-----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, MQJAKqBg77tG3BTm4w5VIMbIEJFox2cXO6L+Kn6oJxkBnZ32Ubb+4h2k8kBADmgR qeRNubyfuSfCgJFPD9rEWQ== 0000950133-97-001152.txt : 19970401 0000950133-97-001152.hdr.sgml : 19970401 ACCESSION NUMBER: 0000950133-97-001152 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970331 SROS: NONE 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-K405 SEC ACT: 1934 Act SEC FILE NUMBER: 000-16234 FILM NUMBER: 97570059 BUSINESS ADDRESS: STREET 1: 1275 PENNSYLVANIA AVE., N.W. CITY: WASHINGTON STATE: DC ZIP: 20004 BUSINESS PHONE: 202-496-4000 MAIL ADDRESS: STREET 1: 1275 PENNSYLVANIA AVE NW CITY: WASHINGTON STATE: DC ZIP: 20004 10-K405 1 FORM 10-K405 FOR YEAR ENDED 12/31-96 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED] FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED] 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 of other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.) 1275 PENNSYLVANIA AVENUE, N.W. 20004 WASHINGTON, D.C. (Zip Code) (Address of principal executive offices)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (202) 496-4100 SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE. SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE 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 21, 1997, the number of shares of common stock outstanding was 1,151,235. 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 $4,000,000. 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, 1996 are incorporated by reference into Part III. 2 CENTURY BANCSHARES, INC. ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996 TABLE OF CONTENTS
Page ---- PART I Item 1. Business........................................................................................1 Item 2. Properties......................................................................................9 Item 3. Legal Proceedings..............................................................................10 Item 4. Submission of Matters to a Vote of Security Holders............................................10 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters..........................10 Item 6. Selected Financial Data........................................................................11 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations...................................................................13 Item 8. Financial Statements and Supplementary Data....................................................42 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure....................................................................78 PART III Item 10. Directors and Executive Officers of the Registrant.............................................78 Item 11. Executive Compensation.........................................................................79 Item 12. Security Ownership of Certain Beneficial Owners and Management.................................79 Item 13. Certain Relationships and Related Transactions.................................................79 PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K................................80
-i- 3 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. and its branch office located at 1275 Pennsylvania Avenue, N.W. Lending services are concentrated in professional, service, and commercial business sectors located in the metropolitan Washington, D.C. area. Effective January 1, 1996, the Company established a loan production office in Tysons Corner, Virginia, which is in the process of being converted to a full service branch, effective April 1, 1997, to be located at 8251 Greensboro Drive, McLean, Virginia. On March 13, 1997, the OCC approved the Bank's application to establish a full service branch in 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, 1996, the Company had total assets of $107 million, total loans of $71 million, total deposits of $91 million, and total stockholders' equity of $6.8 million. At December 31, 1996, the Company had approximately 394 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 its 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 4 deposits, as well as the profit margin and fee income which can be generated thereon. The operating income and net income of the Bank, and, consequently, of the Company will depend to a great extent on "rate differentials," the difference between the income the Bank receives from its loans, investments and other assets and the interest it pays 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 or the Bank, 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 Bank could adversely affect the Bank's 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. 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, 1996, the Company's ROE was 4.2%. 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, 1996, the Company's ROA was 0.27%. 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 Bank acquired its first branch office in downtown Washington in 1994 and in 1996 established an LPO in Tysons Corner, Virginia, which will be replaced by a full service branch in April of 1997. On March 13, 1997, the OCC approved the Bank's application to establish a full service branch in Bethesda, Maryland. 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 -2- 5 merger and acquisition opportunities will be realized in the future. There can be no assurance that the Company will be successful in implementing any of the future plans described above 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 money market 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 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. 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 -3- 6 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. 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. -4- 7 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 -5- 8 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. 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, 1996, 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 -6- 9 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. Current Regulatory Issues. 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. 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 -7- 10 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 for 1996, which was paid on January 2, 1997, was $2,361. 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 January 1, 1997 assessment, which was paid on January 2, 1997, was $2,361. 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 7 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. However, the likelihood of passage of 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. -8- 11 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, 1996, the Company employed 36 employees, including 28 employees at the Eye Street location, 7 employees at the Pennsylvania Avenue location and 1 employee at the Tysons Corner, Virginia location. ITEM 2. PROPERTIES. The Company's principal executive offices are located at 1275 Pennsylvania Avenue, N.W., Washington, D.C. 20004, in leased premises which also serve as a branch location of the Bank. The premises at 1275 Pennsylvania Avenue consist of 2,750 sq. ft. which are under lease through September 30, 2004, with one additional five-year renewal option. The base rent is $25.00 per sq. ft. per year, increasing to $28.00 per sq. ft. effective October 1, 1999. In addition to the base rent, the Company reimburses the landlord for taxes and operating expenses applicable to the leased premises, and the lease provides for the payment of additional rent if the Bank's deposits in the Pennsylvania Avenue branch exceed certain benchmarks, which have not yet been achieved. Century National Bank leases its main banking location at 1875 Eye Street, N.W., Washington D.C. 20006. The lease includes lobby space (3,895 sq. ft), metro-level basement space (5,286 sq.ft.) and space for an automated teller machine in the International Square food court (65 sq. ft.). The lease extends through April 30, 2002, with two additional five-year renewal options. The base rent for the lobby space is $38.50 per sq. ft. per year, increasing to $43.50 per sq. ft. effective May 1, 1997. The base rent for the metro level is $20.00 per sq. ft. per year, increasing 2.5% per year beginning June 1, 1997. The base rent for the food court ATM location is $412.00 per month, increasing 3% per year beginning November 1, 1997. In addition to the base rent, the Company reimburses the landlord for increases in taxes and operating expenses applicable to the leased premises, above the actual expenses incurred in the base year 1992. Century National Bank leases temporary space for the Tysons Corner LPO on a month-to-month basis through March 31, 1997. Effective February 1, 1997, the Bank executed a sublease for a branch location at 8251 Greensboro Drive, McLean, Virginia. The branch premises consist of 1,801 sq. ft. which are under lease through March 31, 1999. The base rent is $23.00 per sq. ft. per year, increasing 3% per year beginning February 1, 1998. In addition to the base rent, the Company reimburses the landlord for increases in taxes and operating expenses applicable to the leased premises, above the actual expenses incurred in the base year 1996. The Company is currently negotiating with the owner of the building to extend the lease for an additional seven (7) years on terms and conditions similar to the sublease. -9- 12 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, 1996. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. There is no active trading market in the Company's Common Stock and no assurance may be given that one will develop. Although the Company's shares of Common Stock are quoted in the "pink sheets" of the National Association of Securities Dealers, Inc. (which set forth the most recent "bid" and "ask" prices), only limited and sporadic quotations are available for shares of the Common Stock in the Washington D.C. area. Based on information available to the Company from a limited number of sellers and purchasers of Common Stock, transactions in shares of Common Stock during the past twelve months took place at prices ranging from a low of $5.50 to a high of $8.00. The most recent transactions in the Common Stock known to the Company involved 130 shares of Common Stock on February 27, 1997 at $7.50 per share. As of March 21, 1997, there were 394 holders of record of Common Stock. 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, to a large extent, upon the dividends received from the Bank. Dividends 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 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 if the total of all dividends, including the proposed dividend, declared by the Bank in any given calendar year exceeds the Bank's -10- 13 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 7% stock dividend declared on March 19, 1996, payable on April 20, 1996 on shares of Common Stock held of record as of March 29, 1996. 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, 1996. 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, 1996 and 1995, and the Consolidated Statements of Operations, Stockholders' Equity and Cash Flows for each of the years in the three year period ended December 31, 1996 and the report thereon of KPMG Peat Marwick LLP are included elsewhere in this document. -11- 14 SELECTED CONSOLIDATED FINANCIAL INFORMATION (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
1996 1995 1994 1993 1992 ---- ---- ---- ---- ---- INCOME STATEMENT DATA (1) Interest income $ 7,689 7,079 5,712 5,455 6,016 Interest expense 2,776 2,562 1,902 1,987 2,486 Net interest income 4,913 4,517 3,810 3,468 3,530 Provision for loan losses 160 26 19 310 596 Net interest income after provision for loan loss 4,754 4,491 3,791 3,158 2,934 Noninterest income 720 590 555 572 611 Noninterest expense 4,920 4,157 3,381 3,071 3,303 Income taxes 275 311 374 240 76 Income before extraordinary item 279 613 591 419 166 Extraordinary item - - - - 34 Net income 279 613 591 419 200 COMMON SHARE DATA (2) Net income before extraordinary item $ 0.23 0.57 0.58 0.41 0.14 Extraordinary income - - - - 0.04 Net income 0.23 0.57 0.58 0.41 0.18 Book value (3) 5.69 5.42 4.53 4.70 4.34 Common and common equivalent shares outstanding End of period 1,186,591 1,174,763 961,169 922,105 920,958 Weighted average during the period 1,196,607 998,512 959,278 922,105 920,958 BALANCE SHEET DATA (1) Total assets $ 107,186 101,730 90,175 86,332 77,280 Investments (4) 25,631 21,690 22,654 25,902 14,918 Total loans (5) 70,676 69,204 60,663 56,644 56,331 Allowance for loan losses 826 740 740 730 744 Total deposits 90,985 90,539 82,081 79,982 71,113 Long term debt 6,850 - - 207 540 Preferred equity (6) - - 460 468 468 Common equity (7) 6,750 6,365 4,350 4,336 4,001 Total stockholders' equity 6,750 6,365 4,810 4,804 4,469 PERFORMANCE DATA Return on average total assets 0.27% 0.68% 0.71% 0.56% 0.29% Return on average total equity 4.20% 11.49% 12.38% 9.84% 5.39% Net interest margin 5.74% 5.42% 4.90% 4.55% 4.94% Loans to deposits 77.7% 76.4% 73.9% 70.8% 79.2% ASSET QUALITY RATIOS Nonperforming assets to total assets 0.30% 0.49% 0.70% 0.37% 1.11% Nonperforming loans to total loans 0.46% 0.45% 1.04% 0.57% 1.16% Net loan charge-offs to average 0.10% 0.04% 0.02% 0.59% 1.40% Allowance for loan losses total loans 1.17% 1.07% 1.22% 1.29% 1.32% Allowance to nonperforming loans 257% 240% 118% 227% 114% BANK CAPITAL RATIOS Tier I risk based capital 9.15% 9.35% 10.12% 10.22% 9.65% Total risk based capital 10.29% 10.47% 11.37% 11.48% 10.91% Tier I leverage 6.44% 6.88% 5.74% 5.24% 6.09%
(FOOTNOTES ON FOLLOWING PAGE) - 12 - 15 (1) Net income for 1995, 1993, and 1992, and related balance sheet accounts, have been restated to reflect an adjustment to the Company's deferred compensation liability account. See Note 2 of the Notes to Consolidated Financial Statements. (2) All common share data has been adjusted for three (3) five percent (5%) Common Stock dividends declared to stockholders of record as of July 31, 1993, March 31, 1994 and March 31, 1995, and one (1) seven percent (7%) Common Stock dividend declared to stockholders of record as of March 31, 1996. (3) Book value per common share is based on common equity, calculated in the manner described in footnote (7) below, divided by the number of common and common equivalent shares outstanding. (4) Investments include federal funds sold and interest-bearing deposits in other financial institutions. (5) Net of unearned income. (6) 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. (7) Common equity is total stockholders' equity less preferred equity. 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. The Bank's mission statement is as follows: Century National Bank is a community bank comprised of experienced professionals with a flexible and creative approach to banking. -13- 16 We are leaders in providing traditional banking services, enhanced by proven technology, to customers who value a person-to-person banking relationship. We specialize in lending to professionals, business-to-business service companies, and non-profit organizations. We do this to build long-term value for our customers, employees and owners. As of December 31, 1996, the Company had total assets of $107 million, total loans of $71 million, total deposits of $91 million, and total stockholders' equity of $6.8 million. The Company had net income of $279,000 for the year ended December 31, 1996, resulting in a return on equity of 4.2% and a return on assets of 0.27%. 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 Bank acquired its first branch office in downtown Washington in 1994 and in 1996 established an LPO in Tysons Corner, Virginia, which will be replaced by a full service branch in April of 1997. On March 13, 1997, the OCC approved the Bank's application to establish a full service branch in Bethesda, Maryland. RESULTS OF OPERATIONS NET INCOME Net income was $279,000 ($0.23 per common share) for 1996, compared with net income of $613,000 ($0.57 per common share) for 1995, a decrease of $334,000 or 55%. 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 Company 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 income for 1995 was restated to reflect an adjustment to the Company's deferred compensation liability account. The impact of this adjustment resulted in a decrease to previously reported net income of $67,000 in 1995. See Note 2 of the Notes to Consolidated Financial Statements for additional discussion. Net income, as restated, was $613,000 for 1995 ($0.57 per common share), a 4% increase compared with $591,000 for 1994 ($0.58 per common share). The increase in net income from 1994 to 1995 resulted from a $708,000 increase in net interest income and a $35,000 increase in non-interest income, which were offset by a $776,000 increase in non-interest expenses primarily -14- 17 resulting from initiatives designed to stimulate quality asset growth, such as the branch office and business development efforts described above. In the above discussion, all "per share" amounts have been adjusted to give effect to the Company's seven percent (7%) stock dividend which was distributed to stockholders of record as of March 31, 1996, and the two (2) five percent (5%) stock dividends which were distributed to stockholders of record as of March 31, 1995, and March 31, 1994. NET INTEREST INCOME Net interest income was $4,913,000 for 1996, an increase of $396,000 or 9% 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 the fact that loans constituted a higher percentage of the Company's total earning assets in 1996 than in 1995. Net interest income was $4,517,000 for 1995, an increase of $707,000 or 19% compared with net interest income of $3,810,000 for 1994. The Company's average total interest-earning assets increased from $77,825,000 for 1994 to $83,348,000 for 1995, representing a 7% increase resulting principally from an increase in loans. The net interest margin of 5.42% for 1995 increased 52 basis points from 4.90% for 1994. The following table 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, 1996, 1995 and 1994: -15- 18 AVERAGE BALANCES AND INTEREST RATES (Dollars in thousands)
Year Ended December 31, ------------------------------------------------------------------------------- 1996 1995 1994 -------------------------- -------------------------- ------------------------- 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 receivable, net (1) $70,523 6,887 9.77% 62,639 6,011 9.60% 57,855 4,802 8.30% Investment securities, taxable (2) 10,312 545 5.29% 18,297 918 5.02% 18,251 829 4.54% Investment securities, nontaxable (2)(3) 228 10 4.39% 991 57 5.75% 127 6 4.45% Federal Funds sold 380 35 9.21% 428 37 8.64% 1,356 65 4.79% Interest-earning deposits with banks (3) 4,091 212 5.18% 993 56 5.64% 236 10 4.09% ------- -------- ------- -------- ------- -------- Total interest earning assets (3) 85,534 7,689 8.99% 83,348 7,079 8.49% 77,825 5,712 7.34% NONINTEREST-EARNING ASSETS Cash and due from banks 4,361 3,854 3,851 Other assets 4,189 2,907 1,378 ------- ------- ------- Total noninterest-earning assets 8,550 6,761 5,229 ------- ------- ------- Total assets $94,084 90,109 83,054 ======= ======= ======= INTEREST BEARING LIABILITIES Deposits: Interest-bearing demand (NOW) deposits $12,522 245 1.96% 12,230 258 2.11% 11,926 248 2.08% Savings deposits 2,217 56 2.53% 2,526 67 2.65% 2,564 66 2.59% Money market deposits 23,072 784 3.40% 25,153 778 3.09% 24,784 618 2.49% Time deposits 25,596 1,400 5.47% 23,128 1,269 5.49% 20,738 922 4.44% Borrowings 4,952 291 5.88% 3,526 190 5.39% 1,102 43 3.93% Note payable - - N/A - - N/A 51 5 8.20% ------- -------- ------- -------- ------- -------- Total interest-bearing liabilities 68,359 2,776 4.06% 66,563 2,562 3.85% 61,165 1,902 3.11% NONINTEREST-BEARING LIABILITIES Non-interest bearing deposits 17,525 16,841 16,159 Other liabilities 1,642 1,236 646 ------- ------- ------- Total noninterest-bearing liabilities 19,167 18,077 16,805 ------- ------- ------- Stockholders' equity 6,558 5,469 5,084 ------- ------- ------- Total liabilities and stockholders' equity $94,084 90,109 83,054 ======= ======= ======= Net interest income $4,913 4,517 3,810 ======== ======== ======== Net interest margin (3) 5.74% 5.42% 4.90% ======== ======== ========
1. Non-accrual loan balances are included in the calculation of Average Balances - Loans Receivable, 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 are as follows: Investment securities, nontaxable 6.84% 8.76% 6.72% Total interest earning assets 9.00% 8.53% 7.34% Net interest margin 5.75% 5.45% 4.90%
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 -16- 19 balance between rate sensitive assets and rate sensitive liabilities, to attempt to maximize interest margins and to provide adequate liquidity for anticipated needs. The following table sets forth for the periods indicated a summary of the changes in interest earned and interest paid resulting from changes in volume and rate:
RATE/VOLUME ANALYSIS OF NET INTEREST INCOME (DOLLARS IN THOUSANDS) Year Ended Year Ended Year Ended December 31, 1996 December 31, 1995 December 31, 1994 Compared With Compared With Compared With December 31, 1995 December 31, 1994 December 31, 1993 Increase (Decrease) due to Increase (Decrease) due to Increase (Decrease) due to --------------------------------- --------------------------------- ----------------------------- Volume Rate Changes Volume Rate Changes Volume Rate Changes ------- ------- --------- -------- -------- ---------- -------- ------ --------- INTEREST EARNED ON: Loans receivable, net $ 768 108 876 428 781 1,209 (317) (87) (230) Investment securities, taxable (425) 52 (373) 2 87 89 202 20 222 Investment securities nontaxable (36) (11) (47) 45 6 51 3 3 6 Federal Funds sold (5) 3 (2) (62) 34 (28) (185) 67 (117) Interest-earning deposits with banks 160 (4) 156 37 9 46 (84) 1 (84) --------- ------ ------- ------ ------ ------- ------ ----- ------ Total interest income 462 148 610 450 917 1,367 253 4 257 --------- ------ ------- ------ ------ ------- ------ ----- ------ INTEREST PAID ON: Interest-bearing demand (NOW) deposits 7 (20) (13) 6 4 10 (2) (12) (14) Savings deposits (8) (3) (11) (1) 2 1 12 (6) 6 Money market deposits (28) 34 6 10 150 160 (57) (25) (82) Time deposits 136 (5) 131 119 228 346 32 (30) 2 Borrowings 82 19 101 113 34 147 21 11 32 Note payable - - - (5) - (4) (28) (1) (29) --------- ------ ------- ------ ------ ------- ------ ----- ------ Total interest expense 189 25 214 242 418 660 (22) (63) (85) --------- ------ ------- ------ ------ ------- ------ ----- ------ Net interest income $ 273 123 396 208 499 708 275 67 342 ========= ====== ======= ====== ====== ======= ====== ===== ======
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 of the Company 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 for 1996 was $160,000, compared with $26,000 for 1995, representing an increase of 515%. 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 -17- 20 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-accural 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. The provision for loan losses for 1995 was $26,000, compared with $19,000 for 1994, representing an increase of $7,000 or 36%. The provision expense for both years was modest, compared to industry averages and the Company's own historical experience, as a result of significant recoveries of loans charged off prior to 1994, as well as improvement in the local and national economy during that period. 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 for 1996 was $720,000, an increase of $130,000 or 22% compared with noninterest income of $590,000 for 1995. This increase resulted primarily from fees generated in connection with the Bank's Mastercard/Visa credit card program, which was initially established in March 1995. These fees, which are reported along with other items as commission and fee income, increased approximately $75,000 or 46% during 1996 as compared to 1995. Noninterest income was $590,000 for 1995, compared with $555,000 for 1994, an increase of $35,000 or 6% resulting primarily from fees associated with the credit card program. The $123,000 or 164% increase in commission and fee income from 1994 to 1995 was partially offset by a $127,000 or 93% decrease in other income during the same period. This decline in other income represented a return to more normal levels from the unusually high levels in 1994 caused by the receipt of miscellaneous non-recurring income items. The following table sets forth the various categories of noninterest income for the years ended December 31, 1996, 1995 and 1994: -18- 21 NONINTEREST INCOME (Dollars in thousands)
Year ended December 31, ------------------------------------------------- 1996 % Change 1995 % Change 1994 ------ --------- -------- -------- -------- Service charges on deposit account $ 416 9.8% 379 11.5% 340 Commission and fee income 286 44.4% 198 164.0% 75 Safe deposit box rentals 12 100.0% 6 -60.0% 15 Gain (loss) on sale of securities - -100.0% (3) -75.0% (12) Other income 6 -40.0% 10 -92.7% 137 ------ --------- -------- -------- -------- Total noninterest income $ 720 22.0% 590 6.3% 555 ====== ========= ======== ======== ========
NONINTEREST EXPENSE 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. -19- 22 Noninterest expense was $4,920,000 for 1996, an increase of $763,000 or 18% compared with noninterest expense of $4,157,000 for 1995. The installation of the new computer system, the writeoff 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 Bank 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 Bank'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. Noninterest expense was $4,157,000 for 1995, compared with $3,381,000 for 1994, representing an increase of $776,000 or 23%. The increase from 1994 to 1995 was primarily attributable to increased personnel and occupancy expenses associated with the Pennsylvania Avenue branch office, which was acquired on September 16, 1994, together with increased expenses incurred in connection with marketing programs. The following table sets forth the various categories of noninterest expense for the years ended December 31, 1996, 1995 and 1994: -20- 23 NONINTEREST EXPENSE (Dollars in thousands)
Year ended December 31, ---------------------------------------------------- 1996 % Change 1995 % Change 1994 --------- --------- ------- ----------- ------- Salaries and employee benefits $ 1,988 -5.1% 2,094 26.0% 1,662 Occupancy and equipment expenses 531 2.7% 517 18.0% 438 Depreciation and amortization 453 104.1% 222 63.2% 136 Professional fees 628 130.9% 272 5.8% 257 Data processing 469 41.3% 332 83.4% 181 Federal deposit insurance premiums 30 -65.9% 88 -47.9% 169 Communications 206 28.0% 161 41.2% 114 Marketing and public relations 174 15.2% 151 26.9% 119 Branch expenses paid to RTC - -100.0% 21 -27.6% 29 Office and operations expenses 317 104.5% 155 -9.9% 172 Insurance and lobby security 104 20.9% 86 48.3% 58 OREO expenses 7 -85.4% 48 N/A - Other expenses 13 30.0% 10 -78.3% 46 --------- --------- ------- ----------- ------- Total noninterest expense $ 4,920 18.4% 4,157 23.0% 3,381 ========= ========= ======= =========== =======
INCOME TAX EXPENSE The Company's effective tax rate increased from 33.7% in 1995 to 49.6% in 1996 due to the nondeductible nature of the $112,000 expense incurred in connection with the registration of shares of the Company's Common Stock with the SEC. The Company's effective tax rate declined from 38.7% in 1994 to 33.7% in 1995 as a result of adjustments made to the amounts of deferred tax assets and deferred tax liabilities. These adjustments were recorded based upon the Company's analysis of the carrying value of its deferred tax items. -21- 24 INTEREST RATE SENSITIVITY MANAGEMENT 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 "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 within a given period 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 within a given period exceeds the amount of its interest-earning assets also maturing or repricing within that time period. During a period of rising interest rates, a positive gap would tend to increase net interest income, while a negative gap would tend to have an adverse effect on net interest income. During a period of falling interest rates, a positive gap would tend to have an adverse effect on net interest income, while a negative gap would tend to increase net interest income. Management of the Company 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%. On a consolidated basis, the Company's one year cumulative gap was plus 8.00% at December 31, 1996. The following table sets forth the interest-rate sensitive assets and liabilities of the Company at December 31, 1996, which are expected to mature or are subject to repricing in each of the time periods indicated: -22- 25 INTEREST RATE SENSITIVE ASSETS AND LIABILITIES (Dollars in thousands)
TERM TO REPRICING (at December 31, 1996) ------------------------------------------------- 90 Days 91 to 180 181 Days Over or Less Days to 1 Year 1 Year Total ---------- --------- ---------- ------- -------- INTEREST-EARNING ASSETS Federal funds sold $ 11,436 - - - 11,436 Interest-bearing deposits 5,930 893 - - 6,823 Investment securities, taxable 2,432 - 704 4,071 7,207 Investment securities, nontaxable - - 100 65 165 Loans 33,495 5,986 13,100 18,157 70,738 ---------- --------- ---------- ------- -------- Total interest-earning assets 53,293 6,879 13,904 22,293 96,369 ---------- --------- ---------- ------- -------- INTEREST-BEARING LIABILITIES Interest-bearing demand and NOW accounts 13,852 - - - 13,852 Savings accounts 2,595 - - - 3,595 Money market deposits 24,232 - - - 24,232 Time deposits 9,445 6,862 5,897 3,038 25,242 Borrowed funds 916 250 450 6,850 8,466 ---------- --------- ---------- ------- -------- Total interest-bearing liabilities 52,040 7,112 6,347 9,888 75,387 ---------- --------- ---------- ------- -------- Interest sensitivity gap per period $1,253 (233) 7,557 12,405 20,982 ========== ========= ========== ======= ======== Cumulative gap $1,253 1,020 8,577 20,982 20,982 ========== ========= ========== ======= ======== Cumulative gap as a percentage of total assets 1.17% 0.95% 8.00% 19.6% 19.6% ========== ========= ========== ======= ======== Cumulative interest-earning assets as percent of cumulative interest-bearing liabilities 102% 102% 113% 128% 128% ========== ========= ========== ======= ========
ANALYSIS OF FINANCIAL CONDITION LOANS AND ASSET QUALITY 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 Washington, D.C. Most of the Company's real estate lending is in the Washington, D.C. metropolitan area, and a -23- 26 substantial portion of its loan portfolio is collateralized by first mortgages and home equity lines of credit on residences. This concentration is declining, however, as the Company continues its emphasis on the development of new commercial loan business. As of December 31, 1996 and 1995, approximately $44,109,000 (62%) and $46,103,000 (67%) 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 $27,043,000 (38%) and $30,561,000 (44%), 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 metropolitan Washington, D.C. area. As of December 31, 1996, the industry concentrations in excess of 10% of total loans, where the borrowers as a group might be affected similarly by economic changes, consists of loans to members of the legal profession ($17,700,000 or 25% of total loans), business services ($10,826,000 or 15% of total loans), and health care services ($9,374,000 or 13% of total loans). The Company offers lines of credit, credit cards, home equity lines, and mortgage loans to these groups. The amount of such loans which are past due or considered by management to be potential problem loans is 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 a debt service coverage ratio of 120% for commercial and commercial real estate loans, a maximum gross debt ratio of 38% for consumer loans (including residential mortgage and home equity loans), and a maximum loan-to-value ratio of 80% 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 -24- 27 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, 1996, loans and commitments outstanding to directors and executive officers of the Company and the Bank, their associates and members of their immediate families totaled $2,277,000 (net of participations sold to other banks on a non-recourse basis), which represented approximately 2.5% of total loans and commitments outstanding as of that date. As of December 31, 1996, 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. -25- 28 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, ------------------------------- 1996 1995 1994 --------- ---------- -------- Aggregate Principal Amount Type of loan: 1-4 family residential mortgage $ 20,612 24,921 25,610 Home equity loans 6,431 5,640 6,004 Multifamily residential 1,963 2,087 2,163 Construction 382 1,545 788 Commercial real estate 14,721 11,910 9,358 Commercial loans 17,403 13,213 10,376 Installment and credit card loans 9,226 9,023 4,989 Other loans - 963 1,486 --------- ---------- -------- Gross loans 70,738 69,302 60,774 Less:Unearned income (62) (98) (111) --------- ---------- -------- Total loans, net of unearned $ 70,676 69,204 60,663 ========= ========== ======== Percentage of Loan Portfolio Type of loan: 1-4 family residential mortgage 29.14% 35.96% 42.14% Home equity loans 9.09% 8.14% 9.87% Multifamily residential 2.78% 3.01% 3.56% Construction 0.54% 2.23% 1.30% Commercial real estate 20.81% 17.18% 15.40% Commercial loans 24.60% 19.07% 17.07% Installment and credit card loans 13.04% 13.02% 8.21% Other loans 0.00% 1.39% 2.45% --------- ---------- -------- Gross loans 100.00% 100.00% 100.00% ========= ========== ========
-26- 29 The following table sets forth the maturities of loans (based upon contractual dates) outstanding as of December 31, 1996, and an analysis of sensitivities of loans to changes in interest rates. 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 2% annual and 6% lifetime "caps" on interest rate changes. Borrowers have the right to prepay such loans without penalty. MATURITIES AND RATE SENSITVITY OF LOANS (DOLLARS IN THOUSANDS)
Over 1 Year Through 5 Years Over 5 Years -------------------- -------------------- One Year Fixed Floating Fixed Floating or Less Rate Rate Rate Rate Total ---------- --------- ---------- -------- ---------- ---------- Commercial $ 5,798 3,006 6,487 196 1,916 17,403 Commerial real estate 803 532 2,810 2,641 7,935 14,721 Residential mortgage/home equity 1,567 1,868 2,659 415 22,497 29,006 Construction - 302 80 - - 382 Installment/credit card 785 1,081 1,343 499 5,518 9,226 ---------- --------- ---------- -------- ---------- ---------- Total $ 8,953 6,789 13,379 3,751 37,866 70,738 ========== ========= ========== ======== ========== ==========
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. 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 -27- 30 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, ----------------------------- 1996 1995 1994 -------- --------- ------- Non-accrual loans $ 272 8 628 Accruing past due 90 days or more 50 300 - -------- --------- ------- Total nonperforming loans 322 308 628 Other real estate owned - 193 - -------- --------- ------- Total nonperforming assets $ 322 501 628 ======== ========= ======= Nonperforming to total assets 0.30% 0.49% 0.70% ======== ========= =======
The amount of interest on non-accrual loans which would have been recorded as income under the original terms of such loans was $17,000, $1,000 and $32,000 for the years ended December 31, 1996, 1995 and 1994, respectively. The amount of interest income recognized on non-accrual loans that was included in net income was $19,581, $13,500 and $13,500 for 1996, 1995 and 1994 respectively. Loans past due 90 days or more and still accruing as of December 31, 1996, totaled $50,000, of which $44,000 is composed of installment loans and credit card debt. The remaining $6,000 is secured by real estate. Non-accrual loans as of December 31, 1996 included two large secured credits totaling $171,000 and three smaller credits. Both of the larger credits are secured by real property. 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, -28- 31 general economic conditions, and other factors related to the collectibility of loans in the Company's portfolios. 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 $740,000 (1.22% of total loans) as of December 31, 1994, $740,000 (1.07% of total loans) as of December 31, 1995, and $826,000 (1.17% of total loans) as of December 31, 1996. The allowance for loan losses as a percentage of nonperforming loans was 257% and 240% as of December 31, 1996 and 1995, respectively. The following table sets forth an analysis of the Company's allowance for loan losses for the periods indicated: -29- 32 ALLOWANCE FOR LOAN LOSSES (DOLLARS IN THOUSANDS)
Year Ended December 31, -------------------------------- 1996 1995 1994 ---------- ---------- -------- Average net loans outstanding $ 70,523 63,354 58,636 ========== ========== ======== Loans outstanding at period-end 70,676 69,204 60,663 ========== ========== ======== Total Nonperforming loans 322 308 628 ========== ========== ======== Beginning balance of allowance 740 740 730 Loans charged-off: 1-4 family residential mortgage - 137 33 Home equity loans - - 61 Commercial loans 126 10 1 Installment and credit card loans 129 51 11 ---------- ---------- -------- Total loans charged off 255 198 106 ---------- ---------- -------- Recoveries of previous charge-offs: 1-4 family residential mortgage 37 77 7 Home equity loans - - 14 Commercial loans 125 93 71 Installment and credit card loans 19 2 5 ---------- ---------- -------- Total recoveries 181 172 97 ---------- ---------- -------- Net loans charged-off 74 26 9 ---------- ---------- -------- Provision for loan losses 160 26 19 ---------- ---------- -------- Balance at end of period $ 826 740 740 ========== ========== ======== Net charge-offs to average loans 0.10% 0.04% 0.02% ========== ========== ======== Allowance as % of total loans 1.17% 1.07% 1.22% ========== ========== ======== Nonperforming as % of total loans 0.46% 0.45% 1.04% ========== ========== ======== Allowance as % of nonperforming loans 257% 240% 118% ========== ========== ========
-30- 33 Although 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, the Company does not formally allocate its allowance for loan losses by loan category. 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 $7,372,000 as of December 31, 1996, consisted primarily of U.S. government agency obligations and mortgage-backed securities. This represented a decrease of $6,307,000 or 46% compared to the investment portfolio as of December 31, 1995, as investment maturities were used to fund loan growth and enhance liquidity. The investment portfolio declined 39% from $22,461,000 as of December 31, 1994 to $13,679,000 as of December 31, 1995, which was anticipated because all of the branch deposits acquired by the Company in 1994 from the RTC were initially invested in U.S. Treasury and agency securities, pending anticipated deposit runoff and eventual redeployment of the deposit funds into the loan portfolio. 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 in accordance with SFAS No. 115, "Accounting For Certain Investments in Debt and Equity Securities," which was adopted by the Company in 1994. The following table sets forth the book value of the Company's investment portfolio as of the dates indicated: -31- 34 INVESTMENT PORTFOLIO COMPOSITION (DOLLARS IN THOUSANDS)
Year Ended December 31, ----------------------------------------- 1996 1995 1994 ----------- ------------ ----------- Available for sale U.S. government agencies $ 3,136 9,968 18,323 Mortgage-backed securities 3,278 2,994 3,356 ----------- ------------ ----------- Total available for sale 6,414 12,962 21,679 Held to maturity State, county and municipal 165 250 250 Other 793 467 532 ----------- ------------ ----------- Total held to maturity 958 717 782 ----------- ------------ ----------- Total investment securities $ 7,372 13,679 22,461 =========== ============ ===========
The following table sets forth the maturity distribution and weighted average yield of the investment portfolio of the Company as of December 31, 1996: -32- 35 INVESTMENT PORTFOLIO--MATURITIES AND YIELDS (DOLLARS IN THOUSANDS)
December 31, 1996 -------------------------------------------------------------- 1 Year or Less 1 to 5 Years 5 to 10 Years After 10 Years --------------- ------------- -------------- -------------- Maturity Distribution U.S. government agencies $ - 3,136 - - Mortgage-backed securities (1) 548 300 - 2,430 State, county and municipal 100 65 - - Other - - - 793 --------------- ------------- -------------- -------------- Total $ 648 3,501 - 3,223 =============== ============= ============== ============== Weighted Averge Yield (2) U.S. government agencies N/A 5.63% N/A N/A Mortgage-backed securities 5.23% 5.86% N/A 5.60% State, county and municipal 4.55% 4.75% N/A N/A Fully tax equivalent 6.74% 7.20% N/A N/A Other N/A N/A N/A 6.32%
(1) Mortgage-backed securities consist of floating rate debt securities that reprice quarterly or more frequently. (2) 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 average balance of total deposits was $80,932,000 for the year ended December 31, 1996, an increase of $1,054,000 or 1.3% compared with average deposits of $79,878,000 for the year ended December 31, 1995, which in turn represented an increase of $3,707,000 or 4.9% compared with average deposits of $76,171,000 for the year ended December 31, 1994. The Company views deposit growth as a significant challenge in its effort to increase its asset size, a challenge which the Company is addressing through its branching program, increased emphasis on commercial accounts, and offering more attractive interest rates to stimulate deposit growth. The following table sets forth the average balances and weighted average rates for the Company's categories of deposits for the periods indicated: -33- 36 AVERAGE DEPOSITS (DOLLARS IN THOUSANDS)
Year Ended December 31, --------------------------------------------------------------------------------------------------- 1996 1995 1994 ------------------------------- ------------------------------- ------------------------------- Average Average % of Average Average % of Average Average % of Balance Rate Total Balance Rate Total Balance Rate Total --------- --------- --------- --------- --------- --------- --------- --------- --------- Noninterest bearing $ 17,525 0.00% 21.65% 16,841 0.00% 21.08% 16,159 0.00% 21.21% deposits Interest-bearing demand 12,522 1.96% 15.47% 12,230 2.11% 15.31% 11,926 2.08% 15.66% (NOW) deposits Savings deposits 2,217 2.53% 2.74% 2,526 2.65% 3.16% 2,564 2.59% 3.37% Money market deposits 23,072 3.40% 28.51% 25,153 3.09% 31.49% 24,784 2.49% 32.54% Time deposits 25,596 5.47% 31.63% 23,128 5.49% 28.96% 20,738 4.44% 27.22% --------- --------- --------- --------- --------- --------- --------- --------- Total $ 80,932 100.00% 79,878 100.00% 76,171 100.00% ========= ========= ========= ========= ========= ========= Weighted average rate 3.07% 2.97% 2.43% ========= ========= =========
The Company seeks to rely primarily on core deposits from regular customers 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, 1996, brokered deposits represented $3,276,000 (3.3%) of the Company's total liabilities. As of December 31, 1996, total time deposits in excess of $100,000 accounted for $15,169,000 or 18.8% of the Company's total deposits. Of this amount, $10,359,000 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, 1996 and 1995: -34- 37 TIME DEPOSITS OF $100,000 OR MORE (DOLLARS IN THOUSANDS)
December 31, -------------------- Maturity Period 1996 1995 - ------------------------------------- --------- -------- Three months or less $ 6,179 5,405 Over three months through six months 4,180 2,320 Over six months through twelve months 3,905 2,142 Over twelve months 905 3,141 --------- -------- Total $ 15,169 13,008 ========= ========
BORROWINGS Borrowings consist of advances from the Federal Home Loan Bank of Atlanta ("FHLBA") and deposits received in the Bank'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, 1996, 1995 and 1994: -35- 38 BORROWINGS (DOLLARS IN THOUSANDS)
Year-ended December 31, ----------------------------------- 1996 1995 1994 ---------- ---------- --------- Federal Home Loan Bank of Atlanta Ending balance $ 7,750 2,000 2,200 Daily average balance for the period 4,559 2,924 707 Maximum outstanding balance at a month-end during the period 7,800 4,000 3,500 Daily average interest rate for the period 5.99% 5.46% 4.24% Average interest rate on period end balance 6.73% 6.10% 6.88% Treasury Tax and Loan Account Ending balance $ 716 1,808 684 Daily average balance for the period 393 473 394 Maximum outstanding balance at a month-end during the period 829 711 684 Daily average interest rate for the period 4.64% 4.60% 3.48% Average interest rate on period end balance 5.16% 2.00% 2.75%
The following table shows the details of the Bank's fixed rate advances from the FHLBA, with original maturities in excess of one year, as of December 31, 1996: -36- 39 BORROWINGS (Dollars in thousands)
December 31, 1996 ------------------------------ Advance Amount Outstanding Current Long Term Interest Maturity Date Borrowed Balance Portion Portion Rate Date Repayment Terms - -------- --------- ----------- ------- --------- -------- ------- ----------------------------- 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 2,000 400 1,600 6.57% 10/10/01 Equal installments quarterly commmencing 1/10/97 10/10/96 2,400 2,400 400 2,000 6.66% 10/10/02 Equal installments quarterly commmencing 1/10/97 2/8/96 800 800 - 800 6.30% 2/8/06 Due at maturity 5/16/96 1,000 1,000 - 1,000 7.34% 5/16/06 Due at maturity 6/24/96 1,000 950 100 850 6.94% 6/24/06 Equal installments semi annu commencing 12/24/96 -------- ------- ------- ------- $ 7,800 7,750 900 6,850 ======== ======= ======= =======
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, ---------------------------------------------- 1996 1995 1994 ---------- ------------- ---------------- Return on average assets 0.27% 0.68% 0.71% Return on average equity 4.20% 11.49% 12.38% Period-end equity to total assets 6.30% 6.26% 5.33%
-37- 40 LIQUIDITY The Company's Asset/Liability Management Policy is intended to maintain adequate liquidity for the Bank 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 the Bank's 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, 1996, the Bank had cash and cash equivalents of $19.8 million, an increase of $10 million compared to December 31, 1995, which increase is primarily attributable to maturities of investment securities and an increase in long-term borrowings. As of December 31, 1996, $18,907,000 or 74% of the Company's total investment portfolio, including federal funds sold and interest bearing deposits held with other financial institutions, was scheduled to mature within one year. The remainder of the portfolio consists of $3,501,000 (14% of total portfolio) in U.S. Government, agency, and municipal securities that will mature within two years, and $2,430,000 (9% of total portfolio) in federal agency mortgage pass-through securities and collateralized mortgage obligations with an estimated weighted average duration of approximately three years, and the Bank's required stock investment in the FHLBA and the Federal Reserve Bank of Richmond totaling $793,000. The unrealized gain contained in the held-to-maturity portion of the investment portfolio as of December 31, 1996 was less than $1,200. 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 FHLBA, the Bank is authorized to borrow up to $13.3 million secured by a blanket pledge of its portfolio of 1-to-4-family residential mortgage loans. The Bank 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, 1996, the Bank had no federal funds purchased or repurchase agreements, and was utilizing $7,750,000 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. -38- 41 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 $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. Net cash provided by operating activities was $448,000 for the year ended December 31, 1995, and $303,000 for the year ended December 31, 1994. The net cash used by investing activities was $6.8 million and $5.5 million for the years ended December 31, 1995 and 1994, respectively, and was primarily reflected by an increase in net loans outstanding. Net cash provided by financing activities, consisting primarily of growth in deposits, was $10.4 million and $3.8 million for the years ended December 31, 1995 and 1994, respectively. In the ordinary course of business, the Bank enters into commitments to make loans and fund letters of credit, and the Company is also a party to three 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 $29,000 as of December 31, 1996 at the holding company level. The Company anticipates using these funds, together with dividends received from the Bank, as working capital to pay normal operating expenses. As of December 31, 1996, the Company had no indebtedness outstanding at the holding company level. CAPITAL RESOURCES Total stockholders' equity as of December 31, 1996 was $6,750,000, an increase of $385,000 or 6% 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 these 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 $84,000 received from the exercise of employee stock options. Total stockholders' equity was $6,365,000 as of December 31, 1995, an increase of $1,555,000 or 32% compared with stockholders' equity of $4,810,000 as of December 31, 1994. The increase in total stockholders' equity as of December 31, 1995 was attributable to $613,000 of net income for 1995, $480,000 in net proceeds from the issuance of Common Stock, and a $502,000 increase in the market value of investment securities available-for-sale, net of tax effect, all partially offset by a $40,000 preferred stock dividend. The OCC has established certain minimum risk-based capital standards that apply to national banks. At December 31, 1996, the Bank exceeded all applicable regulatory capital requirements. See Note 16 of the Notes to Consolidated Financial Statements. -39- 42 ACCOUNTING MATTERS In June 1996, the FASB issued SFAS No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities," which will be effective for transactions occurring after December 31, 1996. This Statement requires that, after a transfer of financial assets, an entity recognize the financial and servicing assets it controls and the liabilities it has incurred, and derecognize financial assets when control has been surrendered. The transferor has surrendered control over financial assets only if such assets have been isolated from the transferor, the transferee obtains the right to pledge or exchange the transferred assets, and any agreement to repurchase the transferred assets can be satisfied by delivery of assets that are readily obtainable. Liabilities and derivatives incurred or obtained in exchange for transferred assets are initially measured at fair value. Servicing assets and other retained interests in the transferred assets are measured by allocating the carrying amount between the assets and the retained interests based on their relative fair values. It is management's belief that the adoption of this Statement will not have a material impact on the Company or its results of operations. -40- 43 IMPACT OF INFLATION, CHANGING PRICES AND MONETARY POLICIES The financial statements and related financial data concerning the Company presented herein have been prepared in accordance with generally accepted accounting principles, which require the measurement of financial position and operating results in terms of historical dollars without considering changes in the relative purchasing power of money over time due to inflation. 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 Bank and its results of operations are not predictable. DISCLOSURE REGARDING FORWARD LOOKING STATEMENTS Items 1 and 7 of this document include forward looking statements within the meaning 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, it can give no assurance that its expectations will be achieved. Important factors that could cause actual results to differ materially from the Company's expectations are disclosed in conjunction with the forward looking statements included herein (Cautionary Disclosures). Subsequent written and oral forward looking statements attributable to the Company or persons acting on its behalf are expressly qualified in their entirety by the Cautionary Disclosures. -41- 44 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, 1996 and 1995, 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, 1996. 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, 1996 and 1995, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1996, in conformity with generally accepted accounting principles. /s/ KPMG Peat Marwick LLP Washington, D.C. February 21, 1997 -42- 45 CENTURY BANCSHARES, INC. AND SUBSIDIARY Consolidated Statements of Financial Condition December 31, 1996 and 1995
========================================================================================================================== ASSETS 1996 1995 - -------------------------------------------------------------------------------------------------------------------------- Cash and due from banks $ 8,363,911 8,045,561 Federal funds sold 11,436,000 1,980,000 Interest bearing deposits in other banks 6,823,077 6,031,700 Investment securities available-for-sale, at fair value 6,414,011 12,961,735 Investment securities, at cost, fair value of $959,389 and $718,851 in 1996 and 1995, respectively 958,245 716,879 Loans, net of unearned income 70,676,356 69,203,965 Less - allowance for loan losses (825,876) (740,000) - -------------------------------------------------------------------------------------------------------------------------- Loans, net 69,850,480 68,463,965 - -------------------------------------------------------------------------------------------------------------------------- Leasehold improvements, furniture, and equipment, net 1,558,247 1,454,056 Accrued interest receivable 509,567 589,130 Other real estate owned - 192,658 Deposit premium 275,072 320,847 Prepaid expenses 157,228 141,844 Other assets 840,171 831,681 - -------------------------------------------------------------------------------------------------------------------------- $ 107,186,009 101,730,056 ========================================================================================================================== LIABILITIES AND STOCKHOLDERS' EQUITY - -------------------------------------------------------------------------------------------------------------------------- Liabilities: Deposits: Noninterest-bearing $ 24,064,454 24,712,204 Interest-bearing 66,920,756 65,827,158 - -------------------------------------------------------------------------------------------------------------------------- Total deposits 90,985,210 90,539,362 Other borrowings 8,465,877 3,807,910 Other liabilities 984,881 1,017,764 - -------------------------------------------------------------------------------------------------------------------------- Total liabilities 100,435,968 95,365,036 - -------------------------------------------------------------------------------------------------------------------------- Stockholders' equity: Common stock, $1 par value; 2,000,000 shares authorized; 1,146,028 and 1,046,047 shares issued and outstanding at December 31, 1996 and 1995, respectively 1,146,028 1,046,047 Additional paid in capital 4,870,856 4,410,876 Retained earnings 779,057 976,161 Unrealized loss on investment securities available-for-sale, net of tax effect (45,900) (68,064) - -------------------------------------------------------------------------------------------------------------------------- Total stockholders' equity 6,750,041 6,365,020 - -------------------------------------------------------------------------------------------------------------------------- Commitments and contingencies $ 107,186,009 101,730,056 ==========================================================================================================================
See accompanying notes to consolidated financial statements. -43- 46 CENTURY BANCSHARES, INC. AND SUBSIDIARY Consolidated Statements of Operations Years ended December 31, 1996, 1995, and 1994
============================================================================================================================= 1996 1995 1994 - ----------------------------------------------------------------------------------------------------------------------------- Interest income: Interest and fees on loans $ 6,887,424 6,010,907 4,801,905 Interest on federal funds sold 34,732 37,145 64,967 Interest on deposits in other banks 211,563 56,258 9,622 Interest on securities available-for-sale 545,481 917,605 790,967 Interest on securities held to maturity 10,296 57,272 43,665 - ----------------------------------------------------------------------------------------------------------------------------- Total interest income 7,689,496 7,079,187 5,711,126 - ----------------------------------------------------------------------------------------------------------------------------- Interest expense: Interest on deposits: Certificates $100,000 and over 768,603 636,236 441,693 Certificates under $100,000 630,875 631,662 480,060 NOW accounts 245,473 258,428 248,148 Savings accounts 56,075 67,189 66,341 Money market accounts 783,466 777,954 617,731 Interest on loan payable - - 4,246 Interest on other borrowings 291,494 190,295 43,323 - ----------------------------------------------------------------------------------------------------------------------------- Total interest expense 2,775,986 2,561,764 1,901,542 - ----------------------------------------------------------------------------------------------------------------------------- Net interest income 4,913,510 4,517,423 3,809,584 Provision for loan losses 160,000 26,347 19,431 - ----------------------------------------------------------------------------------------------------------------------------- Net interest income after provision for loan losses 4,753,510 4,491,076 3,790,153 - ----------------------------------------------------------------------------------------------------------------------------- Noninterest income: Service charges on deposit accounts 416,357 378,739 340,291 Other operating income 303,902 214,797 226,505 Loss on sale of securities - (3,197) (11,748) - ----------------------------------------------------------------------------------------------------------------------------- Total noninterest income 720,259 590,339 555,048 - -----------------------------------------------------------------------------------------------------------------------------
(Continued) -44- 47 CENTURY BANCSHARES, INC. AND SUBSIDIARY Consolidated Statements of Operations, Continued
================================================================================================================================== 1996 1995 1994 - ---------------------------------------------------------------------------------------------------------------------------------- Noninterest expenses: Salaries and employee benefits $ 1,987,989 2,093,816 1,661,821 Occupancy and equipment expense 531,336 516,617 438,355 Depreciation and amortization 452,949 221,557 136,180 Professional fees 628,244 272,960 257,235 Data processing 468,743 332,363 180,900 Federal deposit insurance premiums 30,238 88,146 169,185 Communications 206,404 161,090 113,802 Other real estate owned 6,775 48,445 - Other operating expenses 607,813 422,322 423,273 - ---------------------------------------------------------------------------------------------------------------------------------- Total noninterest expenses 4,920,491 4,157,316 3,380,751 - ---------------------------------------------------------------------------------------------------------------------------------- Income before income tax expense 553,278 924,099 964,450 Income tax expense 274,699 311,445 373,546 - ---------------------------------------------------------------------------------------------------------------------------------- Net income $ 278,579 612,654 590,904 ================================================================================================================================== Income per common share $ .23 .57 .58 ================================================================================================================================== Weighted average common and common equivalent shares outstanding 1,196,607 998,512 959,278 ==================================================================================================================================
See accompanying notes to consolidated financial statements. -45- 48 CENTURY BANCSHARES, INC. AND SUBSIDIARY Consolidated Statements of Stockholders' Equity Years ended December 31, 1996, 1995, and 1994
==================================================================================================================================== Preferred stock Common stock Additional --------------------- -------------------- paid-in Shares Amount Shares Amount capital - ------------------------------------------------------------------------------------------------------------------------------------ Balance, December 31, 1993, as previously reported 62,335 $ 62,335 782,316 $ 782,316 3,898,006 Adjustment related to deferred compensation - - - - - - ------------------------------------------------------------------------------------------------------------------------------------ Balance, December 31, 1993, as restated 62,335 62,335 782,316 782,316 3,898,006 Stock dividend (5% of shares outstanding) - - 39,061 39,061 (39,061) Repurchase of preferred stock (1,008) (1,008) - - (6,552) Exercise of stock options - - 1,855 1,855 3,258 Preferred stock dividend - - - - - Net income - - - - - Unrealized loss on investment securities available-for-sale, net of tax effect - - - - - - ------------------------------------------------------------------------------------------------------------------------------------ Balance, December 31, 1994 61,327 61,327 823,232 823,232 3,855,651 Exercise of stock options - - 7,831 7,831 15,616 Stock dividend (5% of shares outstanding) - - 41,072 41,072 195,092 Redemption of preferred stock (33,878) (33,878) - - (220,207) Exchange of preferred stock (27,449) (27,449) 35,814 35,814 (8,365) Issuance of common stock - - 138,098 138,098 573,089 Preferred stock dividend - - - - - Net income - - - - - Unrealized gain on investment securities available- for-sale, net of tax effect - - - - - - ------------------------------------------------------------------------------------------------------------------------------------ Balance, December 31, 1995 - - 1,046,047 1,046,047 4,410,876 Stock dividend (7% of shares outstanding) - - 73,047 73,047 401,758 Exercise of stock options - - 26,934 26,934 58,222 Net income - - - - - Unrealized loss on investment securities available-for-sale, net of tax effect - - - - - - ------------------------------------------------------------------------------------------------------------------------------------ Balance, December 31, 1996 - $ - 1,146,028 $1,146,028 4,870,856 ====================================================================================================================================
================================================================================================================================= Unrealized loss on Retained investment securities earnings available-for-sale Total - --------------------------------------------------------------------------------------------------------------------------------- Balance, December 31, 1993, as previously reported 152,728 (24,844) 4,870,541 Adjustment related to deferred compensation (66,981) - (66,981) - --------------------------------------------------------------------------------------------------------------------------------- Balance, December 31, 1993, as restated 85,747 (24,844) 4,803,560 - --------------------------------------------------------------------------------------------------------------------------------- Stock dividend (5% of shares outstanding) - - - Repurchase of preferred stock - - (7,560) Exercise of stock options - - 5,113 Preferred stock dividend (36,796) - (36,796) Net income 590,904 - 590,904 Unrealized loss on investment securities available-for-sale, net of tax effect - (545,301) (545,301) - --------------------------------------------------------------------------------------------------------------------------------- Balance, December 31, 1994 639,855 (570,145) 4,809,920 Exercise of stock options - - 23,447 Stock dividend (5% of shares outstanding) (236,164) - - Redemption of preferred stock - - (254,085) Exchange of preferred stock - - - Issuance of common stock - - 711,187 Preferred stock dividend (40,184) - (40,184) Net income 612,654 - 612,654 Unrealized gain on investment securities available- for-sale, net of tax effect - 502,081 502,081 - --------------------------------------------------------------------------------------------------------------------------------- Balance, December 31, 1995 976,161 (68,064) 6,365,020 Stock dividend (7% of shares outstanding) (475,683) - (878) Exercise of stock options - - 85,156 Net income 278,579 - 278,579 Unrealized loss on investment securities available-for-sale, net of tax effect - 22,164 22,164 - --------------------------------------------------------------------------------------------------------------------------------- Balance, December 31, 1996 779,057 (45,900) 6,750,041 =================================================================================================================================
See accompanying notes to consolidated financial statements. -46- 49 CENTURY BANCSHARES, INC. AND SUBSIDIARY Consolidated Statements of Cash Flows Years ended December 31, 1996, 1995, and 1994
================================================================================================================================= 1996 1995 1994 - --------------------------------------------------------------------------------------------------------------------------------- Cash flows from operating activities: Net income $ 278,579 612,654 590,904 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 452,959 221,557 136,180 Provision for loan losses 160,000 26,347 19,431 Provision for losses on other real estate owned 10,000 48,445 - Loss on sale of securities - available-for-sale - 3,197 11,748 Loss (gain) on sale of other real estate owned (21,328) 11,883 - (Increase) decrease in accrued interest receivable 79,563 (7,509) (82,396) Decrease in prepaid expenses and other assets (23,874) (402,960) (117,490) Increase in other liabilities (32,883) (65,943) (255,459) - ---------------------------------------------------------------------------------------------------------------------------------- Net cash provided by operating activities 903,016 447,671 302,918 - ---------------------------------------------------------------------------------------------------------------------------------- Cash flows from investing activities: Loan repayments and recoveries (originations), net (1,547,403) (8,951,855) (4,077,823) Net increase in interest bearing deposits in other banks (791,377) (5,838,933) (169,388) Purchases of securities available-for-sale (3,092,717) (1,010,160) (10,454,516) Purchases of securities held to maturity (326,366) - (254,852) Payments and maturities of securities available-for-sale 9,662,605 6,553,254 7,404,794 Repayments and maturities of securities held to maturity 85,000 - - Proceeds from sale of investment securities available-for-sale - 3,738,431 2,164,757 Purchase of leasehold improvements, furniture and equipment, net of disposals (511,366) (1,366,073) (95,203) Proceeds from sale of other real estate owned 203,986 96,890 - - ---------------------------------------------------------------------------------------------------------------------------------- Net cash provided (used) by investing activities 3,682,362 (6,778,446) (5,482,231) - ----------------------------------------------------------------------------------------------------------------------------------
(Continued) -47- 50 CENTURY BANCSHARES, INC. AND SUBSIDIARY Consolidated Statements of Cash Flows, Continued
============================================================================================================================= 1996 1995 1994 - ----------------------------------------------------------------------------------------------------------------------------- Cash flows from financing activities: Net issuances of certificates of deposit $ 262,533 3,868,183 2,072,464 Net increase in demand, savings, and money market deposits 183,315 4,589,920 26,296 Deposit premium - (62,845) (303,000) Repayments of loan payable - - (207,000) Repurchase of preferred stock - (254,085) (7,560) Issuance of common stock 85,156 734,634 5,113 Dividend paid on preferred stock - (40,184) (36,796) Increase in other borrowings 4,657,968 1,607,910 2,200,000 - ----------------------------------------------------------------------------------------------------------------------------- Net cash provided by financing activities 5,188,972 10,443,533 3,749,517 - ----------------------------------------------------------------------------------------------------------------------------- Net increase (decrease) in cash and cash equivalents 9,774,350 4,112,758 (1,429,796) Cash and cash equivalents, beginning of year 10,025,561 5,912,803 7,342,599 - ----------------------------------------------------------------------------------------------------------------------------- Cash and cash equivalents, end of year $ 19,799,911 10,025,561 5,912,803 ============================================================================================================================= Supplemental disclosures of cash flow information: Interest paid on deposits and borrowings $ 2,743,631 2,483,398 1,902,707 ============================================================================================================================= Income taxes paid (refunded) $ 626,079 19,222 (88,190) ============================================================================================================================= Transfer of loans to other real estate owned $ - 946,366 - =============================================================================================================================
See accompanying notes to consolidated financial statements. -48- 51 CENTURY BANCSHARES, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements December 31, 1996 and 1995 ================================================================================ (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) 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 District of Columbia 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 making 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. 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. (Continued) -49- 52 CENTURY BANCSHARES, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements ================================================================================ (1) CONTINUED 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. INCOME RECOGNITION ON LOANS Interest on loans is credited to income as earned on the principal amount 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. 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. 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 can be anticipated 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 currently anticipated losses. (Continued) -50- 53 CENTURY BANCSHARES, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements ================================================================================ (1) CONTINUED 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 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. Effective January 1, 1995, the Company adopted Statement of Financial Accounting Standards No. 114, Accounting by Creditors for Impairment of a Loan, as amended by Statement 118, Accounting by Creditors for Impairment of a Loan E Income Recognition and Disclosures (collectively referred to as SFAS No. 114). SFAS No. 114 addresses the accounting by creditors for the impairment of all loans except for large groups of smaller-balance homogeneous loans that are collectively evaluated for impairment, and certain other types of loans specifically excluded by the Standard. SFAS No. 114 requires that impaired loans be measured 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, it is probable that a creditor will be unable to collect all amounts due according to the contractual terms of the original loan agreement. The adoption of SFAS No. 114 did not have a significant effect on the Company's financial statements. All loans receivable have been evaluated for collectibility under the provisions of these standards, except for the consumer and home equity loan portfolios, which are evaluated collectively as large groups of smaller balance homogeneous loans. Impaired loans are specifically reviewed loans for which it is probable that the Company will be unable to collect all amounts due according to the terms of the loan agreement. The specific factors that influence management's judgment in determining when a loan is impaired include evaluation of financial strength of the borrower and the fair value of the collateral. 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. (Continued) -51- 54 CENTURY BANCSHARES, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements ================================================================================ (1) CONTINUED LOAN FEES 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. 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 Income per common share is computed by dividing net income less preferred stock dividends by the weighted average number of common and common equivalent shares (when dilutive and significant) outstanding during the year. Common equivalent shares result from stock options and warrants outstanding and are computed using the treasury stock method. (Continued) -52- 55 CENTURY BANCSHARES, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements ================================================================================ (1) CONTINUED 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. Weighted average shares outstanding and income per common share have been restated for the effect of the stock dividends. CASH AND CASH EQUIVALENTS 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. NEW ACCOUNTING STANDARDS NOT YET IMPLEMENTED During February of 1997, the FASB issued Statement of Financial Accounting Standards No. 128, Earnings Per Share (SFAS 128). SFAS 128 establishes standards for computing and presenting earnings per share (EPS) and applies to entities with publicly held common stock or potential common stock. SFAS 128 is effective for financial statements issued for periods ending after December 15, 1997, including interim periods. Management does not expect that the adoption of SFAS 128 will have a material impact on the Company's financial condition or reported earnings per share. During February 1997, the FASB issued Statement of Financial Accounting Standards No. 129, Disclosure of Information about Capital Structure (SFAS 129). SFAS 129 establishes standards for disclosing information about an entity's capital structure and applies to all entities. SFAS 129 is effective for financial statements issued for periods ending after December 15, 1997. 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 provide the pro forma disclosure provisions of SFAS No. 123. (Continued) -53- 56 CENTURY BANCSHARES, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements ================================================================================ (1) CONTINUED RECLASSIFICATIONS Certain amounts for 1995 and 1994 have been reclassified to conform to the presentation for 1996. (2) DEFERRED COMPENSATION The deferred compensation liability for the deferred compensation contracts was understated at December 31, 1996 by approximately $225,000. The after tax effect of this understatement has been reflected in the appropriate periods through restatement of previously reported results. The impact on prior periods resulted in a decrease to previously reported net income of approximately $67,000 in 1995 and a cumulative impact on retained earnings at December 31, 1993 of approximately $67,000. There was no impact on 1994 net income. (3) RESTRICTED CASH 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 $226,000 and $235,000 as of December 31, 1996 and 1995, respectively. (Continued) -54- 57 CENTURY BANCSHARES, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements ================================================================================ (4) INVESTMENT SECURITIES Investment securities available-for-sale, and their contractual maturities, at December 31, 1996 and 1995 are summarized as follows:
1996 ------------------------------------------------------------------ Gross Gross Amortized unrealized unrealized cost gains losses Fair value ---------------------------------------------------------------------------------------------------------------------- Obligations of U.S. Treasury, government agencies and corporations: Within one year $ 542,476 5,377 188 547,665 After one, 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 ---------------------------------------------------------------------------------------------------------------------- Total investment securities available-for-sale $ 6,484,621 8,516 79,126 6,414,011 ====================================================================================================================== 1995 ------------------------------------------------------------------ Gross Gross Amortized unrealized unrealized cost gains losses Fair value ---------------------------------------------------------------------------------------------------------------------- Obligations of U.S. Treasury, government agencies and corporations: Within one year $ 9,001,131 - 26,133 8,974,998 After one, but within five years 1,000,000 - 7,400 992,600 After ten years 1,116,701 - 15,669 1,101,032 ---------------------------------------------------------------------------------------------------------------------- Total 11,117,832 - 49,202 11,068,630 Collateralized mortgage obligations: After ten years 1,948,619 - 55,514 1,893,105 ---------------------------------------------------------------------------------------------------------------------- Total investment securities available-for-sale $ 13,066,451 - 104,716 12,961,735 ======================================================================================================================
(Continued) -55- 58 CENTURY BANCSHARES, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements ================================================================================ (4) CONTINUED Expected maturities may differ from contractual maturities of mortgage backed securities and collateralized mortgage obligations because borrowers have the right to prepay their obligations at any time. Investment securities held-to-maturity at December 31, 1996 and 1995 are summarized as follows:
1996 -------------------------------------------------------------------- Gross Gross Amortized unrealized unrealized cost gains losses Fair value ------------------------------------------------------------------------------------------------------------------- Municipal securities-maturing Within one year $ 99,956 527 - 100,483 After one, but within five years 64,939 617 - 65,556 ------------------------------------------------------------------------------------------------------------------- Total 164,895 1,144 - 166,039 Federal Reserve Bank stock 119,350 - - 119,350 Federal Home Loan Bank stock 674,000 - - 674,000 ------------------------------------------------------------------------------------------------------------------- $ 958,245 1,144 - 959,389 =================================================================================================================== 1995 -------------------------------------------------------------------- Gross Gross Amortized unrealized unrealized cost gains losses Fair value ------------------------------------------------------------------------------------------------------------------- Municipal securities-maturing Within one year $ 85,000 170 - 85,170 After one, but within five years 164,829 1,802 - 166,631 ------------------------------------------------------------------------------------------------------------------- Total 249,829 1,972 - 251,801 Federal Reserve Bank stock 119,350 - - 119,350 Federal Home Loan Bank stock 347,700 - - 347,700 ------------------------------------------------------------------------------------------------------------------- $ 716,879 1,972 - 718,851 ===================================================================================================================
Investment securities available for sale carried at $2,144,283 and $2,000,866 at December 31, 1996 and 1995, respectively, were pledged to secure public deposits and for other purposes as required. No investment securities were sold during 1996. Realized losses on sales of securities available for sale during 1995 and 1994 were $3,197 and $11,748, respectively. (Continued) -56- 59 CENTURY BANCSHARES, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements ================================================================================ (4) CONTINUED 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. (5) LOANS RECEIVABLE The loan portfolio consists of the following:
December 31, ---------------------------- 1996 1995 ------------------------------------------------------------------------- Commercial $ 17,400,323 13,212,532 Real estate -- residential 20,932,776 27,007,742 Real estate -- commercial 14,001,133 11,910,244 Real estate -- construction 462,685 1,545,143 Consumer 11,509,900 9,985,863 Home equity 6,431,425 5,640,012 ------------------------------------------------------------------------- 70,738,242 69,301,536 Unearned income (61,886) (97,571) ------------------------------------------------------------------------- 70,676,356 69,203,965 Allowance for loan losses (825,876) (740,000) ------------------------------------------------------------------------- Loans, net $ 69,850,480 68,463,965 =========================================================================
Loans on which the accrual of interest has been discontinued amounted to approximately $249,000, $8,000, and $628,000 at December 31, 1996, 1995, and 1994, respectively. Interest lost on these nonaccrual loans was approximately $17,000, $1,000, and $32,000 for 1996, 1995, and 1994, respectively. Interest paid on these nonaccrual loans was approximately $19,851, $3,500, and $13,500 for 1996, 1995, and 1994, respectively. At December 31, 1996, the Bank has one investment in impaired loans of $24,136 for which there was no specific reserve for impairment. Average impaired loans for 1996 were approximately $12,000. (Continued) -57- 60 CENTURY BANCSHARES, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements ================================================================================ (5) CONTINUED Analysis of the activity in the allowance for loan losses is as follows:
Year ended December 31, --------------------------------------- 1996 1995 1994 ------------------------------------------------------------------------------- Balance, beginning of year $ 740,000 740,000 730,000 Provision for loan losses 160,000 26,347 19,431 Loans charged off (256,245) (198,126) (106,105) Recoveries 182,121 171,779 96,674 ------------------------------------------------------------------------------- Balance, end of year $ 825,876 740,000 740,000 ===============================================================================
An analysis of the activity of loans to directors, officers, and their affiliates during the years ended December 31, 1996 and 1995, is as follows:
1996 1995 ------------------------------------------------------------------- Balance, beginning of year $ 3,320,113 2,566,970 Additions 29,961 1,550,080 Payments (1,073,366) (796,937) ------------------------------------------------------------------- Balance, end of year $ 2,276,708 3,320,113 ===================================================================
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. 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, 1996, are collateralized. (Continued) -58- 61 CENTURY BANCSHARES, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements ================================================================================ (5) CONTINUED 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 for the years December ------------------------- 1996 1995 ------------------------------------------------------------------------------------- Financial instruments whose contract amounts represent potential credit risk: Commitments to extend credit $ 19,361,000 13,910,000 Standby letters of credit 658,000 882,000 =====================================================================================
At December 31, 1996, 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. (Continued) -59- 62 CENTURY BANCSHARES, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements ================================================================================ (5) CONTINUED 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, service companies, and the health care profession. Century offers lines of credit, home equity lines, and mortgage loans to these groups. The aggregate total of loans to such groups was approximately $17.7 million, $10.8 million, and $9.4 million respectively, as of December 31, 1996. The aggregate total of loans to such groups was approximately $13.9 million, $9.0 million, and $9.1 million respectively, as of December 31, 1995. The amount of such loans which are past due or considered by management to be potential problem loans is not material. (6) LEASEHOLD IMPROVEMENTS, FURNITURE, AND EQUIPMENT Leasehold improvements, furniture, and equipment consist of the following:
December 31, ----------------------------- 1996 1995 -------------------------------------------------------------------------------- Leasehold improvements $ 1,248,990 1,233,384 Furniture and equipment 2,398,978 1,904,090 -------------------------------------------------------------------------------- 3,647,968 3,137,474 Less accumulated depreciation and amortization (2,089,721) (1,683,418) -------------------------------------------------------------------------------- Balance, end of year $ 1,558,247 1,454,056 ================================================================================
Depreciation and amortization expense was $407,175, $151,471, and $77,377 for 1996, 1995, and 1994, respectively. (Continued) -60- 63 CENTURY BANCSHARES, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements ================================================================================ (7) DEPOSITS Major classifications of deposits consist of the following:
December 31, -------------------------------- 1996 1995 ----------------------------------------------------------------------------- Noninterest-bearing -- demand deposits $ 24,064,454 24,712,204 ----------------------------------------------------------------------------- Interest-bearing: NOW accounts 13,852,112 15,132,526 Savings accounts 3,594,587 3,703,943 Money market accounts 24,231,842 22,144,836 Certificates of deposit: Less than $100,000 10,072,924 10,930,074 $100,000 and over 15,169,291 13,915,779 ----------------------------------------------------------------------------- 66,920,756 65,827,158 ----------------------------------------------------------------------------- Total deposits $ 90,985,210 90,539,362 =============================================================================
Certificates of deposit of $22,204,859 have remaining maturities of one year or less. Certificates of deposit with a remaining term of more than one year are as follows:
Year ending December 31, ------------------------------------------------------- 1998 $ 672,238 1999 1,335,025 2000 792,887 2001 232,820 2002 - Thereafter 4,386 ------------------------------------------------------- $ 3,037,356 =======================================================
On September 16, 1994, Century Bank acquired deposit accounts of approximately $9.1 million, for which it paid a premium of $366,000. The premium is amortized over the estimated remaining lives of the deposit account relationships on a straight-line basis. The amount of accumulated amortization is $90,928 at December 31, 1996. (Continued) -61- 64 CENTURY BANCSHARES, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements ================================================================================ (8) 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, ------------------------------------------- 1996 1995 1994 -------------------------------------------------------------------------------------------------- Federal Home Loan Bank Ending balance $ 7,750,000 2,000,000 2,200,000 Daily average balance for the period 4,559,202 2,924,163 706,739 Maximum outstanding balance at a month-end during the period 7,800,000 4,000,000 3,500,000 Daily average interest rate for the period 5.99 % 5.46 % 4.24 % Average interest rate on period end balance 6.73 % 6.10 % 6.88 % Treasury Tax and Loan Account Ending balance 715,877 1,807,909 683,836 Daily average balance for the period 392,740 473,062 394,396 Maximum outstanding balance at a month-end during the period 829,352 710,501 683,836 Daily average interest rate for the period 4.64 % 4.60 % 3.48 % Average interest rate on period and balance 5.16 % 2.00 % 2.75 %
FHLB advances with original maturities in excess of one year are summarized as follows:
December 31, -------------------------- 1996 1995 ---------------------------------------------------------------- 6.60% fixed rate, due 1999 $ 300,000 - 6.85% fixed rate, due 2001 300,000 - 6.57% fixed rate, due 2001 1,600,000 - 6.66% fixed rate, due 2002 2,000,000 - 6.30% fixed rate, due 2006 800,000 - 7.34% fixed rate, due 2006 1,000,000 - 6.94% fixed rate, due 2006 850,000 - ---------------------------------------------------------------- $ 6,850,000 - ================================================================
(Continued) -62- 65 CENTURY BANCSHARES, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements ================================================================================ (8) CONTINUED The Bank has been advised by the FHLB that it has a total credit availability of $13.3 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, 1996, the Bank's available credit from the FHLB was $5.55 million. In connection with its borrowings from the FHLB, the Bank is required to own FHLB stock. At December 31, 1996, the Bank's investment in FHLB stock had a par and carrying value of $674,000 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. (9) STOCKHOLDERS' EQUITY 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. Each Unit consisted of one share of Common Stock and one Warrant. The offering price was $5.75 per Unit. Each Warrant entitles the holder thereof to purchase one share of Common Stock at a price of $5.75 per share, subject to adjustment. 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. Holders of the Company' Series A Cumulative Convertible Preferred Stock were given the opportunity to exchange their Preferred Stock for Units at an exchange ratio of 1.305 Units per share of Preferred Stock. At the time of the Offering, there were 61,327 shares of Preferred Stock outstanding. A total of 27,449 shares of Preferred Stock were exchanged, resulting in the issuance of 35,814 Units and the payment of $40 to redeem fractional shares. The remaining 138,098 Units were sold for cash, yielding net proceeds to the Company of $711,187 after payment of costs associated with the Offering. The Company used a portion of such proceeds to redeem the remaining 33,878 shares of Preferred Stock, which was callable at $7.50 per share. (Continued) -63- 66 CENTURY BANCSHARES, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements ================================================================================ (10) 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, 1996, after adjusting for stock dividends and stock option activity, there are 159,685 shares of stock reserved for issuance pursuant to the 1994 Plan, of which 104,954 shares are reserved for outstanding options and 54,731 shares are reserved for future option grants. These options are granted for a term of 7 years to directors with immediate vesting, and 10 years to employees with 25 percent of the original grant vesting after each six, eighteen, thirty and forty-two months of continued service. Both the price per option and number of options available are adjusted for dividends. 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, 1996, after adjusting for stock dividends and stock option activity, there are 43,363 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, 1996, 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, and March 31, 1995, and 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. (Continued) -64- 67 CENTURY BANCSHARES, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements ================================================================================ (10) CONTINUED Stock option transactions for the years ended December 31, 1996, 1995, and 1994, are summarized as follows:
1996 1995 1994 ------------------ -------------------- ------------------- Weighted- Weighted- Weighted- average average average exercise exercise exercise Fixed options Shares price Shares price Shares price ------------------------------------------------------------------------------------------------------ Outstanding at beginning of year 152,250 $3.49 139,926 $3.26 91,209 $3.31 Granted 33,985 6.00 34,955 5.75 66,687 3.65 Exercised (26,934) 3.16 (14,252) 2.80 (15,572) 2.13 Forfeited (10,984) 5.18 (8,379) 7.18 (2,398) 5.40 --------- --------- --------- Outstanding at end of year 148,317 4.00 152,250 3.49 139,926 3.26 ========= ========= ========= Options exercisable at year-end 134,840 3.85 131,285 3.37 115,719 3.18 ========= ========= ========= Weighted-average fair value of options granted $2.191 $1.909 N/A ========= ========= =========
The following table summarizes information about stock options outstanding at December 31, 1996:
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 -------------------------------------------------------------------------------------------------------- $1.61 to $2.22 33,804 1.2 $1.92 33,804 $1.92 $2.82 to $3.83 31,453 3.3 2.98 30,753 2.97 $4.23 to $5.37 53,981 4.9 4.80 48,380 4.78 $6.00 29,079 9.5 6.00 21,903 6.00 ----------- ----------- $1.61 to $6.00 148,317 4.6 4.00 134,840 3.85 =========== ===========
(Continued) -65- 68 CENTURY BANCSHARES, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements ================================================================================ (10) CONTINUED 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 1996 and 1995, respectively: no dividends for either year, expected volatility of 20 percent for both years, risk free interest rates of 6.3 percent and 5.8 percent, and expected lives of 7 and 5 years. 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:
1996 1995 --------------------------------------------------------------------------------- Net income, as reported $ 278,579 612,654 Net income, pro forma 244,585 586,074 Primary earnings per share, as reported .23 .57 Primary earnings per share, pro forma .20 .55
Pro forma net income reflects only options granted in 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 cost for options granted prior to January 1, 1995 is not considered. (Continued) -66- 69 CENTURY BANCSHARES, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements ================================================================================ (11) INCOME TAXES The provision for taxes on income for the years ended December 31, 1996, 1995, and 1994, consisted of the following:
1996 1995 1994 ----------------------------------------------------------------------------------------- Current: Federal income tax $ 289,329 627,042 29,600 State income tax 73,503 127,114 (39,416) ----------------------------------------------------------------------------------------- 362,832 754,156 (9,816) Deferred: Federal income tax (benefit) (68,715) (370,563) 289,682 State income tax (benefit) (19,418) (72,148) 93,680 ----------------------------------------------------------------------------------------- (88,133) (442,711) 383,362 ----------------------------------------------------------------------------------------- Total income tax $ 274,699 311,445 373,546 =========================================================================================
The difference between the statutory federal income tax rates and the effective income tax rates for 1996, 1995, and 1994, are as follows:
1996 1995 1994 -------------------------------------------------------------------------------------------------- Statutory federal income tax rate 34.0 % 34.0 34.0 State income taxes, net of federal benefit 6.4 3.5 4.0 Nondeductible expenses 8.1 - 0.7 Other 1.1 (3.8) - -------------------------------------------------------------------------------------------------- Effective income tax rate 49.6 33.7 38.7 ==================================================================================================
(Continued) -67- 70 CENTURY BANCSHARES, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements ================================================================================ (11) CONTINUED 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, 1996 and 1995:
1996 1995 ---------------------------------------------------------------------------------------------------------- Assets: Fixed assets $ 107,629 109,032 Book loan loss reserve 428,698 432,395 Deferred rent expense 57,869 71,343 Deferred loan fees 25,113 39,936 Vacation pay accrual 21,996 29,631 Directors' deferred compensation 188,412 145,433 Goodwill 7,389 - ---------------------------------------------------------------------------------------------------------- Deferred tax assets 837,106 827,770 ---------------------------------------------------------------------------------------------------------- Liabilities: Federal Home Loan Bank stock dividends (11,484) (11,583) Tax bad debt reserve (207,305) (269,393) Unrealized losses on investments designated as available-for-sale recognized for tax purposes (5,897) (37,043) Other (86,327) (71,791) ---------------------------------------------------------------------------------------------------------- Deferred tax liabilities (311,013) (389,810) ---------------------------------------------------------------------------------------------------------- Net deferred tax asset (liability) attributable to operations 526,093 437,960 Unrealized losses on investments available-for-sale charged directly to stockholders' equity 5,897 36,650 ---------------------------------------------------------------------------------------------------------- Net deferred tax asset $ 531,990 474,610 ===========================================================================================================
Net deferred tax assets of $531,990 and $474,610 at December 31, 1996 and 1995, 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. (Continued) -68- 71 CENTURY BANCSHARES, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements ================================================================================ (12) PROFESSIONAL FEES TO RELATED PARTIES Included in professional fees are legal fees paid to law firms whose partners are directors of the Company or the Bank, totaling approximately $139,611, $102,000, and $81,000 for the years ended December 31, 1996, 1995, and 1994, respectively. (13) 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 $21,000 for each of the years ended December 31, 1996, 1995, and 1994. (14) COMMITMENTS 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 $327,400, $323,600, and $301,000 for the years ended December 31, 1996, 1995, and 1994, respectively. Total future minimum rental payments at December 31, 1996, are as follows:
Year ending December 31, ---------------------------------------------------- 1997 $ 387,000 1998 401,000 1999 370,000 2000 367,000 Thereafter 680,000 ---------------------------------------------------- $ 2,205,000 ====================================================
(15) DIVIDENDS FROM SUBSIDIARY Dividends paid to the Company by Century Bank are subject to restrictions by regulatory agencies. As of December 31, 1996, approximately $1,544,000 was available to be paid to the Company in dividends from Century Bank, pursuant to such regulatory restrictions. As described in note 15, 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. (Continued) -69- 72 CENTURY BANCSHARES, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements ================================================================================ (16) 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, 1996, that the Bank meets all capital adequacy requirements to which it is subject. (Continued) -70- 73 CENTURY BANCSHARES, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements ================================================================================ (16) CONTINUED As of December 31, 1996, 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, 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 institution's category. The following table presents 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, 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% As of December 31, 1995 Total Capital (to Risk Weighted Assets): Century Bancshares 6,852,237 10.34% $ 5,303,124 8.00% $ N/A N/A Century National Bank 6,917,391 10.47% 5,287,440 8.00% 6,609,300 10.00% Tier 1 Capital (to Risk Weighted Assets): Century Bancshares 6,112,237 9.22% 2,651,562 4.00% N/A N/A Century National Bank 6,177,391 9.35% 2,643,720 4.00% 3,965,580 6.00% Tier 1 Capital (to Average Assets): Century Bancshares 6,112,237 6.80% 3,596,085 4.00% N/A N/A Century National Bank 6,177,391 6.88% 3,591,560 4.00% 4,489,450 5.00%
(Continued) -71- 74 CENTURY BANCSHARES, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements ================================================================================ (17) PARENT COMPANY-ONLY FINANCIAL STATEMENTS The Century Bancshares, Inc. (parent company-only) condensed financial statements are as follows:
Statements of Financial Condition ------------------------------------------------------------------------------------------------------- December 31, 1996 and 1995 ASSETS 1996 1995 ------------------------------------------------------------------------------------------------------- Cash and cash equivalents $ 29,121 56,769 Investment in Century Bank 6,856,926 6,430,174 Other assets 112,668 112,668 ------------------------------------------------------------------------------------------------------- $ 6,998,715 6,599,611 ======================================================================================================= LIABILITIES AND STOCKHOLDERS' EQUITY ------------------------------------------------------------------------------------------------------- Liabilities: Notes payable $ - - Other liabilities 248,674 234,591 ------------------------------------------------------------------------------------------------------- 248,674 234,591 ------------------------------------------------------------------------------------------------------- Stockholders' equity: Preferred stock - - Common stock 1,146,028 1,046,047 Additional paid-in capital 4,870,856 4,410,876 Retained earnings 779,057 976,161 Unrealized loss on investment securities available-for-sale, net of tax effect (45,900) (68,064) ------------------------------------------------------------------------------------------------------- 6,750,041 6,365,020 ------------------------------------------------------------------------------------------------------- $ 6,998,715 6,599,611 =======================================================================================================
(Continued) -72- 75 CENTURY BANCSHARES, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements ================================================================================ (17) CONTINUED
Statements of Operations ------------------------------------------------------------------------------------------------------------- Years ended December 31, 1996, 1995, and 1994 1996 1995 1994 ------------------------------------------------------------------------------------------------------------- Income: Dividends from Century Bank $ - - 140,000 Other income 1,659 929 1,336 ------------------------------------------------------------------------------------------------------------- 1,659 929 141,336 ------------------------------------------------------------------------------------------------------------- Expenses: Professional fees 111,754 112,663 - Interest expense - - 4,246 Other expenses 15,914 50,915 17,291 ------------------------------------------------------------------------------------------------------------- 127,668 163,578 21,537 ------------------------------------------------------------------------------------------------------------- Net income (loss) before income tax benefit and equity in undistributed earnings of bank subsidiary (126,009) (162,649) 119,799 Income tax benefit - (55,702) (8,203) ------------------------------------------------------------------------------------------------------------- Net income before equity in undistributed earnings of bank subsidiary (126,009) (106,947) 128,002 Equity in undistributed earnings of Century Bank 404,588 719,601 462,902 ------------------------------------------------------------------------------------------------------------- Net income $ 278,579 612,654 590,904 =============================================================================================================
(Continued) -73- 76 CENTURY BANCSHARES, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements ================================================================================ (17) CONTINUED
Statements of Cash Flows --------------------------------------------------------------------------------------------------- Years ended December 31, 1996, 1995, and 1994 1996 1995 1994 --------------------------------------------------------------------------------------------------- Cash flows from operating activities: Net income $ 278,579 612,654 590,904 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Undistributed earnings of Century Bank (404,588) (719,601) (462,902) Decrease in other assets - 134,416 174,434 Increase (decrease) in other liabilities 14,083 (178,584) 52,847 --------------------------------------------------------------------------------------------------- Net cash provided by (used in) operating activities (111,926) (151,115) 355,283 --------------------------------------------------------------------------------------------------- Cash flows from investing activities: Capital contributions to Century Bank - (400,000) - --------------------------------------------------------------------------------------------------- Net cash used in investing activities - (400,000) - --------------------------------------------------------------------------------------------------- Cash flows from financing activities: Repayments under notes payable - - (207,000) Repurchase of preferred stock - (254,085) (7,560) Issuance of common stock 85,156 734,634 5,113 Preferred stock dividends paid (878) (40,184) (36,796) --------------------------------------------------------------------------------------------------- Net cash provided (used) by financing activities 84,278 440,365 (246,243) --------------------------------------------------------------------------------------------------- Net (decrease) increase in cash and cash equivalents (27,648) (110,750) 109,040 Cash and cash equivalents, beginning of year 56,769 167,519 58,479 --------------------------------------------------------------------------------------------------- Cash and cash equivalents, end of year $ 29,121 56,769 167,519 =================================================================================================== Supplemental disclosures of cash flow information: Interest paid $ - - 4,246 Income taxes paid (refunded) - 11,222 (88,190) ===================================================================================================
(Continued) -74- 77 CENTURY BANCSHARES, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements ================================================================================ (18) FAIR VALUES OF FINANCIAL INSTRUMENTS Statement of Financial Accounting Standards No. 107, Disclosure 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 and interest-bearing deposits with other banks, and federal funds sold the carrying amount approximates fair value. INVESTMENT SECURITIES AND MORTGAGE-BACKED SECURITIES For these instruments, fair values are based on published market or dealer quotes. LOANS, NET The fair value of loans is estimated by discounting the future cash flows, including estimated prepayments of principal, using the current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities. ACCRUED INTEREST RECEIVABLE The carrying amount approximates fair value. 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. (Continued) -75- 78 CENTURY BANCSHARES, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements ================================================================================ (18) CONTINUED 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. ACCRUED INTEREST PAYABLE The carrying amount approximates fair value. 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 is not material. The estimated fair values of The Company's financial instruments at December 31, 1996 follows:
Carrying Fair ASSETS value value -------------------------------------------------------------------------------------------------- Cash and interest-bearing deposits with other banks $ 8,363,911 8,363,911 Federal funds sold 11,436,000 11,436,000 Interest-bearing deposits with other banks 6,823,077 6,823,077 Investment securities 7,372,256 7,373,400 Loans, net 69,850,480 69,867,616 Accrued interest receivable 509,567 509,567 LIABILITIES -------------------------------------------------------------------------------------------------- Noninterest-bearing deposits $ 24,064,454 24,064,454 Interest-bearing deposits 66,920,756 67,053,793 Other borrowings 8,465,877 8,465,877 Accrued interest payable 185,615 185,615
(Continued) -76- 79 CENTURY BANCSHARES, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements ================================================================================ (19) SUBSEQUENT EVENT On February 1, 1997, the Company signed a lease to open a third branch of its subsidiary, Century National Bank, in McLean, Virginia. This new branch was approved by the regulatory authority and will allow Century to establish its presence in the suburbs and expand its opportunities to provide loans and gather deposits. ================================================================================ -77- 80 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 1996 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, -78- 81 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. -79- 82 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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42 Consolidated Statements of Financial Condition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43 Consolidated Statements of Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44 Consolidated Statements of Stockholders' Equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46 Consolidated Statements of Cash Flows . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47 Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49
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. 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 -80- 83 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). 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. -81- 84 (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. 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, 1996. 27* Financial Data Schedule. - ------------------ * Filed herewith. (b) REPORTS ON FORM 8-K. No reports on Form 8-K were filed during the quarter ended December 31, 1996. -82- 85 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 Dated: March 31, 1997. 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 28 day of March, 1997.
Signature Title --------- ----- /s/ JOSEPH S. BRACEWELL Chairman of the Board, President - --------------------------- and Chief Executive Officer Joseph S. Bracewell (Principal Financial and Accounting Officer) Director - --------------------------- George Contis /s/ JOHN R. COPE* Director - --------------------------- *John R. Cope /s/ BERNARD J. CRAVATH* Director - --------------------------- *Bernard J. Cravath
-83- 86
Signature Title --------- ----- - ---------------------------------- Director Neal R. Gross /s/ JOSEPH H. KOONZ* Director - ---------------------------------- *Joseph H. Koonz, Jr. /s/ WILLIAM McKEE* Director - ---------------------------------- *William McKee /s/ WILLIAM C. OLDAKER* Director - ---------------------------------- *William C. Oldaker *By:./s/ Joseph S. Bracewell ------------------------------ Attorney-in-Fact
SUPPLEMENTAL INFORMATION TO BE FURNISHED WITH REPORTS FILED PURSUANT TO SECTION 15(d) OF THE ACT BY REGISTRANTS WHICH HAVE NOT REGISTERED SECURITIES PURSUANT TO SECTION 12 OF THE ACT. As of the date of the filing of this Annual Report on Form 10-K for the fiscal year ended December 31, 1996, the Registrant has not delivered any annual report or proxy material to security holders. The Registrant anticipates delivering proxy material to security holders relating to the Registrant's Annual meeting of Security Holders within the next 30 days. At such time, the registrant shall file copies of such proxy material with the Securities and Exchange Commission. If an annual report is delivered to security holders, the Registrant shall furnish copies of such material, for information purposes only, with the Commission. -84- EX-10.12 2 SUB LEASE AGREEMENT 1 EXHIBIT 10.12 SUBLEASE AGREEMENT BY AND BETWEEN CHEVY CHASE BANK, F.S.B., Sublessor AND CENTURY NATIONAL BANK Sublessee for premises at Suite 100 8251 Greensboro Drive McLean, Virginia 2 TABLE OF CONTENTS Section Page - ------- ---- 1. PARTIES.................................................................................................3 2. MASTER LEASE............................................................................................3 3. PREMISES................................................................................................3 4. WARRANTY BY SUBLESSOR...................................................................................3 5. INITIAL LEASE TERM......................................................................................3 6. BASE RENT...............................................................................................3 7. MAINTENANCE AND REPAIRS.................................................................................4 8. ALTERATIONS.............................................................................................4 9. SIGNS...................................................................................................5 10. SECURITY DEPOSIT........................................................................................5 11. USE OF THE PREMISES.....................................................................................5 12. ASSIGNMENT AND SUBLETTING...............................................................................5 13. ATTORNE.................................................................................................6 14. NOTICES.................................................................................................6 15. DEFAULT PROVISIONS......................................................................................7 16. BANKRUPTCY TERMINATION PROVISION........................................................................8 17. SUBLESSEE'S INSURANCE...................................................................................8 18. PARKING.................................................................................................9 19. HOLDING OVER............................................................................................9 20. LANDLORD'S CONSENT......................................................................................9 21. OTHER PROVISIONS OF SUBLEASE............................................................................9 22. AGENCY DISCLOSURE......................................................................................10 23. COMMISSION.............................................................................................10
EXHIBIT A -- Master Lease EXHIBIT B -- Overlandlord's Consent 3 CHEVY CHASE BANK, F.S.B. SUBLEASE 1. PARTIES. This Sublease, dated as of November _____, 1996 is made between CHEVY CHASE BANK, F.S.B. ("Sublessor"), and CENTURY NATIONAL BANK, a national banking association, having a principal address of 1875 Eye Street, N.W., Washington, D.C. 20006 ("Sublessee"). 2. MASTER LEASE. Sublessor is the lessee under a written lease dated April 7, 1989 wherein Greensboro Associates Limited Partnership ("Lessor") leased to Sublessor approximately One Thousand Eight Hundred One (1,801) square feet of rentable area located on the first floor in the building known as Edmund Jennings Randolph Building at 8251 Greensboro Drive, McLean, Virginia, (Master Premises). 3. PREMISES. Sublessor hereby subleases to Sublessee on the terms and conditions set forth in this Sublease the following portion of the Master Premises; approximately One Thousand Eight Hundred One (1,801) square feet of rentable area located on the first floor at 8251 Greensboro Drive, McLean, Virginia (the "Premises"). 4. WARRANTY BY SUBLESSOR. Sublessor warrants and represents to Sublessee that the Master Lease has not been amended or modified except as expressly set forth herein. 5. INITIAL LEASE TERM. 5.1 The term of this Sublease shall commence the later of December 1, 1996, the date of Overlandlord's Consent or delivery of the Premises ("Commencement Date"), and end on March 31, 1999 ("Termination Date"), unless otherwise sooner terminated in accordance with the provisions of this Sublease. Possession of the Premises ("Possession") shall be delivered to Sublessee on the commencement of the Term. If Sublessor permits Sublessee to take Possession prior to the commencement of the Term, such early Possession shall not advance the Termination Date and shall be subject to the provisions of the Sublease, including without limitation the payment of rent. 5.2 Lease Year shall mean a period of twelve (12) consecutive months commencing on the Commencement Date and each successive twelve (12) month period thereafter; provided, however, that if the Commencement Date is not the first day of a month, then the second Lease Year shall commence on the first day of the month in which the first anniversary of the Sublease Commencement Date occurs. 6. BASE RENT. 6.1 Minimum Rent. Sublessee shall pay to Sublessor as minimum rent, without deduction, setoff, notice, or demand, at 8401 Connecticut Avenue, Chevy Chase, Maryland 20815, ATTN: Leasing Department, or such other place as Sublessor shall designate from time to time by notice to Sublessee, the sum of Three Thousand Four Hundred Fifty-One and 92/100 Dollars ($3,451.92) per month (which amount is based on an annual Base Rental Rate of Twenty-Three and 00/100 ($23.00) Dollars per square foot of rentable area of the Premises), in advance on the first day of each month of the Term, without deduction, setoff, notice or demand. On the first day of the second and each subsequent Lease Year, the Base Rent then in effect shall be increased Three (3%) Percent annually. Concurrently with Sublessee's execution of this Sublease Agreement, Sublessee shall pay an amount equal to one (1) monthly installment of the Base Rent payable during the first Lease Year representing the first month's Base Rent due under this Sublease. If the Term begins or ends on a day other than the first or last day of a month, the rent for the partial months shall be prorated in a per diem basis. 6.2 All sums payable by Sublessee shall be paid to Sublessor in legal tender of the United States, without offset, deduction or demand, at the address to which written notices to Sublessor are to be given or to such other party or such other address as Sublessor may designate in writing. Sublessor's acceptance of rent after it shall have become due and payable shall not excuse a delay upon subsequent occasions or constitute a waiver of any of Sublessor's rights. 6.3 Operating Costs. Sublessor is required under the Master Lease to pay to Lessor all of the Premises pro rata share of the expenses in excess of $6.00/Square Feet of operating the building and/or project of which the Premises are a part ("Operating Costs"), including but not limited to taxes, utilities, or insurance. Therefore in accordance with the Master Lease, Sublessee shall pay to Sublessor as additional charges its proportionate share of Operating Costs above actual expenses for the year commencing January 1, 1996 and ending December 31, 1996 incurred during the Term. Sublessee covenants and agrees to pay, as additional rent (herein sometimes called "Additional charges"), all sums of money or charges of whatsoever kind, nature or description, if any (except Base Rent), as shall be required to be paid by Sublessee pursuant to the terms of this Sublease, whether or not the same is specifically designated herein as additional rent. Such additional rent shall be payable as and when Operating Costs are payable by Sublessor to Lessor. If the Master Lease provides for the payment by 4 Sublessor of Operating Costs on the basis of an estimate thereof, then as and when adjustments between estimated and actual Operating Costs are made under the Master Lease, the obligations of Sublessor and Sublessee hereunder shall be adjusted in a like manner; and if any such adjustment shall occur after the expiration of earlier termination of the Term, then the obligations of Sublessor and Sublessee under the Subsection 6.2 shall survive such expiration or termination. Sublessor shall furnish Sublessee with copies of all statements submitted by Lessor of actual or estimated Operating Costs during the Term. 7. MAINTENANCE AND REPAIRS. Sublessee shall keep and maintain the Premises and all fixtures and equipment located therein in clean, safe and sanitary condition, shall take good care thereof and make all necessary repairs thereto, shall suffer no waste or injury thereto, and at the expiration or earlier termination of the Lease Term, shall surrender the Premises in the same order and condition in which they were on the Commencement Date, ordinary wear and tear and unavoidable damage by the elements excepted. All injury, breakage and damage to the Premises and to any other part of the Premises or the Building caused by any act or omission of Sublessee or any invitee, agent, employee, subtenant, assignee, contractor, client, family member, licensee, customer or guest of Sublessee (collectively "Invitees"), shall be repaired by and at Sublessee's expense, except that Sublessor and/or Lessor shall have the right at Sublessor's/Lessor's option to make any such repair and to charge Sublessee for all costs and expenses incurred in connection therewith if Sublessee is not diligently pursuing such repair. 8. ALTERATIONS. 8.1 Sublessee shall not make or permit anyone to make any Alteration in or to the Premises without Sublessor's and Lessor's prior written consent, which consent shall not be unreasonably withheld, conditioned or delayed. Any Alteration made by Sublessee shall be made: (a) in a good, workmanlike, first-class and prompt manner; (b) using new material only; (c) by a contractor and in accordance with plans and specifications approved in writing by Sublessor and Lessor; (d) in accordance with all applicable legal requirements and requirements of any company insuring the Building; (e) after obtaining public liability and workmen's compensation insurance policies approved in writing by Sublessor and Lessor; and (f) after delivering to Sublessor written, unconditional waivers of mechanics' and materialmen's liens against the Premises and the Building from all proposed contractors, subcontractors, laborers and material suppliers for all work and materials in connection with such Alteration. If any lien (or a petition to establish a lien) is filed in connection with any such Alteration, then such lien (or petition) shall be discharged by Sublessee at Sublessee's expense within ten (10) days thereafter by the payment thereof or filing of a bond acceptable to Sublessor. Sublessor's consent to the making of an Alteration shall not be deemed to constitute Sublessor's consent to subject its interest in the Premises or the Building to any liens which may be filed in connection therewith. 8.2 Permits. Sublessee shall, at its own expense, promptly obtain from the appropriate governmental authorities any and all permits, licenses and the like required to permit Sublessee to occupy the Premises for the purposes herein stated. This requirement shall not relieve the Sublessee of its liability for rent from the Commencement Date hereinabove set forth. 8.3 If any Alteration is made without Sublessor's and Lessor's prior written consent, Sublessor and Lessor shall have the right at Sublessee's expense to remove and correct such Alteration and restore the Premises to their condition immediately prior thereto or to require Sublessee to do the same. All Alterations to the Premises made by either party shall immediately become Sublessor's and Lessor's property and shall remain upon and be surrendered at the expiration or earlier termination of the Lease Term, except that Sublessee shall be required to remove all Alterations made by Sublessee to the Premises which Sublessor and/or Lessor designates in writing for removal at the time of consent. Notwithstanding the foregoing, if Sublessee is not in default under this Sublease, Sublessee shall have the right to remove, prior to the expiration or earlier termination of the Sublease Term, all movable furniture, furnishings and equipment installed in the Premises solely at Sublessee's expense. Movable furniture, furnishings and equipment shall be deemed to exclude any item which normally would be removed from the Premises with the assistance of any tool or machinery other than a dolly. Sublessor and Lessor shall have the right to repair at Sublessee's expense all damage and injury to the Premises or the Building caused by any such removal or to require Sublessee to do the same. If any furniture, furnishing or equipment is not removed by Sublessee prior to the expiration or earlier termination of the Initial Lease Term, then, excluding all Sublessee's trade fixtures, the same shall become Sublessor's and/or Lessor's property and shall be surrendered with the Premises as a part thereof; provided, however, that Sublessor and/or Lessor shall have the right to remove from the Premises at Sublessee's expense such furniture, furnishings or equipment and any Alteration which Sublessor and/or Lessor designated in writing for removal at the time of consent to such alteration. 8.4 Without limiting any other provision of this Sublease of the Lease, Sublessee shall take good care of the Premises, suffer no waste or injury thereto and shall comply with all laws, orders and regulations which are imposed on Sublessor, as tenant under the Lease and are applicable to the Premises, the Building and Sublessee's use thereof. 8.5 On or before the Termination Date, Subtenant shall remove from the Premises at its sole expense, all of its personal property, Sublessee's trade fixtures and other personal property owned by Sublessee and installed in the Premises. Upon removal of Sublessee's property from the Premises, Sublessee shall, at its sole expense, promptly repair and restore the Premises to the condition existing prior to the placement of such personal property upon the Premises and / or the installation of such improvements and alterations, and repair any damage to the Premises and / or the Building related to such removals, so as to restore the Premises to the condition required under Subsection 8.6. All property permitted or required to be removed by Sublessee upon the Termination Date or sooner termination of this Sublease remaining on the Premises after such Termination 5 Date or sooner termination shall be deemed abandoned and may, at the election of Sublessor, either be retained as Sublessor's property or may be removed from the premises by Sublessor, at Sublessee's expense. Any such expenses shall be paid by Sublessee to Sublessor upon demand therefor, and shall be deemed rent collectible by Sublessor in the same manner and with the same remedies as though such sums constituted basic monthly rent or Additional Sublease Rent reserved hereunder. 8.6 Upon the Termination Date or sooner termination of this Sublease, Sublessee shall quit and surrender the Premises to Sublessor in the condition such Premises were in on the Commencement Date, broom clean, in good order and condition, ordinary wear and tear and damage by fire and other insured casualty excepted. Sublessee agrees to indemnify and save Sublessor harmless from and against any and all loss, cost, expense, or liability resulting from the failure of, or the delay by, Sublessee in so surrendering the Premises on or before the Termination Date, including, without limitation, any claims made by Landlord or any succeeding Sublessee founded on such failure or delay. 9. SIGNS. Any election by Sublessee to install signage shall be in accordance with the Master Lease. 10. SECURITY DEPOSIT. Upon execution of this Sublease, Sublessee shall provide one (1) month's Base Rent as security deposit (the "Security Deposit"). If Sublessee fails to pay rent or other charges when due under the Sublease, or fails to perform any of its other obligations hereunder, Sublessor may use or apply all or any portion of the Security Deposit for the payment of any rent or other amount then due hereunder and unpaid, for the payment of any other sum for which Sublessor may become obligated by reason of Sublessee's default or breach, or for any loss or damage sustained by Sublessor as a result of Sublessee's default or breach. If Sublessor so uses any portion of the Security Deposit, Sublessee shall, within three (3) business days after written demand by Sublessor, restore the Security Deposit to the full amount originally deposited, and Sublessee's failure to do so shall constitute a default under this Sublease. In the event Sublessor assigns its interest in this Sublease, Sublessor shall deliver to its assignee so much of the Security Deposit as is then held by Sublessor. Upon expiration or earlier termination of this Sublease, Sublessor shall return the Security Deposit to Sublessee within thirty (30) days. 11. USE OF THE PREMISES. The Premises shall be used and occupied only for the conduct of its banking business and related financial services. 12. ASSIGNMENT AND SUBLETTING. 12.1 Sublessee shall not assign this Sublease or any of Sublessee's rights or obligations hereunder, sublet or permit anyone to occupy the Premises or any part thereof, or mortgage this Sublease or Sublessee's rights hereunder, without Sublessor's and Lessor's prior written consent. No assignment or transfer of this Sublease may be effected by operation of law or otherwise without Sublessor's and Lessor's prior written consent, which shall not unreasonably be withheld. Sublessor's or Lessor's consent to any assignment, subletting or occupancy thereto or Sublessor's or Lessor's collection or acceptance of rent from any assignee, subtenant or occupant shall not be construed as a waiver or release of Sublessee from any liability hereunder or from the obligation of obtaining Sublessor's and Lessor's prior written consent to any subsequent assignment, subletting or occupancy. Sublessee hereby assigns to Sublessor and Lessor any sums due from any assignee, subtenant or occupant of Sublessee as security for Sublessee's performance of its obligations pursuant to this Sublease, and Sublessee authorizes each such assignee, subtenant or occupant to pay such sums directly to Sublessor or Lessor if such assignee, subtenant or occupant receives written notice from Sublessor specifying that such rent shall be paid directly to Sublessor or Lessor. Sublessor's or Lessor's collection of such rent shall not be construed as an acceptance of such assignee, subtenant or occupant as a tenant. All restrictions and obligations imposed on Sublessee pursuant to this Sublease shall be deemed to extend to any subtenant, assignee or occupant of Sub lessee, and Sublessee shall cause such persons to comply with all such restrictions and obligations. Any sublease, assignment or other transfer shall be effected on forms supplied or approved by Sublessor and Lessor. Sublessee shall pay all expenses incurred by Sublessor and Lessor in connection with Sublessee's request for Sublessor's and Lessor's consent to any assignment, subletting, occupancy or mortgage, including but not limited to any reasonable attorneys' fees incurred in preparing or reviewing documentation related to any such transaction. 12.2 Permitted Assignments. Sublessee shall have the privilege, without the consent of Sublessor but subject to the requirements of subsection 12.7, to assign its interest in this Sublease to any Person who (i) acquires all, or substantially all, of Sublessee's assets, either by merger, consolidation or otherwise, and (ii) has a net worth, determined in accordance with generally accepted accounting principles consistently applied, immediately after the assignment which is at least as great as the net worth of Sublessee (determined in the same manner) immediately before the assignment. 12.3 Subletting to Affiliates. Sublessee shall have the privilege, without the consent of Sublessor but subject to the requirements of subsection 12.7, to sublet all or any part of the Premises to Affiliates of Sublessee. 12.4 Change of Corporate Control. If Sublessee is a corporation, any transfer of any of Sublessee's issued and outstanding capital stock or any issuance of additional capital stock, as a result of which the majority of the issued and outstanding capital stock of Sublessee is held by a Person or Persons who do not hold a majority of 6 the issued and outstanding capital stock of Sublessee on the date of this Sublease, in the case of the original Sublessee, or on the date on which Sublessee acquires the leasehold estate under this Sublease, in the case of a direct or indirect assignee of the original Sublessee, shall be deemed an assignment under this Section 12; provided, however, that this sentence shall not apply to a corporation if all of the outstanding voting stock of such corporation is registered under Sections 12(b) or 12(g) of the Securities Exchange Act of 1934, as amended. If Sublessee is a partnership, any transfer of any interest in the partnership or any other change in the composition of the partnership which results in a change in the control of Sublessee from the Person or Persons controlling the partnership on the date of this Sublease, in the case of the original Sublessee, or on the date on which Sublessee acquires the leasehold estate under this Sublease, in the case of a direct or indirect assignee of the original Sublessee, shall be deemed an assignment under this Section 12. 12.5 Permitted Sublettings. Unless an Event of Default has occurred and is continuing, Sublessor shall not unreasonably withhold or delay Sublessor's consent to sublettings by Sublessee of a part or parts of the Premises, but Sublessor shall not be obligated to consent to a subletting for a use prohibited by Section 11. Each such subletting shall be for undivided occupancy by the subtenant of that part of the floor of the Building affected thereby for the use permitted under this Sublease. Sublessor may, however, withhold such consent if, in Sublessor's reasonable judgment, the proposed subtenant (i) is not engaged in a business consistent with the character and dignity of the Building, (ii) the proposed subtenant does not have sufficient financial resources to perform its obligations under the sublease, or (iii) the proposed subtenant will impose any additional material burden upon Sublessor in the operation of the Building (to an extent greater than the burden to which Sublessor would have been put to if Sublessee continued to use, or used, such part of the Premises for its own purposes) unless Sublessee agrees to pay all additional expenses Sublessor incurs as a result of the additional material burden. 12.6 Subletting Profit. If any portion or portions of the Premises are sublet and if the rent received by Sublessee on account of such subletting exceeds the Basic Rent and Additional Charges, allocated to the space subject to the subleases in the proportion of the area of such space to the Rentable Area, plus actual out-of-pocket expenses incurred by Sublessee in connection with Sublessee's subleasing of such space, including advertising, brokerage commissions and the cost of preparing such space for occupancy by the subtenant (such excess being hereinafter referred to as "Subletting Profit"), then, except as otherwise provided in the next sentence, Sublessee shall pay to Sublessor fifty percent (50%) of Sublessee's Subletting Profit, monthly as received by Sublessee from the subtenant(s). 12.7 Documentation. No permitted assignment or subletting shall be valid unless, within 10 days after the consummation thereof, Sublessee shall deliver to Sublessor (i) in the case of an assignment, (x) a duplicate original instrument of assignment in form reasonably satisfactory to Sublessor, duly executed by Sublessee, and (y) an instrument in form and substance reasonably satisfactory to Sublessor, duly executed by the assignee, in which such assignee shall agree to observe and perform, and to be personally bound by, all of the terms, covenants and conditions of this Sublease on Sublessee's part to be observed and performed, whether or not accruing before or after the date of such assignment and whether or not relating to matters arising before or after such assignment, or (ii) in the case of a subletting, a duplicate original counterpart of the sublease signed by Sublessee and the subtenant. 12.8 If Sublessee desires to assign, sublet or otherwise transfer all or part of the Premises or this Sublease, then Sublessee shall give Sublessor written notice ("Sublessee's Request Notice") of the identity of the proposed assignee or subtenant and its business, the terms of the proposed assignment or subletting, the commencement date of the proposed assignment or subletting (the "Proposed Sublease Commencement Date") and the area proposed to be assigned or sublet (the "Proposed Sublet Space"). Sublessee shall also transmit therewith the most recent financial statement or other evidence of financial responsibility of such assignee or subtenant and a certification executed by Sublessee and such proposed assignee or subtenant stating whether any premium or other consideration is being paid for the proposed assignment or sublease. 12.9 Sublessor shall have the right in its sole discretion to terminate this Sublease with respect to the Proposed Sublet Space by sending Sublessee written notice within fifteen (15) days after Sublessor's receipt of Sublessee's Request Notice. If the Proposed Sublet Space does not constitute the entire Premises and Sublessor elects to terminate this Sublease with respect to the Proposed Sublet Space, then (1) Sublessee shall tender the Proposed Sublet Space to Sublessor on the Proposed Sublease Commencement Date as if the Proposed Sublease Commencement Date had been originally set forth in this Sublease as the expiration date of the Sublease Term with respect to the Proposed Sublet Space, and (2) as to all portions of the Premises other than the Proposed Sublet Space, this Sublease shall remain in full force and effect except that the additional rent payable pursuant to Section 6 and the Base Rent shall be reduced proportionately. Sublessee shall pay all expenses of construction required to permit the operation of the Proposed Sublet Space separate from the balance of the Premises. If the Proposed Sublet Space constitutes the entire Premises and Sublessor elects to terminate this Sublease, Sublessee shall tender the Premises to Sublessor on the Proposed Sublease Commencement Date, and the Sublease Term shall terminate on the Proposed Sublease Commencement Date. 13. ATTORNEYS' FEES. If Sublessor or Sublessee brings an action to enforce the terms hereof or declare rights hereunder, and prevails in any such action, the losing party shall pay the reasonable attorney's fees incurred by prevailing party. 14. NOTICES. All notices and demands which may or are to be required or permitted to be given by either party on the other hereunder shall be in writing. All notices and demands by the Sublessor to Sublessee shall be sent either by 7 hand, by regular overnight carrier, or by United States Mail, postage prepaid, addressed to the Sublessee at the Premises, and to the address hereinbelow, or to such other place as Sublessee may from time to time designate in a notice to the Sublessor. All notices and demands by the Sublessee to Sublessor shall be sent either by hand, by regular overnight carrier, or by United States Mail, postage prepaid, addressed to the Sublessor at the address set forth herein, and to such other person or place as the Sublessor may from time to time designate in a notice to the Sublessee. To Sublessor: Chevy Chase Bank, F.S.B., Leasing Dept. 8401 Connecticut Avenue, Chevy Chase, Maryland 20815 To Sublessee: Century National Bank 1875 Eye Street, N.W. Washington, D.C. 20006 Attention: Joseph S. Bracewell Copy to: John Patrick Brown, Jr., P.C. Attorney at Law 1899 L Street, N.W. Fifth Floor Washington, D.C. 20036-3804 15. DEFAULT PROVISIONS. 15.1 Events of Default. Each of the following events shall be deemed to be, and is referred to in this Sublease as, an "Event of Default": (a) A default by Sublessee in making any payment of Basic Rent or Additional Charges on the day such payment is due and payable which continues for more than five days after Sublessor shall have given Sublessee a written notice specifying such default; (b) The neglect or failure of Sublessee to perform or observe any of the terms, covenants or conditions contained in this Sublease on Sublessee's part to be performed or observed which is not remedied by Sublessee (i) within 15 days after Sublessor shall have given to Sublessee notice specifying such neglect or failure, or (ii) in the case of any such neglect or failure which cannot with due diligence and in good faith be cured within 15 days, within such additional period, if any, as may be reasonably required to cure such default with due diligence and in good faith (it being intended that, in connection with any such default which is not susceptible of being cured with due diligence and in good faith within 15 days, the time within which the Sublessee is required to cure such default shall be extended for such additional period as may necessary for the curing thereof with due diligence and in good faith); (c) The assignment, transfer, mortgaging or encumbering of this Sublease or the subletting of the Premises; (d) The taking of this Sublease or the Subleased Premises, or any part thereof, upon execution or by other process of law directed against Sublessee, or upon or subject to any attachment at the instance of any creditor of or claimant against Sublessee, which execution or attachment shall not be discharged or disposed of within 30 days after the levy thereof; (e) The vacating or abandonment of the Subleased Premises by Sublessee. 15.2 Sublessor's Rights Upon Event of Default. Upon the occurrence of any Event of Default, Sublessor shall have the right, at its election, then or at any time thereafter, either: (a) To give notice to Sublessee that this Sublease will terminate on a date to be specified in such notice, which date shall not be less than three days after such notice, and on the date specified in such notice Sublessee's right to possession of the Subleased Premises shall cease and this Sublease shall thereupon be terminated, but Sublessee shall remain liable as provided in subsection 15.3; (b) Without demand or notice, to reenter and take possession of the Subleased Premises, or any part thereof, and repossess the same as of Sublessor's former estate and expel Sublessee and those claiming through or under Sublessee and remove the effects of both or either, either by summary proceedings, or by action at law or in equity, or by force (if necessary) or otherwise, without being deemed guilty of any manner of trespass and without prejudice to any remedies for arrears of rent or preceding breach of covenant. If Sublessor elects to reenter under paragraph 15.2 (b), Sublessor may terminate this Sublease, or, from time to time, without terminating this Sublease, may relet the Subleased Premises, or any part thereof, as agent for Sublessee for such term or terms and at such rental or rentals and upon such other terms and conditions as Sublessor may deem advisable, with the right to make alterations and repairs to the Subleased Premises. No such reentry or taking of possession of the Subleased Premises by Sublessor shall be construed as an election on Sublessor's part to terminate this Lease unless a written notice of such intention is given to Sublessee under the first paragraph of this subsection 15.2 or unless the termination thereof is decreed by a court of competent jurisdiction. 15.3 Sublessee's Liability for Damages. If Sublessor terminates this Sublease pursuant to subsection 15.2, Sublessee shall remain liable (in addition to accrued liabilities) to the extent legally permissible for (i) the sum of (A) all Basic Rent and Additional Charges provided for in this Sublease until the date this Sublease would have expired had such termination not occurred, and (B) any and all reasonable expenses incurred by Sublessor in reentering the Subleased Premises, repossessing the same, making good any default of Sublessee, painting, altering or dividing the Subleased Premises, putting the same in proper repair, reletting the same (including any and all reasonable attorneys' fees and disbursements and reasonable brokerage fees incurred in so doing), and any and all expenses which Sublessor may incur during the occupancy of any new tenant (other than expenses of a type that are Sublessor's responsibility under the terms of this Sublease); less (ii) the net proceeds of any reletting actually received by Sublessor. Sublessee agrees to pay to Sublessor the difference between items (i) 8 and (ii) above with respect to each month during the Term, at the end of such month. Any suit brought by Sublessor to enforce collection of such difference for any one month shall not prejudice Sublessor's right to enforce the collection of any difference for any subsequent month. In addition to the foregoing, Sublessee shall pay to Sublessor such sums as the court which has jurisdiction thereover may adjudge reasonable as attorneys' fees with respect to any successful legal proceeding or action instituted by Sublessor to enforce the provisions of this Sublease, and Sublessor shall pay to Sublessee such sums as the court which has jurisdiction thereover may adjudge reasonable as attorneys' fees with respect to any successful legal proceeding or action instituted by Sublessee to enforce the provisions of this Sublease. Sublessor shall have the right, at its sole option, to relet the whole or any part of the Subleased Premises for the whole of the unexpired Term, or longer or from time to time for shorter periods, for any rental then obtainable, giving such concessions of rent and making such special repairs and alterations for any new tenant as Sublessor, in its reasonable discretion, may deem advisable. Sublessee's liability under this subsection shall survive the institution of summary proceedings and the issuance of any warrant thereunder. 15.4 Liquidated Damages. If Sublessor terminated this Sublease pursuant to subsection 15.2, Sublessor shall have the right, at any time, at its option, to require Sublessee to pay to Sublessor, on demand, as liquidated and agreed final damages in lieu of Sublessee's liability under subsection 15.3, an amount equal to the difference, discounted to the date of such demand at any annual rate of interest equal to the then-current yield on actively traded U.S. Treasury bonds with 10-year maturities, as published in the Federal Reserve Statistical Release for the week before the date of such termination, between (i) the Basic Rent and Additional Charges, computed on the basis of the then-current annual rate of Basic Rent and Additional Charges and all fixed and determinable increases in Basic Rent, which would have been payable from the date of such demand to the date when this Sublease would have expired, if it had not been terminated, and (ii) the then fair rental value of the Subleased Premises for the same period. Upon payment of such liquidated and agreed final damages, Sublessee shall be released from all further liability under this Sublease with respect to the period after the date of such demand. If, after the Event of Default giving rise to the termination of this Sublease, but before presentation of proof of such liquidated damages, the Subleased Premises, or any part thereof, shall be relet by Sublessor for a term of one year or more, the amount of rent reserved upon such reletting shall be deemed to be the fair rental value for the part of the Subleased Premises so relet during the term of such reletting. 15.5 Acceleration. If (i) Sublessee fails to pay Basic Rent or Additional Charges within five days after the date on which such Basic Rent or Additional Charges are due, and (ii) such failure to pay occurs either for three consecutive months or three times within any period of six consecutive months, Sublessor may, in addition to its other remedies under this Sublease, by notice to Sublessee, declare the Basic Rent payable under this Lease for the next six months (or, at Sublessor's option, for a lesser period) to be due and payable within 10 days after the date of such notice. 16. BANKRUPTCY TERMINATION PROVISION. This Sublease shall automatically terminate and expire, without the performance of any act or the giving of any notice by Sublessor, upon the occurrence of any of the following events: (1) Sublessee's admitting in writing its inability to pay its debts generally as they become due, or (2) the commencement by Sublessee of a voluntary case under the federal bankruptcy laws, as now constituted or hereafter amended, or any other applicable federal or state bankruptcy, insolvency or other similar law, or (3) the entry of a decree or order for relief by a court having jurisdiction in the premises in respect of Sublessee in an involuntary case under the federal bankruptcy laws, as now constituted or hereafter amended, or any other applicable federal or state bankruptcy, insolvency or other similar law, and the continuance of any such decree or order unstayed and in effect for a period of 30 consecutive days, or (4) Sublessee's making an assignment of all or a substantial part of its property for the benefit of its creditors, or (5) Sublessee's seeking or consenting to or its acquiescing in the appointment of, or the taking of possession by, a receiver, trustee or custodian for all or a custodian by, a receiver, trustee or custodian for all or a substantial part of its property, or (6) the entry of a court order without Sublessee's consent, which order shall not be vacated, set aside or stayed within 30 days from the date of entry, appointing a receiver, trustee or custodian for all or substantial part of its property. The provisions of this Section shall be construed with due recognition for the provisions of the federal bankruptcy laws, where applicable, but shall be interpreted in a manner which results in a termination of this Sublease in each and every instance, and to the fullest extent, that such termination is permitted under the federal bankruptcy laws, it being of prime importance to the Sublessor to deal only with Sublessee's who have, and continue to have, a strong degree of financial strength and financial stability. 17. SUBLESSEE'S INSURANCE. 17.1 Insurance Requirements. Sublessee, at Sublessee's sole cost and expense, shall obtain and maintain in effect at all times during the Term or earlier occupancy thereof, a policy of Commercial General Liability Insurance naming Sublessor (and Lessor at the Sublessor's request) as the Additional Insureds, protecting Sublessor, Sublessee and such Additional Insureds against liability for bodily injury, death and property damage occurring upon or in the Subleased Premises, with such policy to afford protection to the limit of not less than $1,000,000 with respect to bodily injury of death or damage to property arising from any one occurrence and $2,000,000 from the aggregate of all occurrences within each policy year. If such policy also covers location other than the Subleased Premises, the policy shall include a provision to the effect that the aggregate limit of $2,000,000 shall apply separately at the Subleased Premises and that the insurer will provide notice to Sublessor if the aggregate is reduced either by payment of claims or the establishment of reserves for claims if the payments or reserves exceed $250,000. If the aggregate limit of $2,000,000 is reduced by the payment of a claim or the establishment of a reserve, Sublessee agrees to take immediate steps to have the aggregate limit restored by endorsement to the existing policy or the purchase of an additional insurance policy which complies with this subsection. 9 17.2 Property Damage Insurance. Sublessee shall, throughout the Term, at its expense, keep Sublessee's alterations and Sublessee's personal property insured against loss or damage by fire with extended coverage in an amount sufficient to prevent Sublessee from becoming a co-insurer. 17.3 Policy Requirements. The insurance policies required to be obtained by Sublessee under this Section: (i) shall be issued by an insurance company of recognized responsibility qualified to do business in the jurisdiction in which the Building is located which is rated VI-A or better by Best's Key Rating Guide or which has an equivalent financial rating from a comparable insurance rating organization, and (ii) in the case of liability insurance, shall be written as primary policy coverage. Neither the issuance of any insurance policy required under this Sublease nor the minimum limits specified herein with respect to Sublessee's insurance coverage shall be deemed to limit or restrict in any way Sublessee's liability arising under or out of this Sublease. 17.4 Evidence of Insurance. With respect to each insurance policy required to be obtained by Sublessee under this Section, on or before the Commencement Date, and at least 30 days before the expiration of the expiring certificate previously furnished, Sublessee shall deliver to Sublessor a certificate of insurance therefore, together with evidence of payment of all applicable premiums for a period of one year. Each insurance policy required to be carried hereunder by or on behalf of Sublessee shall provide (and any certificate evidencing the existence of each such insurance policy shall certify) that such insurance policy shall not be cancelled or amended (other than to increase the amount of coverage) unless Sublessor shall have received 20 days prior written notice of such cancellation or amendment. 17.5 Sublessor's/Lessor's Indemnification. Except for the willful or negligent acts or omission (where applicable law imposes a duty to act) of Sublessor or Lessor or their agents, employees or contractors, Sublessee hereby agrees to indemnify and hold harmless Sublessor or Lessor against any and all claims, losses, actions, damages, liabilities and expenses (including reasonable attorneys' fees and disbursements) that (i) arise from or are in connection with Sublessee's possession, use, occupancy, management, repair, maintenance or control of the Subleased Premises, or any portion thereof, the making or removal of alterations and the performance of all related construction work, or in any other manner that relate to the business conducted by Sublessee in the Subleased Premises, or (ii) arise from or are in connection with any willful or negligent act or omission of Sublessee or Sublessee's agents, employees or contractors, or (iii) result from any default, breach, violation or nonperformance of this Sublease or any provision therein by Sublessee, or (iv) arise from injury or death to individuals or damage to property sustained on or about the Subleased Premises. Sublessee shall, at its own cost and expenses, defend any and all actions, suits and proceedings which may be brought against Sublessor or Lessor with respect to the foregoing or in which Sublessee or Lessor may be impleaded. Sublessee shall pay, satisfy and discharge any and all money judgments which may be recovered against Sublessor or Lessor in connection with the foregoing. 18. PARKING. In accordance with Paragraph 17 of the Master Lease, throughout the Term, Sublessor agrees to lease to Sublessee, and Sublessee agrees to lease from Sublessor, the six (6) Structured Parking Spaces for use by Sublessee and its employees and the eight (8) Surface Parking Spaces for use by Sublessee's customers. Sublessee shall pay the Monthly Structured Parking Space Fee of $43.04/month and the Monthly Surface Parking Space Fee of $49.19/month to Sublessor, in advance, on the Lease Commencement Date and on the first day of each month thereafter during the Term in the same manner as the Basic Rent. In further accordance with Paragraph 17 of the Master Lease, throughout the Term, the Monthly Surface Parking Space Fee shall be payable only for four of the Surface Parking Spaces and Landlord shall provide the other four Surface Parking Spaces at no additional charge to Sublessor or Sublessee. The Monthly Structured Parking Space Fee and the Monthly Surface Parking Space Fee for the period between the Lease Commencement Date and the last day of the month in which the Lease Commencement Date occurs shall be pro-rated on a daily basis if the Lease Commencement Date occurs on a day other than the first day of a month. Sublessee agrees to use the Structured Parking Spaces and the Surface Parking Spaces for the parking of passenger automobiles and for no other purposes. 19. HOLDING OVER. If Sublessee shall hold over possession of the Subleased Premises after the end of the Term, Sublessee shall be deemed to be occupying the Subleased Premises as a Sublessee from month to month, at 250% of the Basic Rent, plus any additional charges incurred by Sublessee, including but not limited to attorneys fees and the charges in Paragraph 27 of the Master Lease adjusted to a monthly basis, and subject to all the other conditions, provisions and obligations of this Sublease, including the obligation to pay Additional Charges, insofar as the same are applicable, or as the same shall be adjusted, to a month-to-month tenancy. 20. LANDLORD'S CONSENT. Sublessor and Sublessee each acknowledge and agree that this Sublease is subject to Sublessor's obtaining the unconditional written consent of Landlord in accordance with the terms of the Lease, and that if such consent shall not be obtained within thirty (30) days of the date hereof, this Sublease shall be deemed disapproved. It is hereby acknowledged by Sublessor and Sublessee that this Sublease shall not make Landlord or its agent a party to this Sublease, shall not create any contractual liability or duty on the part of Landlord or its agent to Sublessee, and shall not in any manner increase, decrease or otherwise affect the rights and obligations of Landlord and Sublessor, as lessor and lessee respectively, under the Lease. Notwithstanding anything to the contrary contained in this Sublease, Sublessor shall remain primarily liable to Landlord for any breaches of the terms of the Lease. 21. OTHER PROVISIONS OF SUBLEASE. 10 21.1 All applicable terms and conditions of the Master Lease are incorporated into and made a part of this Sublease as if Sublessor were the Landlord thereunder, Sublessee, the Tenant thereunder, and the Premises the Master Premises, except for the following. Sublessee assumes and agrees to perform the lessee's obligations under the Master Lease during the Term to the extent that such obligations are applicable to the Premises, except that the obligation to pay rent to Landlord under the Master Lease shall be considered performed by Sublessee to the extent and in the amount rent is paid to Sublessor in accordance with Section 6 of this Sublease. Sublessee shall not commit or suffer any act or omission that will violate any of the provisions of the Master Lease. Sublessor shall exercise due diligence in attempting to perform its obligation under the Master Lease for the benefit of Sublessee. If the Master Lease terminates, this Sublease shall terminate and the parties shall be relieved of any further liability or obligation under this Sublease, provided however, that if the Master Lease terminates as a result of a default or breach by Sublessor or Sublessee under this Sublease and/or the Master Lease, then the defaulting party shall be liable to the nondefaulting party for the damage suffered as a result of such termination. Notwithstanding the foregoing, if the Master Lease gives Sublessor any right to terminate the Master Lease in the event of the partial or total damage, destruction, or condemnation of the Master Premises or the building or project of which the Master Premises are a part, the exercise of such right by Sublessor shall not constitute a default or breach hereunder. 21.2 This Sublease may not be extended, renewed, terminated (other than in accordance with the terms hereof), or by otherwise modified except by an instrument in writing signed by the Party whom enforcement of any such modification is sought. 21.3 Lessor shall have the same meaning as Landlord as defined in the Master Lease and Lessee shall have the same meaning as Tenant as defined in the Master Lease and both terms may be used interchangeably in this Sublease. 22. AGENCY DISCLOSURE. Sublessor and Sublessee each warrant that they have dealt with no other real estate broker in connection with this transaction except CB Commercial who represents Century National Bank. 23. COMMISSION. Upon execution of this Sublease, and consent thereto by lessor (if such consent is required under the terms of the Master Lease, Sublessor shall pay the above referenced Real Estate Brokers a real estate brokerage commission. IN WITNESS WHEREOF, Sublessor and Sublessee have caused this Sublease to be signed by their duly authorized officers as of the day and year first above written. ATTEST: SUBLESSOR: CHEVY CHASE BANK, F.S.B. /s/ VIRGINIA MCKAIG By: /s/ PAUL JACKMAN - ------------------------ ------------------------------ Name: Paul Jackman Title: Senior Vice President ATTEST SUBLESSEE: CENTURY NATIONAL BANK /s/ F. KATHRYN ROBERTS By: /s/ JOSEPH S. BRACEWELL - ------------------------ -------------------------------- Corporate Secretary Name: Joseph S. Bracewell Title: Chairman of The Board EX-11 3 STATEMENT RE COMPUTATION OF PER SHARE EARNINGS 1 EXHIBIT 11 EXHIBIT 11 STATEMENT RE: EARNINGS PER SHARE CALCULATION
Year Ended December 31, -------------------------------------------------------------- 1996 1995 1994 ------------- ------------------- -------------- Net income $ 278,579 612,654 590,904 Preferred dividends paid - (40,184) (36,796) ------------- ------------------- -------------- Net income available for common stock $ 278,579 572,470 554,108 ============= =================== ============== Common stock shares used in earnings per share calculation Shares outstanding at beginning of period 1,046,047 823,232 782,316 Shares issued in connection with stock dividends 73,047 41,072 39,061 Issuance of common stock - 138,098 - Stock options exercised 26,934 7,831 1,855 Exchange of preferred stock - 35,814 - ------------- ------------------- -------------- Shares outstanding at end of period 1,146,028 1,046,047 823,232 Dilutive effect of stock options and warrants 40,563 51,862 32,281 ------------- ------------------- -------------- Common and common equivalent shares outstanding 1,186,591 1,097,909 855,513 ============= =================== ============== Adjusted for subsequent stock dividends 1,186,591 1,174,763 961,169 ============= =================== ============== Common equity $6,750,041 6,365,020 4,349,968 ============= =================== ============== Book value per share $ 5.69 $ 5.42 $ 4.53 ============= =================== ============== Weighted average shares outstanding during period 1,128,698 887,278 821,549 Dilutive effect of stock options and warrants using the treasury stock method 67,909 45,945 32,281 Weighted average common shares used ------------- ------------------- -------------- in earnings per share calculation 1,196,607 933,189 853,830 ============= =================== ============== Adjusted for subsequent stock dividends 1,196,607 998,512 959,278 ============= =================== ============== Eanings per share as originally reported $ 0.23 $ 0.61 $ 0.65 ============= =================== ============== Earnings per share adjusted for stock dividends $ 0.23 $ 0.57 $ 0.58 ============= =================== ==============
EX-21 4 SUBSIDIARIES OF THE REGISTRANT 1 EXHIBIT 21 SUBSIDIARIES OF THE REGISTRANT Century National Bank, incorporated under the laws of the United States. EX-24 5 POWERS OF ATTORNEY 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, 1996, 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 26 day of March, 1997. /s/ JOHN R. COPE - -------------------- 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, 1996, 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 25 day of March, 1997. /s/ BERNARD J. CRAVATH - -------------------------- 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, 1996, 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 25 day of March, 1997. /s/ JOSEPH H. KOONZ - ------------------------------------ 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, 1996, 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 25 day of March, 1997. /s/ WILLIAM S. MCKEE - --------------------------- 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, 1996, 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 26 day of March, 1997. /s/ WILLIAM C. OLDAKER - ---------------------------- EX-27 6 FINANCIAL DATA SCHEDULE
9 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED FINANCIAL STATEMENTS OF CENTURY BANCSHARES, INC. AND SUBSIDIARY AS OF DECEMBER 31, 1996 AND 1995, 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, 1996. 1,000 YEAR DEC-31-1996 JAN-01-1996 DEC-31-1996 8,364 6,823 11,436 0 6,414 958 959 70,676 826 107,186 90,985 1,616 985 6,850 0 0 1,146 5,604 107,186 6,887 802 0 7,689 2,484 2,776 4,913 160 0 4,920 553 279 0 0 279 0.23 0.23 5.74 272 50 74 24 740 256 182 826 826 0 0
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