to Total Incr. Due to Due to Total Incr. Volume Rate (Decr.) Volume Rate (Decr.) ------------- ------------- ------------- ------------- ------------- ------------- INTEREST EARNED ON: Loans, including fees $ 534 $ 133 $ 667 $ 768 $ 108 $ 876 Investment securities 33 58 91 (461) 42 (419) Federal funds sold 242 (19) 223 (5) 3 (2) Interest bearing deposits with banks 524 14 538 160 (4) 156 ------------- ------------- ------------- ------------- ------------- ------------- Total interest income 1,333 186 1,519 462 149 611 INTEREST PAID ON: NOW accounts 30 7 37 7 (20) (13) Savings accounts 116 39 155 (8) (3) (11) Money market accounts (56) 46 (10) (28) 34 6 Time deposits 548 33 581 136 (5) 131 Borrowings and Notes Payable 183 43 226 82 19 101 ------------- ------------- ------------- ------------- ------------- ------------- Total interest expense 821 168 989 189 25 214 ------------- ------------- ------------- ------------- ------------- ------------- NET INTEREST INCOME $ 512 $ 18 $ 530 $ 273 $ 124 $ 397 ------------- ------------- ------------- ------------- ------------- -------------
[FN] (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. -11- AVERAGE BALANCES AND INTEREST RATES (Dollars in Thousands)
Year Ended December 31, ------------------------------------------------------------------------------------------------- 1997 1996 1995 ------------------------------ ------------------------------ ----------------------------- Interest Interest Interest Average Income/ Average Average Income/ Average Average Income/ Average Balance Expense Rate Balance Expense Rate Balance Expense Rate ---------- --------- --------- --------- ---------- --------- --------- --------- --------- INTEREST-EARNING ASSETS Loans, net (1) $75,908 $7,555 9.95% $70,523 $6,888 9.77% $62,639 $6,011 9.60% Investment securities (2)(3) 11,153 646 5.79 10,540 555 5.27 19,288 975 5.05 Federal funds sold 4,576 258 5.64 380 35 9.21 428 37 8.64 Interest bearing deposits with banks 13,628 750 5.50 4,091 212 5.18 993 56 5.64 ---------- --------- --------- --------- ---------- --------- --------- --------- --------- Total interest-earning assets 105,265 $9,209 8.75% 85,534 $7,690 8.99% 83,348 $7,079 8.49% (3) Cash and due from banks 5,336 4,361 3,854 Other assets 3,860 4,189 2,907 ---------- --------- --------- Total Assets $114,461 $94,084 $90,109 ---------- --------- --------- INTEREST-BEARING LIABILITIES Interest-Bearing Deposits: NOW accounts $14,023 $ 282 2.01% $12,522 $ 245 1.96% $12,230 $ 258 2.11% Savings accounts 5,559 211 3.80 2,217 56 2.53 2,526 67 2.65 Money market accounts 21,491 774 3.60 23,072 784 3.40 25,153 778 3.09 Time Deposits 35,399 1,981 5.60 25,596 1,400 5.47 23,128 1,269 5.49 Borrowings and Notes Payable 7,768 517 6.66 4,952 291 5.88 3,526 190 5.39 ---------- --------- --------- --------- ---------- --------- --------- --------- --------- Total interest-bearing liabilities 84,240 3,765 4.47% 68,359 2,776 4.06% 66,563 2,562 3.85% Non-interest bearing deposits 20,272 17,525 16,841 Other liabilities 1,176 1,642 1,236 ---------- --------- --------- Total liabilities 105,688 87,526 84,640 Stockholders' equity 8,773 6,558 5,469 ---------- --------- --------- Total liabilities and stockholders' equity $114,461 $94,084 $90,109 ---------- --------- --------- --------- --------- ---------- --------- --------- --------- Net interest income and spread $5,444 4.28% $4,914 4.93% $4,517 4.64% --------- --------- ---------- --------- --------- --------- Net interest margin (3) 5.17% 5.74% 5.42% --------- --------- --------- (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: Investment securities 5.82% 6.84% 8.76% Total interest-earning assets 8.75 9.00 8.53 Net interest margin 5.18 5.75 5.45
-12- PROVISION FOR LOAN LOSSES Provisions for loan losses are charged to income to bring the total allowance for loan losses to a level deemed appropriate by management based on 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 loan losses was $336,000 for 1997, compared with $160,000 for 1996, increasing $176,000, or 110.0%. This significant increase is the result of an increase in loans, net of unearned income from $70.7 million at year-end 1996 to $94.2 million at year-end 1997, or a 33.2% increase year-to-year. In addition, net charge-offs increased to $275,000 for 1997, from $74,000 in 1996, primarily the result of a $146,000 increase in net charge-offs between the years in the installment and credit card loan portfolios. The provision for loan losses for 1996 was $160,000, compared with $26,000 for 1995, representing an increase of 515.4%. The increase is the result of an increase in charge offs and reserves for certain consumer loans which were deemed uncollectible when the borrowers declared bankruptcy, an unanticipated $38,000 loss reserve established in the fourth quarter of 1996 resulting from a borrower's use of forged collateral as security for a loan, and a $38,000 increase in reserves during the fourth quarter of 1996 for two non-accrual loans secured by real estate. In addition, the Company's loan portfolio continued to grow during 1996, with the majority of growth occurring in the commercial portfolio. 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 loan losses through future provisions charged to income. Management will continue to closely monitor the performance of its portfolio and make additional provisions as considered necessary. The Company does not presently anticipate that such provisions will have a material adverse impact on the Company's results of operations in future periods. NONINTEREST INCOME Noninterest income was $922,000 for 1997, compared with $720,000 for 1996, an increase of $202,000 or 28.1%. This increase was primarily the result of increased fee income from the Company's Mastercard/Visa credit card program, which increased $152,000, or 64.1% in 1997. In addition, commission and other fee income increased $54,000, or 110.2%, due to increased ATM transactions and other miscellaneous fee income in 1997. Noninterest income for 1996 was $720,000, an increase of $130,000 or 22.0% compared with noninterest income of $590,000 for 1995. This increase resulted primarily from fees generated in connection with the Company's credit card program, which was initially established in March 1995. The following table sets forth the various categories of, and changes in, noninterest income for the years ended December 31, 1997, 1996 and 1995:
NONINTEREST INCOME (Dollars in Thousands) Year Ended December 31, ------------------------------------------------------------------------------ 1997 % Change 1996 % Change 1995 --------------- -------------- --------------- --------------- --------------- Service charges on deposit accounts $410 (1.4)% $416 9.8% $379 Credit card and merchant fees 389 64.1 237 54.9 153 Commission and other fee income 103 110.2 49 8.9 45 Other income 20 11.1 18 38.5 13 --------------- -------------- --------------- --------------- --------------- Total noninterest income $922 28.1 % $720 22.0% $590 --------------- -------------- --------------- --------------- ---------------
-13- NONINTEREST EXPENSE Noninterest expense was $5,460,000 for 1997, compared with $4,920,000 for 1996, representing an increase of $540,000 or 11.0%. The increase from 1996 to 1997 was primarily attributable to increased personnel and occupancy-related expenses associated with the addition of two new branches in Virginia in 1997, and other increased expenses from the establishment of the Company's LPO in Maryland. The Company's noninterest expense has been consistently higher in relation to its asset size than the average for small community banks. The Company's strategy is to increase its asset size significantly so that its level of noninterest expense in relation to its assets is more in line with those of comparable institutions. To support an increased rate of asset growth, branch expansion and increased product and service offerings, the Company invested approximately $1 million to upgrade its telephone and computer systems during 1995 and 1996. In addition to these capital expenditures, the Company incurred consulting expenses associated with the installation, specialized programming and security aspects of the computer system. As a result, the Company's noninterest expenses during such periods have increased in anticipation of a subsequent increase in total assets. No assurance may be given, however, that the anticipated asset growth or branch expansions will occur. Noninterest expense was $4,920,000 for 1996, an increase of $763,000 or 18.4% compared with noninterest expense of $4,157,000 for 1995. The installation of the new computer system, the write-off of certain custom software development costs for software under design but abandoned prior to completion, unanticipated consulting, special audit, and legal expenses related to delivery, payments, and security for the computer system required the Company to incur substantial nonrecurring expenses in connection with the installation of the new computer system. Additionally, during the same period in 1996, management of the Company's operations and financial reporting functions related to the utilization of the computer system were realigned. This realignment resulted in unanticipated expenses including negotiated payments for personnel severance, accrued leave, and related expenses. In the aggregate, these items represented approximately $304,000 in nonrecurring expenses. A total of $112,000 in nonrecurring expenses were incurred to file a registration statement with the SEC registering shares of the Company's Common Stock issuable upon exercise of the Company's outstanding warrants to purchase Common Stock. The remainder of the increase in noninterest expense resulted principally from depreciation expenses associated with the Bank's new computer and telephone systems and remote ATM, as well as data processing costs in support of the credit card program. The following table sets forth the various categories of, and changes in, noninterest expense for the years ended December 31, 1997, 1996 and 1995: NONINTEREST EXPENSE (Dollars in Thousands)
Year Ended December 31, ------------------------------------------------------------------------------ 1997 % Change 1996 % Change 1995 --------------- -------------- --------------- --------------- --------------- Salaries and employee benefits $2,201 10.7 % $ 1,988 (5.1)% $2,094 Professional fees 692 10.2 628 130.9 272 Occupancy and equipment expense 650 22.4 531 2.7 517 Depreciation and amortization 571 26.0 453 104.1 222 Data processing 534 13.9 469 41.3 332 Communications 200 (2.9) 206 28.0 161 Office and operations expenses 287 (9.5) 317 104.5 155 Marketing and public relations 157 (9.8) 174 15.2 151 Federal deposit insurance premiums 14 (53.3) 30 (65.9) 88 Other real estate owned -- (100.0) 7 (85.4) 48 Other expenses 154 31.6 117 -- 117 --------------- -------------- --------------- --------------- --------------- Total noninterest expense $5,460 11.0 % $ 4,920 18.4 % $4,157 --------------- -------------- --------------- --------------- ---------------
-14- INCOME TAX EXPENSE The Company's income tax expense includes both federal and state income taxes. The Company's 1997 income tax expense of $234,000 decreased from $275,000 of income tax expense for 1996. This reflects an effective tax rate of 41.0% for 1997, compared with an effective tax rate of 49.6% in 1996. The higher effective rate in 1996 was primarily due to nondeductible expenses of $112,000 incurred in connection with the registration of shares of the Company's Common Stock, as well as other nondeductible expenses. 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 (the "ALCO") which reviews, on a regular basis, the maturity and repricing of the assets and liabilities of the Company. The ALCO has adopted the objective of achieving and maintaining a one-year cumulative GAP, as a percent of total assets, of between plus 10% and minus 10%. In addition, ALCO monitors potential changes in net interest income under various interest rate scenarios. On a consolidated basis, the Company's one year cumulative gap was a positive 6.4% of total assets at December 31, 1997. Market risk is the risk of loss from adverse changes in market prices and rates, arising primarily from interest rate risk in the Company's portfolios, which can significantly impact the Company's profitability. Net interest income can be adversely impacted where assets and liabilities do not react the same to changes in interest rates. At year-end 1997, the forcasted impact of an immediate increase of 100 basis points and 200 basis points would have resulted in an increase in interest income over a 12-month period of 0.5% and 0.8%, respectively, with a comparable decrease resulting in a decrease of 1.6% and 3.3%. 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, 1997, 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, 1997) or Less Days to 1 Year 1 Year Total - ------------------------------------------------------- ------------- ------------- ------------- ------------- ------------- INTEREST-EARNING ASSETS Loans, net $46,942 $7,451 $15,011 $24,767 $94,171 Investment securities 2,617 481 3,245 13,065 19,408 Federal funds sold 5,000 - - - 5,000 Interest bearing deposits with banks 22,223 - - - 22,223 ------------- ------------- ------------- ------------- ------------- Total interest-earning assets 76,782 7,932 18,256 37,832 140,802 INTEREST-BEARING LIABILITIES NOW accounts 6,168 2,056 4,112 6,170 18,506 Savings accounts 8,175 2,725 5,458 - 16,358 Money market accounts 17,989 7,011 - - 25,000 Time deposits 22,402 8,824 6,597 5,693 43,516 Other borrowings 979 256 456 6,508 8,199 ------------- ------------- ------------- ------------- ------------- Total interest-bearing liabilities 55,713 20,872 16,623 18,371 111,579 ------------- ------------- ------------- ------------- ------------- Interest sensitivity gap per period $21,069 $(12,940) $1,633 $19,461 $29,223 Cumulative gap 21,069 8,129 9,762 29,223 Cumulative gap as a percentage of total assets 13.8% 5.3% 6.4% 19.1% Cumulative int.-earning assets as % of int.-bearing liabilities 138 111 111 126
-15- 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, D.C., metropolitan area. Most of the Company's loan portfolio is collateralized by first mortgages and home equity lines of credit on residential real estate. Although residential real estate loans increased during 1997 as a result of the mortgage loan portfolio acquired in connection with the McLean branch acquisition, the Company anticipates that this concentration will decline, as the Company continues its emphasis on the development of new commercial loan business. As of December 31, 1997 and 1996, approximately $56.6 million (60.1%) and $41.8 million (59.1%) of the Company's total loan portfolio, respectively, consisted of loans secured by real estate, of which one-to-four-family residential mortgage loans and home equity lines of credit represented $35.3 million (37.4%) and $25.4 million (35.9%), 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, D.C., metropolitan area. As of December 31, 1997, the industry concentrations in excess of 10% of total loans, where the borrowers as a group might be affected similarly by economic changes, consisted of loans to members of the legal profession ($17.8 million, or 19.0% of total loans) and health care services ($11.5 million, or 12.2% of total loans). The Company offers lines of credit, credit cards, home equity lines, and mortgage loans to these groups. At year-end 1997, the amount of such loans which were past due or considered by management to be potential problem loans was not material. The primary types of loans in the Company's portfolio are residential mortgages and home equity loans, commercial real estate loans, commercial loans, and consumer installment and credit card loans. Generally, the Company underwrites loans based upon the borrower's debt service capacity or cash flow, a consideration of past performance on loans from other creditors as well as an evaluation of the collateral securing the loan. With some exceptions, the Company's general policy is to require conservative underwriting policies, primarily in the analysis of borrowers' debt service coverage capabilities for commercial and commercial real estate loans, while emphasizing lower gross debt ratios for consumer loans and lower loan-to-value ratios for all types of real estate loans. Most of the Company's commercial real estate loans consist of owner-occupied properties financed for the Company's regular commercial customers, rather than speculative or investor-owned properties. Most of the Company's commercial and commercial real estate loans are personally guaranteed by the owners of the business, the primary exceptions to this requirement being loans to non-profit and membership organizations. Given the localized nature of the Company's lending activities, the primary risk factor affecting the portfolio as a whole is the health of the local economy in the Washington metropolitan area and its effects on the value of local real estate and the incomes of local professionals and business firms. To mitigate this risk, the Company's underwriting policy provides that each loan should be supported by an economically independent secondary source of repayment. Any exceptions to the general loan policy must be approved by the Executive Loan Committee. Loans to directors, executive officers and principal stockholders of the Company and to directors and officers of the Bank are subject to limitations contained in the Federal Reserve Act, the principal effect of which is to require that extensions of credit by the Bank to executive officers, directors, and ten percent stockholders satisfy certain standards. The Bank routinely makes loans in the ordinary course of business to certain directors and executive officers of the Company and the Bank, their associates, and members of their immediate families. In accordance with Federal Reserve Act guidelines, these loans are made on substantially the same terms, including interest rates and collateral, as those prevailing for comparable transactions with others and do not involve more than normal risk of collectibility or present other unfavorable features. As of December 31, 1997, loans and commitments outstanding to directors and executive officers of the Company and the Bank, their associates and members of their immediate families totaled $3.5 million (net of participations sold to other banks on a non-recourse basis), which represented approximately 3.7% of total loans as of that date. As of December 31, 1997, 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. -16- 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, 1997 1996 1995 - ----------------------------------------------------- ---------------------- ---------------------- --------------------- AGGREGATE PRINCIPAL AMOUNT Type of loan: 1-4 family residential mortgage $27,502 $18,970 $24,921 Home equity loans 7,808 6,431 5,640 Multifamily residential 1,859 1,963 2,087 Construction 1,459 463 1,545 Commercial real estate 17,999 14,001 11,910 Commercial loans 24,132 17,400 13,213 Installment and credit card loans 13,535 11,510 9,023 Other loans - - 963 ---------------------- ---------------------- --------------------- Gross loans 94,294 70,738 69,302 Less: Unearned income (123) (62) (98) ---------------------- ---------------------- --------------------- Total loans, net of unearned $94,171 $70,676 $69,204 ---------------------- ---------------------- --------------------- PERCENTAGE OF LOAN PORTFOLIO Type of loan: 1-4 family residential mortgage 29.17% 26.82% 35.96% Home equity loans 8.28 9.09 8.14 Multifamily residential 1.97 2.78 3.01 Construction 1.55 0.65 2.23 Commercial real estate 19.09 19.79 17.18 Commercial loans 25.59 24.60 19.07 Installment and credit card loans 14.35 16.27 13.02 Other loans - - 1.39 ---------------------- ---------------------- --------------------- 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, 1997. 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 $ 9,002 $3,917 $ 7,381 $ 860 $ 2,972 $24,132 Commercial real estate 1,134 1,474 2,319 5,660 7,412 17,999 Residential mortgage/home equity 1,239 663 9,037 9,842 16,388 37,169 Construction 1,071 175 213 - - 1,459 Installment/credit card 3,972 1,141 984 67 7,371 13,535 -------------- -------------- -------------- ------------- -------------- -------------- Total $16,418 $7,370 $19,934 $16,429 $34,143 $94,294 -------------- -------------- -------------- ------------- -------------- --------------
[FN] (1) Includes demand loans, loans having no stated schedule of repayment or maturity, and overdrafts. -17- 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 or in-substance 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 loan 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)
Year Ended December 31, -------------------------------------------------------------- 1997 1996 1995 -------------------- -------------------- -------------------- Non-accrual loans $624 $272 $ 8 Accruing past due 90 days or more 76 50 300 -------------------- -------------------- -------------------- Total nonperforming loans 700 322 308 Other real estate owned 52 - 193 -------------------- -------------------- -------------------- Total nonperforming assets $752 $322 $501 -------------------- -------------------- -------------------- Nonperforming to total assets 0.49% 0.30% 0.49%
As of December 31, 1997, non-accrual loans were comprised of a single-large residential first mortgage loan. This property is in the process of being sold, with no material additional loss anticipated for the Company. The amount of interest on non-accrual loans which would have been recorded as income under the original terms of such loans was $26,000, $17,000, and $1,000 for the years ended December 31, 1997, 1996 and 1995, respectively. The amount of interest income recognized on non-accrual loans that was included in net income was $0, $19,581, and $13,500 for 1997, 1996 and 1995, respectively. Loans past due 90 days or more and still accruing as of December 31, 1997, totaled $76,000 and consisted solely of credit card debt. -18- ALLOWANCE FOR LOAN LOSSES The Company maintains an allowance for loan losses based upon, among other things, such factors as historical experience, the volume and type of lending conducted by the Company, the amount of nonperforming assets, regulatory policies, generally accepted accounting principles, general economic conditions, and other factors related to the collectibility of loans in the Company's portfolio. Although management believes it uses the best information available to make determinations with respect to the allowance for loan losses, future adjustments may be necessary if 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 loan losses was $887,000 (0.94% of total loans) as of December 31, 1997, $826,000 (1.17% of total loans) as of December 31, 1996, and $740,000 (1.07% of total loans) as of December 31, 1995. The allowance for loan losses as a percentage of nonperforming loans was 127%, 257% and 240% as of December 31, 1997, 1996 and 1995, respectively. The following table sets forth an analysis of the Company's allowance for loan losses for the periods indicated: ALLOWANCE FOR LOAN LOSSES (Dollars in Thousands)
Year Ended December 31, -------------------------------------------------------------- 1997 1996 1995 -------------------- -------------------- -------------------- Average net loans outstanding $75,908 $70,523 $62,639 Loans outstanding at period-end 94,171 70,676 69,204 Total nonperforming loans 700 322 308 Beginning balance of allowance 826 740 740 Loans charged-off: 1-4 family residential mortgage 29 - 137 Home equity loans 100 - - Commercial loans 25 126 10 Installment and credit card loans 298 129 51 -------------------- -------------------- -------------------- Total loans charged off 452 255 198 Recoveries of previous charge-offs: 1-4 family residential mortgage 1 37 77 Home equity loans - - - Commercial loans 134 125 93 Installment and credit card loans 42 19 2 -------------------- -------------------- -------------------- Total recoveries 177 181 172 -------------------- -------------------- -------------------- Net loans charged-off 275 74 26 Provision for loan losses 336 160 26 -------------------- -------------------- -------------------- Balance at end of period $ 887 $ 826 $ 740 -------------------- -------------------- -------------------- Net charge-offs to average loans 0.36% 0.10% 0.04% Allowance as % of total loans 0.94% 1.17% 1.07% Nonperforming loans as % of total loans 0.74% 0.46% 0.45% Allowance as % of nonperforming loans 127% 257% 240%
-19- 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 loan 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. INVESTMENT ACTIVITIES The Company's investment portfolio of $19.4 million as of December 31, 1997 consisted mostly of U.S. Treasury and government agency obligations. This represented an increase of $12.0 million compared to the investment portfolio total of $7.4 million at December 31, 1996. This substantial increase was the result of liquidity obtained from the purchase of a retail banking branch in Virginia in the fourth quarter of 1997. See Note 15 of Notes to Consolidated Financial Statements. The Company's investment portfolio at December 31, 1996, consisted primarily of U.S. government agency obligations and mortgage-backed securities. This represented a decrease of $6.3 million, or 46.1% compared to the investment portfolio as of December 31, 1995, as investment maturities were used to fund loan growth and enhance liquidity. Investment securities held-to-maturity are stated at cost, adjusted for amortization of premium and accretion of discount. Investment securities available-for-sale are stated at fair value. The following table sets forth the book value of the Company's investment portfolio as of the dates indicated: INVESTMENT PORTFOLIO COMPOSITION (Dollars In Thousands)
Year Ended December 31, -------------------------------------------------------------- 1997 1996 1995 -------------------- -------------------- -------------------- AVAILABLE-FOR-SALE: U.S. Treasuries and government agencies $13,492 $ 4,899 $ 9,968 Other 2,284 2,308 3,461 -------------------- -------------------- -------------------- Total available-for-sale 15,776 7,207 13,429 HELD-TO-MATURITY: U.S. Treasuries and government agencies 1,911 -- -- State, county and municipal 65 165 250 Other 1,656 -- -- -------------------- -------------------- -------------------- Total held-to-maturity 3,632 165 250 -------------------- -------------------- -------------------- Total investment securities $19,408 $ 7,372 $13,679 -------------------- -------------------- --------------------
-20- The following table sets forth the maturity distribution and weighted-average yield of the investment portfolio of the Company as of December 31, 1997:
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 $3,876 $ 8,547 $1,804 $1,176 $15,403 State, county and municipal 65 -- -- -- 65 Other -- 1,656 -- 2,284 3,940 -------------- -------------- -------------- -------------- -------------- Total $3,941 $10,203 $1,804 $3,460 $19,408 -------------- -------------- -------------- -------------- -------------- WEIGHTED-AVERAGE YIELD (1): U.S. Treasuries and government agencies 5.62% 6.02% 6.43% 6.73% 6.02% State, county and municipal 4.75 -- -- -- 4.75 Other -- 6.53 -- 5.47 5.92 -------------- -------------- -------------- -------------- -------------- Total 5.61% 6.10% 6.43% 5.90% 6.00% -------------- -------------- -------------- -------------- --------------
[FN] (1) The calculation of the weighted-average yields is based on yield, weighted by the respective book value of the securities, using cost basis in the case of securities available-for-sale. DEPOSIT ACTIVITIES The Company's total deposits at year-end 1997 were $129.6 million, an increase of $38.6 million, or 42.4%, over 1996's year-end balance. Total average deposits was $96.7 million for the year ended December 31, 1997, an increase of $15.8 million, or 19.5% compared with average deposits of $80.9 million for the year ended December 31, 1996. The Company views deposit growth as a significant challenge in its effort to increase its asset size. Thus, the Company is focusing on its branching program with increased emphasis on commercial accounts, and the offering of more competitive interest rates and products to stimulate deposit growth. -21- 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, ------------------------------ -- ----------------------------- -- ------------------------------ 1997 1996 1995 ------------------------------ ----------------------------- ------------------------------ Weighted- Weighted- Weighted- Average Average % of Average Average % of Average Average % of Balance Rate Total Balance Rate Total Balance Rate Total --------- ----------- -------- --------- ---------- -------- --------- ----------- -------- Noninterest-Bearing Deposits $20,272 --% 21.0% $17,525 --% 21.7% $16,841 --% 21.1% Interest-Bearing Deposits: NOW accounts 14,023 2.01 14.5 12,522 1.96 15.5 12,230 2.11 15.3 Savings accounts 5,559 3.80 5.7 2,217 2.53 2.7 2,526 2.65 3.2 Money market accounts 21,491 3.60 22.2 23,072 3.40 28.5 25,153 3.09 31.5 Time deposits 35,399 5.60 36.6 25,596 5.47 31.6 23,128 5.49 28.9 --------- ----------- -------- --------- ---------- -------- --------- ----------- -------- Total $96,744 100.0% $80,932 100.0% $79,878 100.0% --------- -------- --------- -------- --------- -------- Weighted-Average Rate 3.36% 3.07% 2.97% ----------- ---------- -----------
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, 1997, brokered deposits represented $895,000 (0.6%) of the Company's total liabilities. As of December 31, 1997, total time deposits in excess of $100,000 accounted for $16.5 million, or 12.7% of the Company's total deposits. Of this amount, $6.7 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, 1997 and 1996: TIME DEPOSITS OF $100,000 OR MORE (Dollars In Thousands)
December 31, ----------------------------------------- 1997 1996 -------------------- -------------------- MATURITY PERIOD: Three months or less $ 2,783 $ 6,179 Over three months through six months 3,897 4,180 Over six months through twelve months 7,587 3,905 Over twelve months 2,185 905 -------------------- -------------------- Total $16,452 $15,169 -------------------- --------------------
-22- BORROWINGS Borrowings consist of advances from the Federal Home Loan Bank of Atlanta ("FHLBA") and deposits received in the Company's U.S. Treasury Tax and Loan Account. Balances outstanding and effective rates of interest are shown in the tables below for the years ending December 31, 1997, 1996 and 1995: BORROWINGS (Dollars In Thousands)
Year Ended December 31, --------------------------------------------------------------------- 1997 1996 1995 -------------------- -- --------------------- -- -------------------- FEDERAL HOME LOAN BANK OF ATLANTA: Ending balance $7,423 $7,750 $2,000 Daily average balance for the period 7,397 4,559 2,924 Maximum outstanding balance at a month-end during the period 7,675 7,800 4,000 Daily average interest rate for the period 6.75% 5.99% 5.46% Average interest rate on period end balance 6.73 6.73 6.10 TREASURY TAX AND LOAN ACCOUNT: Ending balance $ 776 $ 716 $1,808 Daily average balance for the period 371 393 473 Maximum outstanding balance at a month-end during the period 776 829 711 Daily average interest rate for the period 4.61% 4.64% 4.60% Average interest rate on period end balance 5.27 5.16 2.00
The following table shows the details of the Company's fixed rate advances from the FHLBA, with original maturities in excess of one year, as of December 31, 1997: BORROWINGS (Dollars in Thousands)
December 31, 1997 ------------------------------------------------ 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 1,000 850 100 750 6.94 6/24/06 semi-annual 10/10/96 300 300 -- 300 6.60 10/10/99 due at maturity 10/10/96 300 300 -- 300 6.85 10/10/01 due at maturity 10/10/96 2,000 1,600 400 1,200 6.57 10/10/01 quarterly 10/10/96 2,400 2,000 400 1,600 6.66 10/10/02 quarterly 9/25/97 573 573 12 561 6.65 9/25/17 monthly ------------ -------------- ----------- --------------- Total $8,373 $7,423 $912 $6,511 ------------ -------------- ----------- ---------------
-23- 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
December 31, --------------------------------------------------------------- 1997 1996 1995 ----------------- --- ------------------ -- ------------------- Return on average assets 0.29% 0.27% 0.68% Return on average equity 3.83 4.20 11.49 Period-end equity to total assets 8.87 6.30 6.26
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, 1997, the Bank had cash and cash equivalents of $12.1 million, a decrease of $7.7 million, when compared with the $19.8 million at December 31, 1996, which decreased primarily due to investments in loans, securities and deposits with banks exceeding the growth in deposits between the years. Liability liquidity is provided by access to core funding sources, principally various customers' deposit accounts in the Company's market area. As a member of the Federal Home Loan Bank of Atlanta ("FHLBA"), the Company is authorized to borrow up to $19.9 million secured by a blanket pledge of its portfolio of 1-to-4-family residential mortgage loans. The Company also has approved lines of credit from larger correspondent banks to borrow excess reserves on an overnight basis (known as "federal funds purchased") in the amount of $1.0 million and to borrow on a secured basis ("repurchase agreements") in the amount of $5.0 million. As of December 31, 1997, the Company had no federal funds purchased or repurchase agreements, and was utilizing $7.4 million of its available FHLBA borrowings in the form of fixed-rate term credit advances with an average cost of 6.73%. The Company utilizes fixed rate term credit advances from the FHLBA to fund fixed rate real estate loans of comparable terms and maturities. The Company'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 $1.0 million for the year ended December 31, 1997. Net cash used in investing activities was $25.5 million for 1997, as net increases in loans and investments exceeded net deposits acquired and repayments from loans and investments during the year. Net cash provided by financing activities for 1997 was $16.8 million and was related mostly to net increases in certificates of deposit and the issuance of Common Stock in 1997. -24- Net cash provided by operating activities was $903,000 for the year ended December 31, 1996. Net cash provided by investing activities, consisting primarily of payments and maturities of securities available-for-sale, was $3.7 million for the year ended December 31, 1996. Net cash provided by financing activities for 1996 was $5.2 million and was related to an increase in long-term borrowings. In the ordinary course of business, the Company enters into commitments to make loans and fund letters of credit, and the Company is also a party to four operating leases with respect to its banking quarters. Details of these commitments may be found in the accompanying Notes to Consolidated Financial Statements. The Company had cash on hand in the amount of $3.0 million at the holding company level at December 31, 1997. 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, 1997, the Company had no indebtedness outstanding at the holding company level. CAPITAL RESOURCES Total stockholders' equity as of December 31, 1997 was $13.5 million, an increase of $6.8 million, double the balance of stockholders' equity of $6.7 million as of December 31, 1996. This significant increase was the result of the Company issuing 977,500 shares of Common Stock, at a price of $7.25 per share, in the third quarter of 1997. The net proceeds from the sale of Common Stock totaled approximately $6.3 million. Net income for the year ended December 31, 1997 was $336,000. In addition to retained earnings, stockholders' equity was also augmented by a $25,000 increase in the market value of investment securities available-for-sale, net of tax effect, and $96,000 received from the exercise of warrants and stock options. Total stockholders' equity as of December 31, 1996 was $6,750,000, an increase of $385,000, compared with stockholders' equity of $6,365,000 as of December 31, 1995. Net income for the year ended December 31, 1996 was $279,000. In addition to retained earnings, stockholders' equity was also augmented by a $22,000 increase in the market value of investment securities available-for-sale, net of tax effect, and $85,000 received from the exercise of stock options. 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, 1997, 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 Information systems and technology are an integral part of the Company's operations. The Company relies on several internal and external systems which support its operations. Beginning in 1997, the Company started a thorough review of its systems in regard to Year 2000 compliance. The Company's management and board of directors have been involved in preparing and acting on a plan to resolve Year 2000 issues in a timely manner. Such plans include the identification, resolution and testing of Year 2000 issues. The scope of these plans has encompassed internal system reviews as well as external reviews of vendors, suppliers and third-party system providers. System reviews and corrective action have been conducted by internal management, supplemented by outside expertise. The Company has completed the review of its operations and finalized its plan for Year 2000 compliance. Issues with critical systems will be resolved by December 31, 1998, in compliance with federal banking regulations applicable to national banks. Testing of the Company's systems will begin in late 1998 and continue into 1999. Management does not expect the resolution of Year 2000 issues to have a material impact to the Company's operations or financial condition. -25- IMPACT OF INFLATION, CHANGING PRICES AND MONETARY POLICIES The primary effect of inflation on the operations of the Company is reflected in increased operating costs. Unlike industrial companies, virtually all of the assets and liabilities of a financial institution are monetary in nature. As a result, changes in interest rates have a more significant effect on the performance of a financial institution than do the effects of changes in the general rate of inflation and changes in prices. Interest rates do not necessarily move in the same direction or in the same magnitude as the prices of goods and services. Interest rates are highly sensitive to many factors which are beyond the control of the Company, including the influence of domestic and foreign economic conditions and the monetary and fiscal policies of the United States government and federal agencies, particularly the Federal Reserve Board. The Federal Reserve Board implements national monetary policy such as seeking to curb inflation and combat recession by its open market operations in United States government securities, control of the discount rate applicable to borrowing by banks, and establishment of reserve requirements against bank deposits. The actions of the Federal Reserve Board in these areas influence the growth of bank loans, investments and deposits, and affect the interest rates charged on loans and paid on deposits. The nature, timing and impact of any future changes in federal monetary and fiscal policies on the Company and its results of operations are not predictable. DISCLOSURE REGARDING FORWARD LOOKING STATEMENTS Statements and financial discussion and analysis contained in Items 1 and 7 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 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. -26- ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. [KPMG PEAT MARWICK LLP LETTERHEAD] 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, 1997 and 1996, 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, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these 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, 1997 and 1996, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1997, in conformity with generally accepted accounting principles. /s/ KPMG Peat Marwick LLP Washington, D.C. February 26, 1998 -27- CENTURY BANCSHARES, INC. AND SUBSIDIARY Consolidated Statements of Financial Condition December 31, 1997 and 1996
1997 1996 - ---------------------------------------------------------------------- ------------------- -------- ------------------ ASSETS Cash and due from banks $ 7,069,139 $ 8,363,911 Federal funds sold 5,000,000 11,436,000 Interest bearing deposits in other banks 22,223,037 6,823,077 Investment securities available-for-sale, at fair value 15,776,517 7,207,361 Investment securities, at cost, fair value of $3,634,867 and $166,039 in 1997 and 1996, respectively 3,632,076 164,895 Loans, net of unearned income 94,171,450 70,676,356 Less: allowance for loan losses (887,046) (825,876) ------------------- ------------------ Loans, net 93,284,404 69,850,480 Leasehold improvements, furniture, and equipment, net 1,708,987 1,558,247 Accrued interest receivable 922,327 509,567 Other real estate owned 52,000 - Deposit premium 1,735,768 275,072 Net deferred taxes 693,360 531,990 Other assets 542,012 465,409 ------------------- ------------------ Total Assets $152,639,627 $107,186,009 ------------------- ------------------ LIABILITIES AND STOCKHOLDERS' EQUITY Liabilities: Deposits: Noninterest-bearing $ 26,225,119 $ 24,064,454 Interest-bearing 103,379,913 66,920,756 ------------------- ------------------ Total deposits 129,605,032 90,985,210 Other borrowings 8,198,843 8,465,877 Other liabilities 1,300,226 984,881 ------------------- ------------------ Total Liabilities 139,104,101 100,435,968 Stockholders' Equity: Common stock, $1 par value; 5,000,000 shares authorized; 2,209,229 and 1,146,028 shares issued and outstanding at December 31, 1997 and 1996, respectively 2,209,229 1,146,028 Additional paid in capital 10,695,480 4,870,856 Retained earnings 651,646 779,057 Unrealized loss on investment securities available-for-sale, net of tax effect (20,829) (45,900) ------------------- ------------------ Total Stockholders' Equity 13,535,526 6,750,041 Commitments and Contingencies ------------------- ------------------ Total Liabilities and Stockholders' Equity $152,639,627 $107,186,009 ------------------- ------------------ See accompanying notes to consolidated financial statements.
-28- CENTURY BANCSHARES, INC. AND SUBSIDIARY Consolidated Statements of Operations Years ended December 31, 1997, 1996, and 1995
1997 1996 1995 - -------------------------------------------------------------- ---------------- ----------------- ---------------- INTEREST INCOME: Interest and fees on loans $7,554,812 $6,887,424 $6,010,907 Interest on federal funds sold 258,311 34,732 37,145 Interest on deposits in other banks 749,568 211,563 56,258 Interest on securities available-for-sale 529,963 545,481 917,605 Interest on securities held-to-maturity 116,220 10,296 57,272 ---------------- ----------------- ---------------- Total interest income 9,208,874 7,689,496 7,079,187 INTEREST EXPENSE: Interest on deposits: Savings accounts 210,928 56,075 67,189 NOW accounts 282,169 245,473 258,428 Money market accounts 773,799 783,466 777,954 Certificates under $100,000 1,216,180 630,875 631,662 Certificates $100,000 and over 764,576 768,603 636,236 ---------------- ----------------- ---------------- Total interest on deposits 3,247,652 2,484,492 2,371,469 ---------------- ----------------- ---------------- Interest on other borrowings 517,644 291,494 190,295 ---------------- ----------------- ---------------- Total interest expense 3,765,296 2,775,986 2,561,764 ---------------- ----------------- ---------------- Net interest income 5,443,578 4,913,510 4,517,423 Provision for loan losses 336,200 160,000 26,347 ---------------- ----------------- ---------------- Net interest income after provision for loan losses 5,107,378 4,753,510 4,491,076 NONINTEREST INCOME: Service charges on deposit accounts 409,747 416,357 378,739 Other operating income 512,637 303,902 214,797 Loss on sale of securities - - (3,197) ---------------- ----------------- ---------------- Total noninterest income 922,384 720,259 590,339 NONINTEREST EXPENSE: Salaries and employee benefits 2,201,299 1,987,989 2,093,816 Professional fees 691,501 628,244 272,960 Occupancy and equipment expense 649,846 531,336 516,617 Depreciation and amortization 571,033 452,949 221,557 Data processing 533,794 468,743 332,363 Communications 200,456 206,404 161,090 Federal deposit insurance premiums 13,996 30,238 88,146 Other real estate owned - 6,775 48,445 Other operating expenses 598,077 607,813 422,322 ---------------- ----------------- ---------------- Total noninterest expense 5,460,002 4,920,491 4,157,316 ---------------- ----------------- ---------------- Income before income tax expense 569,760 553,278 924,099 Income tax expense 233,602 274,699 311,445 ---------------- ----------------- ---------------- NET INCOME $ 336,158 $ 278,579 $ 612,654 ---------------- ----------------- ---------------- Basic income per common share $.23 $.24 $.57 Diluted income per common share $.21 $.22 $.55 Weighted-average common shares outstanding 1,477,435 1,185,133 996,819 See accompanying notes to consolidated financial statements.
-29- CENTURY BANCSHARES, INC. AND SUBSIDIARY Consolidated Statements of Stockholders' Equity Years ended December 31, 1997, 1996, and 1995
Unreal. loss on investment Preferred Common Additional securities Total stock stock paid in Retained avail.-for-sale, Stockholders' $1.00 par $1.00 par capital earnings net of tax Equity effect - --------------------------------- -------------- --------------- --------------- -------------- ----------------- ---------------- Balance, December 31, 1994 $ 61,327 $ 823,232 $ 3,855,651 $ 639,855 $(570,145) $ 4,809,920 Exercise of common stock options- 7,831 shares - 7,831 15,616 - - 23,447 Common stock dividend (5% of shares outstanding)- 41,072 shares - 41,072 195,092 (236,164) - - Redemption of preferred stock, 33,878 shares (33,878) - (220,207) - - (254,085) Exchange of preferred stock (27,449 shs.) for common stock (35,814 shs.) (27,449) 35,814 (8,365) - - - Issuance of common stock- 138,098 shares - 138,098 573,089 - - 711,187 Preferred stock dividend - - - (40,184) - (40,184) Net income - - - 612,654 - 612,654 Unrealized gain on invest. securities avail.-for-sale, net of tax effect - - - - 502,081 502,081 - --------------------------------- -------------- --------------- --------------- -------------- ----------------- -------------- Balance, December 31, 1995 - 1,046,047 4,410,876 976,161 (68,064) 6,365,020 Common stock dividend (7% of shares outstanding)- 73,047 shares - 73,047 401,758 (475,683) - (878) Exercise of common stock options- 26,934 shares - 26,934 58,222 - - 85,156 Net income - - - 278,579 - 278,579 Unrealized gain on invest. securities avail.-for-sale, net of tax effect - - - - 22,164 22,164 - --------------------------------- -------------- --------------- --------------- -------------- ----------------- --------------- Balance, December 31, 1996 - 1,146,028 4,870,856 779,057 (45,900) 6,750,041 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 Net income - - - 336,158 - 336,158 Unrealized gain on invest. securities avail.-for-sale, net of tax effect - - - - 25,071 25,071 - --------------------------------- -------------- --------------- --------------- -------------- ----------------- --------------- Balance, December 31, 1997 $ - $2,209,229 $10,695,480 $ 651,646 $ (20,829) $13,535,526 - --------------------------------- -------------- --------------- --------------- -------------- ----------------- --------------- See accompanying notes to consolidated financial statements.
-30- CENTURY BANCSHARES, INC. AND SUBSIDIARY Consolidated Statements of Cash Flows Years ended December 31, 1997, 1996, and 1995
1997 1996 1995 - -------------------------------------------------------------- -------------------- -------------------- -------------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 336,158 $ 278,579 $ 612,654 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 571,033 452,959 221,557 Provision for loan losses 336,200 160,000 26,347 Provision for losses on other real estate owned - 10,000 48,445 Benefit from net deferred taxes (161,370) (88,133) (442,711) Loss on sale of securities available-for-sale - - 3,197 Loss (gain) on sale of other real estate owned - (21,328) 11,883 (Increase) decrease in accrued interest receivable (412,760) 79,563 (7,509) (Increase) decrease in other assets 48,471 64,259 (23,094) Increase (decrease) in other liabilities 315,345 (32,883) (65,943) -------------------- -------------------- -------------------- Total adjustments 696,919 624,437 (227,828) -------------------- -------------------- -------------------- Net cash provided by operating activities 1,033,077 903,016 384,826 CASH FLOWS FROM INVESTING ACTIVITIES: Net increase in loans (14,810,469) (1,547,403) (8,951,855) Net increase in interest bearing deposits in other banks (15,399,960) (791,377) (5,838,933) Purchases of securities available-for-sale (9,564,799) (3,092,717) (1,010,160) Purchases of securities held-to-maturity (4,411,652) (326,366) - Repayments and maturities of securities available-for-sale 1,034,208 9,662,605 6,553,254 Repayments and maturities of securities held-to-maturity 944,471 85,000 - Proceeds from sale of securities available-for-sale - - 3,738,431 Net purchase of leasehold improv., furn. and equipment (596,888) (511,366) (1,366,073) Acquisition of deposits, net of assets acquired 17,282,864 - - Proceeds from sale of other real estate owned - 203,986 96,890 -------------------- -------------------- -------------------- Net cash (used in) provided by investing activities (25,522,225) 3,682,362 (6,778,446) CASH FLOWS FROM FINANCING ACTIVITIES: Net (decrease) increase in demand, savings, NOW and money market deposit accounts (620,526) 183,315 4,589,920 Net increase in certificates of deposit 11,221,680 262,533 3,868,183 Net increase (decrease) in other borrowings 60,347 (1,092,032) 1,807,910 Net proceeds from issuance of long-term debt 573,000 5,800,000 1,800,000 Repayment of long-term debt (900,381) (50,000) (2,000,000) Repurchase of preferred stock - - (254,085) Net proceeds from issuance of common stock 6,424,256 85,156 734,634 Dividend paid on preferred stock - - (40,184) -------------------- -------------------- -------------------- Net cash provided by financing activities 16,758,376 5,188,972 10,506,378 -------------------- -------------------- -------------------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (7,730,772) 9,774,350 4,112,758 Cash and cash equivalents, beginning of year 19,799,911 10,025,561 5,912,803 -------------------- -------------------- -------------------- CASH AND CASH EQUIVALENTS, END OF YEAR $ 12,069,139 $19,799,911 $10,025,561 -------------------- -------------------- -------------------- SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Interest paid on deposits and borrowings $ 3,724,036 $ 2,743,631 $ 2,483,398 Income taxes paid 112,500 626,079 19,222 Transfer of loans to other real estate owned 52,000 - 946,366 See accompanying notes to consolidated financial statements.
-31- CENTURY BANCSHARES, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements December 31, 1997 and 1996 - ------------------------------------------------------------------------------- (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, D.C. area and 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 as of the date of the balance sheet and revenues and expenses for the period. Actual results could differ significantly 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, adjusted for the amortization or accretion of premiums or discounts. Unrealized holding gains and losses, net of the related tax effect, on available-for-sale securities are excluded from earnings and are reported as a separate component of stockholders' equity until realized. 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. -32- CENTURY BANCSHARES, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements December 31, 1997 and 1996 - ------------------------------------------------------------------------------- (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 LOAN LOSSES The allowance for loan losses is a valuation allowance available for losses incurred on loans. It is established through charges to earnings in the form of provisions for loan losses. Loan losses are charged to the allowance for loan losses when a determination is made that collection is unlikely to occur. Recoveries are credited to the allowance at the time of recovery. Prior to the beginning of each year, and quarterly during the year, management estimates whether the allowance for loan 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 loan 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 loan 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. All loans receivable have been evaluated for collectibility using these criteria, except for the consumer and home equity loan portfolios, which are evaluated collectively as large groups of smaller balance homogeneous loans. The Company's impaired loans are generally nonaccrual loans and restructured loans. 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. -33- CENTURY BANCSHARES, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements December 31, 1997 and 1996 - ------------------------------------------------------------------------------- (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. 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 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 common stock equivalents. SFAS No. 128 was implemented on December 31, 1997, with 1996's and 1995's computations restated to reflect this new pronouncement. Total weighted-average shares outstanding at December 31, 1997, 1996 and 1995 were 1,477,435, 1,185,133, and 996,819, respectively. On March 14, 1995, the Company declared a 5 percent stock dividend to common stock shareholders of record as of March 31, 1995, resulting in the issuance of 41,072 shares. On March 19, 1996, the Company declared a 7 percent stock dividend to common stock shareholders of record as of March 31, 1996, resulting in the issuance of 73,047 shares. On April 22, 1997, the Company declared a 5 percent stock dividend to common stock shareholders of record as of May 7, 1997, resulting in the issuance of 57,793 shares. Weighted-average shares outstanding and income per common share have been restated for the effect of the stock dividends. NEW FINANCIAL ACCOUNTING STANDARDS In June 1996, SFAS No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities" was issued, as amended by SFAS No. 127 "Deferral of the Effective Date of Certain Provisions of FASB Statement No. 125". SFAS No. 125 provides accounting and reporting policies for transfers and servicing of financial assets and extinguishments of liabilities, predicated on a financial components approach focusing on control. Under this approach, after a transfer of financial or servicing assets, assets are recognized if controlled, or liabilities are recognized if incurred. Assets are removed from the statement of condition when control is surrendered, with -34- CENTURY BANCSHARES, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements December 31, 1997 and 1996 - ------------------------------------------------------------------------------- (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED NEW FINANCIAL ACCOUNTING STANDARDS, CONTINUED liabilities being removed when extinguished. SFAS No. 125 was effective January 1, 1997, and was applied prospectively. SFAS No. 127 defers implementation of certain provisions of SFAS No. 125 for one year, primarily relating to repurchase agreements and comparable transactions. The Company did not experience any material effect on its financial position from these pronouncements. In June 1997, SFAS No. 130 "Reporting Comprehensive Income," and No. 131 "Disclosures about Segments of an Enterprise and Related Information" were issued. SFAS No. 130 requires that certain financial activity normally disclosed in stockholders' equity be reported in the statement of operations as an adjustment to net income in computing comprehensive income. Items applicable to the Company would be gain/loss on investment securities and preferred stock dividends. Comprehensive income components should be reported under a separate caption in the statements of condition and stockholders' equity. SFAS No. 130 is effective January 1, 1998, including restatement of prior periods in conformity with this new presentation. The Company does not anticipate any financial impact from the implementation of SFAS No. 130. SFAS No. 131 requires the reporting of selected segmented information in quarterly and annual financial reporting. Information from operating segments is derived from methods used by the Company's management to measure performance and allocate resources. The Company is required to disclose the basis for identifying segments and the services and products offered in each segment. Additionally, the Company should disclose the earnings, revenues and assets of each segment. SFAS No. 131 is effective January 1, 1998, including the restatement of prior periods reported consistent with SFAS No. 131, if practical. The Company does not anticipate any material impact from the implementation of SFAS No. 131. STOCK OPTIONS On January 1, 1996, the Company adopted SFAS No. 123, "Accounting for Stock-Based Compensation", which permits entities to recognize as expense over the vesting period the fair value of all stock-based awards on the date of grant. Alternatively, SFAS No. 123 also allows entities to continue to apply the provisions of APB Opinion No. 25 and provide pro forma net income and pro forma earnings per share disclosures for employee stock option grants made in 1995 and future years as if the fair value-based method defined in SFAS No. 123 had been applied. The Company has elected to continue to apply the provisions of APB Opinion No. 25 and related interpretations in accounting for its plans. Accordingly, no compensation expense has been recognized for the plans. The proforma impact to compensation expense is detailed in Note 9--"Benefit and Incentive Plans." RECLASSIFICATIONS Certain amounts for 1996 and 1995 have been reclassified to conform to the presentation for 1997. -35- CENTURY BANCSHARES, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements December 31, 1997 and 1996 - ------------------------------------------------------------------------------- (2) INVESTMENT SECURITIES Investment securities available-for-sale, and their contractual maturities, at December 31, 1997 and 1996 are summarized as follows:
1997 ---------------------------------------------------------------------------- Gross Gross Amortized unrealized unrealized cost gains losses Fair value - ------------------------------------------------ ------------------ ------------------ ------------------- ------------------ Obligations of U.S. Treasury and government agencies: Within one year $ 3,878,954 $ 978 $ 3,839 $ 3,876,093 After one, but within five years 7,030,507 17,768 671 7,047,604 After five, but within ten years 1,807,032 - 2,558 1,804,474 After ten years 771,756 4,070 11,616 764,210 - ------------------------------------------------ ------------------ ------------------ ------------------- ------------------ Total 13,488,249 22,816 18,684 13,492,381 Collateralized mortgage obligations: After ten years 1,262,163 - 36,177 1,225,986 Federal Reserve Bank stock 236,350 - - 236,350 Federal Home Loan Bank stock 821,800 - - 821,800 - ------------------------------------------------ ------------------ ------------------ ------------------- ------------------ Total investment securities available-for-sale $15,808,562 $22,816 $54,861 $15,776,517 - ------------------------------------------------ ------------------ ------------------ ------------------- ------------------
1996 ---------------------------------------------------------------------------- Gross Gross Amortized unrealized unrealized cost gains losses Fair value - ------------------------------------------------ ------------------ ------------------ ------------------- ------------------ Obligations of U.S. Treasury and government agencies: Within one year $ 542,476 $5,377 $ 188 $ 547,665 After one year, but within five years 3,448,135 1,099 13,543 3,435,691 After ten years 931,138 2,040 17,189 915,989 - ------------------------------------------------ ------------------ ------------------ ------------------- ------------------ Total 4,921,749 8,516 30,920 4,899,345 Collateralized mortgage obligations: After ten years 1,562,872 - 48,206 1,514,666 Federal Reserve Bank stock 119,350 - - 119,350 Federal Home Loan Bank stock 674,000 - - 674,000 - ------------------------------------------------ ------------------ ------------------ ------------------- ------------------ Total investment securities available-for-sale $7,277,971 $8,516 $79,126 $7,207,361 - ------------------------------------------------ ------------------ ------------------ ------------------- ------------------
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. -36- CENTURY BANCSHARES, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements December 31, 1997 and 1996 - ------------------------------------------------------------------------------- (2) INVESTMENT SECURITIES, CONTINUED Investment securities held-to-maturity at December 31, 1997 and 1996 are summarized as follows:
1997 ---------------------------------------------------------------------------- Gross Gross Amortized unrealized unrealized cost gains losses Fair value - ----------------------------------------------------- ------------------ ------------------ ------------------- ------------------ Obligations of U.S. Treasury, municipals, and government agencies: Within one year $ 64,973 $ 161 $ - $ 65,134 After one year, but within five years 1,499,692 798 - 1,500,490 After ten years 411,434 1,719 - 413,153 - ----------------------------------------------------- ------------------ ------------------ ------------------- ------------------ Total 1,976,099 2,678 - 1,978,777 Other securities: After one year, but within five years 656,253 2,337 - 658,590 After ten years 999,724 - 2,224 997,500 - ----------------------------------------------------- ------------------ ------------------ ------------------- ------------------ Total investment securities held-to-maturity $3,632,076 $5,015 $2,224 $3,634,867 - ----------------------------------------------------- ------------------ ------------------ ------------------- ------------------
1996 ---------------------------------------------------------------------------- Gross Gross Amortized unrealized unrealized cost gains losses Fair value - ----------------------------------------------------- ------------------ ------------------ ------------------- ------------------ Municipal securities: Within one year $ 99,956 $ 527 $ - $100,483 After one year, but within five years 64,939 617 - 65,556 - ----------------------------------------------------- ------------------ ------------------ ------------------- ------------------ Total investment securities held-to-maturity $164,895 $1,144 $ - $166,039 - ----------------------------------------------------- ------------------ ------------------ ------------------- ------------------
Investment securities totaling $3,212,794 and $2,144,283 at December 31, 1997 and 1996, respectively, were pledged to secure public deposits and for other purposes as required. No investment securities were sold during 1997 or 1996. Realized losses from the sale of securities available-for-sale totaled $3,197 in 1995. As a member of the Federal Reserve and Federal Home Loan Bank Systems, Century Bank is required to hold stock in the Federal Reserve Bank of Richmond and the Federal Home Loan Bank of Atlanta. These stocks, which have no stated maturity, are carried at cost since no active trading markets exist. -37- CENTURY BANCSHARES, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements December 31, 1997 and 1996 - ------------------------------------------------------------------------------- (3) LOANS RECEIVABLE The loan portfolio consists of the following:
December 31, ------------------------------------- 1997 1996 ------------------ ------------------ Commercial $24,132,290 $17,400,323 Real estate - residential 29,360,709 20,932,776 Real estate - commercial 17,999,360 14,001,133 Real estate - construction 1,458,520 462,685 Consumer 13,535,702 11,509,900 Home equity 7,808,051 6,431,425 ------------------ ------------------ 94,294,632 70,738,242 Unearned income (123,182) (61,886) ------------------ ------------------ 94,171,450 70,676,536 Allowance for loan losses (887,046) (825,876) ------------------ ------------------ Loans, net $93,284,404 $69,850,480 ------------------ ------------------
Loans on which the accrual of interest has been discontinued amounted to approximately $624,000, $272,000, and $8,000, at December 31, 1997, 1996, and 1995, respectively. Interest lost on these nonaccrual loans was approximately $26,000, $17,000, and $1,000, for 1997, 1996, and 1995, respectively. The Company did not receive any interest paid on these nonaccrual loans in 1997 and received approximately $19,851 and $13,500, for 1996 and 1995, respectively. At December 31, 1997, the Bank has one investment in impaired loans of $42,105 for which there was no specific reserve for impairment. Average impaired loans for 1997 was approximately $12,000. Analysis of the activity in the allowance for loan losses is as follows:
Year Ended December 31, --------------------------------------------------------- 1997 1996 1995 ------------------ ------------------ ------------------- Balance, beginning of year $825,876 $740,000 $740,000 Provision for loan losses 336,200 160,000 26,347 Loans charged off (451,593) (256,245) (198,126) Recoveries 176,563 182,121 171,779 ------------------ ------------------ ------------------- Net charge-offs (275,030) (74,124) (26,347) ------------------ ------------------ ------------------- Balance, end of year $887,046 $825,876 $740,000 ------------------ ------------------ -------------------
-38- CENTURY BANCSHARES, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements December 31, 1997 and 1996 - ------------------------------------------------------------------------------- (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, 1997, 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, ------------------------------------- 1997 1996 ------------------ ------------------ Financial instruments whose contract amounts represent potential credit risk: Commitments to extend credit $25,261,000 $19,361,000 Standby letters of credit 1,777,000 658,000
At December 31, 1997, 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 $17.8 million and $11.5 million, respectively, as of December 31, 1997. The aggregate total of loans to such groups was approximately $17.7 million and $9.4 million, respectively, as of December 31, 1996. The amount of such loans which are past due or considered by management to be potential problem loans is not material. -39- CENTURY BANCSHARES, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements December 31, 1997 and 1996 - ------------------------------------------------------------------------------- (4) RELATED PARTIES An analysis of the activity of loans to directors, officers, and their affiliates during the years ended December 31, 1997 and 1996, is as follows:
Year Ended December 31, 1997 1996 ------------------ ------------------ Balance, beginning of year $2,661,708 $3,320,113 Additions 939,478 29,961 Payments (90,652) (688,366) ------------------ ------------------ Balance, end of year $3,510,534 $2,661,708 ------------------ ------------------
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 $282,000 and $938,000 at December 31, 1997 and 1996, respectively. Also, included in professional fees are legal fees paid to law firms whose partners are directors of the Company or the Bank, totaling $282,536, $139,611, and $102,000 for the years ended December 31, 1997, 1996, and 1995, respectively. (5) LEASEHOLD IMPROVEMENTS, FURNITURE, AND EQUIPMENT Leasehold improvements, furniture, and equipment consist of the following:
December 31, 1997 1996 ------------------ ------------------ Leasehold improvements $ 1,459,696 $ 1,248,990 Furniture and equipment 2,828,881 2,398,978 ------------------ ------------------ 4,288,577 3,647,968 Less accumulated depreciation and amortization (2,579,590) (2,089,721) ------------------ ------------------ Balance, end of year $ 1,708,987 $ 1,558,247 ------------------ ------------------
Depreciation and amortization expense was $502,556, $407,175, and $151,471 for 1997, 1996, and 1995, respectively. -40- CENTURY BANCSHARES, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements December 31, 1997 and 1996 - ------------------------------------------------------------------------------- (6) DEPOSITS Major classifications of deposits consist of the following:
December 31, 1997 1996 ------------------ ------------------ Noninterest-bearing - demand deposits $26,225,119 $24,064,454 Interest-bearing: NOW accounts 18,505,617 13,852,112 Savings accounts 16,357,774 3,594,587 Money market accounts 24,999,539 24,231,842 Certificates of deposit--less than $100,000 27,065,335 10,072,924 Certificates of deposit--$100,000 and over 16,451,648 15,169,291 ------------------ ------------------ Total interest-bearing 103,379,913 66,920,756 ------------------ ------------------ Total deposits $129,605,032 $90,985,210 ------------------ ------------------
Certificates of deposit of $37,823,880 have remaining maturities of one year or less as of year-end 1997. Certificates of deposit with a remaining term of more than one year as of December 31, 1997, are as follows:
Year Ending December 31, - ---------------------------------------------------------------------------------------- 1999 $2,662,536 2000 1,241,210 2001 727,785 2002 939,921 2003 19,581 Thereafter 102,070 -------------------- Total $5,693,103 --------------------
In October 1997, Century Bank acquired deposit accounts totaling approximately $28.0 million. This acquisition included a premium of $1.5 million to be amortized over an estimated life of ten years on a straight-line basis. Also, in September 1994, Century Bank acquired deposit accounts of approximately $9.1 million, for which it paid a premium of $366 thousand. Total amortization was $68 thousand in 1997 and $48 thousand in 1996. -41- CENTURY BANCSHARES, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements December 31, 1997 and 1996 - ------------------------------------------------------------------------------- (7) OTHER BORROWINGS Other borrowings consists of advances from the Federal Home Loan Bank of Atlanta and deposits received in the Bank's U.S. Treasury Tax and Loan Account. Balances outstanding are shown below:
Year Ended December 31, --------------------------------------------------------- 1997 1996 1995 ------------------ ------------------ ------------------- Federal Home Loan Bank: Ending balance $7,422,619 $7,750,000 $2,000,000 Daily average balance for the period 7,397,407 4,559,202 2,924,163 Maximum outstanding balance at a month-end 7,675,000 7,800,000 4,000,000 Daily average interest rate for the period 6.75% 5.99% 5.46% Average interest rate on period end balance 6.73 6.73 6.10 Treasury Tax and Loan Account Ending balance $776,224 $715,877 $1,807,909 Daily average balance for the period 370,944 392,740 473,062 Maximum outstanding balance at a month-end 776,224 829,352 710,501 Daily average interest rate for the period 4.61% 4.64% 4.60% Average interest rate on period end balance 5.27 5.16 2.00
FHLB advances with original maturities in excess of one year are summarized as follows:
December 31, ------------------------------------- 1997 1996 ------------------ ------------------ 6.60% fixed rate, due 1999 $ 300,000 $ 300,000 6.85% fixed rate, due 2001 300,000 300,000 6.57% fixed rate, due 2001 1,200,000 1,600,000 6.66% fixed rate, due 2002 1,600,000 2,000,000 6.30% fixed rate, due 2006 800,000 800,000 7.34% fixed rate, due 2006 1,000,000 1,000,000 6.94% fixed rate, due 2006 750,000 850,000 6.65% fixed rate, due 2017 561,000 - ------------------ ------------------ $6,511,000 $6,850,000 ------------------ ------------------
The Bank has been advised by the FHLB that it has a total credit availability of $19.9 million. The FHLB credit availability does not represent a firm commitment by the FHLB. Rather, it is the FHLB's assessment of what the Bank could borrow given the Bank's current financial condition. The credit availability is subject to change at any time based upon the Bank's financial condition and that of the FHLB, as well as changes in FHLB policies or Congressional mandates. At December 31, 1997, the Bank's available credit from the FHLB was $12.5 million. In connection with its borrowings from the FHLB, the Bank is required to own FHLB stock. At December 31, 1997, the Bank's investment in FHLB stock had a par and carrying value of $821,800 and was automatically pledged against FHLB advances. Advances from the FHLB are secured by a blanket floating lien on the Bank's residential, one-to-four family first mortgage loans. -42- CENTURY BANCSHARES, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements December 31, 1997 and 1996 - ------------------------------------------------------------------------------- (8) STOCKHOLDERS' EQUITY COMMON STOCK The Company is authorized to issue 5 million shares of Common Stock, par value $1.00. At December 31, 1997, the Company had 2,209,229 shares outstanding. On September 26, 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. On November 14, 1995, the Company issued 173,912 Units pursuant to an Offering made on September 15, 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 1997 and 1996, the terms of the Warrants have been adjusted to the effect that as of December 31, 1997, each Warrant entitles the holder to purchase 1.1235 shares of Common Stock at an adjusted price of $5.12 per share. The Warrants may be exercised at any time from November 15, 1996 through November 16, 1998. The Warrants may be repurchased by the Company at any time on and after November 14, 1997, at a price of $.26 per Warrant. As of December 31, 1997, there were 164,766 Warrants outstanding, entitling holders to purchase an aggregate 185,115 shares of Common Stock. INCOME PER COMMON SHARE In accordance with SFAS No. 128, the calculation of basic income per common share and diluted income per common share is detailed below:
Years Ended December 31, ---------------------------------------------------- 1997 1996 1995 ----------------- ---------------- ----------------- Basic Income Per Share: Net income $336,158 $278,579 $612,654 Less: Dividends paid on preferred stock -- -- 40,184 ----------------- ---------------- ----------------- Net income applicable to common stock $336,158 $278,579 $572,470 Weighted-average common shares outstanding 1,477,435 1,185,133 996,819 ----------------- ---------------- ----------------- Basic income per share $0.23 $0.24 $0.57 Diluted Income Per Share: Net income applicable to common stock $336,158 $278,579 $572,470 Weighted-average common shares outstanding 1,477,435 1,185,133 996,819 Dilutive effect of warrants and stock options 122,982 71,304 51,619 ----------------- ---------------- ----------------- Diluted weighted-average common shares outstanding 1,600,417 1,256,437 1,048,438 ----------------- ---------------- ----------------- Diluted income per share $0.21 $0.22 $0.55
-43- CENTURY BANCSHARES, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements December 31, 1997 and 1996 - ------------------------------------------------------------------------------- (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 provides 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 vest pursuant to a schedule, with 20% of the benefit vesting each year over a five-year period. As of December 31, 1997, the net present value of the deferred compensation liability for all directors totaled approximately $544,000, compared with $448,000 for 1996. Expenses related to the deferred compensation program totaled $84,000 for 1997, $112,000 for 1996, and $139,000 for 1995. STOCK OPTION PLANS Pursuant to the Century Bancshares, Inc. 1994 Stock Option Plan ("1994 Plan") the Company in 1994 reserved 150,000 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, 1997, after adjusting for stock dividends and stock option activity, there are 166,551 shares of stock reserved for issuance pursuant to the 1994 Plan, of which 148,247 shares are reserved for outstanding options and 18,304 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, 1997, after adjusting for stock dividends and stock option activity, there are 28,367 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, 1997, all options granted under the Prior Plans are fully exercisable. In connection with the 5 percent stock dividend effective July 31, 1993, March 31, 1994, March 31, 1995, and May 7, 1997, 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, 1997, 1996, and 1995, are summarized as follows:
1997 1996 1995 --------------------------- --------------------------- --------------------------- Weighted- Weighted- Weighted- average average average exercise exercise exercise Fixed options Shares price Shares price Shares price - ----------------------------------- ------------- ------------- ------------- ------------- ------------- ------------- Outstanding at beginning of year 155,068 $3.83 159,001 $3.32 146,677 $3.11 Granted 45,462 6.95 33,985 6.00 34,955 5.75 Exercised (17,699) 2.45 (26,934) 3.16 (14,252) 2.80 Forfeited (6,217) 6.30 (10,984) 5.18 (8,379) 7.18 - ----------------------------------- ------------- ------------- --- ------------- ------------- --- ------------- ------------- Outstanding at end of year 176,614 $4.68 155,068 $3.81 159,001 $3.32 - ----------------------------------- ------------- ------------- --- ------------- ------------- --- ------------- ------------- Options exercisable at year-end 154,876 $4.40 141,582 $3.68 137,849 $3.21 Weighted-average fair value of options granted $3.07 $2.09 $1.82
-44- CENTURY BANCSHARES, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements December 31, 1997 and 1996 - ------------------------------------------------------------------------------- (9) BENEFIT AND INCENTIVE PLANS, CONTINUED STOCK OPTION PLANS, CONTINUED The following table summarizes information about stock options outstanding at December 31, 1997:
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 - ----------------------------------- -------------- ------------- ------------- ------------- ------------- $1.54 to $2.00 13,204 0.6 $1.58 13,204 $1.58 $2.01 to $3.00 35,264 2.0 2.55 35,264 2.55 $3.01 to $4.00 2,834 2.1 3.33 2,834 3.33 $4.01 to $5.00 27,366 3.3 4.03 27,366 4.03 $5.01 to $6.00 55,359 6.3 5.43 49,967 5.41 $6.01 to $8.81 42,587 9.4 6.95 26,241 6.88 - ----------------------------------- -------------- ------------- ------------- ------------- ------------- $1.54 to $8.81 176,614 5.2 $4.68 154,876 $4.40 - ----------------------------------- -------------- ------------- ------------- ------------- -------------
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 1997, 1996 and 1995, respectively: no dividends for either year, expected volatility of 29 percent in 1997 and 20 percent for both 1996 and 1995, risk free interest rates of 5.8 percent for 1997, 6.3 percent for 1996 and 5.8 percent for 1995, along with expected lives of 7 years for 1997 and 1996 and 5 years for 1995. 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:
1997 1996 1995 ------------------ ------------------ ------------------- Net income, as reported $336,158 $278,579 $612,654 Net income, pro forma 298,320 244,585 586,074 Diluted earnings per share, as reported .21 .22 .55 Diluted earnings per share, pro forma .19 .19 .53
Pro forma net income reflects only options granted in 1997, 1996 and 1995. Therefore, the full impact of calculating compensation cost for stock options under SFAS No. 123 is not reflected in the pro forma net income amounts presented above because compensation cost is reflected over the options vesting period and compensation costs for options granted prior to January 1, 1995 are not considered. EMPLOYEE BENEFIT PLAN The Company maintains a 401(k) plan which covers substantially all employees. Participants may contribute up to 6 percent of their compensation. The Company matches 50 percent of participant contributions to the Plan. This matching contribution totaled approximately $17,000 for the year ended 1997 and $21,000 for each of the years ended December 31, 1996, and 1995. -45- CENTURY BANCSHARES, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements December 31, 1997 and 1996 - ------------------------------------------------------------------------------- (10) INCOME TAXES The provision for taxes on income for the years ended December 31, 1997, 1996, and 1995, consisted of the following:
1997 1996 1995 ------------------ ------------------ ------------------- Current federal income tax $304,721 $289,329 627,042 Current state income tax 90,251 73,503 127,114 ------------------ ------------------ ------------------- Total current income tax 394,972 362,832 754,156 Deferred Federal income tax benefit (117,497) (68,715) (370,563) Deferred state income tax benefit (43,873) (19,418) (72,148) ------------------ ------------------ ------------------- Total deferred income tax benefit (161,370) (88,133) (442,711) ------------------ ------------------ ------------------- Total income tax $233,602 $274,699 311,445 ------------------ ------------------ -------------------
The difference between the statutory federal income tax rates and the effective income tax rates for 1997, 1996, and 1995, are as follows:
1997 1996 1995 - ----------------------------------------------------- ------------------ ------------------ ------------------- Statutory federal income tax rate 34.0 % 34.0% 34.0 % State income taxes, net of federal benefit 5.4 6.4 3.5 Nondeductible expenses 2.6 8.1 - Other (1.0) 1.1 (3.8) - ----------------------------------------------------- ------------------ ------------------ ------------------- Effective income tax rate 41.0 % 49.6% 33.7 % - ----------------------------------------------------- ------------------ ------------------ -------------------
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, 1997 and 1996:
1997 1996 ------------------ ------------------ ASSETS: Fixed assets $ 84,289 $107,629 Bad debts 318,827 221,393 Deferred rent expense 44,703 57,869 Deferred loan fees 49,987 25,113 Vacation pay accrual 20,479 21,996 Directors' deferred compensation 220,749 188,412 Intangibles 22,254 7,389 ------------------ ------------------ Deferred tax assets 761,288 629,801 LIABILITIES: Federal Home Loan Bank stock dividends (11,484) (11,484) Unrealized losses on investments designated as available-for-sale recognized for tax purposes 11,217 (5,897) Other (56,444) (86,327) ------------------ ------------------ Deferred tax liabilities (56,711) (103,708) ------------------ ------------------ Net deferred tax asset attributable to operations 704,577 526,093 Unrealized losses on investments available-for- sale charged directly to stockholders' equity (11,217) 5,897 ------------------ ------------------ Net deferred tax asset $693,360 $531,990 ------------------ ------------------
Net deferred tax assets of $693,360 and $531,990 at December 31, 1997 and 1996, 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. -46- CENTURY BANCSHARES, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements December 31, 1997 and 1996 - ------------------------------------------------------------------------------- (11) RESERVE BALANCES, FUNDS RESTRICTION, COMMITMENTS AND CONTINGENCIES RESERVE BALANCES Under Federal Reserve Board regulations, banks are required to maintain cash reserves against certain categories of deposit liabilities. Cash balances qualified to meet these reserve requirements consist of vault cash and balances on deposit with the Federal Reserve Bank. Such restricted cash balances are included in "Cash and due from banks" in the consolidated statements of financial condition and amount to approximately $1 million at year-end 1997 and $226,000 at year-end 1996. FUNDS RESTRICTIONS Dividends paid to the Company by Century Bank are subject to restrictions by regulatory agencies. As of December 31, 1997, approximately $1.4 million was available to be paid to the Company in dividends from Century Bank, pursuant to such regulatory restrictions. As described in Note 12--Capital and Liquidity, regulatory agencies have established laws and guidelines with respect to the maintenance of appropriate levels of bank capital that could further limit the amount available for payment of dividends by Century Bank under regulatory restrictions if applied in the future. COMMITMENTS AND CONTINGENCIES The Company leases its banking facilities under operating leases providing for payment of fixed rentals and providing for pass-through of certain landlord expenses, with options to renew. Rental expense was approximately $399,000, $327,000, and $324,000 for the years ended December 31, 1997, 1996, and 1995, respectively. Total future minimum rental payments at December 31, 1997, are as follows:
Year Ending December 31, - ------------------------------------------------------------------------ 1998 $ 550,000 1999 519,000 2000 520,000 2001 528,000 2002 338,000 Thereafter 389,000 ------------------ Total $2,844,000 ------------------
-47- CENTURY BANCSHARES, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements December 31, 1997 and 1996 - ------------------------------------------------------------------------------- (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, 1997, that the Bank meets all capital adequacy requirements to which it is subject. As of December 31, 1997, the most recent notification from the OCC categorized Century Bank as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, Century Bank must maintain minimum total risk-based, Tier 1 risk-based, and Tier 1 leverage ratios as set forth in the table. There are no conditions or events since that notification that management believes have changed the Company's category. The following tables present the actual and required capital information for the Company and Century Bank:
To be well capitalized under For capital prompt corrective Actual adequacy purposes action provisions ------------------------- ------------------------ ------------------------ Amount Ratio Amount Ratio Amount Ratio - -------------------------------------------- ------------ ------------ ------------ ----------- ----------- ------------ AS OF DECEMBER 31, 1997 Total Capital (to Risk Weighted Assets): Century Bancshares $12,686,803 13.19% $7,693,644 8.00% n/a n/a Century National Bank 9,861,672 10.26% 7,686,055 8.00% $9,607,569 10.00% Tier 1 Capital (to Risk Weighted Assets): Century Bancshares 11,799,757 12.27% 3,846,822 4.00% n/a n/a Century National Bank 8,974,716 9.34% 3,843,028 4.00% 5,764,541 6.00% Tier 1 Capital (to Average Assets): Century Bancshares 11,799,757 8.83% 5,346,792 4.00% n/a n/a Century National Bank 8,974,716 6.44% 5,572,560 4.00% 6,965,700 5.00%
-48- CENTURY BANCSHARES, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements December 31, 1997 and 1996 - ------------------------------------------------------------------------------- (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, 1996 Total Capital (to Risk Weighted Assets): Century Bancshares $7,346,745 10.13% $5,803,841 8.00% n/a n/a Century National Bank 7,453,630 10.29% 5,792,880 8.00% $7,241,100 10.00% Tier 1 Capital (to Risk Weighted Assets): Century Bancshares 6,520,869 8.99% 2,901,920 4.00% n/a n/a Century National Bank 6,627,754 9.15% 2,896,440 4.00% 4,344,660 6.00% Tier 1 Capital (to Average Assets): Century Bancshares 6,520,869 6.35% 4,110,634 4.00% n/a n/a Century National Bank 6,627,754 6.44% 4,114,080 4.00% 5,142,600 5.00%
-49- CENTURY BANCSHARES, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements December 31, 1997 and 1996 - ------------------------------------------------------------------------------- (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, 1997 and 1996
1997 1996 --------------------- -------------------- Assets Cash and cash equivalents $ 3,041,413 $ 29,121 Investment in Century Bank 10,710,484 6,856,926 Other assets 91,462 112,668 --------------------- -------------------- Total Assets $13,843,359 $6,998,715 --------------------- -------------------- Liabilities and Stockholders' Equity Liabilities: Other liabilities $ 307,833 $ 248,674 --------------------- -------------------- Total Liabilities 307,833 248,674 Stockholders' Equity: Common stock 2,209,229 1,146,028 Additional paid-in capital 10,695,480 4,870,856 Retained earnings 651,646 779,057 Unrealized loss on investment securities available-for-sale, net of tax (20,829) (45,900) effect --------------------- -------------------- Total Stockholders' Equity 13,535,526 6,750,041 --------------------- -------------------- Total Liabilities and Stockholders' Equity $13,843,359 $6,998,715 --------------------- --------------------
Statements of Operations Years ended December 31, 1997, 1996, and 1995
1997 1996 1995 -------------------- --------------------- -------------------- INCOME: Interest income $ 35,421 $ - $ - Other income - 1,659 929 -------------------- --------------------- -------------------- Total Income 35,421 1,659 929 EXPENSE: Professional fees - 111,754 112,663 Other expenses 22,414 15,914 50,915 -------------------- --------------------- -------------------- Total Expense 22,414 127,668 163,578 -------------------- --------------------- -------------------- Net income (loss) before income tax benefit and equity in undistributed earnings of bank subsidiary 13,007 (126,009) (162,649) Income tax expense (benefit) 5,333 - (55,702) -------------------- --------------------- -------------------- Net income before equity in undistributed earnings of bank subsidiary 7,674 (126,009) (106,947) Equity in undistributed earnings of Century Bank 328,484 404,588 719,601 -------------------- --------------------- -------------------- NET INCOME $336,158 $ 278,579 $ 612,654 -------------------- --------------------- --------------------
-50- CENTURY BANCSHARES, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements December 31, 1997 and 1996 - ------------------------------------------------------------------------------- (13) PARENT COMPANY-ONLY FINANCIAL STATEMENTS, CONTINUED Statements of Cash Flows Years ended December 31, 1997, 1996, and 1995
1997 1996 1995 -------------------- --------------------- -------------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 336,158 $ 278,579 $ 612,654 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Undistributed earnings of subsidiary (328,484) (404,588) (719,601) Decrease in other assets 21,203 - 134,416 Increase (decrease) in other liabilities 59,159 14,083 (178,584) -------------------- --------------------- -------------------- Net cash provided by (used in) operating activities 88,036 (111,926) (151,115) CASH FLOWS FROM INVESTING ACTIVITIES: Capital contributions to subsidiary (3,500,000) - (400,000) -------------------- --------------------- -------------------- Net cash used in investing activities (3,500,000) - (400,000) CASH FLOWS FROM FINANCING ACTIVITIES: Repurchase of preferred stock - - (254,085) Issuance of common stock 6,424,256 85,156 734,634 Preferred stock dividends paid - (878) (40,184) -------------------- --------------------- -------------------- Net cash provided by financing activities 6,424,256 84,278 440,365 -------------------- --------------------- -------------------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 3,012,292 (27,648) (110,750) Cash and cash equivalents, beginning of year 29,121 56,769 167,519 -------------------- --------------------- -------------------- CASH AND CASH EQUIVALENTS, END OF YEAR $ 3,041,413 $ 29,121 $ 56,769 -------------------- --------------------- -------------------- SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Interest paid $ - $ - $ - Income taxes paid - - 11,222
-51- CENTURY BANCSHARES, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements December 31, 1997 and 1996 - ------------------------------------------------------------------------------- (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. -52- CENTURY BANCSHARES, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements December 31, 1997 and 1996 - ------------------------------------------------------------------------------- (14) FAIR VALUES OF FINANCIAL INSTRUMENTS, CONTINUED The estimated fair values of the Company's financial instruments at December 31, 1997 and 1996 are as follows:
1997 1996 ---------------------------------- ---------------------------------- Carrying Fair Carrying Fair Value Value Value Value ---------------- ----------------- ----------------- ---------------- Financial Assets: Cash and due from banks $ 7,069,139 $ 7,069,139 $ 8,363,911 $ 8,363,911 Federal funds sold 5,000,000 5,000,000 11,436,000 11,436,000 Interest bearing deposits with other banks 22,223,037 22,223,037 6,823,077 6,823,077 Investment securities 19,408,593 19,411,384 7,372,256 7,373,400 Loans, net of unearned income 94,171,450 93,381,358 70,676,356 69,867,616 Financial Liabilities: Noninterest-bearing deposits $ 26,225,119 $ 26,225,119 $24,064,454 $24,064,454 Interest-bearing deposits 103,379,913 103,448,942 66,920,756 67,053,793 Other borrowings 8,198,843 8,318,962 8,465,877 8,465,877
(15) ACQUISITIONS AND INTANGIBLES On October 10, 1997, the Company completed the previously announced purchase and assumption of the deposits and certain other liabilities of the branch of Eastern American Bank, FSB ("Eastern American") located at 6832 Old Dominion Drive, McLean Virginia (the "McLean Branch"). As part of the transaction, the Company's wholly-owned subsidiary, Century National Bank assumed approximately $28.0 million in deposits at the McLean Branch, and also assumed the obligations under the related lease and acquired approximately $9.0 million in mortgage loans from Eastern American's portfolio, in addition to $0.2 million in equipment and other assets. The assumption of the deposits and other liabilities by the Bank was made pursuant to a Purchase and Assumption Agreement between the Bank and Eastern American dated July 24, 1997, as amended August 15, 1997 and October 10, 1997. In consideration of the assumption of the deposits and liabilities, Eastern American made a cash transfer to the Bank on the closing date of approximately $17.3 million, representing the total amount of the liabilities assumed, less the sum on the closing date of (i) the value of the vault cash at the McLean Branch, (ii) the net book value of the leasehold improvements and the personal property located at the McLean Branch, (iii) the amount of the security deposit related to the lease of the McLean Branch, (iv) the unpaid balance of the designated mortgage loans and certain overdraft protection loans, (v) certain proration items, and (vi) a deposit premium of approximately $1.5 million, equal to 5.6% of the balance of the deposits assumed as of the closing date, excluding deposits of affiliates of Eastern American and certain other types of deposits. The acquisition premium of $1.5 million will be amortized over the estimated life of the deposit account relationship on a straight-line basis. Total accumulated amortization at December 31, 1997 was $32,000, as was the amount of amortization expense for the 1997 year. -53- 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 1997 with the Company's independent public accountants. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. The information required by this Item will be included in a definitive proxy statement, pursuant to Regulation 14A, to be filed not later than 120 days after the close of the Company's fiscal year. Such information is incorporated herein by reference. ITEM 11. EXECUTIVE COMPENSATION. The information required by this Item will be included in a definitive proxy statement, pursuant to Regulation 14A, to be filed not later than 120 days after the close of the Company's fiscal year. Such information is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. The information required by this Item will be included in a definitive proxy statement, pursuant to Regulation 14A, to be filed not later than 120 days after the close of the Company's fiscal year. Such information is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. The information required by this Item will be included in a definitive proxy statement, pursuant to Regulation 14A, to be filed not later than 120 days after the close of the Company's fiscal year. Such information 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 27 Consolidated Statements of Financial Condition 28 Consolidated Statements of Operations 29 Consolidated Statements of Stockholders' Equity 30 Consolidated Statements of Cash Flows 31 Notes to Consolidated Financial Statements 32 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. -54- 3. Exhibits 3.1 Certificate of Incorporation, as amended of the Company. (Incorporated by reference from Exhibit 3.1 of the Registrant's Registration Statement on Form S-1 (Registration No. 333-14417)). 3.2 Bylaws of the Company. (Incorporated by reference from Exhibit 3.2 of the Registrant's Registration Statement on Form S-1 (Registration No. 333-14417)). 3.3 Articles of Association of the Bank. (Incorporated by reference from Exhibit 3.3 of the Registrant's Registration Statement on Form S-1 (Registration No. 333-14417)). 4.1 Form of Warrant to Purchase Common Stock of Century Bancshares, Inc. (Incorporated by reference from Exhibit 4.1 of the Registrant's Registration Statement on Form S-1 (Registration No. 333-14417)). 4.2 Form of Common Stock certificate. (Incorporated by reference from Exhibit 4.2 of the Registrant's Registration Statement on Form S-1 (Registration No. 333-14417)). 10.1 Century Bancshares, Inc. 1994 Stock Option Plan. (Incorporated by reference from Exhibit 10.1 of the Registrant's Registration Statement on Form S-1 (Registration No. 333-14417)). 10.2 Incentive Stock Option Plan for Key Employees, as amended. (Incorporated by reference from Exhibit 10.2 of the Registrant's Registration Statement on Form S-1 (Registration No. 333-14417)). 10.3 Nonqualified Stock Option Plan for Key Employees, as amended. (Incorporated by reference from Exhibit 10.3 of the Registrant's Registration Statement on Form S-1 (Registration No. 333-14417)). 10.4 Nonqualified Stock Option Plan for Directors, as amended. (Incorporated by reference from Exhibit 10.4 of the Registrant's Registration Statement on Form S-1 (Registration No. 333-14417)). 10.5 Form of Director Compensation Agreement between the Company and its directors. (Incorporated by reference from Exhibit 10.5 of the Registrant's Registration Statement on Form S-1 (Registration No. 333-14417)). 10.6 Form of Indemnity Agreement between Company and the persons named therein. (Incorporated by reference from Exhibit 10.6 of the Registrant's Registration Statement on Form S-1 (Registration No. 333-14417)). 10.7 Employment Agreement dated September 1, 1996, between the Company and Mr. Joseph S. Bracewell. (Incorporated by reference from Exhibit 10.7 of the Registrant's Registration Statement on Form S-1 (Registration No. 333-14417)). 10.8 Lease Agreement dated January 3, 1995, between the Bank and Pennsylvania Building Associates. (Incorporated by reference from Exhibit 10.8 of the Registrant's Registration Statement on Form S-1 (Registration No. 333-14417)). 10.9 Lease and Services Agreement dated November 17, 1995, between ALLIANCE Greensboro, L.P., a Delaware limited partnership d/b/a/ ALLIANCE Business Centers, and the Bank. (Incorporated by reference from Exhibit 10.9 of the Registrant's Registration Statement on Form S-1 (Registration No. 333-14417)). -55- 10.10 Retail Lease dated January 14, 1982, between the Square 106 Associates and the Bank, as amended on March 14, 1984, December 18, 1991, February 12, 1992, October 27, 1995, and June 1, 1996. (Incorporated by reference from Exhibit 10.10 of the Registrant's Registration Statement on Form S-1 (Registration No. 333-14417)). 10.11 Sublease Agreement, dated May 1, 1992, between the Company and the Bank. (Incorporated by reference from Exhibit 10.11 of the Registrant's Registration Statement on Form S-1 (Registration No. 333-14417)). 10.12 Sublease Agreement dated November 1996, effective as of February 1, 1997, by and between Chevy Chase Bank, F.S.B., and Century National Bank. (Incorporated by reference to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1996 (SEC File No.--0-16234)). 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, 1997. 27* Financial Data Schedule. - --------------- * Filed herewith. (b) Reports On Form 8-K. On October 10, 1997, the Company filed a Form 8-K, announcing the completion of the purchase and assumption of the deposits and certain other liabilities of a branch from Eastern American Bank, FSB. -56- 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/ JAMES T. DUKE ----------------------------- James T. Duke Senior Vice President and Chief Financial Officer (Principal Financial and Accounting Officer) Dated: March 27, 1998. 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 27 day of March, 1998.
/s/ JOSEPH S. BRACEWELL Chairman of the Board, President and - ----------------------------------------------------- Chief Executive Officer Joseph S. Bracewell * Director - ----------------------------------------------------- *George Contis * Director - ----------------------------------------------------- *John R. Cope * Director - ----------------------------------------------------- *Bernard J. Cravath * Director - ----------------------------------------------------- *Neal R. Gross * Director - ----------------------------------------------------- *Joseph H. Koonz, Jr. Director - ----------------------------------------------------- William McKee * Director - ----------------------------------------------------- *William C. Oldaker
*By: /s/ Joseph S. Bracewell - ----------------------------------------------------- ATTORNEY-IN-FACT -57- Index to Exhibits Exhibit No. Description - ------------------------------------------------------------------------------ 11 Earnings per share computation. 21 List of Subsidiaries. 24 Power of Attorney. 27 Financial Data Schedule. EX-11 2 CENTURY BANCSHARES, INC. Exhibit 11 Computation of Per Share Earnings Three Years Ended December 31, 1997
Year Ended December 31, ---------------------------------------- 1997 1996 1995 Basic Earnings Per Share: Net income $336,158 $278,579 $612,654 Less: Dividends paid on preferred stock -- -- 40,184 ---------------------------------------- Net income applicable to common stock $336,158 $278,579 $572,470 Weighted-average common shares outstanding 1,477,435 1,185,133 996,819 ---------------------------------------- Basic earnings per share $0.23 $0.24 $0.57 Diluted Earnings Per Share: Net income applicable to common stock $336,158 $278,579 $572,470 Weighted-average common shares outstanding 1,477,435 1,185,133 996,819 Dilutive effect of warrants and stock options 122,982 71,304 51,619 ---------------------------------------- Diluted weighted-average common shares outstanding 1,600,417 1,256,437 1,048,438 ---------------------------------------- Diluted earnings per share $0.21 $0.22 $0.55
EX-21 3 1 EXHIBIT 21 SUBSIDIARIES OF THE REGISTRANT Century National Bank, incorporated under the laws of the United States. EX-24 4 1 EXHIBIT 24 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that the undersigned director of Century Bancshares, Inc. a Delaware corporation (the "Company"), hereby constitutes and appoints Joseph S. Bracewell, the undersigned's true and lawful attorney-in-fact and agent, for the undersigned and on the undersigned's behalf and in the undersigned's name, place and stead, in any and all capacities, to sign, execute and file with the Securities and Exchange Commission the Company's Annual Report on Form 10-K for the year ended December 31, 1997, 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 17 day of March, 1998. /s/ GEORGE CONTIS - - -------------------- 2 EXHIBIT 24 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that the undersigned director of Century Bancshares, Inc. a Delaware corporation (the "Company"), hereby constitutes and appoints Joseph S. Bracewell, the undersigned's true and lawful attorney-in-fact and agent, for the undersigned and on the undersigned's behalf and in the undersigned's name, place and stead, in any and all capacities, to sign, execute and file with the Securities and Exchange Commission the Company's Annual Report on Form 10-K for the year ended December 31, 1997, 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 17 day of March, 1998. /s/ JOHN R. COPE - - -------------------- 3 EXHIBIT 24 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that the undersigned director of Century Bancshares, Inc. a Delaware corporation (the "Company"), hereby constitutes and appoints Joseph S. Bracewell, the undersigned's true and lawful attorney-in-fact and agent, for the undersigned and on the undersigned's behalf and in the undersigned's name, place and stead, in any and all capacities, to sign, execute and file with the Securities and Exchange Commission the Company's Annual Report on Form 10-K for the year ended December 31, 1997, 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 17 day of March, 1998. /s/ BERNARD J. CRAVATH - - ---------------------------------- 4 EXHIBIT 24 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that the undersigned director of Century Bancshares, Inc. a Delaware corporation (the "Company"), hereby constitutes and appoints Joseph S. Bracewell, the undersigned's true and lawful attorney-in-fact and agent, for the undersigned and on the undersigned's behalf and in the undersigned's name, place and stead, in any and all capacities, to sign, execute and file with the Securities and Exchange Commission the Company's Annual Report on Form 10-K for the year ended December 31, 1997, 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 17 day of March, 1998. /s/ NEAL R. GROSS - - --------------------------- 5 EXHIBIT 24 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that the undersigned director of Century Bancshares, Inc. a Delaware corporation (the "Company"), hereby constitutes and appoints Joseph S. Bracewell, the undersigned's true and lawful attorney-in-fact and agent, for the undersigned and on the undersigned's behalf and in the undersigned's name, place and stead, in any and all capacities, to sign, execute and file with the Securities and Exchange Commission the Company's Annual Report on Form 10-K for the year ended December 31, 1997, 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 17 day of March, 1998. /s/ JOSEPH H. KOONZ, Jr. - - ------------------------------------ 6 EXHIBIT 24 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that the undersigned director of Century Bancshares, Inc. a Delaware corporation (the "Company"), hereby constitutes and appoints Joseph S. Bracewell, the undersigned's true and lawful attorney-in-fact and agent, for the undersigned and on the undersigned's behalf and in the undersigned's name, place and stead, in any and all capacities, to sign, execute and file with the Securities and Exchange Commission the Company's Annual Report on Form 10-K for the year ended December 31, 1997, 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 17 day of March, 1998. /s/ WILLIAM C. OLDAKER - ----------------------------------- EX-27 5 WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
9 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED FINANCIAL STATEMENTS OF CENTURY BANCSHARES, INC. AND SUBSIDIARY AS OF DECEMBER 31, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH CONSOLIDATED FINANCIAL STATEMENTS APPEARING IN THE FORM 10-K FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997. CENTURY BANCSHARES, INC. 785813 1,000 12-MOS 12-MOS 12-MOS DEC-31-1997 DEC-31-1996 DEC-31-1995 DEC-31-1997 DEC-31-1996 DEC-31-1995 7,069 22,223 5,000 -- 15,777 3,632 3,635 94,171 887 152,640 129,605 1,688 1,300 6,511 2,209 -- -- 11,327 152,640 7,555 646 1,008 9,209 3,248 3,765 5,444 336 -- 5,460 570 570 -- -- 336 0.23 0.24 0.57 0.21 0.22 0.55 5.17 624 76 -- 640 826 452 177 887 887 - 613
-----END PRIVACY-ENHANCED MESSAGE-----