-----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, OPewyeNdsTuO60yN7OboipGrcAZI+UpUqErw0z12V4qI7z/rdVGhtlt/LnD4zM1f Y/KpEs6ERJ0omO0YmVkSwA== 0000785813-99-000016.txt : 19990817 0000785813-99-000016.hdr.sgml : 19990817 ACCESSION NUMBER: 0000785813-99-000016 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19990630 FILED AS OF DATE: 19990816 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-Q SEC ACT: SEC FILE NUMBER: 000-16234 FILM NUMBER: 99690959 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-Q 1 FORM 10-Q SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 1999 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM____________ TO ____________. COMMISSION FILE NUMBER: 0-16234 CENTURY BANCSHARES, INC. (Exact Name of Registrant as Specified in its Charter) DELAWARE 52-1489098 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 1275 PENNSYLVANIA AVENUE, N.W. WASHINGTON, D. C. 20004 (Address of Principal Executive Offices) (Zip Code) (202) 496-4100 (Registrant's Telephone Number, Including Area Code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No At August 10, 1999, there were 2,689,313 shares of the registrant's Common Stock, par value $1.00 per share outstanding.
CENTURY BANCSHARES, INC. QUARTERLY REPORT ON FORM 10-Q For The Quarter Ended June 30, 1999 TABLE OF CONTENTS PART I - FINANCIAL INFORMATION Page Item 1. Financial Statements.......................................... 1 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations........................... 8 Item 3. Quantitative and Qualitative Disclosures About Market Risk.... 22 PART II - OTHER INFORMATION Item 1. Legal Proceedings............................................. 23 Item 2. Changes in Securities and Use of Proceeds..................... 23 Item 3. Defaults Upon Senior Securities............................... 23 Item 4. Submission of Matters to a Vote of Security Holders........... 23 Item 5. Other Information............................................. 23 Item 6. Exhibits and Reports on Form 8-K.............................. 23 Signatures............................................................... 24 Exhibit Index............................................................ 25 Exhibit 10.17 Amendment dated March 31, 1999, of the employment agreement between the Company and the Bank and Mr. Joseph S. Bracewell.. 26 Exhibit 27 Financial Data Schedule for the quarter ended June 30, 1999... 27
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PART I - FINANCIAL INFORMATION Item 1. Condensed Financial Information CENTURY BANCSHARES, INC. QUARTERLY REPORT ON FORM 10-Q Consolidated Statements of Financial Condition June 30, 1999, and December 31, 1998 June 30, 1999 December 31, (Unaudited) 1998 ---------------- ---------------- ASSETS Cash and due from banks $ 5,058,255 $ 8,950,733 Federal funds sold 10,000,000 4,285,000 Interest bearing deposits in other banks 18,379,479 9,847,315 Investment securities available-for-sale, at fair value 9,104,036 6,811,356 Investment securities, at cost, fair value of $1,970,115 and $2,449,680 at June 30, 1999 and December 31, 1998, respectively 2,054,782 2,441,537 Loans held for sale 180,000 - Loans, net of unearned income 130,197,206 115,231,298 Less: allowance for credit losses (1,408,621) (1,128,147) ---------------- ---------------- Loans, net 128,788,585 114,103,151 Premises and equipment, net 1,212,123 1,372,370 Accrued interest receivable 940,203 742,721 Deposit premiums, net 1,451,463 1,546,232 Net deferred taxes 707,616 683,113 Other assets 561,737 566,373 ---------------- ---------------- Total Assets $ 178,438,279 $ 151,349,901 ---------------- ---------------- LIABILITIES AND STOCKHOLDERS' EQUITY Liabilities: Deposits: Noninterest-bearing $ 32,327,729 $ 31,676,194 Interest-bearing 113,471,967 94,535,082 ---------------- ---------------- Total deposits 145,799,696 126,211,276 Other borrowings 15,529,410 8,461,241 Other liabilities 1,320,734 1,360,710 ---------------- ---------------- Total Liabilities 162,649,840 136,033,227 ---------------- ---------------- Stockholders' Equity: Common stock, $1 par value; 5,000,000 shares authorized; 2,720,956, and 2,574,219 shares issued at June 30, 1999 and December 31, 1998, respectively 2,720,956 2,574,219 Additional paid in capital 13,030,713 12,343,631 Treasury stock, at cost, 5,000 shares at June 30, 1999 (30,303) - Retained earnings 121,026 392,384 Accumulated other comprehensive income (loss), net of tax effect (53,953) 6,440 ---------------- ---------------- Total Stockholders' Equity 15,788,439 15,316,674 Commitments and contingencies ---------------- ---------------- Total Liabilities and Stockholders' Equity $ 178,438,279 $ 151,349,901 ---------------- ---------------- See accompanying condensed notes to consolidated financial statements (unaudited).
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CENTURY BANCSHARES, INC. QUARTERLY REPORT ON FORM 10-Q Consolidated Statements of Operations (Unaudited) Three and Six Months Ended June 30, 1999 and 1998 Three Months Three Months Six Months Six Months Ended Ended Ended Ended June 30, 1999 June 30, 1998 June 30, 1999 June 30, 1998 -------------- -------------- -------------- --------------- Interest income: Interest and fees on loans $ 2,860,807 $ 2,285,711 $ 5,510,757 $ 4,619,303 Interest on federal funds sold 69,119 51,145 116,589 124,905 Interest on deposits in other banks 147,562 150,468 271,490 408,750 Interest on securities available-for-sale 125,324 218,968 225,433 434,398 Interest on securities held-to-maturity 34,079 62,602 71,662 145,154 -------------- -------------- -------------- --------------- Total interest income 3,236,891 2,768,894 6,195,931 5,732,510 Interest expense: Interest on deposits: Savings accounts 212,006 203,039 427,127 395,747 NOW accounts 54,835 72,620 115,222 164,844 Money market accounts 163,881 185,488 328,021 418,708 Certificates under $100,000 376,962 303,087 663,330 663,484 Certificates $100,000 and over 252,908 228,148 461,896 450,828 -------------- -------------- -------------- --------------- Total interest on deposits 1,060,592 992,382 1,995,596 2,093,611 Interest on other borrowings 186,676 124,883 315,339 251,172 -------------- -------------- -------------- --------------- Total interest expense 1,247,268 1,117,265 2,310,935 2,344,783 -------------- -------------- -------------- --------------- Net interest income 1,989,623 1,651,629 3,884,996 3,387,727 Provision for credit losses 145,000 190,000 325,000 383,000 -------------- -------------- -------------- --------------- Net interest income after provision for credit losses 1,844,623 1,461,629 3,559,996 3,004,727 Noninterest income: Service charges on deposit accounts 175,049 110,158 328,624 208,595 Other operating income 270,977 146,649 507,383 298,855 Gain on sale of available for sale securitites - 14,570 - 14,570 Gain on liquidation of other real estate owned - 15,853 - 15,853 -------------- -------------- -------------- --------------- Total noninterest income 446,026 287,230 836,007 537,873 -------------- -------------- -------------- --------------- Noninterest expense: Salaries and employee benefits 719,486 482,651 1,384,446 1,086,230 Occupancy and equipment expense 214,177 205,247 420,552 411,170 Professional fees 183,966 209,740 348,198 400,429 Depreciation and amortization of premises and equipment 110,031 117,942 227,446 236,309 Amortization of deposit premiums 47,384 47,384 94,768 94,768 Data processing 284,317 169,141 545,486 336,774 Communications 90,936 70,989 169,928 134,506 Federal deposit insurance premiums 4,305 3,376 8,656 9,636 Other operating expenses 163,392 179,774 382,204 346,606 -------------- -------------- -------------- --------------- -------------- -------------- -------------- --------------- Total noninterest expense 1,817,994 1,486,244 3,581,684 3,056,428 -------------- -------------- -------------- --------------- Income before income tax expense 472,655 262,615 814,319 486,172 Income tax expense 179,560 93,078 309,877 184,745 -------------- -------------- -------------- --------------- Net income $ 293,095 $ 169,537 $ 504,442 $ 301,427 -------------- -------------- -------------- --------------- Basic income per common share $ 0.11 $ 0.07 $ 0.19 $ 0.12 Diluted income per common share 0.11 0.06 0.18 0.11 Weighted-average common shares outstanding 2,714,802 2,473,959 2,711,818 2,457,550 See accompanying condensed notes to consolidated financial statements (unaudited).
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CENTURY BANCSHARES, INC. QUARTERLY REPORT ON FORM 10-Q Consolidated Statements of Stockholders' Equity (Unaudited) Six Months Ended June 30, 1999 and 1998 Accumulated Common Additional Other Total stock paid in Retained Comprehensive Stockholders' $1.00 par capital Treasury Stock earnings Income (Loss) Equity ----------------------------------------------------------------------------------------------- Balance, December 31, 1997 $ 2,209,229 $ 10,695,480 $ - $ 651,646 $ (20,829) $ 13,535,526 Comprehensive Income: Net income 301,427 301,427 Unrealized gain on investment securities available-for-sale, net of tax effect of $4,678 8,687 8,687 ----------------------------------------------------------------------------------------------- Total Comprehensive Income (Loss) - - - 301,427 8,687 310,114 Stock dividend 112,665 shares 112,665 779,765 (894,288) (1,858) Exercise of common stock options 43,099 shares 43,099 91,896 134,995 Exercise of warrants 3,817 shares 3,817 15,727 19,544 Other (22,858) (22,858) ----------------------------------------------------------------------------------------------- Balance, June 30, 1998 $ 2,368,810 $ 11,560,010 $ - $ 58,785 $ (12,142) $ 13,975,463 ------------------------------------------------------------------------------------------------ Balance, December 31, 1998 $ 2,574,219 $ 12,343,631 $ - $ 392,384 $ 6,440 $ 15,316,674 Comprehensive Income Net income 504,442 504,442 Unrealized gain (loss) on investment securities available-for-sale, net of tax effect of $32,519 (60,393) (60,393) ------------------------------------------------------------------------------------------------ Total Comprehensive Income (Loss) 2,574,219 12,343,631 - 896,826 (53,953) 15,760,723 Stock dividend 129,173 shares 129,173 645,865 (775,800) (762) Purchase of treasury stock, at cost, 5,000 shares (30,303) (30,303) Exercise of common stock options 17,564 shares 17,564 41,217 58,781 ------------------------------------------------------------------------------------------------ Balance, June 30, 1999 $ 2,720,956 $ 13,030,713 $ (30,303) $ 121,026 $ (53,953) $ 15,788,439 ------------------------------------------------------------------------------------------------ See accompanying condensed notes to consolidated financial statements (unaudited).
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CENTURY BANCSHARES, INC. QUARTERLY REPORT ON FORM 10-Q Consolidated Statements of Cash Flows (Unaudited) Six Months Ended June 30, 1999 and 1998 Six Months Six Months Ended Ended June 30, 1999 June 30, 1998 ----------------- ----------------- Cash flows from operating activities: Net income $ 504,442 $ 301,427 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization of premises and equipment 227,446 236,309 Amortization of deposit premiums 94,768 94,768 Provision for credit losses 325,000 383,000 Gain on sale of available-for-sale securities - (14,570) Gain on liquidation of other real estate owned - (15,853) (Increase) decrease in accrued interest receivable (197,482) 187,955 (Increase) decrease in other assets 4,636 (70,219) Increase (decrease) in other liabilities (39,976) 24,876 ----------------- ----------------- Total adjustments 414,392 826,266 ----------------- ----------------- Net cash provided by operating activities 918,834 1,127,693 ----------------- ----------------- Cash flows from investing activities: Net decrease (increase) in loans (14,965,908) (7,321,997) Net decrease (increase) in loans held for sale (180,000) - Net decrease (increase) in interest bearing deposits in other banks (8,532,164) 10,742,158 Purchases of securities available-for-sale (3,170,000) (1,998,440) Proceeds from sale of securities available-for-sale - 6,527,985 Repayments and maturities of securities available-for-sale 841,320 1,806,310 Repayments and maturities of securities held-to-maturity 386,755 844,624 Proceeds from sale of other real estate owned - 67,853 Purchase of premises and equipment (67,239) (87,847) ----------------- ----------------- Net cash provided by (used in) investing activities (25,687,236) 10,580,646 ----------------- ----------------- Cash flows from financing activities: Net (decrease) increase in demand, savings, NOW and money market deposit accounts 5,091,227 (8,120,483) Net (decrease) increase in certificates of deposit 14,497,193 (6,350,327) Net (decrease) increase in other borrowings 1,522,928 (216,617) Proceeds from long term borrowing 6,000,000 - Repayment of long-term debt (454,759) (454,937) Purchase of treasury stock (30,303) - Net proceeds from issuance of common stock 58,019 131,681 Other (93,381) (1,858) ----------------- ----------------- Net cash (used in) provided by financing activities 26,590,924 (15,012,541) ----------------- ----------------- Net increase (decrease) in cash and cash equivalents 1,822,522 (3,304,202) Cash and cash equivalents, beginning of year 13,235,733 12,069,139 ----------------- ----------------- Cash and cash equivalents, end of period $ 15,058,255 $ 8,764,937 ----------------- ----------------- Supplemental disclosures of cash flow information: Interest paid on deposits and borrowings $ 2,198,477 $ 2,379,016 Income taxes paid 375,000 27,000 See accompanying condensed notes to consolidated financial statements (unaudited).
- 4 - CENTURY BANCSHARES, INC. QUARTERLY REPORT ON FORM 10-Q CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (1) Basis of Presentation In the opinion of management the unaudited consolidated financial statements as of June 30, 1999 and December 31, 1998 and for the three and six months ended June 30, 1999 and 1998 contain all adjustments (consisting only of normal recurring adjustments) necessary to present fairly the financial position and results of operations of the Company as of such dates and for such periods. The unaudited consolidated financial statements should be read in conjunction with the Consolidated Financial Statements of the Company and the Notes thereto appearing in the Company's 1998 Annual Report on Form 10-K filed with the Securities and Exchange Commission. The results of operations for the six months ended June 30, 1999 are not necessarily indicative of the results of operations that may be expected for the year ending December 31, 1999 or any future periods. Certain prior period balances have been restated to conform with the current period.
(2) Investment Securities Investment securities available-for-sale, and their contractual maturities, at June 30, 1999 are summarized as follows: Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value - -------------------------------------------------------------------------------------------------------------------------- Obligations of U.S. treasury and government agencies: Within one year $ 1,999,553 $ 2,125 $ - $ 2,001,678 After one, but within five years 3,168,497 - 59,003 3,109,494 After five, but within ten years 1,265,041 - 4,553 1,260,488 After ten years 497,339 1,091 12,305 486,125 --------------------------------------------------------------- --------------------------------------------------------------- Total 6,930,430 3,216 75,861 6,857,785 --------------------------------------------------------------- Collateralized mortgage obligations: After one, but within five years 332,850 - 5,629 327,221 After ten years 207,748 - 4,730 203,018 --------------------------------------------------------------- Total 540,598 - 10,359 530,239 --------------------------------------------------------------- Federal Reserve Bank stock 236,350 - - 236,350 Federal Home Loan Bank stock 605,500 - - 605,500 Other 874,162 - - 874,162 --------------------------------------------------------------- Total investment securities available-for-sale $ 9,187,040 $ 3,216 $ 86,220 $ 9,104,036 --------------------------------------------------------------- Investment securities held-to-maturity, and their contractual maturities at June 30, 1999, are summarized as follows: Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value - -------------------------------------------------------------------------------------------------------------------------- Obligations of U.S. treasury and government agencies: After ten years $ 2,054,782 $ 1,066 $ 85,733 $ 1,970,115 --------------------------------------------------------------- Total investment securities held-to-maturity $ 2,054,782 $ 1,066 $ 85,733 $ 1,970,115 ---------------------------------------------------------------
- 5 - CENTURY BANCSHARES, INC. QUARTERLY REPORT ON FORM 10-Q CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(3) Income per Common Share Basic income per share is calculated by dividing net income by the weighted- average common shares outstanding. Diluted income per share is calculated by dividing net income by the sum of weighted-average common shares and common stock equivalents. On April 14, 1999, the Company declared a 5 percent stock dividend payable on May 28, 1999, to common stock shareholders of record as of April 28, 1999, resulting in the issuance of 129,173 shares and a corresponding increase in stock options outstanding. On May 19, 1998, the Company declared a 5 percent stock dividend payable on June 29, 1998, to common stock shareholders f record as of May 29, 1998, resulting in the issuance of 112,665 shares and a corresponding increase in stock options and warrants ourstanding. Weighted- average shares outstanding and income per common share have been restated for the effect of the stock dividends. Three Months Ended Six Months Ended June 30, June 30, ----------------------------- ------------------------------- 1999 1998 1999 1998 ----------------------------- ------------------------------- Basic Income Per Share: Net income applicable to common stock $293,095 $169,537 $504,442 $301,427 Weighted-average common shares outstanding 2,714,802 2,473,959 2,711,818 2,457,550 ----------------------------- ------------------------------- Basic income per share $0.11 $0.07 $0.19 $0.12 ----------------------------- ------------------------------- Diluted Income Per Share: Net income applicable to common stock $293,095 $169,537 $504,442 $301,427 Weighted-average common shares outstanding 2,714,802 2,473,959 2,711,818 2,457,550 Dilutive effect of warrants and stock options 27,393 179,020 27,393 180,825 ----------------------------- ------------------------------- Diluted weighted-average common shares outstanding 2,742,195 2,652,978 2,739,211 2,638,375 Diluted income per share $0.11 $0.06 $0.18 $0.11 ----------------------------- -------------------------------
- 6 - CENTURY BANCSHARES, INC. QUARTERLY REPORT ON FORM 10-Q CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (4) New Financial Accounting Standards Effective January 1, 1998, the Company adopted SFAS No. 130 "Reporting Comprehensive Income." SFAS No. 130 requires that certain financial activity normally disclosed in stockholders' equity be reported in the statement of operations as an adjustment to net income in computing comprehensive income. In addition, SFAS No. 130 requires restatement of all prior periods presented. Items applicable to the Company include unrealized gains and losses on investment securities. Accumulated comprehensive income components are to be reported in a separate caption in the consolidated statements of stockholders' equity. The Company did not experience any financial impact from the implementation of SFAS No. 130. In June 1998, SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," was issued. SFAS 133 requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure these instruments at fair value. In certain circumstances a derivative may be specifically designed as a hedge of the exposure to changes in the fair values of a recognized asset or liability or an unrecognized firm commitment, the exposure to variable cash flows of a forecasted transaction, or the exposure to fluctuations in foreign currency. SFAS No. 133 will be effective for all periods beginning after June 15, 2000. Earlier application is permitted, but the statement shall not be applied retroactively to financial statements of prior periods. The Company does not anticipate any material impact from the implementation of SFAS No. 133. - 7 - CENTURY BANCSHARES, INC. QUARTERLY REPORT ON FORM 10-Q ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Overview Century Bancshares, Inc., a Delaware corporation ("Company"), and a registered bank holding company under the Bank Holding Company Act of 1956, as amended ("BHCA"), was incorporated and organized in 1985. The Company began active operations in 1986 with the acquisition of its subsidiary, Century National Bank ("Bank"), a full service bank which opened for business in 1982. The Bank provides a broad line of financial products and services to small and medium sized businesses and consumers, through its main office located at 1875 Eye Street, N.W., Washington, D.C., a branch office located at 1275 Pennsylvania Avenue, N.W., two offices in Northern Virginia at 8251 Greensboro Drive and 6832 Old Dominion Drive, McLean, Virginia, and a branch office at 7625 Wisconsin Avenue, Bethesda, Maryland. Lending services are concentrated in professional, service, and commercial business sectors located in the metropolitan Washington, DC area. The Company has contracted to purchase what will become its sixth branch office and the third in Northern Virginia. The acquisition of this new branch in Dumfries, Virginia, is expected to be completed in October 1999 with loans and deposits of approximately $5.7 million and $9.8 million, respectively. The Company's principal executive offices are located at 1275 Pennsylvania Avenue, N.W., Washington, DC 20004, and its phone number at that address is (202) 496-4100. The Company derives substantially all of its revenue and income from the operation of the Bank, which provides a full range of commercial and consumer banking services to small and middle market businesses and individuals in the Washington, DC metropolitan area. As of June 30, 1999, the Company had total assets of $178.4 million, total deposits of $145.8 million, and stockholders' equity of $15.8 million. At June 30, 1999, the Company had approximately 1,000 shareholders of the Company's common stock, par value $1.00 per share ("Common Stock"). Items 2 and 3 of this report contain certain forward-looking statements regarding future financial condition and results of operations and the Company's business operations. The words "may," "intend," "will," "believe," "expect," "estimate," "anticipate," "predict" and similar expressions, the negatives of those words and other variations on those words or comparable terminology, and similar expressions are intended to identify forward-looking statements. Such tatements involve risks, uncertainties and assumptions and, although the Company believes that such assumptions are reasonable, it can give no assurance that its expectations regarding these matters will be achieved. Our actual results may differ materially from what we expect. The important factors that could cause actual results to differ materially from the forward-looking statements include, without limitation, the factors discussed in the Company's Form 10-K for the year ended December 31, 1998 under the caption "Management's Discussion and Analysis of Financial Condition and Results of Operations" as well as the following factors: general economic conditions in the Washington, DC metropolitan area; changes in interest rates; changes in asset quality; the effect on the Company of the extensive scheme of regulation by several federal agencies; the departure of certain key executives; the year 2000 problem; and competition from other providers of financial services. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, such actual outcomes may vary materially from those indicated. Net Income For the three months ended June 30, 1999, the Company's net income was $293 thousand, or $0.11 per diluted share, compared with $170 thousand for the first three months of 1998, or $0.06 per diluted share. The 73 percent increase in net income was primarily attributable to a $338 thousand increase in net interest income resulting from a significant increase in earning assets, and a $159 thousand increase in noninterest income, partially offset by a $332 thousand increase in noninterest expense. Service charges on deposit accounts increased by 59 percent to $175 thousand, and other operating income increased 85 percent to $271 thousand primarily as a result of an increase in bank card revenues. Increases in noninterest expenses included 49 percent increase in of salaries and benefits, and a 68 percent increase in data processing due largely to the increased costs of bank card processing of merchant accounts. Return on average assets was 0.70 percent in the second quarter of 1999 compared to 0.48 percent for the same period in 1998. Return on average stockholders' equity was 7.50 percent for the three months ended June 30, 1999, compared with 4.89 percent for the same period in 1998. Stockholders' equity to total assets was 8.85 percent at June 30, 1999 compared to 10.13 percent at June 30, 1998. - 8 - CENTURY BANCSHARES, INC. QUARTERLY REPORT ON FORM 10-Q ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONTINUED Net Income, continued For the six months ended June 30, 1999, the Company's net income was $504 thousand, or $0.18 per diluted share, compared with $301 thousand for the first six months of 1998, or $0.11 per diluted share. The 67 percent increase in net income was primarily attributable to a $497 thousand increase in net interest income resulting from a significant increase in earning assets, and a $298 thousand increase in noninterest income, partially offset by a $525 thousand increase in noninterest expense. Service charges on deposit accounts increased by 58 percent to $329 thousand, and other operating income increased 70 percent to $507 thousand primarily as a result of an increase in bank card revenues. Increases in noninterest expenses included 27 percent a increase in the cost of salaries and benefits, and a 62 percent increase in data processing due largely to increased costs of bank card processing of merchant accounts. Return on average assets was 0.63 percent in the first half of 1999 compared to 0.42 percent for the same period in 1998. Return on average stockholders' equity was 6.54 percent for the first six months ended June 30, 1999, compared with 4.41 percent for the same period in 1998. Stockholders' equity to total assets was 8.85 percent at June 30, 1999 compared to 10.13 percent at June 30, 1998. Net Interest Income For the quarter ended June 30, 1999, net interest income was $2.0 million compared with $1.7 million for the quarter ended June 30, 1998, an increase of $338 thousand, or 20 percent. The increase in net interest income between the periods was due to an increase in the net interest spread as the 0.36 percent reduction in the cost of funds exceeded the 0.25 percent reduction in the gross yield on earning assets, and there was a $5.2 million increase in average net interest earning assets while the net interest margin was unchanged at 5.02 percent during the second quarter of 1999. For the six months ended June 30, 1999, net interest income was $3.9 million compared with $3.4 million for the six months ended June 30, 1998, an increase of $497 thousand, or 15 percent. The increase in net interest income between the periods was due to an increase in the net interest spread as the 0.45 percent reduction in the cost of funds exceeded the 0.30 percent reduction in the gross yield on earning assets, and there was a $6.0 million increase in average net interest earning assets while the net interest margin increased by 0.12 percent to 5.19 percent during the first half of 1999. During the three and six month periods of 1999 compared to 1998, the reduction in the yields of the components of earning assets was greater than the reduction in the yield on total average earning assets, because there was a redeployment of assets from relatively lower yielding securities and short term investments to relatively higher yielding loans. The following tables set forth the average yields and rates for interest earned and paid for significant categories of interest earning assets and interest bearing liabilities for the three and six month periods ended June 30, 1999 and 1998. - 9 - CENTURY BANCSHARES, INC. QUARTERLY REPORT ON FORM 10-Q
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONTINUED Three Months Ended June 30, ----------------------------------------------------------------------------- 1999 1998 -------------------------------------- ------------------------------------ Interest Interest Average Income/ Average Average Income/ Average Balance Expense Yield/Rate Balance Expense Yield/Rate -------------------------------------- ------------------------------------ ($ in thousands) Interest-Earning Assets Loans, net (1) $ 129,537 $ 2,861 8.86% $ 97,811 $ 2,286 9.37% Investment securities (2) 11,410 159 5.59% 19,403 282 5.83% Federal funds sold 5,762 69 4.80% 3,769 51 5.43% Interest bearing deposits with banks 12,236 148 4.85% 10,993 150 5.47% ------------------------------------ -------------------------------- Total interest-earning assets 158,945 3,237 8.17% 131,976 2,769 8.42% Cash and due from banks 6,461 5,413 Other assets 3,412 4,025 ------------- -------------- Total Assets $ 168,818 $ 141,414 ------------- -------------- Interest-Bearing Liabilities Interest-Bearing Deposits: NOW accounts $ 19,357 $ 55 1.14% $ 17,178 $ 73 1.70% Savings accounts 20,188 212 4.21% 17,708 203 4.60% Money market accounts 21,081 164 3.12% 20,658 185 3.59% Time deposits 49,137 630 5.14% 38,128 531 5.59% Borrowings and notes payable 13,059 186 5.71% 7,356 125 6.82% ------------------------------------ -------------------------------- Total interest-bearing liabilities 122,822 1,247 4.07% 101,028 1,117 4.43% ------------------------------------ -------------------------------- Non-interest bearing deposits 28,739 25,007 Other liabilities 1,573 1,484 ------------- -------------- Total liabilities 153,134 127,519 Stockholders' equity 15,684 13,895 ------------- -------------- Total liabilities and stockholders' equity $ 168,818 $ 141,414 ------------- -------------- Net interest income and spread $ 1,990 4.10% $ 1,652 3.98% -------------------- ----------------- Net interest margin 5.02% 5.02% --------- -------- (1) Non-accrual loan balances are included in the calculation of Average Balances - Loans, Net. Interest income on non-accrual loan balances is included in interest income to the extent that it has been collected. (2) Average balance and average rate for investment securities are computed based on book value of securities held-to-maturity and cost basis of securities available-for-sale.
- 10 - CENTURY BANCSHARES, INC. QUARTERLY REPORT ON FORM 10-Q
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONTINUED Six Months Ended June 30, ------------------------------------------------------------------------------ 1999 1998 -------------------------------------- --------------------------------------- Interest Interest Average Income/ Average Average Income/ Average Balance Expense Yield/Rate Balance Expense Yield/Rate -------------------------------------- -------------------------------------- ($ in thousands) Interest-Earning Assets Loans, net (1) $ 124,227 $ 5,511 8.95% $ 96,046 $ 4,619 9.70% Investment securities (2) 10,721 297 5.59% 19,311 580 6.06% Federal funds sold 4,792 117 4.92% 4,589 125 5.49% Interest bearing deposits with banks 11,099 271 4.92% 14,834 409 5.56% ----------------------------------- ---------------------------------- Total interest-earning assets 150,839 6,196 8.28% 134,780 5,733 8.58% Cash and due from banks 6,650 5,348 Other assets 3,589 4,408 ------------- -------- Total Assets $ 161,078 $ 144,536 ------------- --------- Interest-Bearing Liabilities Interest-Bearing Deposits: NOW accounts $ 19,287 $ 115 1.20% $ 17,927 $ 165 1.86% Savings accounts 20,433 427 4.21% 17,362 396 4.60% Money market accounts 21,136 328 3.13% 22,418 419 3.77% Time deposits 43,800 1,126 5.18% 40,154 1,114 5.59% Borrowings and notes payable 10,774 315 5.90% 7,516 251 6.73% ------------------------------------ ---------------------------------- Total interest-bearing liabilities 115,430 2,311 4.04% 105,377 2,345 4.49% ---------------------------------------- ---------------------------------- Non-interest bearing deposits 28,436 23,974 Other liabilities 1,658 1,404 ------------- --------- Total liabilities 145,524 130,755 Stockholders' equity 15,554 13,781 ------------- --------- Total liabilities and stockholders' equity $ 161,078 $ 144,536 ------------- --------- Net interest income and spread $ 3,885 4.25% $ 3,388 4.09% -------------------- ------------------ Net interest margin 5.19% 5.07% ------- -------- (1) Non-accrual loan balances are included in the calculation of Average Balances - Loans, Net. Interest income on non-accrual loan balances is included in interest income to the extent that it has been collected. (2) Average balance and average rate for investment securities are computed based on book value of securities held-to-maturity and cost basis of securities available-for-sale.
- 11 - CENTURY BANCSHARES, INC. QUARTERLY REPORT ON FORM 10-Q
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONTINUED Noninterest Income Noninterest income was $446 thousand in the second quarter of 1999, a $159 thousand increase when compared with the same quarter of 1998, which was $287 thousand (see table below). The increase between the periods was primarily due to increases in deposit service charges, credit card and merchant fees caused by increased volumes, and the new mortgage loan origination program which began in the second quarter of 1999. Unlike 1998, there were no nonrecurring gains from the sale of investment securities or foreclosed property in 1999. Noninterest Income Three Months Ended (in thousands) June 30, Change ---------------------------------------------- 1999 1998 $ % ---------------------------------------------- Service charges on deposit accounts $ 175,049 $ 110,158 $ 64,891 58.9% Credit card and merchant fees 184,981 109,791 75,190 68.5% Commission and other fee income 80,957 35,006 45,951 131.3% Other income 5,039 1,852 3,187 172.1% Gain on sale of investment securities - 14,570 (14,570) -100.0% Gain on liquidation of other real estate owned - 15,853 (15,853) -100.0% ----------------------------------------------- Total noninterest income $ 446,026 $ 287,230 $ 158,796 55.3% -----------------------------------------------
Noninterest income was $836 thousand in the first six months of 1999, a $298 thousand increase when compared with the same period of 1998, which was $538 thousand (see table below). The increase between the periods was primarily due to increases in deposit service charges, credit card and merchant fees caused by increased volumes, and the new mortgage loan origination program which began in the second quarter of 1999. Unlike 1998, there were no nonrecurring gains from the sale of investment securities or foreclosed property in 1999.
Noninterest Income Six Months Ended (in thousands) June 30, Change ---------------------------------------------- 1999 1998 $ % ---------------------------------------------- Service charges on deposit accounts $ 328,624 $ 208,595 $ 120,029 57.5% Credit card and merchant fees 374,616 225,266 149,350 66.3% Commission and other fee income 113,941 60,158 53,783 89.4% Other income 18,826 13,431 5,395 40.2% Gain on sale of investment securities - 14,570 (14,570) -100.0% Gain on liquidation of other real estate owned - 15,853 (15,853) -100.0% ----------------------------------------------- Total noninterest income $ 836,007 $ 537,873 $ 298,134 55.4% -----------------------------------------------
- 12 - CENTURY BANCSHARES, INC. QUARTERLY REPORT ON FORM 10-Q ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONTINUED Noninterest Expense Noninterest expense was $1.8 million in the second quarter of 1999, an increase of $332 thousand, or 22 percent, when compared to 1998 when total noninterest expense was $1.5 million. The increase in noninterest expense included a $115 thousand (68 percent) increase in data processing expense, which corresponds with the growth in the bank's operations, the increase in the volume of bank card processing of merchant accounts, and the costs of Y2K preparedness. A significant increase in the scope of the Company's operations was accompanied by increases in many of the noninterest expense categories, including salaries and benefits, which increased by $237 thousand (49 percent) and communications which increased by $20 thousand (28 percent). The $237 thousand increase in salaries and benefits during the second quarter is primarily due to increased personnel costs of $94 thousand (13 percent) consistent with Company growth, and timing differences of $143 thousand (64 percent) associated with the application of SFAS No. 91, Accounting for Nonrefundable Fees and Costs Associated with Originating or Acquiring Loans and Initial Direct Costs of Leases, between year to date 1999 versus 1998.
Noninterest Expense Three Months Ended (in thousands) June 30, Change --------------------------------------------- 1999 1998 $ % --------------------------------------------- Salaries and employee benefits $ 719,486 $ 482,651 $ 236,835 49.1% Occupancy and equipment expense 214,177 205,247 8,930 4.4% Professional fees 183,966 209,740 (25,774) -12.3% Data processing 284,317 169,141 115,176 68.1% Depreciation and amortization of premises and equipment 110,031 117,942 (7,911) -6.7% Amortization of deposit premiums 47,384 47,384 - 0.0% Communications 90,936 70,989 19,947 28.1% Other expenses 167,697 183,150 (15,453) -8.4% --------------------------------------------- Total noninterest expense $ 1,817,994 $1,486,244 $ 331,750 22.3% ---------------------------------------------
Noninterest expense was $3.6 million in the first half of 1999, an increase of $525 thousand, or 17 percent, when compared to 1998 when total noninterest expense was $3.1 million. The increase in noninterest expense included a $209 thousand (62 percent) increase in data processing expense, which corresponds with the growth in the bank's operations, the increase in the volume of bank card processing of merchant accounts, and the costs of Y2K preparedness. A significant increase in the scope of the Company's operations was accompanied by increases in many of the noninterest expense categories, including salaries and benefits, which increased by $298 thousand (28 percent) and communications which increased by $35 thousand (26 percent).
Noninterest Expense Six Months Ended (in thousands) June 30, Change --------------------------------------------- 1999 1998 $ % --------------------------------------------- Salaries and employee benefits $ 1,384,446 $ 1,086,230 $ 298,216 27.5% Occupancy and equipment expense 420,552 411,170 9,382 2.3% Professional fees 348,198 400,429 (52,231) -13.0% Data processing 545,486 336,774 208,712 62.0% Depreciation and amortization of premises and equipment 227,446 236,309 (8,863) -3.8% Amortization of deposit premiums 94,768 94,768 - 0.0% Communications 169,928 134,506 35,422 26.3% Other expenses 390,860 356,242 34,618 9.7% --------------------------------------------- Total noninterest expense $ 3,581,684 $3,056,428 $ 525,256 17.2% ---------------------------------------------
- 13 - CENTURY BANCSHARES, INC. QUARTERLY REPORT ON FORM 10-Q ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONTINUED Investments The Company's investment portfolio of $11.2 million as of June 30, 1999, consisted mostly of U.S. Government Agency obligations. This represented an increase of $1.8 million, or 19 percent, compared with the investment portfolio total of $9.3 million at December 31, 1998. The increase during the first half of 1999 provided additional liquidity and collateral available for borrowing and customer repurchase agreements. (see Note 2-- "Investment Securities"). Investment securities held-to-maturity are stated at cost, adjusted for amortization of premium and accretion of discount. Investment securities available-for-sale are stated at fair value. Loans The Company presently is, and in the future expects to remain, a middle market banking organization serving professionals and businesses with interests in and around the Washington, DC metropolitan area. Most of the Company's loan portfolio is collateralized by first mortgages and home equity lines of credit on residential real estate. Although residential real estate loans increased over the past twelve months, the Company anticipates that this concentration will decline as the Company continues its emphasis on the development of new commercial loan business, including commercial real estate loans. Most of the Company's commercial real estate loans are secured by owner-occupied properties with borrowers that are also banking customers of the Company. As of June 30, 1999 and 1998, approximately $87.1 million (67 percent) and $62.0 million (61 percent) of the Company's total loan portfolio, respectively, consisted of loans secured by real estate, of which one-to-four family residential mortgage loans and home equity lines of credit represented $34.8 million (27 percent) and $32.3 million (32 percent), respectively, of the Company's total loan portfolio.
June 30, ------------------------------------------------------- 1999 1998 ------------------------------------------------------- Type of loan ( in thousands): $ % $ % ------------------------------------------------------- 1-4 family residential mortgage $ 27,509 21.1% $ 23,875 23.6% Home equity loans 7,260 5.6% 8,428 8.3% Multifamily residential 2,712 2.1% 2,121 2.1% Construction 5,088 3.9% 1,039 1.0% Commercial real estate 44,499 34.2% 26,543 26.2% Commercial loans 31,955 24.5% 26,793 26.5% Installment and credit card loans 10,848 8.3% 12,376 12.2% Other loans 378 0.3% 98 0.1% ------------------------------------------------------- Gross loans 130,249 100.0% 101,273 100.0% --------- ---------- Less: Unearned income 52 42 --------- ---------- Total loans, net of unearned $130,197 $ 101,231 --------- ----------
- 14 - CENTURY BANCSHARES, INC. QUARTERLY REPORT ON FORM 10-Q ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONTINUED Asset Quality In originating loans, the Company recognizes that credit losses will be experienced and the risk of loss will vary with, among other things, general economic conditions, the type of loan being made, the creditworthiness of the borrower over the term of the loan and, in the case of a collateralized loan, the quality of the collateral for such loan. The Company maintains an allowance for credit losses based upon, among other things, such factors as historical experience, the volume and type of lending conducted by the Company, the amount of nonperforming assets, regulatory policies, generally accepted accounting principles, general economic conditions, and other factors related to the collectibility of loans in the Company's portfolios. In addition to unallocated allowances, specific allowances are provided for individual loans when ultimate collection is considered questionable by management after reviewing the current status of loans which are contractually past due and after considering the net realizable value of the collateral for the loan. Management actively monitors the Company's asset quality in a continuing effort to charge-off loans against the allowance for loan losses when appropriate and to provide specific loss allowances when necessary. Although management believes it uses the best information available to make determinations with respect to the allowance for credit losses, future adjustments may be necessary if actual economic conditions and other assumptions differ from those used in making the initial determinations. At June 30, 1999, the allowance for credit losses was $1.4 million, or 1.08 percent of total loans. This represents an increase in the allowance compared to $1.1 million, or 0.98 percent of total loans as of December 31, 1998. The Company has increased the allowance, as a percentage of total loans outstanding, to reflect the upward trend in loan charge-offs experienced by the Company over the previous two years. The allowance for credit losses as a percentage of nonperforming loans 157 percent at June 30, 1999, compared to 72 percent at December 31, 1998 and 105 percent at June 30, 1998. Total nonperforming loans were $898 thousand at June 30, 1999, compared with $1.5 million at December 31, 1998, and $958 thousand at June 30, 1998. At June 30, 1999, there were 5 nonperforming loans amounting to $898 thousand. One of these loans, in the amount of $383 thousand, is secured by owner-occupied commercial real estate with a loan-to-value ratio of 77 percent. A second loan, in the amount of $223 thousand, is secured by residential rental property with a loan-to-value ratio of 81 percent. The other loans are secured by business assets and junior liens on real estate. In each of these cases, the borrowers and the Company are working together to resolve the loans and, although the loans are past due, some payments are being made on a regular basis. Where appropriate, the Company has established reserves which management believes are sufficient to absorb future losses. - 15 - CENTURY BANCSHARES, INC. QUARTERLY REPORT ON FORM 10-Q ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONTINUED Asset Quality, continued Provisions for credit losses are charged to income to bring the total allowance for loan losses to a level deemed appropriate by management, based on the factors identified above. The provision for credit losses during the first half of 1999 was $325 thousand, while the allowance for credit losses increased from $1.1 million (0.98 percent of loans) to $1.4 million (1.08 percent of loans) and net charge-offs were $44 thousand. During the first half of 1998, the provision for credit losses was $383 thousand, as the allowance for credit losses increased from $887 thousand (0.94 percent of loans) to $1.0 million (1.00 percent of loans) and net charge-offs were $262 thousand. The increases in the valuation allowance for credit losses were largely the result of the $15.0 million (13 percent) increase in loans outstanding during the first half of 1999 and the $36.0 million (38 percent) increase in loans during the past eighteen months. These trends, taken into consideration with other factors in the Company's internal analysis of the valuation allowance for credit loss, have led to increased reserve requirements and a resulting provision expense to maintain the allowance at a level deemed appropriate by management of the Company (see table on the following page). - 16 - CENTURY BANCSHARES, INC. QUARTERLY REPORT ON FORM 10-Q ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONTINUED
Nonperforming Loans (in thousands) June 30, --------------------------- 1999 1998 --------------------------- Non-accrual loans $ 675 $ 472 90 days past due 223 486 --------------------------- Total nonperforming loans 898 958 Other real estate owned - - --------------------------- Total nonperforming assets $ 898 $ 958 --------------------------- Nonperforming assets to total assets 0.50% 0.69%
Provision and Allowance for Loan Losses (in thousands) Three Months Ended Six Months Ended June 30, June 30, -------------------------- ------------------------- 1999 1998 1999 1998 -------------------------- ------------------------- Average net loans outstanding $ 129,537 $ 97,811 $ 124,227 $ 96,046 Loans outstanding at period-end 130,197 101,231 130,197 101,231 Total nonperforming loans at period end 898 958 898 958 Beginning balance of allowance $ 1,310 $ 1,023 $ 1,128 $ 887 Loans charged-off: 1-4 family residential mortgage - 18 - 18 Home equity loans - 25 - 26 Commercial loans 14 152 20 162 Installment and credit card loans 36 51 37 133 -------------------------- ------------------------- Total loans charged off 50 246 57 339 Recoveries of previous charge-offs: 1-4 family residential mortgage 2 - 3 1 Home equity loans - 25 - 27 Commercial loans - 11 - 11 Installment and credit card loans 2 5 10 38 -------------------------- ------------------------- Total recoveries 4 41 13 77 -------------------------- ------------------------- Net loans charged-off (recoveries) 46 205 44 262 Provision for credit losses 145 190 325 383 -------------------------- ------------------------- Balance at end of period $ 1,409 $ 1,008 $ 1,409 $ 1,008 -------------------------- -------------------------
- 17 - CENTURY BANCSHARES, INC. QUARTERLY REPORT ON FORM 10-Q ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONTINUED Deposits The Company's total deposits at June 30, 1999 were $145.8 million, an increase of $30.7 million, or 27 percent, over the balance at June 30, 1998, and an increase of $19.6 million, or 16 percent, compared to 1998's year-end balance. Total average deposits were $133.1 million for the six months ended June 30, 1999, an increase of $11.3 million, or 9 percent, compared to the first six months of 1998. The Company views deposit growth as a significant challenge in its effort to increase its asset size. Thus, the Company is focusing on its branching program with increased emphasis on commercial accounts, and the offering of more competitive interest rates and products to stimulate deposit growth. This strategy has and will continue to result in a relatively higher cost of funds in addition to lower fee income as many of these commercial customers may utilize accounts with lower transaction costs and have a lower number of transactions than retail customers.
Six Months Ended June 30, --------------------------------------------------------------------- 1999 1998 --------------------------------------------------------------------- Weighted- Weighted- Average Average % of Average Average % of Balance Rate Total Balance Rate Total --------------------------------------------------------------------- (in thousands) Noninterest-Bearing Deposits $ 28,436 0.00% 21.4% $ 23,974 0.00% 19.7% Interest-Bearing Deposits: NOW accounts 19,287 1.20% 14.5% 17,927 1.86% 14.7% Savings accounts 20,433 4.21% 15.4% 17,362 4.60% 14.3% Money market accounts 21,136 3.13% 15.9% 22,418 3.77% 18.4% Time deposits 43,800 5.18% 32.9% 40,154 5.59% 33.0% ------------- ------- -------- ---------- ------- -------- Total $ 133,092 100.0% $ 121,835 100.0% ------------- -------- ---------- -------- Weighted-Average Rate 3.02% 3.47% ------- ------
Capital Resources Total stockholders' equity at June 30, 1999 was $15.8 million, an increase of $472 thousand, compared to total stockholders' equity of $15.3 million at December 31, 1998. Stockholders' equity was increased during the first half of 1999 by net income of $504 thousand and by $58 thousand received from the exercise of stock options, and was reduced by $60 thousand attributable to the decline in the market value of investment securities available for sale net of the tax effect and the repurchase of 5,000 shares of common stock held in treasury at a cost of $30 thousand. The Office of the Comptroller of the Currency has established certain minimum risk-based capital standards that apply to national banks, and the Company is subject to certain capital requirements imposed by the Federal Reserve Board. At June 30, 1999, Century National Bank exceeded all applicable regulatory capital requirements for classification as a "well capitalized" bank, and the Company satisfied all applicable regulatory requirements imposed on it by the Federal Reserve Board. - 18 - CENTURY BANCSHARES, INC. QUARTERLY REPORT ON FORM 10-Q ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONTINUED Year 2000 Compliance The "Year 2000 problem" arose because many existing computer programs use only the last two digits to refer to a year. Therefore, these computer programs do not properly recognize a year that begins with "20" instead of the familiar "19." If not corrected, many computer applications could fail or create erroneous results. The extent of the potential impact of the year 2000 problem is not yet known; however, the consequences of the year 2000 problem could have a material effect on the Company's business, results of operations, or financial condition. In December 1997, the Company adopted a year 2000 compliance plan ("Y2K Plan") for the assessment of its exposure to the year 2000 problem, completion of any required remediation, and testing of systems compliance. A specific timetable was established, and a senior officer of the Company was assigned leadership responsibility. The officer reports monthly to the Board of Directors concerning the status of the Y2K Plan, and the Company's progress is also reviewed from time to time by bank regulatory authorities. The Company believes that it is presently on schedule with respect to its Y2K Plan, and outside reviews to date have found the Company's year 2000 compliance efforts to be satisfactory. As of June 30, 1999 the Company's estimated percentage of completion on its Y2K Plan was 98 percent, and the estimated date for 100 percent completion was August 31, 1999. Testing of mission critical systems was completed in November 1998. Testing methodology included copying the entire customer data base onto a Year 2000 compliant (hardware and software) computer system, and utilizing the key Year 2000 dates defined by the Federal Financial Institutions Examination Council (FFIEC) to test date sensitive transactions and calculations. These tests were performed on all mission critical systems and the results revealed compliance or very minor discrepancies; such failed test transactions were tested again in 1999 and the minor discrepancies have been resolved. Material third party risks also include assessing the Year 2000 preparation status of bank borrowing customers. The Company completed a risk assessment of Year 2000 preparedness of borrowers within its loan portfolio as of the bank regulatory target date, September 30, 1998, and continues to monitor Y2K preparedness related to new loans and any borrowers deemed to be at high risk. As part of its Y2K Plan, the Company has spent approximately $145,000 for the replacement of outdated computer hardware and software. Much of these expenditures would have been incurred in the ordinary course of business to maintain such computer systems, regardless of Year 2000 problem considerations. The human resources requirement includes the time of regular Company employees, a network administration consultant, and approximately $20,000 of additional consulting expenses. Because most of the Company's data processing is provided by outside vendors on a contract basis, management does not currently anticipate that the costs to address the Company's year 2000 issues will have a significant impact on the financial position or results of operations of the Company. - 19 - CENTURY BANCSHARES, INC. QUARTERLY REPORT ON FORM 10-Q ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONTINUED Year 2000 Compliance, continued The Company believes that the most likely worst case scenarios due to the Year 2000 problem could include: (1) lack of liquidity caused by customers' withdrawal of extra cash, (2) increased criminal activity stimulated by public awareness that banks are holding additional cash to avoid liquidity problems, and (3) short term electric power interruptions. The Company is taking steps to establish and renew lines of credit with its correspondent banks and the Federal Home Loan Bank of Atlanta to assure that adequate liquidity will be available to meet the needs of customers. Additional security precautions will be taken to prevent possible crimes due to heightened public awareness of additional cash reserves. The Company does not believe that long term and widespread electric power outages are likely, and has planned to address short term interruptions by training bank management and staff to be ready to provide limited service to customers. The Company is dependent upon the services of Electronic Data Systems Corp. (EDS) in Reston, Virginia, to provide access to customer data bases and other mission critical functions. EDS has informed the Company that EDS has back-up services sites ready and available to provide services to the Company should electric power interruptions or other problems occur in the Reston area. The Company has completed the testing of the mission critical systems provided by EDS. The Company does not expect any significant loss in revenue to occur as a result of Year 2000 problems. The Company's Y2K Plan includes certain contingency plans to be implemented in the event compliance benchmarks are not met on a timely basis and/or systems fail to perform in accordance with plans and expectations. For the most part, these contingency plans involve a reversion to manual process for all mission critical business functions, which the Company believes is practical in view of the relative size and scope of its operations. Training of management and staff on these procedures and processes was completed in July 1999, and additional refresher training will be provided during November and December 1999. - 20 - CENTURY BANCSHARES, INC. QUARTERLY REPORT ON FORM 10-Q ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONTINUED Liquidity The Company's Asset/Liability Management Policy is intended to maintain adequate liquidity for the Company and thereby enhance its ability to raise funds to support asset growth, meet deposit withdrawals and lending needs, maintain reserve requirements and otherwise sustain operations. The Company accomplishes this primarily through management of the maturities of its interest-earning assets and interest-bearing liabilities. The Company believes that its present liquidity position is adequate to meet its current and future needs. Asset liquidity is provided by cash and assets which are readily marketable, or which can be pledged, or which will mature in the near future. The asset liquidity of the Bank is maintained in the form of vault cash, demand deposits with commercial banks, federal funds sold, interest bearing deposits with other financial institutions, short-term investment securities, other investment securities available-for-sale, and short-term loans. The Company has defined "cash and cash equivalents" as those amounts included in cash and due from banks and federal funds sold. At June 30, 1999, the Company had cash and cash equivalents of $15.0 million, an increase of $1.8 million, when compared with the $13.2 million at December 31, 1998. Liability liquidity is provided by access to core funding sources, principally customers' deposit accounts in the Company's market area. As a member of the Federal Home Loan Bank of Atlanta ("FHLBA"), the Company is authorized to borrow up to $30.0 million secured by a blanket pledge of its portfolio of 1-to-4-family residential mortgage loans, investment securities, and other collateral. The Company also has lines of credit from larger correspondent banks to borrow excess reserves on an overnight basis (known as "federal funds purchased") in the amount of $5.7 million, and to borrow on a secured basis ("repurchase agreements") in the amount of $5.0 million. At June 30, 1999, the Company had no federal funds purchased, $2.9 million in customer repurchase agreements, and was utilizing $12.1 million of its available FHLBA borrowings in the form of fixed-rate ($9.1 million) and variable-rate ($3.0 million) advances with an average cost of 5.81%. The Company utilizes fixed rate term credit advances from the FHLBA to fund fixed rate real estate loans of comparable terms and maturities. As of June 30, 1999, the Company had also obtained a guaranteed $4.0 million Y2K Commitment from the FHLBA under which funds will be available in November and December 1999, if needed, in the form of fixed or variable rate advances with 3 to 12 month maturities. The Company had cash on hand in the amount of $1.5 million at the holding company level at June 30, 1999. The Company anticipates using these funds as working capital available to support the future growth of the franchise as well as to pay normal operating expenses. Working capital is further augmented by dividends available from the Bank, subject to certain regulatory restrictions generally applicable to national banks. At June 30, 1999, the Company had no indebtedness outstanding at the holding company level. - 21 - CENTURY BANCSHARES, INC. QUARTERLY REPORT ON FORM 10-Q ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company's principal market risk exposure is to interest rates. Net interest income, which constitutes the principal source of income for the Company, represents the difference between interest income on interest-earning assets and interest expense on interest-bearing liabilities. The difference between the Company's interest-rate sensitive assets and interest-rate sensitive liabilities for a specified time-frame is referred to as an interest sensitive "gap." Interest rate sensitivity reflects the potential effect on net interest income of a movement in interest rates. A financial institution is considered to be asset sensitive, or having a positive gap, when the amount of its interest-earning assets maturing or repricing exceeds the amount of its interest-bearing liabilities also maturing or repricing within that time period. Conversely, a financial institution is considered to be liability sensitive, or having a negative gap, when the amount of its interest-bearing liabilities maturing or repricing exceeds the amount of its interest-earning assets. During a period of rising (falling) interest rates, a positive gap would tend to increase (decrease) net interest income, while a negative gap would tend to decrease (increase) net interest income. Management seeks to maintain a balanced interest rate risk position to protect its net interest margin from market fluctuations. Toward this end, the Company maintains an Asset/Liability Committee (the "ALCO") which reviews, on a regular basis, the maturity and repricing of the assets and liabilities of the Company. The ALCO has adopted the objective of achieving and maintaining a one-year cumulative GAP, as a percent of total assets, of between plus 10 percent and minus 10 percent. In addition, ALCO monitors potential changes in net interest income under various interest rate scenarios. On a consolidated basis, the Company's one year cumulative gap was a positive 4.92 percent of total assets at June 30, 1999. Market risk is the risk of loss from adverse changes in market prices and rates, arising primarily from interest rate risk in the Company's portfolios, which can significantly impact the Company's profitability and market value of equity. The ALCO has adopted the objective that an immediate increase or decrease of 200 basis points in market interest rate should not result in a change of more than 10 percent (plus or minus) in the Company's projected net interest income over the next twelve months or in the Company's market value of portfolio equity, and not more than 20 percent (plus or minus) in projected net income. At June 30, 1999, the forecasted impact of an immediate increase (or decrease) of 200 basis points would have resulted in an increase (or decrease) in net interest income over a twelve month period of 2.91 percent and (5.04 percent) respectively, an increase (or decrease) in the market value of portfolio equity of 2.31 percent and (2.86 percent) respectively, and an increase (or decrease) in net income over a twelve month period of 10.20 percent and (17.70 percent) respectively. Since there are limitations inherent in any methodology used to estimate the exposure to changes in market interest rates, the analysis included herein is not intended to be a forecast of the actual effect of a change in market interest rates on the Company. The analysis is based on the Company's assets and liabilities as of June 30, 1999, and does not contemplate any actions the Company might undertake in response to changes in market interest rates, which could change the anticipated results. The analysis assumes repricing and/or repayment of all assets and liabilities in accordance with their contractual terms with the exception of (a) mortgage-backed securities, which are assumed to prepay at a rate based on consensus market expectations, and (b) non-maturity customer deposits, which are assumed to respond to interest rate changes on a three-month time-lag basis consistent with the company's historical experience for various types of deposit accounts. - 22 - CENTURY BANCSHARES, INC. QUARTERLY REPORT ON FORM 10-Q PART II - OTHER INFORMATION Items 1 through 5 Management notes that no occurrences have taken place during the reporting period which require disclosure under any of the captioned headings. Item 6. Exhibits and Reports on Form 8-K (a) Exhibits. The following exhibits are filed with this report: Exhibit 10.17 - Amendment dated March 31, 1999, of the employment agreement between the Company and the Bank and Mr. Joseph S. Bracewell Exhibit 27 - Financial Data Schedule, Quarter Ended June 30, 1999 (b) Reports on Form 8-K None. - 23 - CENTURY BANCSHARES, INC. QUARTERLY REPORT ON FORM 10-Q For Quarter Ended June 30, 1999 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. CENTURY BANCSHARES, INC. Date: August 12, 1999 By: /s/b/ JOSEPH S. BRACEWELL - ----------------------- -------------------------- Joseph S. Bracewell Chairman of the Board, President and Chief Executive Officer Date: August 12, 1999 By: /s/b/ CHARLES V. JOYCE III - ----------------------- -------------------------- Charles V. Joyce III Senior Vice President and Chief Financial Officer (Principal Financial and Accounting Officer) - 24 - CENTURY BANCSHARES, INC. EXHIBIT INDEX June 30, 1999 The following exhibit is filed within this report. Exhibit Number Description - -------------- ----------------------------------------------------------- 10.17 Amendment dated March 31, 1999, of the employment agreement between the Company and the Bank and Mr. Joseph S. Bracewell 27 Financial Data Schedule for the quarter ended June 30, 1999 - 25 - Exhibit 10.17 CENTURY BANCSHARES, INC. Amendment to Executive Employment Agreement [Letterhead of Century Bancshares, Inc.] February 19, 1999 Mr. Joseph S. Bracewell President Century Bancshares, Inc. 1275 Pennsylvania Avenue, NW Washington, DC 20004 RE: Executive Employment Agreement dated September 1, 1996, as amended ("Agreement") Dear Mr. Bracewell: Pursuant to Paragraph 2 of the above-referenced Agreement, this letter constitutes the Employer's written notice that the term of the Agreement will be extended for an additional one (1) year term commencing September 1, 1999, and ending August 31, 2000. Please indicate your consent to such extension by signing below and returning s copy of this letter within sixty (60) days of the date of this letter. Very truly yours, CENTURY BANCSHARES, INC. BY: /s/b/ WILLIAM C. OLDAKER William C. Oldaker, Secretary I hereby consent to the extension set forth above. BY: /s/b/ JOSEPH S. BRACEWELL /u/d/ March 31, 1999 Joseph S. Bracewell Date - 26 -
Exhibit 27 CENTURY BANCSHARES, INC. Financial Data Schedule June 30, 1999 [ARTICLE] 9 [CIK] 785813 [NAME] CENTURY BANCSHARES, INC. [MULTIPLIER] 1000 [PERIOD-TYPE] 6-MOS [FISCAL-YEAR-END] DEC-31-1999 [PERIOD-END] JUN-30-1999 [CASH] 5,058 [INT-BEARING-DEPOSITS] 18,379 [FED-FUNDS-SOLD] 5,000 [TRADING-ASSETS] 0 [INVESTMENTS-HELD-FOR-SALE] 9,104 [INVESTMENTS-CARRYING] 2,055 [INVESTMENTS-MARKET] 1,970 [LOANS] 130,197 [ALLOWANCE] 1,409 [TOTAL-ASSETS] 178,438 [DEPOSITS] 145,800 [SHORT-TERM] 3,471 [LIABILITIES-OTHER] 1,321 [LONG-TERM] 12,058 [COMMON] 2,721 [PREFERRED-MANDATORY] 0 [PREFERRED] 0 [OTHER-SE] 13,067 [TOTAL-LIABILITIES-AND-EQUITY] 178,438 [INTEREST-LOAN] 5,511 [INTEREST-INVEST] 297 [INTEREST-OTHER] 388 [INTEREST-TOTAL] 6,196 [INTEREST-DEPOSIT] 2,094 [INTEREST-EXPENSE] 315 [INTEREST-INCOME-NET] 2,311 [LOAN-LOSSES] 325 [SECURITIES-GAINS] 0 [EXPENSE-OTHER] 3,582 [INCOME-PRETAX] 814 [INCOME-PRE-EXTRAORDINARY] 504 [EXTRAORDINARY] 0 [CHANGES] 0 [NET-INCOME] 504 [EPS-BASIC] 0.19 [EPS-DILUTED] 0.18 [YIELD-ACTUAL] 5.19 [LOANS-NON] 675 [LOANS-PAST] 223 [LOANS-TROUBLED] 0 [LOANS-PROBLEM] 0 [ALLOWANCE-OPEN] 1,128 [CHARGE-OFFS] 57 [RECOVERIES] 13 [ALLOWANCE-CLOSE] 1,409 [ALLOWANCE-DOMESTIC] 1,409 [ALLOWANCE-FOREIGN] 0 [ALLOWANCE-UNALLOCATED] 675
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