1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended SEPTEMBER 30, 1998
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or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from
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Commission file number. 0-15752
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CENTURY BANCORP, INC.
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(Exact name of registrant as specified in its charter)
COMMONWEALTH OF MASSACHUSETTS 04-2498617
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(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)
400 MYSTIC AVENUE, MEDFORD, MA 02155
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(Address of principal executive offices) (Zip Code)
(781)391-4000
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(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by section 13 or 15(d) of the Securities and 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. X Yes No
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Indicate the number of shares outstanding of each of the registrant's classes of
common stock as of September 30, 1998:
CLASS A COMMON STOCK, $1.00 PAR VALUE 3,608,897 SHARES
CLASS B COMMON STOCK, $1.00 PAR VALUE 2,208,770 SHARES
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: NOVEMBER 13, 1998 CENTURY BANCORP, INC.
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(Registrant)
/s/ Paul V. Cusick, Jr. /s/ Kenneth A. Samuelian
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PAUL V. CUSICK, JR. KENNETH A. SAMUELIAN
VICE PRESIDENT AND TREASURER VICE PRESIDENT AND CONTROLLER,
(PRINCIPAL FINANCIAL OFFICER) CENTURY BANK & TRUST COMPANY
(CHIEF ACCOUNTING OFFICER)
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Century Bancorp, Inc.
Page
Index Number
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PART I. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
Consolidated Balance Sheets:
September 30, 1998 and December 31, 1997. 3
Consolidated Statements of Income:
Three (3) Months Ended September 30, 1998
and 1997; and Nine (9)Months Ended 4
September 30, 1998 and 1997.
Consolidated Statements of Changes in Stockholders
Equity: Nine (9) Months Ended September
30, 1998 and 1997. 5
Consolidated Statements of Cash Flows:
Nine (9) Months Ended September 30, 1998
and 1997. 6
Notes to Consolidated Financial
Statements 7 - 12
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS 12 - 15
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT
MARKET RISK 15
PART II. OTHER INFORMATION
Item 1 through Item 6 16
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PART I - Item 1
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Century Bancorp, Inc. - Consolidated Balance Sheets (unaudited)
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(000's)
Sep 30, Dec 31,
Assets 1998 1997
- ------ --------- ---------
Cash and due from banks $ 52,165 $ 46,868
Federal funds sold and interest-bearing deposits in other banks 17 51,024
--------- ---------
Total cash and cash equivalents 52,182 97,892
--------- ---------
Securities available-for-sale, amortized cost $161,356 and
$89,004, respectively 162,761 89,190
Securities held-to-maturity, market value $167,388 and
$109,454, respectively 165,814 109,239
Loans, net of unearned discount:
Commercial & industrial 57,891 50,560
Construction & land development 20,619 7,549
Commercial real estate 185,448 140,270
Industrial revenue bonds 1,869 2,693
Residential real estate 89,019 76,385
Consumer 16,063 19,254
Home equity 20,132 19,031
Overdrafts 1,056 648
--------- ---------
Total loans, net of unearned discount 392,097 316,390
Less allowance for loan losses (5,956) (4,446)
--------- ---------
Net loans 386,141 311,944
Bank premises and equipment, net 10,200 8,718
Accrued interest receivable 6,500 4,334
Other assets 14,203 9,808
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Total assets $ 797,801 $ 631,125
========= =========
Liabilities
- -----------
Deposits:
Demand deposits $ 125,188 $ 123,301
Savings and NOW deposits 157,016 149,808
Money market accounts 87,752 71,061
Time deposits 241,525 171,279
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Total deposits 611,481 515,449
Securities sold under agreements to repurchase 39,550 32,850
Federal Home Loan Bank (FHLB) borrowings and other borrowed funds 50,627 13,474
Other liabilities 7,420 15,495
Long term debt 28,750 0
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Total liabilities 737,828 577,268
Stockholders' equity
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Class A common stock, $1.00 par value per share; 3,639 3,541
authorized 10,000,000 shares; issued 3,638,897
Class B common stock, $1.00 par value per share; 2,256 2,327
authorized 5,000,000 shares; issued 2,256,320
Additional paid-in capital 10,952 10,877
Retained earnings 42,476 37,180
Treasury stock, Class A, 30,000 shares (136) (136)
Treasury stock, Class B, 47,550 shares (41) (41)
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Realized stockholders' equity 59,146 53,748
Accumulated other comprehensive income 827 109
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Total stockholders' equity 59,973 53,857
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Total liabilities and stockholders' equity $ 797,801 $ 631,125
========= =========
See accompanying Notes to Consolidated Financial Statements 3 of 16
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Century Bancorp, Inc. - Consolidated Statements of Income (unaudited)
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(000's except share data) Three months ended September 30, Nine months ended September 30,
1998 1997 1998 1997
---------------- -------------- -------------- ----------------
Interest income
Loans $ 9,193 $ 7,280 $ 24,310 $ 21,057
Securities held-to-maturity 2,352 1,751 6,058 5,366
Securities available-for-sale 2,653 1,274 5,773 3,817
Federal funds sold and interest-bearing deposits in other banks 205 90 1,286 383
---------- ---------- ---------- ----------
Total interest income 14,403 10,395 37,427 30,623
Interest expense
Savings and NOW deposits 1,043 998 3,236 3,005
Money market accounts 641 466 1,644 1,435
Time deposits 3,490 2,088 8,302 6,312
Securities sold under agreements to repurchase 449 275 1,134 688
FHLB borrowings and other borrowed funds 972 164 1,398 388
---------- ---------- ---------- ----------
Total interest expense 6,595 3,991 15,714 11,828
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Net interest income 7,808 6,404 21,713 18,795
Provision for loan losses 225 135 575 525
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Net interest income after provision
for loan losses 7,583 6,269 21,138 18,270
Other operating income
Service charges on deposit accounts 456 460 1,337 1,309
Lockbox fees 398 365 1,252 1,088
Brokerage commissions 258 278 859 839
Gain on sales of loans 8 37 47 88
Other income 131 108 370 323
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Total other operating income 1,251 1,248 3,865 3,647
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Operating expenses
Salaries and employee benefits 3,422 3,055 9,953 9,090
Occupancy 423 323 1,071 957
Equipment 317 285 955 840
Other 1,310 1,030 3,680 3,100
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Total operating expenses 5,472 4,693 15,659 13,987
---------- ---------- ---------- ----------
Income before income taxes 3,362 2,824 9,344 7,930
Provision for income taxes 1,273 1,093 3,468 3,160
---------- ---------- ---------- ----------
Net income $ 2,089 $ 1,731 $ 5,876 $ 4,770
========== ========== ========== ==========
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Share data:
Weighted average number of shares outstanding, basic 5,817,667 5,777,767 5,806,509 5,769,503
Weighted average number of shares outstanding, diluted 5,858,784 5,846,473 5,848,388 5,836,008
Net income per share, basic $ 0.36 $ 0.30 $ 1.01 $ 0.83
Net income per share, diluted $ 0.36 $ 0.30 $ 1.00 $ 0.82
Cash dividends declared:
Class A common stock $ 0.0600 $ 0.0500 $ 0.1600 $ 0.1500
Class B common stock $ 0.0170 $ 0.0070 $ 0.0310 $ 0.0210
See accompanying Notes to Consolidated Financial Statements.
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Century Bancorp, Inc. - Consolidated Statement of Changes in Stockholders'
Equity (unaudited)
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Accumulated
Class A Class B Additional Treasury Treasury Other Total
Common Common Paid-In Retained Stock Stock Comprehensive Stockholders'
Nine months ended September 30, Stock Stock Capital Earnings Class A Class B Income (Loss) Equity
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(000's)
1997
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Balance at December 31, 1996 $3,488 $ 2,348 $10,786 $ 31,117 ($136) ($41) ($ 73) $ 47,489
Net income - - - 4,770 - - - 4,770
Other comprehensive income, net of tax:
Increase in unrealized gain on
securities available-for-sale - - - - - - 166 166
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Comprehensive income 4,936
Conversion of Class B common stock to
Class A common stock, 9,200 shares 10 (10) - - - - - -
Stock options exercised, 19,300 shares 19 - 54 - - - - 73
Cash dividends, Class A common stock,
$.050 per share, per quarter - - - (521) - - - (521)
Cash dividends, Class B common stock,
$.0070 per share, per quarter - - - (48) - - - (48)
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Balance at September 30, 1997 $3,517 $ 2,338 $10,840 $ 35,318 ($136) ($41) $ 93 $ 51,929
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1998
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Balance at December 31, 1997 $3,541 $ 2,327 $10,877 $ 37,180 ($136) ($41) $ 109 $ 53,857
Net income - - - 5,876 - - - 5,876
Other comprehensive income, net of tax:
Increase in unrealized gain on
securities available-for-sale - - - - - - 718 718
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Comprehensive income 6,594
Conversion of Class B common stock to
Class A common stock, 70,200 shares 71 (71) - - - - - -
Stock options exercised, 27,250 shares 27 - 75 - - - - 102
Cash dividends, Class A common stock,
$.050 per share, per quarter - - - (533) - - - (533)
Cash dividends, Class B common stock,
$.0070 per share, per quarter - - - (47) - - - (47)
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Balance at September 30, 1998 $3,639 $ 2,256 $10,952 $ 42,476 ($136) ($41) $ 827 $ 59,973
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See accompanying Notes to Consolidated Financial Statements.
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Century Bancorp, Inc. - Consolidated Statements of Cash Flows (unaudited) 1998 1997
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For the nine months ended
September 30,
(000's)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 5,876 $ 4,770
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 575 525
Deferred income taxes (228) (312)
Net depreciation and amortization 588 442
Increase in accrued interest receivable (1,488) (515)
(Increase) decrease in other assets (1,679) 167
Loans originated for sale (2,532) (6,899)
Proceeds from sales of loans 3,118 7,037
Gain on sales of loans (47) (88)
(Gain) loss on sales of real estate owned (7) 4
(Decrease) increase in other liabilities (2,183) 778
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Net cash provided by operating activities 1,993 5,909
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CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturities of securities available-for-sale 71,214 18,776
Purchase of securities available-for-sale (89,579) (18,993)
Proceeds from maturities of securities held-to-maturity 59,787 15,502
Purchase of securities held-to-maturity (116,309) (16,923)
Decrease in investments purchased payable (6,499) 0
Net cash paid for acquired institution (5,786) 0
Net increase in loans (1,567) (22,893)
Proceeds from sales of real estate owned 137 319
Capital expenditures (1,087) (1,062)
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Net cash used in investing activities (89,689) (25,274)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Net decrease in time deposits (32,197) (10,899)
Net increase (decrease) in demand, savings, money market and NOW deposits 2,058 (4,200)
Net proceeds from the issuance of common stock 102 73
Cash Dividends (580) (570)
Net increase in securities sold under agreements to repurchase 6,700 12,190
Net increase in FHLB borrowings and other borrowed funds 37,153 4,717
Issuance of long term debt 28,750 0
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Net cash provided by financing activities 41,986 1,311
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Net decrease in cash and cash equivalents (45,710) (18,054)
Cash and cash equivalents at beginning of year 97,892 67,681
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Cash and cash equivalents at end of period $ 52,182 $ 49,627
========= ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 17,665 $ 11,146
Income taxes 3,891 3,569
Noncash transactions:
Property acquired through foreclosure $ 130 $ 296
Change in unrealized gains on securities available-for-sale, net of taxes $ 718 $ 181
See accompanying Notes to Consolidated Financial Statements.
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Century Bancorp Inc.
Notes to Consolidated Financial Statements
BASIS OF PRESENTATION In the opinion of management, the accompanying
unaudited interim consolidated financial statements
reflect all adjustments, consisting of normal
recurring adjustments, which are necessary to
present a fair statement of the results for the
interim period presented of Century Bancorp, Inc.
(the "Company") and its wholly owned subsidiary,
Century Bank and Trust Company (the "Bank"). The
results of operations for the interim period ended
September 30, 1998, are not necessarily indicative
of results for the entire year. It is suggested that
these statements be read in conjunction with the
consolidated financial statements and the notes
thereto included in the Company's Annual Report.
The financial statements have been prepared in
conformity with generally accepted accounting
principles and to general practices within the
banking industry. 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 from those estimates.
Material estimates that are susceptible to change in
the near-term relate to the allowance for losses on
loans. Management believes that the allowance for
losses on loans is adequate based on independent
appraisals and review of other factors associated
with the assets. While management uses available
information to recognize losses on loans, future
additions to the allowance for loans may be
necessary based on changes in economic conditions.
In addition, regulatory agencies periodically review
the Company's allowance for losses on loans. Such
agencies may require the Company to recognize
additions to the allowance for loans based on their
judgements about information available to them at
the time of their examination.
RECENT ACCOUNTING DEVELOPMENTS
In June 1997, FASB issued SFAS No. 130, "Reporting
Comprehensive Income." SFAS No. 130 establishes
standards for reporting and displaying comprehensive
income, which is defined as all changes to equity
except investments by and distributions to
shareholders. Net income is a component of
comprehensive income, with all other components
referred to in the aggregate as other comprehensive
income. The Bank has adopted SFAS No. 130 effective
for January 1, 1998.
In February 1998, the FASB issued SFAS No. 132,
"Employers' Disclosures about Pensions and Other
Postretirement Benefits--an amendment of FASB
Statements No. 87, 88, and 106." This Statement
revises employers' disclosures about pension and
other postretirement benefit plans. It does not
change the measurement or recognition of those
plans. It standardizes the disclosure requirements
for pensions and other postretirement benefits to
the extent practicable, requires additional
information on changes in the benefit obligations
and fair values of plan assets that will facilitate
financial analysis, and eliminates certain
disclosures that are no longer as useful as they
were when FASB
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Statements No. 87, "Employers' Accounting for
Pensions," No. 88, "Employers' Accounting for
Settlements and Curtailments of Defined Benefit
Pension Plans and for Termination Benefits," and No.
106, "Employers' Accounting for Postretirement
Benefits Other Than Pensions," were issued. The
Statement suggests combined formats for presentation
of pension and other postretirement benefit
disclosures. The provisions of the statement will be
adopted in the December 31, 1998 financial
statements.
In June 1998, the FASB issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging
Activities" which amends FASB Statements No. 52, 80,
105, and 107, as well as, nullifies or modifies the
consensuses reached in a number of issues addressed
by the Emerging Issues Task Force. This statement
establishes accounting and reporting standards for
derivative instruments, including certain derivative
instruments embedded in other contracts,
(collectively referred to as derivatives) and for
hedging activities. It requires that an entity
recognize all derivatives as either assets or
liabilities in the statement of financial position
and measure those instruments at fair value. If
certain conditions are met, a derivative may be
specifically designated as (a) a hedge of the
exposure to changes in the fair value of a
recognized asset or liability or an unrecognized
firm commitment, (b) a hedge of the exposure to
variable cash flows of a forecasted transaction, or
(c ) a hedge of the foreign currency exposure of a
net investment in a foreign operation, an
unrecognized firm commitment, an available-for-sale
security, or a foreign-currency-denominated
forecasted transaction.
Under this Statement, an entity that elects to apply
hedge accounting is required to establish at the
inception of the hedge the method it will use for
assessing the effectiveness of the hedging
derivative and the measurement approach for
determining the ineffective aspect of the hedge.
Those methods must be consistent with the entity's
approach to managing risk.
The Statement is effective for the year 2000
financial statements. This statement is not expected
to have a material impact on the financial
statements.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The consolidated financial statements include the
accounts of Century Bancorp, Inc. (the "Company")
and its wholly-owned subsidiary, Century Bank and
Trust Company (the "Bank"). The Company provides a
full range of banking services to individual,
business and municipal customers in Massachusetts.
As a bank holding company, the Company is subject to
the regulation and supervision of the Federal
Reserve Board. The Bank, a state chartered financial
institution, is subject to supervision and
regulation by applicable state and federal banking
agencies, including the Federal Reserve Board, the
Office of the Comptroller of the Currency (the
"Comptroller") and the Federal Deposit Insurance
Corporation (the "FDIC").
The Bank is also subject to various requirements and
restrictions under federal and state law, including
requirements to maintain reserves against deposits,
restrictions on the types and amounts of loans that
may be granted and the interest that may be charged
thereon, and limitations on
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the types of investments that may be made and the
types of services that may be offered. Various
consumer laws and regulations also affect the
operations of the Bank. In addition to the impact of
regulation, commercial banks are affected
significantly by the actions of the Federal Reserve
Board as it attempts to control the money supply and
credit availability in order to influence the
economy. All aspects of the Company's business are
highly competitive. The Company faces aggressive
competition from other lending institutions and from
numerous other providers of financial services.
INVESTMENT SECURITIES
Debt securities that the Company has the positive
intent and ability to hold to maturity are
classified as held-to-maturity and reported at
amortized cost; debt and equity securities that are
bought and held principally for the purpose of
selling are classified as trading and reported at
fair value, with unrealized gains and losses
included in earnings; and debt and equity securities
not classified as either held-to-maturity or trading
are classified as available-for-sale and reported at
fair value, with unrealized gains and losses
excluded from earnings and reported as a separate
component of stockholders' equity, net of estimated
related income taxes. The Company has no securities
held for trading.
Premiums and discounts on investment securities are
amortized or accreted into income by use of the
level-yield method. If a decline in fair value below
the amortized cost basis of an investment is judged
to be other than temporary, the cost basis of the
investment is written down to fair value. The amount
of the writedown is included as a charge to
earnings. Gains and losses on the sale of investment
securities are recognized at the time of sale on a
specific identification basis.
LOANS
Interest on loans is recognized based on the daily
principal amount outstanding. Accrual of interest is
discontinued when loans become 90 days delinquent
unless the collateral is sufficient to cover both
principal and interest and the loan is in the
process of collection. Loans, including impaired
loans, on which the accrual of interest has been
discontinued are designated non-accrual loans. When
a loan is placed on non-accrual, all income which
has been accrued but remains unpaid is reversed
against current period income and all amortization
of deferred loan fees is discontinued. Non-accrual
loans may be returned to an accrual status when
principal and interest payments are not delinquent
and the risk characteristics of the loan have
improved to the extent that there no longer exists a
concern as to the collectibility of principal and
income. Income received on non-accrual loans is
either recorded in income or applied to the
principal balance of the loan depending on
management's evaluation as to the collectibility of
principal.
Loans held for sale are carried at the lower of
aggregate cost or market value. Gain or loss on
sales of loans is recognized at the time of sale
when the sales proceeds exceed or are less than the
Bank's investment in the loans. Additionally, gains
and losses are recognized when the average interest
rate on the loans sold, adjusted for normal
servicing fee, differs from the agreed yield to the
buyer. The resulting excess service fee
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receivables, if any, are amortized using the
interest method over the estimated life of the
loans, adjusted for estimated prepayments.
Discounts and premiums on loans purchased from
failed financial institutions that represent market
yield adjustments are accreted or amortized to
interest income over the estimated lives of the
loans using the level-yield method.
Loan origination fees and related direct incremental
loan origination costs are offset and the resulting
net amount is deferred and amortized over the life
of the related loans using the level-yield method.
The Bank accounts for impaired loans, except those
loans that are accounted for at fair value or at
lower of cost or fair value, at the present value of
the expected future cash flows discounted at the
loan's effective interest rate. This method applies
to all loans, uncollateralized as well as
collateralized, except large groups of
smaller-balance homogeneous loans that are
collectively evaluated for impairment, loans that
are measured at fair value and leases and debt
securities. Management considers the payment status,
net worth and earnings potential of the borrower,
and the value and cash flow of the collateral as
factors to determine if a loan will be paid in
accordance with its contractual terms. Management
does not set any minimum delay of payments as a
factor in reviewing for impaired classification.
Impaired loans are charged-off when management
believes that the collectibility of the loan's
principal is remote. In addition, criteria for
classification of a loan as in-substance foreclosure
has been modified so that such classification need
be made only when a lender is in possession of the
collateral. The Bank measures the impairment of
troubled debt restructurings using the
pre-modification rate of interest.
ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses is based on
management's evaluation of the quality of the loan
portfolio and is used to absorb losses resulting
from loans which ultimately prove uncollectible. In
determining the level of the allowance, periodic
evaluations are made of the loan portfolio which
take into account such factors as the character of
the loans, loan status, financial posture of the
borrowers, value of collateral securing the loans
and other relevant information sufficient to reach
an informed judgement. The allowance is increased by
provisions charged to income and reduced by loan
charge-offs, net of recoveries.
While management uses available information in
establishing the allowance for loan losses, future
adjustments to the allowance may be necessary if
economic conditions differ substantially from the
assumptions used in making the evaluations. Loans
are charged off in whole or in part when, in
management's opinion, collectibility is not
probable.
Management believes that the allowance for loan
losses is adequate. In addition, various regulatory
agencies, as part of their examination process,
periodically review the Company's allowance for loan
losses. Such agencies may require the Company to
recognize additions to the allowance based on their
judgements about information available to them at
the time of their examination.
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OTHER REAL ESTATE OWNED
Other real estate owned ("OREO") includes real
estate acquired by foreclosure and real estate
substantively repossessed. Real estate acquired by
foreclosure is comprised of properties acquired
through foreclosure proceedings or acceptance of a
deed in lieu of foreclosure. Real estate
substantively repossessed includes only those loans
for which the Company has taken possession of the
collateral, but has not completed legal foreclosure
proceedings. Both in-substance foreclosures and real
estate formally acquired in settlement of loans are
recorded at the lower of the carrying value of the
loan or the fair value of the property
constructively or actually received. Loan losses
from the acquisition of such properties are charged
against the allowance for loan losses. After
foreclosure, if the fair value of an asset minus its
estimated cost to sell is less than the carrying
value of the asset, such amount is recognized as a
valuation allowance. If the fair value of an asset
less its estimated cost to sell subsequently
increases so that the resulting amount is more than
the asset's current carrying value, the valuation
allowance is reversed by the amount of the increase.
Increases or decreases in the valuation allowance
are charged or credited to income. Gains upon
disposition of OREO are reflected in the statement
of income as realized. Realized losses are charged
to the valuation allowance.
BANK PREMISES AND EQUIPMENT
Bank premises and equipment are stated at cost less
accumulated depreciation and amortization.
Depreciation is computed using the straight-line
method over the estimated useful lives of the assets
or the terms of leases, if shorter.
It is general practice to charge the cost of
maintenance and repairs to operations when incurred;
major expenditures for improvements are capitalized
and depreciated.
INCOME TAXES
The Company uses the asset and liability method of
accounting for income taxes. Under 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. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply
to taxable income in the years in which temporary
differences are expected to be recovered or settled.
Under this method, 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.
====================================================
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ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.
OVERVIEW For the quarter ended and year-to-date ended
September 30, 1998.
Earnings for the third quarter ended September 30,
1998 were $2.1 million, an increase of 20.7% when
compared with the third quarter 1997 earnings of
$1.7 million. Diluted earnings per share for the
third quarter 1998 were $0.36 versus $0.30 for the
third quarter of 1997.
For the nine months ending September 30, 1998,
earnings were $5.9 million an increase of 23.2% when
compared with the same period last year earnings of
$4.8 million. Diluted earnings per share were $1.00
for the first nine months of 1998 compared with $.82
for the first nine months of 1997.
YEAR 2000 The Company has completed its assessment of Year
2000 issues and developed a plan, budget, and
testing strategy for mission-critical systems. The
Bank relies on its recently converted new core
processing system for critical data warehousing and
transaction processing. Other, less critical,
systems are supported by purchased applications
software. The Bank is continually evaluating
mission-critical vendor plans and monitoring project
milestones. The Bank plans to begin testing its key
transaction processing system in the fourth quarter
of 1998 and to substantially complete testing on its
core processing system and on most other
applications no later than December 31, 1998. The
vendor has disclosed that its core processing system
is Year 2000 compliant. Currently, there are five
vendors for which testing will not commence until
the first quarter of 1999. There can be no guarantee
that the systems of other companies, or third party
vendors on which the Company's systems rely, will be
remedied on a timely basis. Therefore, the Company
could possibly be negatively impacted to the extent
other entities not affiliated with the Company are
unsuccessful in properly addressing their respective
Year 2000 compliance responsibilities. Specific
factors that might cause such material differences
include, but are not limited to, the availability
and cost of personnel trained in this area, the
ability to locate and correct all relevant computer
codes, and similar uncertainties.
The Company will continue to utilize both internal
and external resources to update, or replace,
develop and test all software information systems
for Year 2000 modification. The Bank's cost of Year
2000 remediation, which includes its cost of
converting to new mainframe software, is expected to
approach $1.5 - $2.0 million of which approximately
$1.0 million has been incurred. The Company expects
that the majority of the costs yet to be incurred
will be to replace or update existing hardware and
software, which will be capitalized and amortized in
accordance with the Company's existing accounting
policy. In most instances, upgrades to computer
hardware and software are being made to improve the
capacity and performance of the systems as well as
to achieve Year 2000 compliance. Maintenance and
modification costs will be expensed as incurred.
The costs of the project and the date on which the
Bank plans to complete
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13
Management's Discussion and Analysis of Financial
Condition and Results of Operation (con't.)
Year 2000 testing are based on management's best
estimates, which were derived utilizing numerous
assumptions of future events including the continued
availability of certain resources, third party
modification plans and other factors.
The Bank has also assessed the impact of the Year
2000 issue on its major borrowing customers.
Borrowers that could experience a significant
disruption in their business due to a Year 2000
failure have been identified. Management is in the
process of obtaining specific information as to the
readiness of these borrowers for Year 2000.
Management will complete this assessment process by
December 31, 1998.
After the Bank completes its testing of
mission-critical systems, a contingency plan will be
completed for non-compliant systems. The Bank's
contingency plan is expected to be in place by the
second quarter of 1999.
FINANCIAL CONDITION
LOANS On September 30, 1998 total loans outstanding, net
of unearned discount, were $392.1 million, an
increase of 23.9% from the total on December 31,
1997. At September 30, 1998 commercial real estate
loans accounted for 47.3% and residential real
estate loans and real estate loans held-for- sale
accounted for 27.8% of total loans. Construction
loans increased to $20.6 million at September 30,
1998 from $19.6 million at the end of the previous
quarter. Total loans increased primarily as a result
of the acquisition of Haymarket in June 1998.
ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses was 1.52% of total
loans on September 30, 1998 compared with 1.41% on
December 31, 1997. Net charge-offs for the nine
month period ended September 30, 1998, were $259
thousand, compared with net charge-offs of $270
thousand for the same period in 1997. The allowance
for loan losses is based on management's overview of
the quality of the loan portfolio, previous loan
loss experience and current economic conditions.
As of September 30, 1998, loans on non-accrual
status totaled $1.6 million or .40% of loans; loans
past due 90 days or more totaled $682 thousand;
restructured performing loans totaled $1.0 million.
SECURITIES HELD-TO-MATURITY
The securities held-to-maturity portfolio totaled
$165.8 million on September 30, 1998, an increase of
51.8% from the total on December 31, 1997. The
portfolio is concentrated in United States Treasury
and Agency securities and had a legal weighted
average maturity of 11.0 years.
Total securities held-to-maturity increased
primarily as a result of leveraged balance sheet
transactions.
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14
Management's Discussion and Analysis of Financial
Condition and Results of Operation (con't.)
SECURITIES AVAILABLE-FOR-SALE
The securities available-for-sale portfolio totaled
$162.8 million at September 30, 1998, an increase of
82.5 % from December 31, 1997. The portfolio is
concentrated in United States Treasury and Agency
securities and had a weighted average maturity of
3.25 years. Total securities available-for-sale
increased primarily as a result of the acquisition
of Haymarket.
DEPOSITS AND BORROWED FUNDS
On September 30, 1998 deposits totaled $611.5
million, representing a 18.6% increase in total
deposits from December 31, 1997. Borrowed funds
totaled $90.2 million compared to $46.3 million at
December 31, 1997. The majority of the increase was
an increase in borrowings from the Federal Home Loan
Bank, as well as an increase in securities sold
under agreements to repurchase. Total deposits
increased primarily as a result of the acquisition
of Haymarket.
RESULTS OF OPERATIONS
NET INTEREST INCOME
For the three month period ended September 30, 1998
net interest income totaled $7.8 million, an
increase of 21.9% from the comparable period in
1997. For the nine month period ended September 30,
1998 net interest income totaled $21.7 million, an
increase of 15.5% from the comparable period in
1997. Interest income was primarily affected
positively by the acquisition of Haymarket. The net
yield on average earning assets on a fully taxable
equivalent basis decreased to 4.60% in the first
nine months of 1998 from 4.91% during the same
period in 1997.
PROVISION FOR LOAN LOSSES
For the three month period ended September 30, 1998
the loan loss provision totaled $225 thousand
compared to $135 thousand for the same period in
1997.
Loan loss provision for the nine months ended
September 30, 1998 was $575 thousand compared with
$525 thousand for the same period in 1997. Loan loss
provision increased due to growth in loan
portfolio.The Company's loan loss allowance as a
percentage of total loans outstanding has increased
from 1.43% at September 30, 1997 to 1.52% at
September 30, 1998, respectively.
NON-INTEREST INCOME AND EXPENSE
Other operating income for the quarter ended
September 30, 1998 was $1.3 million unchanged,
compared to the third quarter of 1997. For the nine
month period ended September 30, 1998 other
operating income totaled $3.9 million compared to
$3.6 million for the same period in
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15
Management's Discussion and Analysis of Financial
Condition and Results of Operation (con't.)
1997. Lockbox fees increased 6.0% due to an increase
in lockbox volume relating to new customers for
September 30, 1998.
During the third quarter 1998, operating expenses
increased by $779 thousand to $5.5 million or 16.6%
from the same quarter last year. The third quarter
increase reflects expenses associated with the
Haymarket acquisition.. For the nine month period
ended September 30, 1998 operating expenses totaled
$15.7 million compared to $14.0 million for the same
period in 1997. For both the third quarter and
year-to-date approximately half of the increase was
in salaries and employee benefits with the remaining
half in all other expenses. The Company has incurred
expenses relating to increased professional fees for
certain strategic initiatives.
INCOME TAXES
For the third quarter of 1998, the Company's income
taxes totaled $1.3 million on pretax income of $3.4
million for an effective tax rate of 37.9%. For last
year's corresponding quarter, the Company's income
taxes totaled $1.1 million on pretax income of $2.8
million for an effective rate of 38.7%. For the nine
month period ended September 30, 1998 income taxes
totaled $3.5 million on pretax income of $9.3
million for an effective tax rate of 37.1%. For last
year's corresponding period, the Company's income
taxes totaled $3.2 million on pretax income of $7.9
million for an effective tax rate of 39.8%. The
Company is continuing to realize savings in this
area as the result of strategic tax savings
initiatives.
====================================================
ITEM 3 QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET
RISK
The response is incorporated herein by reference
from the discussion under the subcaption "Interest
Rate Sensitivity" of the caption "MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS" on pages 7 through 10 of the
Annual Report which is incorporated herein by
reference.
====================================================
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PART II - OTHER INFORMATION
Item 1 Legal proceedings - The Company is not engaged in
any legal proceedings of a material nature at the
present time. From time to time, the Company is
party to routing legal proceedings within the normal
course of business. Such routine legal proceedings,
in the aggregate, are believed by management to be
immaterial to the Company's financial condition and
results of operation.
Item 2 Change in securities - Not applicable
Item 3 Defaults upon senior securities - Not applicable
Item 4 Submission of matters to a vote - Not applicable
Item 5 Other information - Not applicable
Item 6 Exhibits and reports on form 8-K - Not applicable
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