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
For the fiscal year ended December 31, 1999
[ ] Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the transition period from _______________ to _______________.
Commission file number 0-20378
CENIT BANCORP, INC.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 54-1592546
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
300 East Main Street, Suite 1350
Norfolk, Virginia 23510
- ------------------------------ ------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code 757-446-6600
-------------
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.01 per share
- ---------------------------------------------------------------------------
(Title of class)
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 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. [ ]
Based on the closing price of $13.25 of the registrant's common stock on
February 29, 2000, as reported on the Nasdaq Stock Market under the symbol
"CNIT," the aggregate market value of the voting stock held by non-affiliates of
the registrant was $53,131,215. Solely for purposes of this calculation, all
executive officers and directors of the registrant are considered to be
affiliates. Also included are certain shares held by various employee benefit
plans.
The number of shares of the registrant's common stock outstanding as of February
29, 2000 was 4,753,663.
DOCUMENTS INCORPORATED BY REFERENCE
The Registrant's Definitive Proxy Statement for its 2000 Annual Meeting of
Stockholders will be filed with the Securities and Exchange Commission not later
than 120 days after the end of the fiscal year covered by this Form 10-K
pursuant to Rule G(3) of the General Instructions for Form 10-K. Information
from such Definitive Proxy Statement is hereby incorporated by reference into
Part III, Items 10, 11, 12, and 13.
PART I
Item 1 - Business
General
CENIT Bancorp, Inc. (the "Company") is a Delaware corporation that was
organized in July, 1991 for the purpose of becoming the unitary savings and loan
holding company for CENIT Bank (the "Bank").
The Company currently conducts its business from its corporate headquarters
in Norfolk, Virginia, and through twenty retail offices and two mortgage
origination offices located in southeastern Virginia. The Company operates in
one business segment, providing retail and commercial banking services to
customers within its market. At December 31, 1999, the Company had total
deposits of $464.6 million. The Bank's deposits are insured up to the maximum
allowable amount by the Federal Deposit Insurance Corporation (the "FDIC")
through the Savings Association Insurance Fund ("SAIF") and the Bank Insurance
Fund ("BIF"). The Bank is regulated by the Office of Thrift Supervision ("OTS"),
the FDIC, and the Securities and Exchange Commission (the "SEC"). The Bank is a
member of the Federal Home Loan Bank of Atlanta (the "FHLB") and is subject to
the Board of Governors of the Federal Reserve Board (the "Federal Reserve")
concerning reserves required to be maintained against deposits and certain other
matters.
At December 31, 1999, the Company had total assets of $674.2 million and
total stockholders' equity of $51.3 million. The Company's office is located at
the corporate headquarters of the Bank at 300 East Main Street, Suite 1350,
Norfolk, Virginia, 23510. The telephone number is (757) 446-6600.
Market Area
The Company is located in the Norfolk-Virginia Beach-Newport News
Metropolitan Statistical Area ("MSA"), which extends approximately 65 miles from
Williamsburg, Virginia to Virginia Beach, Virginia, and Currituck County, North
Carolina. This MSA is the 27th largest MSA in the United States and the fourth
largest MSA in the southeastern United States with a population in 1999 of
approximately 1.6 million persons. The Company's principal market within this
region is the Hampton Roads area, which is composed of the cities of Norfolk,
Portsmouth, Virginia Beach, Chesapeake, Suffolk, Hampton, and Newport News. The
Company has its corporate headquarters in Norfolk, Virginia and the Bank
currently has a total of twenty retail offices and twenty-six automated teller
machines located in the cities of Norfolk, Portsmouth, Virginia Beach,
Chesapeake, Hampton, Newport News and in York County, Virginia. In addition, the
Company has a mortgage loan origination office located in the city of
Chesapeake. One of the Company's York County retail offices also includes a
mortgage loan origination office.
Although the Hampton Roads area supports a wide range of industrial and
commercial activities, the area's principal employer is the United States Navy
and other branches of the Armed Forces of the United States. Recent cutbacks in
defense spending and the realignment of domestic military installations have not
had an adverse impact on the Company's market area. However, future significant
cutbacks in defense spending and future consolidations of domestic military
installations could affect the general economy of the Company's market area.
Depending on whether the Hampton Roads area experiences an overall increase or
decrease in military and federal wages and salaries, the potential future impact
of any such cutbacks or consolidations could be either favorable or unfavorable.
Competition
The Company faces significant competition both in making loans and in
attracting deposits. The Company's competition for loans comes from commercial
banks, savings banks, mortgage banking subsidiaries of regional commercial
banks, national mortgage bankers, insurance companies, and other institutional
lenders. The Company's most direct competition for deposits has historically
come from savings banks, commercial banks, credit unions and other financial
institutions. Based upon total assets at December 31, 1999, the Bank constitutes
the largest bank or thrift institution with its parent company headquartered in
its MSA. The Company may face an increase in competition as a result of the
continuing reduction in the restrictions on the interstate operations of
financial institutions. The Company also faces competition for deposits from
short-term money market mutual funds and other corporate and government
securities funds.
2
Net Interest Income
Net interest income, the primary source of the Company's earnings,
represents the difference between income on interest-earning assets (primarily
loans and investments) and expense on interest-bearing liabilities (primarily
deposits and borrowings). Net interest income is affected by both the interest
rate spread (the difference between the rates of interest earned on
interest-earning assets and the rates of interest paid on interest-bearing
liabilities) and by the Company's net interest position (the difference between
the average amount of interest-earning assets and the average amount of
interest-bearing liabilities). Changes in the volume and mix of interest-
earning assets and interest-bearing liabilities, market interest rates, the
volume of noninterest-earning assets and the volume of noninterest-bearing
liabilities available to support interest-earning assets all affect net interest
income.
Average Balance Sheet
The following table sets forth, for the years indicated, information
regarding: (i) the total dollar amounts of interest income from interest-earning
assets and the resulting average yields; (ii) the total dollar amounts of
interest expense from interest-bearing liabilities and the resulting average
costs; (iii) net interest income; (iv) interest rate spread; (v) net interest
position; (vi) the net yield earned on interest-earning assets; and (vii) the
ratio of total interest-earning assets to total interest-bearing liabilities.
Average balances shown in the following table have been calculated using daily
average balances. Yield information does not give effect to changes in fair
value that are reflected as a component of stockholders' equity.
3
Year ended December 31,
-----------------------------------------------------------------------------------------
1997 1998 1999
-----------------------------------------------------------------------------------------
Average Yield/ Average Yield/ Average Yield/
Balance Interest Cost Balance Interest Cost Balance Interest Cost
------- -------- ------ ------- -------- ------ ------- -------- -----
(Dollars in Thousands)
Interest-earning assets:
Loans (1) $ 470,594 $ 38,220 8.12% $ 507,694 $39,931 7.87% $480,627 $ 36,506 7.60%
Mortgage-backed certificates 124,761 8,685 6.96 46,967 3,208 6.83 36,300 2,533 6.98
U.S. Treasury, other U.S.
Government agency and other
debt securities 44,489 2,775 6.24 44,542 2,664 5.98 56,556 3,237 5.72
Federal funds sold 8,109 450 5.55 13,292 705 5.30 13,894 683 4.92
Federal Home Loan Bank and
Federal Reserve Bank stock 8,959 646 7.21 7,078 523 7.39 4,666 353 7.57
--------- -------- --------- ------ -------- --------
Total interest-earning assets 656,912 50,776 7.73 619,573 47,031 7.59 592,043 43,312 7.32
--------- -------- --------- ------ -------- --------
Noninterest-earning assets:
REO 1,794 710 314
Other 38,784 41,095 38,232
--------- -------- --------
Total noninterest-earning assets 40,578 41,805 38,546
--------- --------- --------
Total assets $ 697,490 $ 661,378 $630,589
========= ========= ========
Interest-bearing liabilities:
Passbook and statement savings $ 45,050 1,522 3.38 $ 39,700 1,250 3.15 $ 34,500 841 2.44
Checking accounts 29,167 602 2.06 34,861 606 1.74 40,633 579 1.42
Money market deposit accounts 46,790 1,566 3.35 64,109 2,397 3.74 75,442 2,604 3.45
Certificates of deposit 329,477 17,282 5.25 292,456 15,318 5.24 255,142 12,713 4.98
--------- -------- --------- ------- -------- --------
Total interest-bearing deposits 450,484 20,972 4.66 431,126 19,571 4.54 405,717 16,737 4.13
Advances from the Federal Home
Loan Bank 140,077 7,819 5.58 103,592 5,622 5.43 87,921 4,602 5.23
Other borrowings 1,461 110 7.53 1,008 77 7.64 - - -
Securities sold under agreements
to repurchase 8,893 409 4.60 12,026 535 4.45 15,711 641 4.08
--------- -------- --------- ------ -------- --------
Total interest-bearing liabilities 600,915 29,310 4.88 547,752 25,805 4.71 509,349 21,980 4.32
--------- -------- --------- ------- -------- --------
Noninterest-bearing liabilities:
Deposits 42,725 56,407 65,730
Other liabilities 3,832 6,413 4,909
--------- --------- --------
Total noninterest-bearing
liabilities 46,557 62,820 70,639
--------- -------- --------
Total liabilities 647,472 610,572 579,988
Stockholders' equity 50,018 50,806 50,601
--------- --------- --------
Total liabilities and stockholders'
equity $ 697,490 $661,378 $630,589
========= ======== ========
Net interest income/interest rate spread $ 21,466 2.85% $21,226 2.88% $ 21,332 3.00
========= ==== ======= ==== ====== ====
Net interest position/net interest
margin $ 55,997 3.27% $ 71,821 3.43% $ 82,694 3.60%
========= ==== ======== ==== ======== ====
Ratio of average interest-earning assets
to average interest-bearing liabilities 109.30% 113.11% 116.24%
====== ====== ======
<FN>
(1) Includes nonaccrual loans and loans held for sale.
</FN>
4
Volume/Rate Analysis
The following table analyzes changes in interest income and interest expense
in terms of: (i) changes in the volume of interest- earning assets and
interest-bearing liabilities and (ii) changes in rate. The table reflects the
extent to which changes in the Company's interest income and interest expense
are attributable to changes in volume (changes in volume multiplied by prior
period's rate) and changes in rate (changes in rate multiplied by prior period's
volume). Changes attributable to the combined impact of volume and rate have
been allocated proportionately to changes due to volume and changes due to rate.
Year ended December 31,
------------------------------------------------------------------------
1997 vs. 1998 1998 vs. 1999
------------------------------- --------------------------------
Increase (decrease) Increase (decrease)
due to due to
------------------------------- --------------------------------
Volume Rate Net Volume Rate Net
------ ---- --- ------ ---- ---
(Dollars in Thousands)
Interest Income:
Loans (1) $ 2,946 $(1,235) $ 1,711 $(2,084) $(1,341) $(3,425)
Mortgage-backed certificates (5,316) (161) (5,477) (743) 68 (675)
U.S. Treasury, other U.S.
Government agency and other
debt securities 3 (114) (111) 692 (119) 573
Federal funds sold 276 (21) 255 31 (53) (22)
Federal Home Loan Bank and
Federal Reserve Bank stock (139) 16 (123) (182) 12 (170)
------- ------- ------- ------ ------- -------
Total interest income (2,230) (1,515) (3,745) (2,286) (1,433) (3,719)
------- ------- ------- ------ ------- -------
Interest Expense:
Passbook and statement savings (172) (100) (272) (150) (259) (409)
Checking accounts 109 (105) 4 92 (119) (27)
Money market deposit accounts 632 199 831 401 (194) 207
Certificates of deposit (1,938) (26) (1,964) (1,886) (719) (2,605)
Advances from the Federal Home Loan Bank (1,985) (212) (2,197) (826) (194) (1,020)
Other borrowings (33) - (33) (77) - (77)
Securities sold under agreements to
repurchase 140 (14) 126 153 (47) 106
------- ------- ------- ------ ------- -------
Total interest expense (3,247) (258) (3,505) (2,293) (1,532) (3,825)
------- ------- ------- ------ ------- -------
Net interest income $ 1,017 $(1,257) $ (240) $ 7 $ 99 $ 106
======= ======= ======= ====== ======= =======
<FN>
- ---------------------------
(1) Includes nonaccrual loans and loans held for sale.
</FN>
5
Interest Rate Risk Management
For discussion, See Item 7 - "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Market Risk Management."
Lending Activities
General. The Company engages in a wide range of lending activities, which
include the origination, primarily in its market area, of one to four-family and
multi-family residential mortgage loans, commercial real estate loans,
construction loans, land acquisition and development loans, consumer loans, and
commercial business loans; and the bulk purchase of residential loans primarily
located outside its market area. At December 31, 1999, the Company's total gross
loans held for investment in all categories equaled $506.7 million.
Set forth on the following page is selected data relating to the
composition of the Company's loan portfolio by type of loan and type of security
on the dates indicated.
6
Loan Portfolio Composition. The following table sets forth the composition
of the Company's loans held for investment in dollar amounts and as a percentage
of the Company's total loans held for investment at the dates indicated.
At December 31,
--------------------------------------------------------------------------------------
1995 1996 1997 1998 1999
-------------- --------------- --------------- --------------- ---------------
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ ------- ------ ------- ------ -------
(Dollars in Thousands)
Real estate loans:
Residential permanent 1- to 4-family:
Adjustable rate $ 98,093 27.44% $157,542 33.63% $213,682 40.20% $181,104 34.63% $149,163 29.44%
Fixed rate
Conventional 47,633 13.32 98,952 21.12 89,356 16.81 66,041 12.63 69,055 13.63
Guaranteed by VA or insured by FHA 7,691 2.15 7,004 1.50 5,487 1.03 3,972 0.76 2,823 .56
------- ----- ------- ----- -------- ------ ------- ----- -------- ------
Total permanent 1- to 4-family 153,417 42.91 263,498 56.25 308,525 58.04 251,117 48.02 221,041 43.63
------- ----- ------- ----- -------- ------ ------- ----- -------- ------
Residential permanent 5 or more family 9,343 2.61 7,100 1.52 6,374 1.20 7,874 1.51 8,082 1.59
------- ----- ------- ----- -------- ------ ------- ----- -------- ------
Total permanent residential loans 162,760 45.52 270,598 57.77 314,899 59.24 258,991 49.53 229,123 45.22
------- ----- ------- ----- -------- ------ ------- ----- -------- ------
Commercial real estate loans:
Hotels 9,652 2.70 9,651 2.06 10,240 1.93 9,208 1.76 10,711 2.11
Office and warehouse facilities 30,483 8.52 27,178 5.80 26,710 5.02 36,659 7.01 38,908 7.68
Retail facilities 17,450 4.88 18,181 3.88 18,249 3.43 22,823 4.37 22,098 4.36
Other 5,459 1.53 3,304 0.71 2,714 0.51 7,921 1.51 10,007 1.97
-------- ----- ------- ----- -------- ------ ------- ----- -------- ------
Total commercial real estate loans 63,044 17.63 58,314 12.45 57,913 10.89 76,611 14.65 81,724 16.12
-------- ----- ------- ----- ------ ------ ------- ----- -------- ------
Construction loans:
Residential 1- to 4-family 51,637 14.44 43,807 9.35 44,208 8.32 47,232 9.03 48,912 9.65
Residential 5 or more family 4,224 1.18 8,855 1.89 12,784 2.40 19,621 3.75 9,616 1.90
Nonresidential 50 0.02 3,365 0.72 1,420 0.27 4,101 0.79 7,685 1.52
-------- ----- ------- ----- -------- ------ ------- ----- -------- ------
Total construction loans 55,911 15.64 56,027 11.96 58,412 10.99 70,954 13.57 66,213 13.07
-------- ----- ------- ----- -------- ------ ------- ----- -------- ------
Land acquisition and development loans:
Consumer lots 5,646 1.58 5,396 1.15 4,573 0.86 3,703 0.71 3,566 .70
Acquisition and development 14,961 4.18 16,010 3.42 13,327 2.51 11,444 2.19 18,065 3.57
-------- ----- ------- ----- -------- ------ ------- ----- -------- ------
Total land acquisition and
development loans 20,607 5.76 21,406 4.57 17,900 3.37 15,147 2.90 21,631 4.27
-------- ----- ------- ----- -------- ------ ------- ----- -------- ------
Total real estate loans 302,322 84.55 406,345 86.75 449,124 84.49 421,703 80.65 398,691 78.68
-------- ----- ------- ----- -------- ------ ------- ----- -------- ------
Consumer loans:
Boats 9,766 2.73 7,814 1.67 5,685 1.07 4,275 0.82 2,855 .56
Home equity and second mortgage 20,811 5.82 29,578 6.31 45,194 8.50 52,845 10.11 56,469 11.14
Mobile homes 206 0.06 137 0.03 95 0.02 52 0.01 31 .01
Other 5,211 1.46 6,606 1.41 7,250 1.36 10,537 2.01 11,937 2.36
-------- ----- ------- ----- -------- ------ ------- ----- -------- ------
Total consumer loans 35,994 10.07 44,135 9.42 58,224 10.95 67,709 12.95 71,292 14.07
-------- ----- ------- ----- -------- ------ ------- ----- -------- ------
Commercial business loans 19,259 5.38 17,922 3.83 24,222 4.56 33,485 6.40 36,739 7.25
-------- ----- ------- ----- -------- ------ ------- ----- -------- ------
Total loans 357,575 100.00% 468,402 100.00% 531,570 100.00% 522,897 100.00% 506,722 100.00%
-------- ======= ------- ======= -------- ======= ------- ======= -------- =======
Less:
Allowance for loan losses 3,696 3,806 3,783 4,024 3,860
Undisbursed portion of construction and
acquisition and development loans 34,728 42,309 42,067 35,463 34,714
Unearned discounts, premiums, and
loan fees, net (43) 68 (767) (1,373) (1,470)
-------- ------- -------- ------- --------
38,381 46,183 45,083 38,114 37,104
-------- ------- -------- ------- --------
Total loans, net $319,194 $422,219 $486,487 $484,783 $469,618
======== ======== ======== ======== ========
7
Loan Maturities and Interest Rate Sensitivity. The following tables set
forth the fixed-rate and adjustable-rate composition and the contractual
maturities by general loan categories of the Company's loan portfolio at
December 31, 1999. Loans shown in the second table as including a "call"
provision are fixed-rate loans that permit the Company to demand payment of the
loan on one or more specified dates as set forth in the loan documents. Such
loans are included in the category in which they first may be called by the
Company. The amounts shown for each period do not take into account loan
prepayments. The contractual maturities of the loans indicated in the following
tables do not necessarily reflect the actual average life of loans in the
Company's loan portfolio because of loan prepayments and other factors.
Maturity in:
-----------------------------------------------------------------------------
Over one Over five Over ten Over
One year to five to ten to twenty twenty
or less years years years years Total
-------- -------- --------- --------- ----- -----
(Dollars in Thousands)
Permanent 1- to 4-family $ 11,267 $ 28,239 $36,945 $ 81,476 $ 63,114 $ 221,041
Permanent 5 or more family 345 2,152 2,626 2,959 - 8,082
Commercial real estate 9,900 22,873 23,283 25,142 526 81,724
Construction 66,213 - - - - 66,213
Land acquisition and development 18,078 915 679 1,216 743 21,631
Consumer 34,255 20,156 8,465 6,191 2,225 71,292
Commercial business 22,006 13,080 1,081 572 - 36,739
-------- ------- -------- -------- -------- ---------
Total $162,064 $ 87,415 $73,079 $117,556 $ 66,608 $ 506,722
======== ======== ======== ======== ======== =========
Maturity after December 31, 2000:
----------------------------------------------------------------------------
Floating
or
Fixed Adjustable
Rates Rates Calls Total
----- --------- ------- ------
(Dollars in Thousands)
Permanent 1- to 4-family $36,123 $146,621 $27,030 $209,774
Permanent 5- or more family 58 6,032 1,647 7,737
Commercial real estate 13,983 29,804 28,036 71,824
Construction - - - -
Land acquisition and development 390 167 2,996 3,553
Consumer 29,608 559 6,870 37,037
Commercial business 12,240 1,718 776 14,733
------ -------- ------- -------
Total $92,402 $184,901 $67,355 $344,658
======= ======== ======= ========
The Company's Credit Policy. The Company's credit policy establishes minimum
requirements and provides for appropriate limitations on overall concentration
of credit within the Company. The policy provides guidance in general credit
policies, underwriting policies and risk management, credit approval, and
administrative and problem asset management policies. The overall goal of the
Company's credit policy is to ensure that loan growth is accompanied by
acceptable asset quality with uniform and consistently applied approval,
administration, and documentation practices and standards.
8
Residential Mortgage Lending. A major lending activity of the Company is
the origination of residential mortgage loans secured by properties located in
its primary market area in southeastern Virginia. Originations are supplemented
by the bulk purchase of residential mortgage loans outside of the Company's
market area. The Company originates mortgage loans through its branch managers
and its loan officers. The Company currently offers both fixed-rate and
adjustable-rate mortgage loans. At December 31, 1999, $221.0 million were
invested in one-to-four family residential mortgage loans. Of these residential
mortgage loans, $149.2 million or 67.5% were invested in ARM loans and $71.9
million or 32.5% were invested in fixed-rate mortgage loans.
Fixed-rate mortgage loans are offered with 15-year and 30-year terms and
are underwritten by the Company on terms consistent with prevailing secondary
mortgage market standards. The Company's current policy is to sell the majority
of the fixed-rate mortgage loans that it originates to private institutional
investors and government agencies in the secondary mortgage market.
The Company also currently offers ARM loans with terms of up to 30 years.
Generally, the Company's ARM loans have an initial fixed interest rate for a
one-year, a three-year or a five-year period. After the first year (or third or
fifth year, if appropriate) of the term of the loan, and once every year
thereafter, the interest rate is adjusted by the Company to an index typically
based on the weekly average yield on United States Treasury securities adjusted
to a constant maturity of one year as made available by the Federal Reserve
Board, plus a margin of (typically) 2.75% for one year ARM loans. The amount of
any increase or decrease in the interest rate on ARM loans is generally limited
to 2% per adjustment period, with a maximum increase of 6% over the initial
interest rate for the duration of the loan. The terms and conditions, including
the index for interest rates of ARM loans offered by the Company, may and do
vary from time to time. Some of the ARM loans offered by the Company contain
provisions that permit the borrower to convert the loan from an adjustable-rate
loan to a fixed-rate loan. The Company does not offer ARM loans that contain
provisions permitting negative amortization. ARM loans generally decrease the
Company's exposure to interest rate risk arising from increases in prevailing
interest rates but create other potential risks for the Company in a steadily
rising interest rate environment. If interest rates were to rise steadily over
several years, interest rates on the Company's ARM portfolio could reach fully
indexed levels and the resulting higher mortgage payments for the Company's
borrowers could increase the potential for loan defaults.
The Company also originates residential mortgage loans through its private
banking groups. These loans are generally nonconforming jumbos to high income
and/or net worth borrowers.
Construction Lending. At December 31, 1999, $66.2 million of the Company's
total loans held for investment were construction loans, of which $30.3 million
were undisbursed loan proceeds. Of these construction loans, $48.9 million were
for one- to four-family residences.
The Company has an active construction lending program. The Company makes
loans for the construction of one- to four-family residences and, to a lesser
extent, multi-family dwellings. The Company also makes construction loans for
office and warehouse facilities and other nonresidential projects generally
limited to the borrowers that present other business opportunities for the
Company.
The amounts, interest rates and terms for construction loans vary,
depending upon market conditions, the size and complexity of the project, and
the financial strength of the borrower and the guarantors of the loan. The term
for the Company's typical construction loan ranges from 9 to 12 months for the
construction of an individual residence and from 18 months to a maximum of three
years for larger residential or commercial projects. The Company does not
typically amortize its construction loans, and the borrower pays interest
monthly on the outstanding principal balance of the loan. The Company's
construction loans generally have a floating or variable rate of interest plus a
margin but occasionally have a fixed interest rate. The Company does not
generally finance the construction of commercial real estate projects built on a
speculative basis. For residential builder loans, the Company limits the number
of models and/or speculative units allowed depending on market conditions, the
builder's financial strength and track record, and other factors. The maximum
loan-to-value ratio established by the Company for one-to-four family
residential construction loans is 80% of the property's fair market value, or
85% of the property's fair market value if the property will be the borrower's
primary residence. The fair market value of a project is determined on the basis
of an appraisal of the project usually conducted by an independent, outside
appraiser acceptable to the Company. For larger projects where unit absorption
or leasing is a concern, the Company may also obtain a feasibility study or
other acceptable information from the borrower or other sources about the likely
disposition of the property following the completion of construction.
9
Construction loans for nonresidential projects and multi-unit residential
projects are generally larger and involve a greater degree of risk to the
Company than residential mortgage loans. The Company attempts to minimize such
risks by making construction loans in accordance with the Company's underwriting
standards to established customers in its primary market area and by monitoring
the quality, progress, and cost of construction. Out of market projects to
strong, creditworthy builders or developers may be considered on an exception
basis. These loans must be additionally approved by the Bank's Board of
Directors. The maximum loan-to-value established by the Company for
non-residential projects and multi-unit residential projects is 75%; however,
this maximum can be waived for particularly strong borrowers on an exception
basis. Such waivers are reported to the Bank's Board of Directors.
Commercial Real Estate Lending. At December 31, 1999, the Company had $81.7
million of commercial real estate loans.
The Company's commercial real estate loans are primarily secured by the
value of real property and the income arising therefrom. The proceeds of
commercial real estate loans are generally used by the borrower to finance or
refinance the cost of acquiring and/or improving a commercial property. The
properties that typically secure these loans are office and warehouse
facilities, hotels, retail facilities, restaurants and other commercial
properties. The Company's present policy is generally to restrict the making of
commercial real estate loans to borrowers who will occupy or use the financed
property in connection with their normal business operations. However, the
Company will consider making commercial real estate loans under the following
two conditions. First, the Company will consider making commercial real estate
loans for other purposes if the borrower is in strong financial condition and
presents a substantial business opportunity for the Company. Second, the Company
will consider making commercial real estate loans to creditworthy borrowers who
have substantially pre-leased the improvements to recognized credit quality
tenants. Generally, such loans require full amortization over a fifteen-year
term compared to the normal twenty-five year amortization period.
Commercial real estate loans are usually amortized over a period of time
ranging from fifteen years to twenty-five years and usually have a term to
maturity ranging from five years to fifteen years. These loans normally have
provisions for interest rate adjustments generally after the loan is three to
five years old. The Company's maximum loan-to-value ratio for a commercial real
estate loan is 80%; however, this maximum can be waived for particularly strong
borrowers on an exception basis. Such waivers are reported to the Bank's Board
of Directors. Most commercial real estate loans are further secured by one or
more unconditional personal guarantees. The Company's commercial real estate
loans are approved by its Loan Committee.
In recent years, the Company has structured many of its commercial real
estate loans as mini-permanent loans. The amortization period, term, and
interest rates for these loans vary based on borrower preferences and the
Company's assessment of the loan and the degree of risk involved. If the
borrower prefers a fixed rate of interest, the Company usually offers a loan
with a fixed rate of interest for a term of three to five years, with required
monthly payments of interest only, or principal and interest with an
amortization period of up to twenty-five years. The remaining balance of the
loan is due and payable in a single balloon payment at the end of the initial
term. Additionally, the Company offers a fixed rate of interest for up to
fifteen years for loans that fully amortize during the fifteen- year term. If
the borrower prefers a variable or floating rate of interest, the Company
usually offers a loan with an interest rate indexed to the Company's prime rate
or the Company's average cost of funds plus a margin for a term of five years
with the remaining balance of the loan due and payable in a single balloon
payment at the end of five years. Management of the Company believes that
shorter maturities for commercial real estate loans are necessary to give the
Company some protection from changes in the borrower's business and income as
well as changes in general economic conditions. In the case of fixed-rate
commercial real estate loans, shorter maturities also provide the Company with
an opportunity to adjust the interest rate on this type of interest-earning
asset in accordance with the Company's asset/liability management strategies.
Loans secured by commercial real estate are generally larger and involve a
greater degree of risk than residential mortgage loans. Because payments on
loans secured by commercial real estate are usually dependent on successful
operation or management of the properties securing such loans, repayment of such
loans is subject to changes in both general and local economic conditions and
the borrower's business and income. As a result, events beyond the control of
the Company, such as a downturn in the local economy, could adversely affect the
performance of the Company's commercial real estate loan portfolio. The Company
seeks to minimize these risks by lending to established customers and generally
restricting its commercial real estate loans to its primary market area.
Emphasis is placed on the income producing characteristics and capacity of the
collateral.
Consumer Lot Lending. Consumer lot loans are loans made to individuals for
personal use for the purpose of acquiring an unimproved building site for the
construction of a residence to be occupied by the borrower. At December 31,
1999, the Company had $3.6 million of consumer lot loans. Consumer lot loans are
made only to individual borrowers, and each borrower generally must certify to
the Company his intention to build and occupy a single-family residence on his
lot generally within three or five years of
10
the date of origination of the loan. These loans typically have a maximum term
of either three or five years with a balloon payment of the entire balance of
the loan being due in full at the end of the initial term. The interest rate for
these loans is usually a fixed rate that is slightly higher than prevailing
fixed rates for one- to four-family residential mortgage loans. Management does
not view consumer lot loans as bearing as much risk as land acquisition and
development loans because such loans are not made for the construction of
residences for immediate resale, are not made to developers and builders, and
are not concentrated in any one subdivision or community.
Land Acquisition and Development Lending. Land acquisition and development
loans are loans made to builders and developers for the purpose of acquiring
unimproved land to be developed for residential building sites, residential
housing subdivisions, multi-family dwellings, and a variety of commercial uses.
At December 31, 1999, the Company had $18.1 million of land acquisition and
development loans, of which $4.4 million were undisbursed loan proceeds. The
Company's present policy is to make land loans to borrowers for the purpose of
acquiring developed lots for single-family, townhouse or condominium
construction or to facilitate the sale of real estate owned ("REO"). The Company
will also make land acquisition and development loans to residential builders
and to experienced developers in strong financial condition in order to provide
additional construction and mortgage lending opportunities for the Company.
Land acquisition and development loans are underwritten and processed by
the Company in much the same manner as commercial construction loans and
commercial real estate loans. The Company uses a lower loan-to-value ratio for
these types of loans, which is a maximum of 65% for unimproved land, and 75% for
developed lots for single-family or townhouse construction, respectively, of the
discounted appraised value of the property as determined in accordance with the
Company's appraisal policies. The maximum loan-to-value ratio can be waived for
particularly strong borrowers on an exception basis with such waivers reported
to the Bank's Board of Directors. The term of land acquisition and development
loans ranges from a maximum of two years for loans relating to the acquisition
of unimproved land to a maximum of five years for other types of projects. All
land acquisition and development loans are generally further secured by one or
more unconditional personal guarantees, and all land acquisition and development
loans are approved by the Company's Loan Committee. Because these loans are
usually in a larger amount and involve more risk than consumer lot loans, the
Company carefully evaluates the borrower's assumptions and projections about
market conditions and absorption rates in the community in which the property is
located and the borrower's ability to carry the loan if the borrower's
assumptions prove inaccurate.
Consumer Lending. The Company offers a variety of consumer loans, including
home equity and second mortgage loans, and other consumer loans, which include
automobile, personal (secured and unsecured), credit card, and loans secured by
savings accounts or certificates of deposit. At December 31, 1999, the balance
of all consumer loans was $71.3 million. The Company offers consumer loans to
its customers as part of its consumer and small business banking strategy and
because the shorter terms and generally higher interest rates on such loans help
the Company maintain a profitable spread between its average loan yield and its
cost of funds.
Consumer loans generally have shorter terms and higher interest rates than
residential mortgage loans. Consumer loans secured by collateral other than a
personal residence generally involve more credit risk than residential mortgage
loans because of the type and nature of the collateral or, in certain cases, the
absence of collateral. However, the Company believes the higher yields generally
earned on such loans compensate for the increased credit risk associated with
such loans. Home equity loans, second mortgage loans, and other consumer loans
secured by a personal residence do not present as much risk to the Company as
other types of consumer loans.
Boat Loans. At December 31, 1999, the Company had a portfolio of boat loans
totaling $2.9 million. The Company's portfolio of boat loans consists of loans
made by the Company predominantly in its local market area. These loans were
made with fixed or adjustable interest rates and with terms ranging from five to
twenty years. The Company no longer markets or promotes boat loans. As a result,
the outstanding balance of boat loans has gradually decreased over time.
Home Equity and Second Mortgage Lending. The Company offers its customers
home equity lines of credit and second mortgage loans that enable customers to
borrow funds secured by the equity in their homes. Currently, home equity lines
of credit are offered with adjustable rates of interest that are generally
priced at the prime lending rate plus .5%, with the rate for the first 12 months
set at 7.49%. Second mortgage loans are offered with fixed and adjustable rates.
Call option provisions are included in the loan documents for some longer-term,
fixed-rate second mortgage loans, and these provisions allow the Company to make
interest rate adjustments for such loans. Second mortgage loans are granted for
a fixed period of time, usually between five and twenty years, and home equity
lines of credit are made on an open-end, revolving basis under which the
borrower is obligated to pay each month a
11
variable amount equal to accrued interest on the outstanding principal plus
three fourths of one percent of the outstanding principal. At December 31, 1999,
the Company's outstanding home equity and second mortgage loans totaled $56.5
million.
Commercial Business Lending. Commercial business loan products include
revolving lines of credit to provide working capital, term loans to finance the
purchase of vehicles and equipment, letters of credit to guarantee payment and
performance, and other commercial loans. In general, all of these credit
facilities carry the unconditional guaranty of owners/stockholders. As of
December 31, 1999, the Company had a total of $36.7 million of commercial
business loans.
Revolving, operating lines of credit are typically secured by all current
assets of the borrower, provide for the acceleration of repayment upon any event
of default, are monitored monthly or quarterly to ensure compliance with loan
covenants, and are re- underwritten/renewed annually. Interest rates generally
will float at a spread tied to the Company's prime lending rate. Term loans are
generally advanced for the purchase of, and are secured by, vehicles and
equipment and are normally fully amortized over a two- to five-year term, on
either a fixed or floating rate basis.
Asset Quality
Management constantly monitors and reviews all delinquent and nonperforming
loans and all REO and other repossessed assets in order to develop appropriate
plans to collect delinquent loans or to dispose of foreclosed or repossessed
properties as promptly as possible.
Delinquent Loans. The following table sets forth certain information at the
dates indicated relating to delinquent loans and the percentage of such loans to
total gross loans held for investment. The information presented below excludes
matured loans for which the borrowers are still making required monthly payments
of interest or principal and interest. At December 31, 1999 and December 31,
1998, there were no such amounts. At December 31, 1997 such amounts totaled
$6,000 for 90 days and over.
At December 31,
------------------------------------------------------------------------------------------------
1997 1998 1999
---------------------- ---------------------- ----------------------
(Dollars in Thousands)
Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ -------
30-59 days $ 729 0.14% $ 985 0.19% $1,037 0.21%
60-89 days 859 0.16 490 0.09 114 0.02
90 days and over 1,097 0.21 1,076 0.21 379 0.07
------ ------ ----- ------ ------ -----
Total $2,685 0.51% $2,551 0.49% $1,530 0.30%
====== ===== ====== ===== ====== ======
Nonperforming Assets. The Company's nonperforming assets include
nonperforming loans, REO and other repossessed assets. The Company does not
generally accrue interest on loans that are 90 days or more past due and does
not include in its interest income interest on such loans that accrued during
the first 90 days after the loan became delinquent (with the exception of
certain VA- guaranteed or FHA-insured one- to four-family permanent mortgage
loans, certain credit card loans, and matured loans for which the borrowers are
still making required monthly payments of interest, or principal and interest,
and with respect to which the Company is negotiating extensions or refinancings
with the borrowers).
Real property purchased or acquired by foreclosure or by deed in lieu of
foreclosure is classified as REO until sold. REO is recorded at the lower of
cost or estimated fair value as determined by independent appraisals. If the
fair value of REO is less than the book value of the loan formerly secured by
such REO, the fair value becomes the new cost basis of the REO, and the
difference is charged against the allowance for loan losses on the date of
foreclosure or completion of the appraisal. Subsequent valuations are
periodically performed and valuation allowances are established if the carrying
value of the real estate exceeds estimated fair value less estimated costs of
sales. Other repossessed assets (boats, mobile homes, automobiles, etc.) are
carried at the lower of cost or estimated fair value as determined by
independent surveys or appraisals at the time of repossession. If the fair value
of the repossessed asset is less than the book value of the loan formerly
secured by such repossessed asset, the difference between the book value and the
fair value is charged to the allowance for loan losses on the date of
repossession.
12
The following table sets forth information about the Company's
nonperforming loans, REO, other repossessed assets, and troubled debt
restructurings at the dates indicated.
At December 31,
----------------------------------------------
1995 1996 1997 1998 1999
---- ---- ---- ---- ----
(Dollars in Thousands)
Nonperforming loans:
Real estate loans:
Permanent residential 1- to 4-family:
Nonaccrual $ 420 $1,172 $ 528 $ 359 $ 54
Accruing loans 90 days or more past due 77 246 53 511 87
------ ------ ------ ------ ------
Total 497 1,418 581 870 141
------ ------ ------ ------ ------
Commercial real estate:
Nonaccrual - 457 - - -
------ ------ ------ ------ ------
Total - 457 - - -
------ ------ ------ ------ ------
Construction:
Accruing loans 90 days or more past due - 170 - - -
------ ------ ------ ------ ------
Total - 170 - - -
------ ------ ------ ------ ------
Land acquisition and development:
Nonaccrual 200 200 200 - 48
------ ------ ------ ------ ------
Total 200 200 200 - 48
------ ------ ------ ------ ------
Consumer loans:
Nonaccrual
Boats - - 10 37 10
Home equity and second mortgage 107 - - 57 49
Other 137 100 62 46 20
Accruing loans 90 days or more past due 13 9 5 2 -
------ ------ ------ ------ ------
Total 257 109 77 142 79
------ ------ ------ ------ ------
Commercial business loans:
Nonaccrual 70 483 240 64 111
Accruing loans 90 days or more past due 4 - 5 - -
------ ------ ------ ------ ------
Total 74 483 245 64 111
------ ------ ------ ------ ------
Total nonperforming loans:
Nonaccrual 934 2,412 1,040 563 292
Accruing loans 90 days or more past due 94 425 63 513 87
------ ------ ------ ------ ------
Total 1,028 2,837 1,103 1,076 379
Real estate owned, net 1,828 2,769 1,098 377 218
Other repossessed assets, net 1 55 228 21 6
------ ------ ------ ------ ------
Total nonperforming assets, net 2,857 5,661 2,429 1,474 603
Total troubled debt restructurings - - - - -
------ ------ ------ ------ ------
Total nonperforming assets, net, and
troubled debt restructurings $2,857 $5,661 $2,429 $1,474 $ 603
====== ====== ====== ====== ======
Total nonperforming assets, net, and troubled
debt restructurings, to total assets .45% .80% .34% .23% .09%
====== ====== ====== ====== ======
13
Nonperforming Loans. At December 31, 1999, the Company's nonaccrual loans
totaled $292,000. This was comprised of $103,000 of single-family and home
equity loans, $111,000 of commercial business loans, $48,000 of land loans, and
$30,000 of other consumer loans. Total nonperforming loans were $379,000 at
December 31, 1999. Interest income on nonaccrual loans at December 31, 1999
would have approximated $33,000 for the year ended December 31, 1999, if such
loans had been current and performing under their stated, contractual terms
throughout the year. Interest income actually recognized on nonaccrual loans at
December 31, 1999 approximated $22,000.
Classified Assets. In accordance with applicable regulations and guidelines,
the Company has adopted a detailed, written policy (the "Classification Policy")
concerning the internal review and classification of assets. Pursuant to this
policy, an asset is considered "substandard" if it (i) is inadequately protected
by the current net worth and paying capacity of the obligor or of the collateral
pledged and (ii) is characterized by the "distinct possibility" that the insured
institution will sustain "some loss" if the deficiencies are not corrected.
Assets classified as "doubtful" have all of the weaknesses inherent in those
classified "substandard" with the added characteristic that the weaknesses
present make "collection or liquidation in full," on the basis of currently
existing facts, conditions, and values, "highly questionable and improbable."
Assets classified "loss" are those considered "uncollectible" and of such little
value that their continuance as assets without the establishment of a specific
loss reserve is not warranted.
The Company's Internal Review Committee meets each quarter to identify any
assets that have undergone a change in circumstances. The Company's objective is
to identify problem assets early in order to minimize losses. Assets that are
classified by the Company are reviewed at least quarterly to determine whether
corrective action has had the effect of improving the quality of the classified
asset. At December 31, 1999, the Company had $677,000 of assets classified as
substandard, including $224,000 of REO and other repossessed assets, $34,000 of
assets classified as doubtful, and $14,000 of assets classified as loss. All
assets classified as loss have been fully reserved. These amounts compare with
$1.9 million, $17,000 and $28,000 of assets classified as substandard, doubtful,
and loss, respectively, at December 31, 1998.
Real Estate Owned, Other Repossessed Assets and Claims Receivable Property.
The Company's REO includes real estate acquired by foreclosure or deed in lieu
of foreclosure. At December 31, 1999, the Company had REO of $218,000, which was
comprised of three residential single-family properties totaling $123,000 and
land of $95,000.
Loans. Loans classified as substandard at December 31, 1999 were comprised of
$253,000 (seven loans) of commercial land and business loans, $148,000 (two
loans) of permanent one- to four-family real estate loans, and $52,000 (eight
loans) of consumer loans.
Allowance for Loan Losses. The allowance for loan losses represents
management's estimate of an amount adequate to absorb potential losses on loans
that may become uncollectible. Factors considered in the establishment of the
allowance for loan losses include management's evaluation of specific loans, the
level and composition of classified loans, historical loan loss experience,
concentrations of credit, the relative inherent risk of loan types that comprise
the loan portfolio and other judgmental factors.
At December 31, 1999, the Company had an allowance for loan losses of $3.9
million and nonperforming loans of $379,000 which resulted in a coverage ratio
of approximately ten times the nonperforming loans. At December 31, 1998, the
Company had an allowance for loan losses of $4.0 million and nonperforming loans
of $1.1 million which resulted in a coverage ratio of approximately four times
the nonperforming loans.
The Company's provision for loan losses was $98,000 in 1999 compared to
$510,000 in 1998. Net chargeoffs remained substantially the same in 1999 as
compared to 1998. The difference between the provision for loan losses and net
loans charged-off during 1999 relates primarily to loan types in which the Bank
is no longer active and for which provisions for loan losses have previously
been made. Management believes that these previous provisions are adequate.
14
The following table sets forth an analysis of the Company's allowance for
loan losses for the periods indicated.
Year ended December 31,
-----------------------------------------------------------------------
1995 1996 1997 1998 1999
---- ---- ---- ---- ----
(Dollars in Thousands)
Balance at beginning of year $ 3,789 $ 3,696 $ 3,806 $ 3,783 $ 4,024
------- ------- ------- -------- -------
Charge-offs:
Real estate:
Residential 474 312 359 173 184
Commercial - 75 181 - -
Mobile home 91 50 22 26 1
Other consumer 371 199 180 143 112
Commercial 59 102 94 40 61
------- ------- ------- -------- -------
Total charge-offs 995 738 836 382 358
Recoveries 205 471 213 113 96
------ ------- ------ ------- ------
Total charge-offs, net 790 267 623 269 262
Provision for loan losses 697 377 600 510 98
------- ------- ------- --------- -------
Balance at end of year $ 3,696 $ 3,806 $ 3,783 $ 4,024 $ 3,860
======= ======= ======= ========= =======
Ratio of net charge-offs during the year to
average loans receivable during the year 0.24% 0.08% 0.13% 0.05% 0.05%
Ratio of allowance for loan losses to total
outstanding loans (gross) at end of year 1.03% 0.81% 0.71% 0.77% 0.76%
Allowance for loan losses as a percentage
of nonperforming loans 359.53% 134.16% 342.97% 373.98% 1,018.47%
15
The following table sets forth the allocation of the allowance for loan
losses at the dates indicated by category of loans and as a percentage of the
Company's total loans. The entire allowance for loan losses is available to
absorb losses from any type of loan.
At December 31,
----------------------------------------------------------------------------------------
1995 1996 1997 1998 1999
---------------- ---------------- ---------------- ---------------- ----------------
Percent Percent Percent Percent Percent
of loans of loans of loans of loans of loans
in each in each in each in each in each
category category category category category
to total to total to total to total to total
Amount loans Amount loans Amount loans Amount loans Amount loans
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
(Dollars in Thousands)
Real estate loans:
Permanent:
Residential 1- to 4-family $ 451 48.73% $ 512 62.56% $ 484 66.54% $ 350 58.13% $ 416 54.77%
Residential 5 or more family 36 2.61 21 1.52 25 1.20 6 1.51 81 1.59
Commercial real estate 869 17.63 799 12.45 698 10.89 824 14.65 817 16.12
Construction loans:
Residential 1- to 4-family 337 14.44 251 9.35 243 8.32 472 9.03 223 9.65
Residential 5 or more family 42 1.18 89 1.89 128 2.40 196 3.75 85 1.90
Nonresidential 1 0.02 34 .72 14 .27 41 .79 51 1.52
Land acquisition:
Individual lots 18 1.58 23 1.15 20 .86 37 .71 42 .70
Acquisition and development 137 4.18 127 3.42 133 2.51 114 2.19 143 3.57
Consumer loans:
Mobile homes 116 0.06 43 .03 40 .02 1 .01 - -
Other consumer 195 4.19 283 3.08 161 2.43 122 2.83 500 2.93
Commercial business loans 350 5.38 316 3.83 342 4.56 237 6.40 420 7.25
Unallocated 1,144 - 1,308 - 1,495 - 1,624 - 1,082 -
----- ------ ----- ----- ----- ------ ----- ----- ----- ------
$3,696 100.00% $3,806 100.00% $3,783 100.00% $4,024 100.00% $3,860 100.00%
====== ====== ====== ====== ====== ====== ====== ====== ====== ======
16
Mortgage-Backed Certificates
The Company invests in mortgage-backed certificates that are insured or
guaranteed by FNMA, FHLMC, or the Government National Mortgage Association
("GNMA"). On December 31, 1999, mortgage-backed certificates available for sale
totaled $82.8 million. The weighted average yield on the total mortgage-backed
certificate portfolio at December 31, 1999 was 6.85%.
The following table sets forth the composition of the Company's portfolio
of mortgage-backed certificates at the dates indicated. All mortgage-backed
certificates were held in the Company's available for sale portfolio.
At December 31,
-------------------------------------------------------------------------------------------------------
1995 1996 1997 1998 1999
------------------ ------------------ ----------------- ------------------ ------------------
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ ------- ------ ------- ------ -------
(Dollars in Thousands)
FHLMC:
Fixed rate $ 24,963 (1) 12.29% $ 20,033 (2) 11.27% $ 3,825 (2) 4.16% $ 1,329 7.18% $11,454 13.84%
Adjustable rate 154,891 76.23 144,020 81.04 78,435 85.41 10,330 60.70 30,342 36.66
FNMA:
Fixed rate 965 0.48 830 0.47 727 .79 569 3.34 26,256 31.72
Adjustable rate 17,909 8.81 9,283 5.22 6,067 6.61 2,776 16.31 12,108 14.63
GNMA:
Fixed rate 4,448 2.19 3,540 2.00 2,787 3.03 2,015 11.84 1,440 1.74
Adjustable rate - - - - - - - - 1,163 1.41
-------- ------ -------- ------ ------- ------ ------- ------ ------ -----
Total mortgage-backed
certificates $203,176 100.00% $177,706 100.00% $91,841 100.00% $17,019 100.00% $82,763 100.00%
======== ====== ======== ======= ======= ======= ======= ======= ======= =======
- ------
<FN>
(1) Includes $10.5 million and $11.9 million with five- and seven-year balloon
provisions, respectively.
(2) Includes $7.7 million and $10.3 million with five-and seven-year balloon
provisions, respectively.
(3) Includes $2.1 million and $6,000 with five- and seven-year balloon
provisions, respectively.
</FN>
Mortgage-backed certificates present limited credit risk to the Company because
of the insurance or guarantees that stand behind them. However, the value of the
Company's mortgage-backed certificates fluctuates in response to changing
economic and interest rate conditions and the rate of prepayment of the
underlying mortgages. It has been the Company's experience that most
mortgage-backed certificates prepay substantially in advance of their scheduled
amortizations. Mortgage-backed certificates can also be used as collateral for
borrowings. Mortgage-backed certificates constitute a "qualified thrift
investment" for purposes of the qualified thrift lender test and carry a
relatively low risk-weight for purposes of determining compliance with the
risk-based capital standard established by the Financial Institutions Reform,
Recovery, and Enforcement Act of 1989 ("FIRREA"). See "Regulation and
Supervision--Regulation of the Bank--Regulatory Capital Requirements" and
"--Qualified Thrift Lender Test."
17
The following table sets forth certain yield, maturity and market value
information concerning the Company's mortgage-backed certificates at December
31, 1999:
Principal maturing in (1):
--------------------------------------------------
Estimated
Market Average
Over five Total Value at Life
One year Over one to to ten Over Carrying December 31, to
or less five years years ten years Amount 1999 Maturity
-------- ---------- ------- --------- -------- ---------- --------
(Dollars in Thousands) (years)
FHLMC:
Fixed rate $ 3,105 $ 8,349 $ - $ - $ 11,454 $ 11,454 2.0
Adjustable rate 10,216 16,844 3,282 - 30,342 30,342 2.0
FNMA:
Fixed rate 6,508 18,547 1,175 26 26,256 26,256 2.1
Adjustable rate 2,420 6,665 2,173 850 12,108 12,108 3.3
GNMA:
Fixed rate 414 1,026 - - 1,440 1,440 1.8
Adjustable rate 386 613 39 125 1,163 1,163 1.4
--------- --------- --------- --------- --------- ---------
Total $ 23,049 $ 52,044 $ 6,669 $ 1,001 $ 82,763 $ 82,763 2.2
========= ========= ========= ========= ========= =========
Weighted average yield 6.85% 6.86% 6.78% 6.71% 6.85%
<FN>
- ---------------
(1) Reflects estimated average life to maturity based on recent prepayment
experience of the Company (approximately 17% to 28%). It has been the
Company's experience that most mortgage-backed certificates prepay
substantially in advance of their scheduled amortizations.
</FN>
Investment Activities
The Company is authorized to invest in various types of liquid assets,
including United States Treasury obligations, securities issued by various
federal agencies, certain certificates of deposit of insured banks and savings
institutions, certain bankers' acceptances, repurchase agreements, federal
funds, and FHLB stock. Subject to certain restrictions, the Company may also
invest its assets in commercial paper, corporate debt securities, and mutual
funds. The Company's investment policies do not permit investment in
noninvestment grade bonds.
The Company's investment policies were adopted by its Board of Directors,
are approved annually, and authorize the Company to invest in obligations issued
or guaranteed by the United States Government, and the agencies and
instrumentalities thereof, other qualified investment grade debt securities and
trust preferred obligations. At December 31, 1999, the Company's investment
portfolio totaled $75.5 million.
The Bank's investment activities are structured in part to enable the Bank
to meet the liquidity requirements mandated under OTS regulations. See
"Regulation and Supervision--Regulation of the Bank--Liquidity." In addition,
the amount of the Company's investments at any time will depend in part upon the
Company's loan originations at that time and the availability of attractive
long- term investments. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Market Rate Risk Management."
18
The following table sets forth certain information concerning the Company's
investment portfolio at the dates and for the years indicated.
At or for the year ended December 31,
---------------------------------------------------------------------
1997 1998 1999
------------------- -------------------- -------------------
(Dollars in Thousands)
Carrying Average Carrying Average Carrying Average
Value Yield (1) Value Yield (1) Value Yield(1)
------------------- -------------------- -------------------
Investment securities available for sale:
U.S. Treasury securities $ 39,343 6.25% $ 26,396 6.07% $ 14,004 6.13%
Other U.S. Government agency securities 6,004 6.28 21,471 5.71 41,281 5.49
Other debt security 250 9.26 250 9.25
Federal funds sold 37,118 5.55 42,289 5.30 12,908 4.91
Federal Home Loan Bank and Federal
Reserve Bank stock 8,711 7.21 5,066 (2) 7.39 7,100 (2) 7.58
-------- -------- -------
Total investments $ 91,176 6.30 $ 95,472 6.00 $ 75,543 5.69
======== ======== ========
<FN>
----------
(1) Yields are calculated during the years indicated.
(2) Due to the merger of the Company's subsidiary banks in 1998, investment in
Federal Reserve Bank Stock is no longer required and stock was redeemed in
1998.
</FN>
The following table presents certain yield, maturity, and market value data
for the U.S. Treasury securities and other U.S. Government agency securities in
the Company's investment portfolio at December 31, 1999. Investment securities
with "call" provisions that permit the issuer to demand payment on one or more
specified dates are included in the category in which they may first be called
by the issuer.
Over One Over Five After Total
One Year to Five to Ten Ten Carrying Market
or Less Years Years Years Value Value
--------- --------- --------- ----- ----------- ------
(Dollars in Thousands)
Investment securities available for sale:
U.S. Treasury securities $ 13,013 $ 991 $ - $ - $ 14,004 $ 14,004
========= ========= ======== ======== ======== ========
Weighted average yield 6.21% 5.32% -% -% 6.15%
Other U.S. Government agency
securities $ 2,983 $ 38,298 $ - $ - $ 41,281 $ 41,281
========= ========= ======== ======== ======== ========
Weighted average yield 5.79% 5.51% -% -% 5.53%
Other debt security $ - $ - $ - $ 250 $ 250 $ 250
========= ========= ======== ======== ======== ========
Weighted average yield -% -% -% 9.25% 9.25%
19
Sources of Funds
General. The Company's lending and investment activities are funded
primarily by deposits, principal and interest payments on loans and investments,
and borrowings from the FHLB.
Deposits. The Company's primary market for attracting deposits is the Hampton
Roads area. The Company attracts short-term and long-term deposits from the
general public by offering a wide variety of deposit accounts, competitive
interest rates, and convenient office locations and service hours. The Company
offers savings accounts, personal and commercial checking accounts, money market
deposit accounts, and certificates of deposit with terms ranging from 180 days
to 60 months. The Company relies on deposits obtained on a retail basis through
its offices and does not rely significantly on jumbo deposits. Jumbo deposits
are viewed as a less reliable source of deposits because they tend to be more
sensitive to variations in the interest rates paid by the Company and its
competitors. As a matter of policy, the Company does not accept brokered
deposits, which management views to be a highly interest rate sensitive source
of funds.
The Company's ability to attract and maintain deposits at favorable rates is
affected by competitive interest rates in the Company's market area and general
economic conditions.
The following table sets forth the distribution and the weighted average
interest rates of the Company's deposit accounts at the dates indicated.
At December 31,
--------------------------------------------------------------------------------------------------------
1997 1998 1999
------------------------------ ------------------------------ ------------------------------
Weighted Weighted Weighted
Percent of Average Percent of Average Percent of Average
Total Nominal Total Nominal Total Nominal
Amount Deposits Rate Amount Deposits Rate Amount Deposits Rate
------ -------- ---- ------ -------- ---- ------ -------- ----
(Dollars in Thousands)
Commercial checking $ 47,499 9.36% -% $ 69,801 14.05% -% $ 55,568 11.96% -%
Savings 44,118 8.69 3.34 36,588 7.37 2.46 32,191 6.93 2.41
Personal checking 40,129 7.90 2.05 50,673 10.20 1.18 52,832 11.37 1.26
Money market deposits 47,726 9.40 3.25 73,896 14.87 3.36 76,342 16.43 3.56
-------- ------ -------- ------ -------- ------
Subtotal 179,472 35.35 2.14 230,958 46.49 1.72 216,933 46.69 1.92
Certificate accounts 328,198 64.65 5.41 265,814 53.51 5.21 247,685 53.31 5.03
-------- ------ -------- ------ -------- ------
Total deposits $507,670 100.00% 4.26 $496,772 100.00% 3.59% $464,618 100.00% 3.58%
======== ====== ======== ====== ======== ======
20
The following table sets forth, by various rate categories, the amount of
certificate accounts outstanding at the dates indicated and the periods to
maturity of the certificate accounts outstanding at December 31, 1999.
At December 31, At December 31, 1999, Maturing in
------------------------------ -------------------------------------------------
Greater
One year than three
1997 1998 1999 or less Two years Three years years
-------- -------- -------- --------- --------- ----------- --------
(Dollars in Thousands)
Certificate accounts:
3.99% or less $ 519 $ 345 $ 52 $ 52 $ - $ - $ -
4.00% to 4.99% 70,286 121,862 159,000 151,708 4,449 795 2,048
5.00% to 5.99% 218,016 113,417 67,257 35,244 16,582 5,967 9,464
6.00% to 6.99% 27,210 18,818 13,908 10,870 1,864 1,142 32
7.00% to 7.99% 10,369 9,958 7,312 6,970 342 - -
8.00% to 8.99% 668 294 156 156 - - -
9.00% to 9.99% 1,130 1,120 - - - - -
-------- -------- -------- -------- ------ ------ -------
Total certificates $328,198 $265,814 $247,685 $205,000 $23,237 $7,904 $11,544
======== ======== ======== ======== ======= ====== =======
At December 31, 1999, the Company had outstanding $26.4 million in
certificate accounts in amounts greater than $100,000 maturing as follows (which
amount includes $1.2 million of jumbo certificates of deposit with negotiated
rates of interest):
Amount
---------------
(Dollars in Thousands)
Three months or less $ 7,781
Over three months to six months 5,858
Over six months to twelve months 8,195
Over twelve months 4,583
-------
Total $26,417
=======
Borrowings. Deposits are the Company's primary source of funds. The Company
also uses borrowings as an additional source of funds. The Company obtains
advances from the FHLB which can be collateralized by certain of its mortgage
loans or mortgage- backed certificates. See "Regulation and
Supervision--Regulation of the Bank--Federal Home Loan Bank System." Such
advances are made pursuant to several credit programs that have specific
interest rates and ranges of maturities. The maximum amount that the FHLB will
advance to member institutions, including the Bank, fluctuates from time to time
in accordance with the policies of the Federal Home Financing Board and the FHLB
and the current financial and operating condition of the Bank.
At December 31, 1999, the Company had $142.0 million of outstanding advances
from the FHLB.
21
The following table sets forth certain information regarding FHLB advances at
the dates indicated:
At or for the year ended December 31,
-------------------------------------------------------
1997 1998 1999
------------ ------------ --------
(Dollars in Thousands)
Adjustable-rate advances:
One year or less $ 85,000 $ - $127,000
Fixed-rate advances:
One year or less - - -
Over one year 60,000 (1) 75,000 (2) 15,000
---------- -------- ----------
Total advances $ 145,000 $ 75,000 $142,000
========== ======== ========
Maximum balance outstanding at any month-end $ 156,000 $158,000 $142,000
Average amount outstanding during the year $ 140,077 $103,592 $ 87,921
Weighted average cost of advances for the year 5.58% 5.43% 5.23%
<FN>
(1) The $60,000,000 fixed-rate advance was convertible to an adjustable-rate
advance at the option of the FHLB beginning in September, 1998. In December,
1999, the FHLB converted the advance to an adjustable-rate advance.
(2) Consists of the $60,000,000 fixed-rate advance discussed above and a
$15,000,000 fixed-rate advance, subject, in December 2001, to a one-time option
by the FHLB to convert to an adjustable-rate advance. The fixed rate is 4.84%.
The advance matures in December, 2003.
</FN>
Securities Sold Under Agreements to Repurchase. The Company enters into
reverse repurchase agreements or "sweep accounts" with commercial deposit
customers to enable these customers to earn interest on excess funds on deposit
with the Company. The Company may also enter into reverse repurchase agreements
with nationally recognized primary securities dealers and financial
institutions. Reverse repurchase agreements are accounted for as borrowings by
the Company and are generally secured by mortgage- backed certificates. The
Company's borrowing policy sets forth various terms and limitations with respect
to reverse repurchase agreements, including acceptable types and maturities of
collateral securities and the maximum amount of borrowings from any one approved
broker.
The following table presents certain information regarding reverse repurchase
agreements during the years indicated:
At or for the year ended December 31,
---------------------------------------------
1997 1998 1999
-------- -------- ------
(Dollars in Thousands)
Maximum amount outstanding at any month-end $ 12,199 $ 22,913 $ 20,755
Balance at end of year 9,664 13,084 13,233
Average amount outstanding during the year 8,893 12,026 15,711
Weighted average interest rate:
Amount outstanding at end of year 4.57% 3.96% 3.78%
Average amount outstanding during the year 4.60% 4.45% 4.08%
22
Activities of Subsidiary Companies of The Bank
The Bank is permitted by current OTS regulations to invest a maximum of two
percent of its assets in stock, paid-in surplus, and secured and unsecured loans
to service corporations. The Bank may also invest an additional one percent of
its assets in its service corporations when the additional funds are used for
community or inner city purposes. In addition, federally chartered savings
institutions under certain circumstances also may make conforming loans to
service corporations in which the lender owns or holds more than 10% of the
capital stock in an aggregate amount of up to 50% of regulatory capital. As of
December 31, 1999, the Bank's initial investment in and loans outstanding to its
service corporations totaled $1.8 million. These loans are primarily to finance
the acquisition of REO by the Bank's subsidiaries and the sale of REO by such
subsidiaries and are eliminated in accordance with accounting principles
generally accepted in the United States on the Company's Consolidated Financial
Statements.
The Bank has a total of seven direct or indirect subsidiaries: Independent
Investors, Inc. ("Independent Investors"); Olney-Duke Investors, Inc.
("Olney-Duke"); Independent Developers, Ltd. ("Independent Developers"); CENIT
Equity Company ("CENIT Equity"); CENIT Mortgage Corporation of North Carolina
("CENIT Mortgage"), which is a wholly owned subsidiary of CENIT Equity; CENIT
Commercial Mortgage Corporation ("CENIT Commercial Mortgage"); and Princess Anne
Equity Company ("Princess Anne Equity").
Independent Investors is a Virginia corporation incorporated in 1981, which
acts as a corporate trustee on various deeds of trust that secure loans made by
the Bank. At December 31, 1999, the Bank's initial investment in Independent
Investors was $15,000.
Olney-Duke is a Virginia corporation incorporated in 1986 for the original
purpose of owning and marketing certain unsold units in a condominium complex
acquired at foreclosure following the default of the original developer/builder.
In 1993 Olney-Duke entered into an arrangement with L. M. Associates, a
subsidiary of Legg Mason, Inc., to offer full-service stock and investment
brokerage to customers of the Bank in its retail branches. Olney-Duke's 1998
activities consisted of transactions with L. M. Associates. At December 31,
1999, the Bank's initial investment in and loans outstanding to Olney-Duke
totaled $1,000.
CENIT Equity is a Virginia corporation incorporated in 1977 which primarily
acquires properties at foreclosure sales or by deeds in lieu of foreclosure
following borrower defaults on loans made by the Bank. CENIT Equity then markets
such REO for resale. At December 31, 1999, CENIT Equity held REO with a total
net book value of $218,000, and the Bank's initial investment in and loans
outstanding to CENIT Equity amounted to $1.7 million.
Independent Developers is a Virginia corporation incorporated in 1977.
Independent Developers and a local builder and developer were involved in a
partnership in the development of unimproved land into residential building
sites and in the construction of townhouses and other single-family dwellings.
In 1986, the Bank and Independent Developers discontinued new real estate
development projects and in 1995 wound up the business and affairs of the
partnership and liquidated its assets. The corporation is currently inactive.
CENIT Mortgage is a North Carolina corporation incorporated in 1985 to act as
a mortgage loan originator for the Bank on the Outer Banks of North Carolina.
CENIT Mortgage is a wholly owned subsidiary of CENIT Equity. CENIT Mortgage
closed its office in 1995 and is currently inactive. At December 31, 1999, CENIT
Equity's initial investment in CENIT Mortgage equaled $50,000.
CENIT Commercial Mortgage is a Virginia corporation incorporated in 1990 for
the purpose of engaging in commercial mortgage loan brokerage transactions. At
December 31, 1999, the Bank's initial investment in and loans outstanding to
CENIT Commercial Mortgage totaled $50,000.
Princess Anne Equity is a Virginia corporation incorporated in 1997 for the
purpose of acquiring properties at foreclosure sales or by deeds in lieu of
foreclosure following borrower defaults. Princess Anne Equity then markets such
REO for sale. In June 1998, Princess Anne Equity became a wholly-owned
subsidiary of the Bank. At December 31, 1999, Princess Anne Equity held no REO
and the Bank's initial investment and loans outstanding amounted to $31,000.
Personnel. At December 31, 1999, the Company and its subsidiary had 219
full-time and 58 part-time employees. The Company's employees are not
represented by a collective bargaining unit, and the Company considers its
relationship with its employees to be excellent.
23
REGULATION AND SUPERVISION
Set forth below is a brief description of certain laws and regulations that
relate to the regulation of the Company and the Bank. The descriptions of these
laws and regulations, as well as descriptions of laws and regulations contained
elsewhere herein, do not purport to be complete and are qualified in their
entirety by reference to applicable laws and regulations.
Regulation of the Company
General. The Company is a unitary savings and loan holding company pursuant
to the Home Owners' Loan Act, as amended (the "HOLA"). As such, the Company is
subject to OTS regulation, examination, supervision and reporting requirements.
The OTS is the "appropriate banking agency" for the Company for purposes of many
federal banking regulations. The Company is also required to file certain
reports with and otherwise comply with the rules and regulations of the SEC
under the federal securities laws. As a subsidiary of a savings and loan holding
company, the Bank is subject to certain restrictions in its dealings with the
Company and affiliates thereof.
Limitations on Transactions with Affiliates. Transactions between financial
institutions such as the Bank and any affiliate are governed by Sections 23A and
23B of the Federal Reserve Act (the "FRA"). An affiliate of an institution is
any company or entity that controls, is controlled by or is under common control
with the institution. In a holding company context, the parent holding company
of an institution (such as the Company) and any companies that are controlled by
such parent holding company are affiliates of the institution. Generally,
Sections 23A and 23B of the FRA (i) limit the extent to which the institution or
its subsidiaries may engage in "covered transactions" with any one affiliate to
an amount equal to 10% of such institution's capital stock and surplus, and
contain an aggregate limit on all such transactions with all affiliates to an
amount equal to 20% of such capital stock and surplus and (ii) require that all
such transactions be on terms substantially the same, or at least as favorable,
to the institution or subsidiary as those provided to a non-affiliate. The term
"covered transaction" includes the making of loans, purchase of assets, issuance
of a guarantee and other similar types of transactions. In addition to the
restrictions imposed by Sections 23A and 23B of the FRA, no institution may (i)
loan or otherwise extend credit to an affiliate, except for any affiliate which
engages only in activities that are permissible for bank holding companies, or
(ii) purchase or invest in any stocks, bonds, debentures, notes or similar
obligations of any affiliate, except for affiliates that are subsidiaries of the
institution.
The restrictions contained in Section 22(h) of the FRA on loans to executive
officers, directors and principal stockholders also apply to the Bank. Under
Section 22(h), loans to a director, an executive officer and to a greater than
10% stockholder of a financial institution, and certain affiliated interests of
either, may not exceed, together with all other outstanding loans to such person
and affiliated interests, the institution's loans to one borrower limit
(generally equal to 15% of the institution's unimpaired capital and surplus).
Section 22(h) also prohibits loans above prescribed amounts to directors,
executive officers and greater than 10% stockholders of an institution, and
their respective affiliates, unless such loan is approved in advance by a
majority of the board of directors of the institution, with any "interested"
director not participating in the voting. The prescribed loan amount (which
includes all other outstanding loans to such person) as to which such prior
board of director approval is required generally is the greater of $25,000 or 5%
of capital and surplus (up to $500,000). Section 22(h) also requires that loans
to directors, executive officers and principal stockholders be made on terms
substantially the same as offered in comparable transactions to other persons.
Restrictions on Acquisitions. Savings and loan holding companies are
prohibited from acquiring, without prior approval of the director of the OTS (i)
control of any other savings association or savings and loan holding company or
substantially all of the assets thereof or (ii) more than 5% of the voting
shares of a savings association or holding company thereof that is not a
subsidiary. The director of the OTS may only approve acquisitions resulting in
the formation of a multiple savings and loan holding company that controls
savings associations in more than one state if (i) the multiple savings and loan
holding company involved controls a savings association that operated a home or
branch office located in the state of the association to be acquired as of March
5, 1987; (ii) the acquirer is authorized to acquire control of the savings
association pursuant to the emergency acquisition provisions of the Federal
Deposit Insurance Act; or (iii) the statutes of the state in which the
association to be acquired is located specifically permit institutions to be
acquired by state-chartered associations or savings and loan holding companies
located in the state where the acquiring entity is located (or by a holding
company that controls such state-chartered savings associations).
FIRREA amended provisions of the BHCA to specifically authorize the Federal
Reserve to approve an application by a bank holding company to acquire control
of a savings association. FIRREA also authorized a bank holding company that
controls a savings association to merge or consolidate the assets and
liabilities of the savings association with, or transfer assets and liabilities
to, any subsidiary Company that is a member of the BIF with the approval of the
appropriate federal banking agency and the Federal Reserve.
24
As a result of these provisions, there have been a number of acquisitions of
savings associations by bank holding companies in recent years.
Financial Modernization Legislation
The Gramm-Leach-Bliley Act of 1999 became law on November 12, 1999. This
legislation amends numerous federal banking laws and eliminates the prohibitions
against bank affiliations with securities firms and permits financial holding
companies to engage in banking, insurance, and securities brokerage activities.
In addition, this legislation restricts the sale of existing unitary thrift
holding companies like the Company to companies other than certain financial
companies and limits the granting of new charters for unitary thrift holding
companies to certain financial companies. Finally, this legislation establishes
a minimum federal standard of privacy for customers of financial institutions.
It authorizes the federal banking agencies to establish rules and regulations
protecting the confidentiality of a consumer's personal financial information
and provides the consumer with the power to choose how such personal financial
information is used.
Regulation of the Bank
General. The Bank is a federally chartered savings bank, and its deposit
accounts are insured up to applicable limits by the FDIC through the SAIF and
BIF. The Bank is subject to extensive regulation by the OTS and the FDIC, and
must file reports with the OTS concerning its activities and financial
condition, in addition to obtaining regulatory approvals before entering into
certain transactions such as mergers with or acquisitions of other financial
institutions. The OTS and the FDIC conduct periodic examinations to test the
Bank's compliance with various regulatory requirements. The OTS completed its
most recent regular supervisory examination in March, 1999. In addition, the OTS
conducted on-site Year 2000 examinations in June 1998, March 1999, and June
1999. In February, 1998, a multi-agency compliance examination of the Bank was
completed. The Bank is also a member of the FHLB and is subject to certain
limited regulation by the Federal Reserve.
FIRREA. FIRREA, which was signed into law in 1989, granted most of the
regulatory authority of savings institutions to the OTS, an office of the
Department of the Treasury. In addition, FIRREA abolished the Federal Savings
and Loan Insurance Corporation (the "FSLIC") and transferred its functions with
respect to deposit insurance to the FDIC, which administers the SAIF and BIF. As
a result, the FDIC was granted certain regulatory and examination authority over
the Bank. The FDIC fund existing prior to the enactment of FIRREA is now known
as the BIF, which continues to insure the deposits of commercial banks and
certain savings banks and is also administered by the FDIC. Although the FDIC
administers both funds, the assets and liabilities of the two funds are not
commingled.
The OTS, as the primary regulator of savings institutions, has extensive
enforcement authority over all savings institutions and all savings and loan
holding companies, including the Bank. The FDIC also has authority to impose
enforcement action on savings institutions and banks in certain situations. This
enforcement authority applies to all "institution-affiliated parties", including
directors, officers, controlling stockholders, and other persons or entities
participating in the affairs of the institution, as well as attorneys,
appraisers and accountants who knowingly or recklessly participate in wrongful
action likely to have an adverse effect on an insured institution.
FDIC Improvement Act of 1991. The FDIC Improvement Act of 1991 (the "FDIC
Improvement Act") primarily addressed additional sources of funding for the BIF,
as well as imposed a number of mandatory supervisory measures on savings
associations and banks.
Improved Examinations. All insured institutions must now undergo a
full-scope, on site examination by their appropriate Federal banking agency
("appropriate agency") at least once every eighteen months. The cost of
examinations of insured depository institutions and any affiliates may be
assessed by the appropriate agency against each institution or affiliate as it
deems necessary or appropriate.
Financial Reporting. Insured institutions with $500 million or more in total
assets are required to submit independently audited annual reports to the FDIC
and the appropriate agency. These publicly available reports must include (a)
annual financial statements prepared in accordance with accounting principles
generally accepted in the United States and such other disclosure requirements
as required by the FDIC or the appropriate agency and (b) a management report
signed by the Chief Executive Officer and the Chief Financial Officer or Chief
Accounting Officer of the institution that contains a statement of the
management's responsibilities for (i)
25
preparing the annual financial statements; (ii) establishing and maintaining an
adequate internal control structure and procedures for financial reporting; and
(iii) complying with the laws and regulations designated by the FDIC relating to
safety and soundness and an assessment of (aa) the effectiveness of the system
of internal control and procedures for financial reporting as of the end of the
fiscal year and (bb) the institution's compliance during the fiscal year with
applicable laws and regulations designated by the FDIC relating to safety and
soundness. With respect to any internal control report, the institution's
independent public accountants must attest to, and report separately on, certain
assertions of the institution's management contained in such report. Any
attestation by the independent accountant pursuant to this section would be made
in accordance with auditing standards generally accepted in the United States
for attestation engagements. At January 1, 1999, the Bank's assets exceeded $500
million; accordingly, the Bank is required to prepare the aforementioned reports
for 1999.
Large insured institutions, as determined by the FDIC, are required to
monitor the above activities through an independent audit committee which has
access to independent legal counsel.
Standards for Safety and Soundness. The FDIC Improvement Act requires the
federal banking regulatory agencies to prescribe, by regulation, standards for
all insured depository institutions and depository institution holding
companies.
Effective August 9, 1995, the federal banking regulatory agencies jointly
implemented Interagency Guidelines Establishing Standards for Safety and
Soundness ("Guidelines") for all insured depository institutions relating to
internal controls, information systems and internal audit systems, loan
documentation, credit underwriting, interest rate risk exposure, asset growth,
compensation, fees and benefits, and employment contracts and other compensation
arrangements of executive officers, employees, directors and principal
stockholders of insured depository institutions that would prohibit compensation
and benefits and arrangements that are excessive or that could lead to a
material financial loss for the institution. The federal banking regulatory
agencies also adopted asset quality and earnings standards within the
Guidelines, which became effective October 1, 1996. The Interagency Guidelines
Establishing Year 2000 Standards for Safety and Soundness ("Year 2000
Guidelines") were implemented in 1998 and set forth safety and soundness
standards to ensure that insured depository institutions would be able to
achieve Year 2000 readiness and to successfully continue business operations
after January 1, 2000. At December 31, 1999, the Bank was in compliance with the
Guidelines and had taken substantially all steps required by the Year 2000
Guidelines. See Item 7 - Management's Discussion and Analysis of Financial
Condition and Results of Operations "Impact of the Year 2000 Issue" filed with
this report.
Certain FIRREA and the FDIC Improvement Act regulatory requirements and
limitations, to which the Bank is subject, are discussed below.
Loans-to-One-Borrower Limitations. FIRREA imposed limitations on the
aggregate amount of loans that a savings association could make to any one
borrower, including related entities. Under FIRREA, the permissible amount of
loans-to-one-borrower follows the national bank standard for all loans made by
savings associations. The national bank standard generally does not permit
loans-to- one-borrower to exceed 15% of unimpaired capital and surplus. Loans in
an amount equal to an additional 10% of unimpaired capital and surplus also may
be made to a borrower if the loans are fully secured by readily marketable
securities. At December 31, 1999, the Bank had no borrowers to which it had
outstanding loans in excess of its loans-to-one-borrower limit.
Regulatory Capital Requirements. Federally insured savings associations and
banks are required to maintain minimum levels of regulatory capital. Pursuant to
FIRREA, the OTS and the FDIC have established capital standards applicable to
the Bank. The OTS is also authorized to impose capital requirements in excess of
these standards on individual institutions on a case-by-case basis. As of
December 31, 1999, the Bank exceeded all minimum levels of regulatory capital.
See Note 18 of the Consolidated 1999 Financial Statements filed with this
report.
In August 1993, the OTS adopted a final rule incorporating an interest-rate
risk component into the risk-based capital regulation. Under the rule, an
institution with a greater than "normal" level of interest rate risk will be
subject to a deduction of its interest rate risk component from total capital
for purposes of calculating its risk-based capital requirement. As a result,
such an institution will be required to maintain additional capital in order to
comply with the risk-based capital requirement. The final rule was effective
January 1, 1994. However, the date that institutions are first required to
deduct the interest rate risk component has been postponed indefinitely until a
final rule is published by the OTS. Pursuant to the rule, the Bank would have
not been subject to the interest rate risk component as of December 31, 1999.
Effective December 1, 1998, the OTS updated the guidance that it provides to
savings institutions such as the Bank to provide savings institutions with
additional, detailed information concerning the management of interest rate
risk, investment securities, and derivatives activities.
26
Capital Distributions. Limitations are imposed upon all "capital
distributions" by savings institutions, including cash dividends, payments to
repurchase or otherwise acquire its shares, payments by an institution to
shareholders of another institution in a cash-out merger, and other
distributions charged against capital.
The OTS issued a final rule, effective April 1, 1999, updating and
streamlining the regulations governing capital distributions by savings
institutions like the Bank. The intent of the OTS was to conform its capital
distribution regulations more closely with the distribution requirements
established by other banking agencies. As a subsidiary of a savings and loan
holding company, the Bank must file a notice of a proposed capital distribution
with the OTS.
Qualified Thrift Lender Test. The QTL test requires that qualified thrift
investments represent 65% of portfolio assets. Portfolio assets are defined as
total assets less intangibles, properties used to conduct the institution's
business, and liquid assets (up to 20% of total assets). The penalties for
failure to meet the QTL test are substantial. Any savings institution that fails
to meet the test either must convert to a commercial bank charter or comply with
the restrictions imposed for noncompliance. If the institution does not convert
to a commercial bank, its new investments and activities shall be limited to
those permissible for a national bank, and it shall be subject to national bank
branching limitations. Both the investment and activities powers and the
branching rights available to national banks are generally more restrictive than
those available to savings institutions. In addition, the institution is
immediately ineligible to receive any new FHLB advances and is subject to
national bank limits on the payment of dividends. If such institution has not
requalified as a QTL or converted to a commercial bank charter within three
years after the failure, it then must divest all investments and cease all
activities not permissible for a national bank and must repay promptly any
outstanding FHLB advances. If any institution that fails the QTL test is
controlled by a holding company, then within one year after the failure, the
holding company must register as a bank holding company and thereby become
subject to all restrictions on bank holding companies.
At December 31, 1999, the Bank's qualified thrift investments as a
percentage of its total assets exceeded the percentage required to qualify the
Bank under the QTL test in effect at that time. The Bank will remain in
compliance unless its monthly average percentage of qualified thrift investments
to portfolio assets falls below 65% in nine months out of any 12-month period.
Liquidity. All savings institutions, including the Bank, are required to
maintain an average daily balance of liquid assets equal to a certain percentage
of the sum of its average daily balance of net withdrawable deposit accounts and
borrowings payable in one year or less. The liquidity requirement may vary from
time to time (between 4% and 10%) depending upon economic conditions and savings
flows of all savings institutions. At the present time, the required liquid
asset ratio is 4%. At December 31, 1999, the Bank was in compliance with these
requirements, and exceeded the required liquid asset ratio.
Insurance of Accounts, Assessments and Regulation by the FDIC. The Bank's
deposits are insured up to $100,000 per insured depositor (as defined by law and
regulation) by the FDIC through the SAIF and the BIF. The SAIF and the BIF are
administered and managed by the FDIC. As insurer, the FDIC is authorized to
conduct examinations of and to require reporting by SAIF and BIF- insured
institutions. FIRREA also authorizes the FDIC to prohibit any SAIF and
BIF-insured institution from engaging in any activity that the FDIC determines
by regulation or order to pose a serious threat to the SAIF and BIF. The FDIC
also has the authority to initiate enforcement actions against savings
institutions, after first giving the OTS an opportunity to take such action.
Through the SAIF, the FDIC insures deposits at savings institutions such as
the Bank, and through the BIF, the FDIC insures deposits at other financial
institutions (principally commercial banks, state-chartered banks, and certain
federally chartered savings banks).
FICO assessment rates for the first semiannual period of 1999 were set at
.012% annually for BIF-assessable deposits and .061% annually for
SAIF-assessable deposits. These rates may be adjusted quarterly to reflect
changes in assessment bases for the BIF and SAIF. By law, the FICO rate on
BIF-assessable deposits were to be one-fifth the rate on SAIF assessable
deposits until the insurance funds are merged or until January 1, 2000,
whichever occured first. There was no FDIC assessment for either SAIF-assessable
or BIF-assessable deposits for the first semiannual period of 1999.
From time to time, there are various proposals that involve increasing the
deposit insurance premiums paid by banks and/or savings institutions. The
Company is unable to predict whether or to what extent the rates that the Bank
pays for federal deposit insurance may increase in future periods as a result of
such proposals. Such increases would adversely affect its operations.
27
Federal Home Loan Bank System. The Bank is a member of the FHLB-Atlanta,
which is one of twelve regional FHLBs that administers the home financing credit
functions of savings associations. As a member of the FHLB system, the Bank is
required to purchase and maintain stock in the FHLB in an amount equal to the
greater of 1% of its aggregate unpaid residential mortgage loans and
mortgage-backed securities, 0.3% of its assets or 5% (or such greater fraction
as established by the FHLB) of its outstanding FHLB advances. At December 31,
1999, the Bank held $7.1 million in FHLB stock, which was in compliance with
these requirements.
Federal Reserve System. The Federal Reserve requires all depository
institutions to maintain reserves against their transaction accounts (primarily
NOW and Super NOW checking accounts) and non-personal time deposits. At December
31, 1999, the Bank was in compliance with such requirements. The balances
maintained to meet the reserve requirements imposed by the Federal Reserve may
be used to satisfy applicable liquidity requirements. However, because required
reserves must be maintained in the form of either vault cash, a
noninterest-bearing account at a Federal Reserve Bank or a pass-through account
as defined by the Federal Reserve, the effect of this reserve requirement is to
reduce the Company's interest-earning assets.
Savings institutions are authorized to borrow from the Federal Reserve Bank
"discount window," but Federal Reserve regulations require institutions to
exhaust other reasonable alternative sources of funds, including FHLB advances,
before borrowing from the Federal Reserve Bank.
Federal Securities Laws
The Company's Common Stock is registered with the SEC under the Securities
Exchange Act of 1934, as amended (the "Exchange Act"). The Company is subject to
the information, proxy solicitation, insider trading restrictions and other
requirements of the SEC under the Exchange Act. Under the Securities Enforcement
and Penny Stock Reform Act of 1990, the Company may be subject, among other
things, to civil money penalties for violations of the federal securities laws.
FEDERAL AND STATE TAXATION
Federal Taxation
General. The Company and the Bank are subject to the applicable corporate
tax provisions of the Internal Revenue Code of 1986, as amended (the "Code"), as
well as certain additional provisions of the Code that apply to thrifts and
other types of financial institutions. The following discussion of tax matters
is intended only as a summary and does not purport to be a comprehensive
description of the tax rules applicable to the Company and the Bank.
Under the applicable statutes of limitation, the Company's federal income
tax returns for 1996 through 1998 are open to examination by the Internal
Revenue Service (the "Service"). The Company is unaware, however, of any current
or pending Service examinations of the Company's returns for any of those open
years.
The Company reports its income and expenses on the accrual method of
accounting and files a consolidated federal income tax return on a December 31
calendar year basis. Consolidated tax returns have the effect of eliminating
intercompany distributions, including dividends, from the computation of
consolidated taxable income for the taxable year in which the distributions
occur.
Bad Debt Reserves. Prior to 1996, savings institutions such as the Bank
that met certain definitional tests primarily relating to their assets and the
nature of their business ("Qualifying Thrifts") were permitted to establish a
reserve for bad debts and to make annual additions thereto, which additions
could, within specified formula limits, be deducted by the savings institutions
in arriving at their taxable income. For purposes of the bad debt deduction,
loans were separated into "qualifying real property loans" (which are, in
general, loans secured by interests in improved real property or real property
which is to be improved out of the proceeds of the loan) and "nonqualifying
loans" (which are all other loans).
During 1996, new tax legislation was enacted that repealed the reserve
method of accounting for bad debts of qualified thrift institutions and, for
years after 1995, the Bank is only eligible to claim tax deductions for bad
debts under the rules for banks. Because the Bank is a "large bank" as that term
is defined in the Code, it is required to compute its bad debt deduction based
only on actual chargeoffs. Additionally, the new legislation required a thrift
institution to recapture over a six-year period its reserve as of December 31,
1995, to the extent it exceeds its reserve balance at December 31, 1987. The
Bank is recapturing the excess reserve of approximately $139,000 over six years.
28
Thrift Charter Conversion. The Bank's retained earnings at December 31,
1999 included $6,134,000 representing that portion of the Bank's reserve for bad
debts for which no provision for income taxes has been made. Under legislation
passed in 1996, this amount would not be subject to federal income taxes if the
Bank were to convert to, or merge with, a commercial bank. This amount would be
subject to federal income taxes if the Bank were to use the reserve for purposes
other than to absorb losses.
Distributions. If the Bank's reserve for losses on qualifying real property
loans exceeds the amount that would have been allowed under the Experience
Method and makes a distribution to the Company that is considered to be drawn
from its excess bad debt reserve or from the Bank's supplemental reserve
("Excess Distributions"), then an amount based on the Excess Distribution will
be included in the Bank's taxable income during the year of distribution.
Distributions by the Bank in excess of its current and accumulated earnings and
profits and distributions in redemption of stock would cause a portion of the
Bank's bad debt reserves to be recaptured into taxable income. However,
dividends paid out of the Bank's current or accumulated earnings and profits, as
calculated for federal income tax purposes, will not be considered to result in
a distribution from the Bank's bad debt reserves. In addition, the payment of a
dividend to stockholders by the Company, or the repurchase of shares of Common
Stock by the Company, would not normally cause any amount of bad debt reserve
recapture at the Bank's level provided that the Bank's payment to the Company of
funds used for such purposes did not exceed the amount of the Bank's available
earnings and profits.
The amount of additional taxable income created in the event of a
distribution by the Bank to the Company of an amount in excess of the Bank's
available earnings and profits, is an amount that, when reduced by the tax
attributable to the income, is equal to the amount of the distribution. At
current corporate income tax rates this amount equals approximately 150% of the
amount of the distribution. Thus, if certain portions of the Bank's bad debt
reserve are used for any purpose other than to absorb qualified bad debt loans,
such as for the payment of nondividend distributions with respect to the Bank's
capital stock (including distributions upon redemption or liquidation), a
portion of those distributions may be includable in the Bank's gross income for
federal income tax purposes. Neither the Bank nor the Company anticipates paying
dividends or making distributions with respect to the Bank's capital stock which
would give rise to that type of federal tax liability. See "Regulation and
Supervision--Regulation of the Bank--Capital Distributions" for limits on the
payment of dividends by the Company.
Corporate Dividends Received Deduction. The Company is permitted to exclude
from its taxable income 100% of any dividends received from the Bank, and the
Bank may exclude from its income dividends received from its subsidiaries
pursuant to the regulations applicable to consolidated income tax returns. The
Company and the Bank may deduct from their income 80% of any dividends received
from an unaffiliated corporation if they own at least 20% of the stock of the
corporation. If they own less than 20% of the stock of a corporation paying a
dividend, 70% of any dividends received may be excluded from income.
State and Local Taxation
The Company, the Bank and its subsidiaries (other than CENIT Mortgage of
North Carolina) are subject to Virginia corporate income taxes. The Virginia
corporate income tax is imposed at a rate of 6% on the combined net income of
the Company, the Bank and its subsidiaries (other than CENIT Mortgage of North
Carolina) as reported for federal income tax purposes with certain
modifications. CENIT Mortgage of North Carolina is subject to North Carolina
corporate income taxes at an annual rate of 7.25% on its separately computed
federal taxable income with certain modifications.
29
EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth information with respect to the executive
officers of the Bank as of December 31, 1999.
Name Age Position Held
---- --- -------------------------------
Michael S. Ives 47 President/Chief Executive
Officer/Director
Barry L. French 56 Senior Vice President/
Retail Banking Group Manager
John O. Guthrie 50 Senior Vice President/
Chief Financial Officer and
Finance and Administration
Group Manager
Roger J. Lambert 50 Senior Vice President/
Information Services
Group Manager
Alvin D. Woods 55 Senior Vice President/
Credit Policy and Administration
Chief Lending Officer and
Lending Group Manager
Winfred O. Stant, Jr. 46 First Vice President/
Chief Accounting Officer
Set forth below is certain information with respect to the executive
officers of the Bank and the Company. Unless otherwise indicated, the principal
occupation listed for each person below has been his or her principal occupation
for the past five years.
Michael S. Ives has been President and Chief Executive Officer of the Bank
since January, 1987. Mr. Ives also became President and Chief Executive Officer
of the Company after its incorporation in 1991. Mr. Ives is also a director of
the Bank and the Company.
Barry L. French joined the Bank in November, 1991, and is a Senior Vice
President and Retail Banking Group Manager. In this position, Mr. French is
responsible for Retail Banking Operations. Before assuming this position in
November 1992, Mr. French shared responsibility for Retail Commercial Lending.
Mr. French came to the Bank after a long affiliation with Crestar Bank in
Newport News, Virginia, where he was employed from 1971 until 1991. From 1987
until 1991, Mr. French was Crestar's regional president and Commercial Division
Manager in Newport News, Virginia, where he was responsible for establishing
Crestar's policies and procedures in the region and for the direction of
Crestar's commercial banking operations in the region.
John O. Guthrie joined the Bank in 1972. He has served in a number of
capacities with the Bank, and since 1988, has been Senior Vice President and the
Bank's Chief Financial Officer. In his present position, he is responsible for
overseeing the Bank's asset/liability and investment management, for budgeting,
and for administering the Bank's external and internal reporting. From 1983 to
1988, Mr. Guthrie served as Senior Vice President and Manager of the Bank's
Finance/Administrative Division. He also acted as Manager of the Retail Banking
Division from 1986 to 1989. Mr. Guthrie is also Senior Vice President, Chief
Financial Officer, Finance and Administration Group Manager, and Secretary for
the Company.
Roger J. Lambert joined the Bank in January, 1980, and is a Senior Vice
President and Information Services Group Manager. In this position, Mr. Lambert
is responsible for data processing, electronic funds transfer and proof
operations, voice and data communications, and all forms of electronic banking
such as automated teller machines. Before assuming this position, Mr. Lambert
was a Systems Engineer for the N.C.R. Corporation.
30
Alvin D. Woods, a Senior Vice President, joined the Bank in March 1992 and
is the Bank's Chief Lending Officer and Lending Group Manager. Mr. Woods is
responsible for all lending activities of the Bank, including collections and
special assets. Mr. Woods also serves as Senior Vice President/Credit Policy and
Administration for the Company. Prior to assuming these positions, Mr. Woods was
in charge of the Bank's residential construction and mortgage lending. Before
joining the Bank, Mr. Woods had been employed by NationsBank Financial
Corporation and its predecessor institutions, including C&S Sovran Financial
Corporation, Sovran Financial Corporation and Sovran Company, N.A. and Virginia
National Bank, since 1970. Since January 1991, he had served as Executive Vice
President and Manager of the Metro D.C. Real Estate Finance Division of C&S
Sovran, and from 1984 until January 1991, managed Sovran's real estate finance
lending activities in the Hampton Roads area.
Winfred O. Stant, Jr. has served as First Vice President and Chief
Accounting Officer since September 1998. Mr. Stant joined Princess Anne Bank
("Princess Anne") in May 1992 and served as Senior Vice President and Chief
Financial Officer of Princess Anne until its merger with the Bank in 1998.
Before joining Princess Anne, Mr. Stant had been employed since March 1989 by
Independent Banks of Virginia, Inc. in Norfolk, Virginia. Mr. Stant was Vice
President and Chief Financial Officer of Independent Banks of Virginia, Inc.,
which was the parent company of Princess Anne and two other banks prior to the
spin-off of Princess Anne in August of 1992. Mr. Stant is a certified public
accountant and has ten years of experience with a national public accounting
firm.
Item 2 - Properties
The Company neither owns nor leases any real property. The Company currently
uses the property and equipment of the Bank without payment to the Bank.
The Company conducts its business through its corporate headquarters,
operations center, loan administration center, twenty retail branch offices, and
two mortgage branch offices, all of which are located in the Hampton Roads area.
In 1999, the Company relocated its corporate headquarters to 300 East Main
Street, Suite 1350, Norfolk, Virginia.
31
The following table sets forth the location of each of the Bank's offices and
whether it is owned or leased by the Bank at December 31, 1999.
Corporate Headquarters
300 East Main St., Suite 1350
Norfolk, Virginia Leased
Operations Center
225 W. Olney Road
Norfolk, Virginia Leased
Loan Operations Center
641 Lynnhaven Parkway
Virginia Beach, Virginia Leased
Retail Branch Offices
- -----------------------------------------------------------------------------------------------------------------------------------
745 Duke Street 2203 E. Little Creek Rd.
Norfolk, Virginia Owned Norfolk, Virginia Owned
300 E. Main Street 3315 High Street
Norfolk, Virginia Leased Portsmouth, Virginia Leased
675 N. Battlefield Blvd. 2600 Taylor Road
Chesapeake, Virginia Owned Chesapeake, Virginia Owned
5627 W. High Street 2205 Executive Drive
Portsmouth, Virginia Owned Hampton, Virginia Owned
110 Ottis Road 5007 Victory Boulevard
York County, Virginia Owned York County, Virginia Leased
13307 Warwick Blvd. 6101 Military Highway
Newport News, Virginia Owned Norfolk, Virginia Leased
550 Settlers Landing Road 1616 Laskin Road Land Leased
Hampton, Virginia Owned Virginia Beach, Virginia Building and
improvements owned
699 Independence Boulevard 905 Kempsville Road
Virginia Beach, Virginia Owned Virginia Beach, Virginia Owned
641 Lynnhaven Parkway 4801 Columbus Street
Virginia Beach, Virginia Leased Virginia Beach, Virginia Leased
3001 Shore Drive 3901 Holland Road
Virginia Beach, Virginia Leased Virginia Beach, Virginia Leased
Mortgage Branch Offices
- -----------------------------------------------------------------------------------------------------------------------------------
2612 Taylor Road 110 Ottis Road
Chesapeake, Virginia Owned Yorktown, Virginia Owned
32
Item 3 - Legal Proceedings
The Company is not involved in any pending legal proceedings other than
routine legal proceedings arising in the ordinary course of business. In the
opinion of management, pending legal proceedings against the Company in the
aggregate do not involve amounts that are material to the financial condition or
results of operations of the Company.
Item 4 - Submission of Matters to a Vote of Security Holders
During the fourth quarter ended December 31, 1999, no matters were
submitted to a vote of security holders through a solicitation of proxies or
otherwise.
PART II
Item 5 - Market for Registrant's Common Stock and Related Stockholder Matters
The Company's Common Stock trades on The Nasdaq Stock Market (R) under the
symbol CNIT. The following table presents the reported high and low sales prices
of the Company's Common Stock by quarters in fiscal years 1999 and 1998.
1999(2) 1998 (2)
--------------------- ----------------
Quarter High (1) Low (1) High (1) Low (1)
------- ---- --- ---- ---
First $ 23.13 $ 19.38 $ 29.00 $ 23.33
Second 20.88 18.00 28.67 20.50
Third 19.50 16.50 24.63 16.75
Fourth 19.00 16.88 21.50 14.13
(1) The source for the high and low sales prices by quarter is The Nasdaq Stock
Market(R).
(2) Sales prices have been restated for the 3-for-1 stock split declared on
March 24, 1998.
The Company paid a quarterly cash dividend on its Common Stock of $.15 per
share for each quarter of 1999 and $.10, $.10, $.10 and $.11 per share for the
first, second, third and fourth quarters, respectively in 1998. The Company also
declared quarterly cash dividends of $.15 per share for the first quarter of
2000. If the Company experiences quarterly results in line with projections, the
Company intends to continue the quarterly dividend at $.15 per share. However,
no assurance can be given that such dividends will be paid at all or, if paid,
that such dividends will not be reduced or eliminated in future periods. The
declaration of dividends by the Board of Directors of the Company will depend
upon a variety of factors, including, but not limited to, the Company's current
and projected results of operations and financial condition, regulatory capital
requirements, applicable statutory and regulatory restrictions on the payment of
dividends, alternative uses of capital, tax considerations, and general economic
conditions. The declaration of dividends by the Company in the future initially
will depend upon dividend payments by the Bank to the Company. Pursuant to OTS
regulations, all capital distributions by savings institutions, including the
declaration of dividends, are subject to limitations that depend largely on the
level of the institution's capital following such distribution. For information
concerning these regulations, see "Item 1.--Business-Regulation and
Supervision--Regulation of the Bank--Capital Distributions." Moreover, the Bank
will not be permitted to pay dividends on, or repurchase, any of its capital
stock if such dividends or repurchases would cause the total capital of the Bank
to be reduced below the amount required for its liquidation account established
in connection with the Conversion. See Note 18 of the Notes to the Consolidated
Financial Statements filed with this report.
Unlike the Bank, the Company is not subject to these regulatory
restrictions on the payment of dividends to its shareholders, although the
source of such dividends is dependent upon dividends received from the Bank. The
Company is subject, however, to the restrictions of Delaware law, which
generally limit dividends to the amount of a corporation's surplus or, in the
case where no such surplus exists, the amount of a corporation's net profits for
the fiscal year in which the dividend is declared and/or the preceding fiscal
year.
Earnings appropriated for bad debt reserves and deducted for federal income
tax purposes cannot be used by the Bank to pay cash dividends to the Company
without the payment of income taxes by the Bank on the amount deemed
distributed, which would include the amount of any federal income taxes
attributable to the distribution. Neither the Company nor the Bank anticipates
creating federal tax liabilities in this manner. See "Item 1-Business--Federal
and State Taxation" and Note 14 of the Notes to Consolidated Financial
Statements filed with this report.
As of February 7, 2000, there were approximately 1,112 holders of record of
the Company's Common Stock.
33
Item 6 - Selected Financial Data
The following table presents selected financial data for the five years
ended December 31, 1999.
At or for the year ended December 31,
1999 1998 1997 1996 1995
------------------------------------------------------------------
(Dollars in thousands, except per share)
Financial Condition Data:
Total assets $ 674,213 $ 641,056 $718,083 $ 707,100 $ 639,812
Securities available for sale:
U.S. Treasury, other U.S. Government agency
and other debt securities, net 55,535 48,117 45,347 46,305 65,118
Mortgage-backed certificates, net 82,763 17,019 91,841 177,706 203,176
Loans held for investment, net 469,618 484,783 486,487 422,219 319,194
Real estate owned, net 218 377 1,098 2,769 1,828
Deposits 464,618 496,772 507,670 498,965 450,530
Borrowings 155,233 88,084 157,239 155,138 138,171
Stockholders' equity 51,265 50,076 49,937 49,608 46,729
Operating Data:
Interest income $ 43,312 $ 47,031 $ 50,776 $ 48,171 $ 45,527
Interest expense 21,980 25,805 29,310 28,087 27,476
----------------------------------------------------------------------
Net interest income 21,332 21,226 21,466 20,084 18,051
Provision for loan losses 98 510 600 377 697
----------------------------------------------------------------------
Net interest income after provision for loan losses 21,234 20,716 20,866 19,707 17,354
Other income 7,132 7,013 5,713 3,894 2,944
Other expenses 18,899 18,197 17,312 18,172 16,174
----------------------------------------------------------------------
Income before income taxes 9,467 9,532 9,267 5,429 4,124
Provision for income taxes 3,408 3,417 3,264 1,821 1,652
----------------------------------------------------------------------
Net income $ 6,059 $ 6,115 $ 6,003 $ 3,608 $ 2,472
----------------------------------------------------------------------
Earnings per share:
Basic $ 1.32 $ 1.30 $ 1.24 $ .74 $ .52
----------------------------------------------------------------------
Diluted $ 1.30 $ 1.27 $ 1.20 $ .72 $ .50
----------------------------------------------------------------------
Cash dividends per share $ .60 $ .41 $ .33 $ .25 $ .13
----------------------------------------------------------------------
Selected Financial Ratios and Other Data:
Return on average assets 0.96% 0.92% 0.86% (1) 0.54% (2) 0.40%(3)
Return on average stockholders' equity 11.97 12.04 12.00 (1) 7.56 (2) 5.57 (3)
Average stockholders' equity to average assets 8.02 7.68 7.17 7.20 7.21
Stockholders' equity to total assets at year end 7.60 7.81 6.95 7.02 7.30
Interest rate spread 3.00 2.88 2.85 2.83 2.60
Net interest margin 3.60 3.43 3.27 3.22 3.07
Other expenses to average assets 3.00 2.75 2.48 (1) 2.74 (2) 2.63 (3)
Net interest income to other expenses 112.87 116.65 123.99 (1) 110.52 (2) 111.61 (3)
Nonperforming assets to total assets .09 .23 34 .80 .45
Allowance for loan losses to total net loans .82 .83 .78 .90 1.16
Dividend payout ratio (4) 45.45 31.54 26.95 33.63 25.81
Book value per share $ 11.29 (5) $ 10.93 (5) $ 10.57 $ 10.11 $ 9.76
Tangible book value per share 10.57 (5) 10.13 (5) 9.72 9.22 9.38
Number of retail branch offices 20 20 20 19 16
<FN>
- --------
(1) Exclusive of the $405 of expenses related to the proxy contest and other
matters and the related tax effect, the return on average assets and return
on average stockholders' equity for the year ended December 31, 1997 would
have been .90% and 12.50%, respectively, and the ratio of other expenses to
average assets and net interest income to other expenses would have been
2.42% and 126.97%, respectively.
(2) Exclusive of the $2,340 one-time SAIF special assessment paid in November,
1996 and the related tax effect, the return on average assets and return on
average stockholders' equity for the year ended December 31, 1996 would have
been .76% and 10.52%, respectively, and the ratio of other expenses to
average assets and net interest income to other expenses would have been
2.39% and 126.86%, respectively.
(3) Exclusive of the $757 of merger expenses and the $563 loss on the sale of
securities and the related tax effect, the return on average assets and
return on average stockholders' equity for the year ended December 31, 1995
would have been .57% and 7.91%, respectively. Exclusive of the $757 of
merger expenses relating to the Princess Anne combination, the ratio of
other expenses to average assets and net interest income to other expenses
would have been 2.50% and 117.09%, respectively.
(4) Represents dividends per share divided by basic income per share. Dividends
per share represent historical dividends declared by the Company.
(5) Book value per share and tangible book value per share, computed by
including unallocated common stock held by the Company's Employee Stock
Ownership Plan at December 31, 1999, were $10.79 and $10.10, respectively,
and at December 31, 1998 were $10.41 and $9.65, respectively.
</FN>
34
Item 7 - Management's Discussion and Analysis of Financial Condition and Results
of Operations
- --------------------------------------------------------------------------------
Financial Condition of the Company
Total Assets. At December 31, 1999, the Company had total assets of $674.2
million, an increase of $33.2 million since December 31, 1998. This increase is
primarily from purchases of mortgage-backed certificates, offset by a decrease
in loans held for investment and federal funds sold.
Securities Available For Sale. Securities available for sale totaled $138.3
million at December 31, 1999 compared to $65.1 million at December 31, 1998. The
net increase of $73.2 million from December 31, 1998 resulted primarily from the
net effect of $101.0 million of purchases, $10.5 million of repayments, and
$15.4 million of proceeds from maturities or calls. Purchases included $37.0
million of adjustable-rate mortgage certificates with an average rate reset of
28 months and $39.9 million of fixed-rate certificates with an average maturity
of 8.7 years.
The portfolio of securities available for sale at December 31, 1999 was
comprised primarily of $41.3 million of U.S. Government agency securities, $14.0
million of U.S. Treasury securities and $82.8 million of mortgage-backed
certificates.
Loans. The balance of net loans held for investment decreased from $484.8
million at December 31, 1998 to $469.6 million at December 31, 1999.
Single-family first mortgage loans decreased $30.1 million from $251.1 million
at December 31, 1998 to $221.0 million at December 31, 1999, while all other net
loans increased by $14.9 million from $233.7 million at December 31, 1998 to
$248.6 million at December 31, 1999. The increase in other net loans is the
result of the Company's emphasis on originating consumer and commercial loans
during 1999.
Deposits. During 1999, the Company's total deposits decreased from $496.8
million at December 31, 1998 to $464.6 million at December 31, 1999. The
Company's noninterest-bearing deposits decreased from $78.7 million at December
31, 1998 to $64.5 million at December 31, 1999, primarily as a result of
attorney escrow accounts at December 31, 1999, being lower compared to December
31, 1998. Attorney escrow account deposits fluctuate with the level of mortgage
activity handled by the attorneys. Average noninterest- bearing deposits
increased from $56.4 million in 1998 to $65.7 million in 1999. The balance of
all interest checking, savings and money market accounts at December 31, 1999
was $152.4 million, an increase of $196,000 compared to the balance of these
accounts at December 31, 1998, while the average balance of these accounts
increased from $138.7 million in 1998 to $150.6 million in 1999. Certificate of
deposit balances decreased $18.1 million from $265.8 million at December 31,
1998 to $247.7 million at December 31, 1999. The increase in average
noninterest-bearing deposits and decrease in certificates of deposit resulted
from the Company's ongoing strategy to seek lower-cost deposits to further
enhance the Company's profitability.
Borrowed Funds. The Company's borrowed funds, which include Federal Home Loan
Bank ("FHLB") advances and securities sold under agreements to repurchase,
increased from $88.1 million at December 31, 1998 to $155.2 million at December
31, 1999. FHLB advances increased from $75.0 million to $142.0 million during
this period. The primary use of funds from FHLB advances was the purchase of
mortgage-backed certificates.
Capital. The Company's and CENIT Bank's (the "Bank") capital ratios
significantly exceeded applicable regulatory requirements at both December 31,
1999 and 1998. During 1999, the Company repurchased 80,330 shares of its
outstanding common stock.
Asset Quality. The Company's total nonperforming assets decreased by 59%, to
a total of $603,000, or .09% of assets, at December 31, 1999 compared to $1.5
million, or .23% of assets, at December 31, 1998. Real estate owned ("REO")
decreased by 42%, from $377,000 at December 31, 1998 to $218,000 at December 31,
1999. Nonperforming loans were $379,000 and $1.1 million at December 31, 1999
and 1998, respectively. The Company's allowance for loan losses was $3.9 million
at December 31, 1999, compared to $4.0 million at December 31, 1998, resulting
in a coverage ratio of 10 times nonperforming loans at December 31, 1999 and 4
times nonperforming loans at December 31, 1998.
Comparison of Operating Results for the Years Ended December 31, 1999 and 1998
General. The Company's pre-tax income was $9.5 million for the years ended
December 31, 1999 and 1998. During 1999, net interest income after the provision
for loan losses increased by $518,000, other income increased by $119,000 and
other expenses increased by $702,000.
35
Net Interest Income. The Company's net interest income before provision for
loan losses increased by $106,000 for the year ended December 31, 1999. This
increase resulted from a $3.7 million decrease in interest income, which was
exceeded by a $3.8 million decrease in interest expense.
Interest on loans decreased by approximately $3.4 million, or 9%, from $39.9
million in the year ended 1998 to $36.5 million in 1999. This decrease was
attributable to a $27.1 million decrease in the average balance of loans, and a
decrease in the yield on the Company's loan portfolio from 7.87% in 1998 to
7.60% in 1999. The decrease in the average balance of loans resulted primarily
from a decrease in residential single-family loans. The weighted average yield
on the loan portfolio for the month of December 1999 was 7.76%.
Interest on investment securities increased $573,000 in 1999 compared to
1998. This increase resulted primarily from an increase in the average balance
of the portfolio from $44.5 million in 1998 to $56.6 million in 1999. Interest
on mortgage-backed certificates decreased $675,000 primarily the result of a
decrease in average balances from $47.0 million in 1998 to $36.3 million.
The Company's interest expense decreased by $3.8 million, as a result of a
decrease in interest on both deposits and borrowings. The average balance of
interest-bearing deposits decreased by $25.4 million in 1999 compared to 1998,
while the average costs of interest-bearing deposits decreased from 4.54% in
1998 to 4.13% in 1999. The average balance of borrowings decreased by $13.0
million in 1999 compared to 1998, while the average cost of the borrowings
decreased from 5.35% in 1998 to 5.06% in 1999.
The Company's net interest margin increased from 3.43% for the year ended
December 31, 1998 to 3.60% for the year ended December 31, 1999. The net
interest margin for 1999 increased, in part, due to the increase of $9.3 million
of average noninterest- bearing deposits between 1999 and 1998. For the fourth
quarter of 1999, the Company's net interest margin was 3.58% compared to 3.57%
in the fourth quarter of 1998. The Company's interest rate spread increased from
2.88% in the year ended December 31, 1998 to 3.00% in the comparable 1999
period. The increase in the Company's interest rate spread occurred because the
Company's overall yield on its interest-earning assets decreased from 7.59% to
7.32%, while the overall cost of its interest-bearing liabilities decreased from
4.71% in 1998 to 4.32% in 1999. The Company's net interest spread in the fourth
quarter of 1999 was 2.98% compared to 2.95% in the fourth quarter of 1998. The
Company's calculations of interest rate spread and net interest rate margin
include nonaccrual loans as interest-earning assets.
Provision for Loan Losses. The Company's provision for loan losses decreased
from $510,000 in 1998 to $98,000 in 1999. Net chargeoffs totaled $262,000 in
1999 compared to $269,000 in 1998. The difference between the provision for loan
losses and net loans charged-off during 1999 relates primarily to loan types in
which the Bank is no longer active and for which provisions for loan losses have
previously been made.
Other Income. Total other income increased by 2%, from $7.0 million in 1998
to $7.1 million in 1999. Gain on sales of loans decreased $282,000 in 1999 due
primarily to the decreased volume of mortgage loan originations. Deposit fees
and merchant processing fees increased by $57,000 and $402,000, respectively, in
1999 compared to 1998. Deposit fees increased in 1999 as a result of additional
transaction accounts and increases in the Company's deposit fee schedule.
Merchant processing fees increased in 1999 as the Company continued to
experience substantial growth in its merchant portfolio. Brokerage fees
recognized by the Bank's commercial mortgage loan brokerage subsidiary decreased
by $300,000 in 1999 compared to 1998, as a result of a decrease in the volume of
brokerage activity.
Other Expenses. Total other expenses increased from $18.2 million in the year
ended December 31, 1998 to $18.9 million in 1999. Merchant processing expenses
increased by $187,000 in 1999 as a result of increased volume. Expenses related
to professional fees increased by $67,000 during 1999 due, in part, to
activities associated with the century date change. Equipment, data processing
and supply expenses increased by $131,000 in 1999, reflecting increases
primarily in depreciation and maintenance. Salaries and employee benefits
increased by $223,000 or 2.7%, reflecting general wage increases.
Income Taxes. The Company's income tax expense for both the years ended
December 31, 1999 and 1998 was $3.4 million, which represented an effective tax
rate of approximately 36% for each year.
Comparison of Operating Results for the Years Ended December 31, 1998 and 1997
General. The Company's pre-tax income increased by 2.9% to $9.5 million for
the year ended December 31, 1998 from $9.3 million for 1997. This increase was
attributable primarily to a $1.3 million increase in other income, offset by a
$885,000 increase in other expenses and a $150,000 decrease in net interest
income after provision for loan losses.
36
Net Interest Income. The Company's net interest income before provision for
loan losses decreased by $240,000 for the year ended December 31, 1998, a 1.1%
decrease from 1997. This decrease resulted from a $3.7 million decrease in
interest income, which exceeded a $3.5 million decrease in interest expense. The
Company sold a substantial portion of its lower-yielding mortgage-backed
certificate portfolio during 1998 and used proceeds from the sale to fund other
interest-earning assets and to pay down borrowings, thereby reducing the asset
size of the Company. Interest on the Company's portfolio of mortgage-backed
certificates decreased by $5.5 million in 1998 primarily due to a $77.8 million
decrease in their average balances. This decrease was not totally offset by
reductions in interest expense or interest income from other sources.
Interest on loans increased by approximately $1.7 million, or 4.5%, from
$38.2 million in the year ended 1997 to $39.9 million in 1998. This increase was
attributable to a $37.1 million increase in the average balance of loans, the
effect of which more than offset a decrease in the yield on the Company's loan
portfolio from 8.12% in 1997 to 7.87% in 1998. The increase in the average
balance of loans resulted from both an increase in originations and from the
purchase of residential single-family loans. The weighted average yield on the
loan portfolio for the month of December 1998 was 7.56%.
Interest on investment securities decreased $133,000 in 1998 compared to
1997. This decrease resulted primarily from a decrease in the yield on the
portfolio from 6.24% in 1997 to 5.93% in 1998.
The Company's interest expense decreased by $3.5 million, as a result of a
decrease in interest on both deposits and borrowings. The average balance of
interest bearing deposits decreased by $19.4 million in 1998 compared to 1997,
while the average costs of interest bearing deposits decreased from 4.66% in
1997 to 4.54% in 1998. The average balance of borrowings decreased by $33.8
million in 1998 compared to 1997, while the average cost of the borrowings
decreased from 5.54% in 1997 to 5.35% in 1998.
The Company's net interest margin increased from 3.27% for the year ended
December 31, 1997 to 3.43% for the year ended December 31, 1998. This resulted
primarily from the sale of lower-yielding mortgage-backed certificates and
reduction in the asset size of the Company, and also a $13.7 million increase in
the average balance of noninterest-bearing deposits. For the fourth quarter of
1998, the Company's net interest margin was 3.57% compared to 3.31% in the
fourth quarter of 1997. The Company's interest rate spread increased from 2.85%
in the year ended December 31, 1997 to 2.88% in the comparable 1998 period. The
increase in the Company's interest rate spread occurred because the Company's
overall yield on its interest-earning assets decreased from 7.73% to 7.59%,
while the overall cost of its interest-bearing liabilities decreased from 4.88%
in 1997 to 4.71% in 1998. The Company's net interest spread in the fourth
quarter of 1998 was 2.95% compared to 2.86% in the fourth quarter of 1997. The
Company's calculations of interest rate spread and net interest rate margin
include nonaccrual loans as interest-earning assets.
Provision for Loan Losses. The Company's provision for loan losses decreased
from $600,000 in 1997 to $510,000 in 1998. Net chargeoffs totaled $269,000 in
1998 compared to $623,000 in 1997. At December 31, 1998, the Company's total
allowance for loan losses was $4.0 million and nonperforming loans totaled $1.1
million, resulting in a coverage ratio of 374%, compared to a coverage ratio of
343% at December 31, 1997.
The provision for loan losses decreased by $90,000 in 1998 compared to 1997.
The Company considered a number of factors in determining the 1998 loan loss
provision and the adequacy of the allowance for loan losses at December 31,
1998, including: (a) the level of nonperforming loans at December 31, 1998 and
1997, (b) the increase in the percentage of non-residential mortgage loans in
the loan portfolio, which have more inherent risk in comparison to residential
mortgage loans and, (c) the decrease in net loan chargeoffs during 1998.
Other Income. Total other income increased by 22.8%, from $5.7 million in
1997 to $7.0 million in 1998. Gain on sales of loans increased $482,000 in 1998
due primarily to the increased volume of mortgage loan originations. Deposit
fees and merchant processing fees increased by $414,000 and $671,000,
respectively, in 1998 compared to 1997. Deposit fees increased in 1998 as a
result of additional transaction accounts and increases in the Company's deposit
fee schedule. Merchant processing fees increased in 1998 as the Company
continued to experience substantial growth in its merchant portfolio. Brokerage
fees recognized by the Bank's commercial mortgage loan brokerage subsidiary
decreased by $382,000 in 1998 compared to 1997, primarily as a result of a
decrease in the volume of brokerage activity.
Other Expenses. Total other expenses increased from $17.3 million in the year
ended December 31, 1997 to $18.2 million in 1998. Total other expenses for 1997
includes $405,000 of expenses relating to the proxy contest and other matters.
Merchant processing expenses increased by $636,000 in 1998 as a result of
increased volume. Expenses related to professional fees increased by $266,000
during 1998 due, in part, to a recovery of legal costs in 1997 related to
previous problem assets. Equipment, data processing and supply expenses
increased by $158,000 in 1998, reflecting increases primarily in depreciation
and maintenance.
37
Income Taxes. The Company's income tax expense for the year ended December
31, 1998 was $3.4 million, which represents an effective tax rate of 35.8%. The
Company's income tax expense for 1997 was $3.3 million, which represented an
effective tax rate of 35.2%. The effective tax rate increased during 1998
primarily as a result of the increase in the income of the Bank subject to state
tax.
Liquidity
The principal sources of funds for the Company for the year ended December
31, 1999, included $194.0 million in proceeds from FHLB advances, $10.5 million
in principal repayments of securities available for sale, $15.3 million in
proceeds from sales, maturities and calls of securities available for sale, and
$55.7 million in proceeds from the sale of loans. Funds were used primarily to
repay FHLB advances totaling $127.0 million, to fund purchases of investment
securities available for sale totaling $101.0 million, and to originate loans
held for sale of $54.5 million.
Savings institutions, such as the Bank, are required to maintain an average
daily balance of liquid assets equal to a certain percentage of the sum of its
average daily balance of net withdrawable deposit accounts and borrowings
payable in one year or less. The liquidity requirements may vary from time to
time (between 4% and 10%) depending upon economic conditions and savings flows
of all savings institutions. At the present time, the required liquid asset
ratio is 4%. The Bank's liquid asset ratio exceeded regulatory requirements at
December 31, 1999 and 1998.
At December 31, 1999, the Company had outstanding mortgage and nonmortgage
loan commitments, including unused lines of credit, of $57.8 million,
outstanding commitments to purchase loans of $850,000 and outstanding
commitments to sell mortgage loans of $4.5 million, if such loans close. The
Company anticipates that it will have sufficient funds available to meet its
current commitments.
Certificates of deposit that are scheduled to mature within one year totaled
$205.0 million at December 31, 1999. The Company believes that a significant
portion of the certificates of deposit maturing in this period will remain with
the Company. The Company's liquidity could be impacted by a decrease in the
renewals of deposits or general deposit runoff. However, the Company has the
ability to raise deposits by conducting deposit promotions. In the event the
Company requires funds beyond its ability to generate them internally, the
Company could obtain additional advances from the FHLB. The Company could also
obtain funds through the sale of investment securities from its available for
sale portfolio.
Market Risk Management
The Company's primary market risk exposure is interest rate risk.
Fluctuations in interest rates will impact both the level of interest income and
interest expense and the market value of the Company's interest-earning assets
and interest-bearing liabilities.
The primary goal of the Company's asset/liability management strategy is to
maximize its net interest income over time while keeping interest rate risk
exposure within levels established by the Company's management. The Company's
ability to manage its interest rate risk depends generally on the Company's
ability to match the maturities and repricing characteristics of its assets and
liabilities while taking into account the separate goals of maintaining asset
quality and liquidity and achieving the desired level of net interest income.
The principal variables that affect the Company's management of its interest
rate risk include the Company's existing interest rate gap position,
management's assessment of future interest rates, the need for the Company to
replace assets that may prepay before their scheduled maturities, and the
withdrawal of liabilities over time.
One technique used by the Company in managing its interest rate risk exposure
is the management of the Company's interest sensitivity gap. The interest
sensitivity gap is defined as the difference between the amount of
interest-earning assets anticipated, based upon certain assumptions, to mature
or reprice within a specific time period and the amount of interest-bearing
liabilities anticipated, based upon certain assumptions, to mature or reprice
within that time period. At December 31, 1999, the Company's one year "negative
gap" (interest-bearing liabilities maturing within a period exceed
interest-earning assets repricing within the same period) was approximately
$34.8 million, or 5.2% of total assets. Thus, during periods of rising interest
rates, this implies that the Company's net interest income would be negatively
affected because the yield of the Company's interest-earning assets is likely to
rise more slowly than the cost on its interest-bearing liabilities. In periods
of falling interest rates, the opposite effect on net interest income is likely
to occur. The interest sensitivity gap position of the Company is a static
analysis at December 31, 1999. Because many factors affect the composition of
the Company's assets and liabilities, a change in prevailing interest rates will
not necessarily result in a corresponding change in net interest income that
would be projected using only the interest sensitivity gap table for the Company
at December 31, 1999.
38
At December 31, 1998, the Company's one year "positive gap" was approximately
$120.9 million, or 18.9% of total assets. The change in the one year gap of
approximately $155.7 million was primarily the result of: (a) slower prepayment
assumptions in 1999 regarding prepayment of loans which has resulted in a
decrease in one year interest sensitive loans of $23.3 million, (b) an increase
in mortgage-backed securities with one year interest sensitivity of $15.2
million due primarily to purchases, (c) a decrease of $11.4 million of one year
interest sensitive deposits due primarily to a decrease in the outstanding
balances of certificates of deposit and, (d) an increase of $127 million in one
year interest sensitive advances from the FHLB as proceeds were used to purchase
mortgage- backed certificates and a $60 million advance moved from a fixed rate
maturing in over one year to a variable rate.
The Company manages its interest rate risk by influencing the adjustable and
fixed rate mix of its loans, securities, deposits and borrowings. The Company
can add loans or securities with adjustable, balloon or call features, as well
as fixed rate loans and mortgage securities if the yield on such loans and
securities is consistent with the Company's asset/liability management strategy.
Also, the Company can manage its interest rate risk by extending the maturity of
its borrowings or selling certain assets and repaying borrowings.
Certain shortcomings are inherent in any method of analysis used to estimate
a financial institution's interest rate gap. The analysis is based at a given
point in time and does not take into consideration that changes in interest
rates do not affect all assets and liabilities equally. For example, although
certain assets and liabilities may have similar maturities or repricing, they
may react differently to changes in market interest rates. The interest rates on
certain types of assets and liabilities also may fluctuate in advance of changes
in market interest rates, while interest rates on other types may lag behind
changes in market rates. The interest rates on loans with balloon or call
features may or may not change depending upon their interest rates relative to
market interest rates. Additionally, certain assets, such as adjustable-rate
mortgages, have features that may restrict changes in interest rates on a
short-term basis and over the life of the asset.
The Company is also subject to prepayment risk, particularly in falling
interest rate environments or in environments where the slope of the yield curve
is relatively flat or negative. Such changes in the interest rate environment
can cause substantial changes in the level of prepayments of loans and
mortgage-backed certificates, which may also affect the Company's interest rate
gap position.
The methodology used estimates various rates of withdrawal (or "decay") for
money market deposit, savings, and checking accounts, which may vary
significantly from actual experience.
The following table sets forth the amounts of interest-earning assets and
interest-bearing liabilities outstanding at December 31, 1999 that are subject
to repricing or that mature in each of the future time periods shown. The table
reflects certain assumptions regarding prepayment of loans and mortgage-backed
certificates that are outside of actual contractual terms, and are based on the
1999 prepayment experience of the Company. Additionally, loans with call or
balloon provisions are included in the period in which they balloon or may first
be called. Except as stated above, the amount of assets and liabilities shown
that reprice or mature during a particular period were determined in accordance
with the contractual terms of the asset or liability.
39
Interest Sensitivity Analysis
December 31, 1999
(Dollars in thousands, except footnotes)
Over
Over One Three
Total Year to Years or
0-3 4-6 7-12 Within Three Non-
Months Months Months One Year Years Sensitive Total
-------------------------------------------------------------------------------
Assets
Interest-earning assets:
Loans (1) $154,304 $ 50,035 $ 84,391 $288,730 $ 114,142 $ 73,770 $476,642
Securities available for sale:
U.S. Treasury securities 5,010 3,006 4,997 13,013 991 - 14,004
Other U.S. Government agency
securities - - 2,983 2,983 37,321 977 41,281
Other debt security - - - - - 250 250
Mortgage-backed certificates 9,140 7,688 12,251 29,079 40,416 13,268 82,763
Federal funds sold 12,908 - - 12,908 - - 12,908
Federal Home Loan Bank stock - - - - - 7,100 7,100
-------------------------------------------------------------------------------
Total interest-earning assets 181,362 60,729 104,622 346,713 192,870 95,365 634,948
-------------------------------------------------------------------------------
Liabilities
Interest-bearing liabilities:
Interest-bearing deposits:
Passbook, statement savings
and checking accounts (2) 3,085 3,084 6,171 12,340 18,937 44,823 76,100
Money market deposits 5,993 5,994 11,987 23,974 27,726 24,642 76,342
Certificates of deposits 74,919 57,263 72,818 205,000 31,141 11,544 247,685
-------------------------------------------------------------------------------
Total interest-bearing deposits 83,997 66,341 90,976 241,314 77,804 81,009 400,127
Advances from the Federal Home Loan Bank 127,000 - - 127,000 15,000 - 142,000
Securities sold under
agreements to repurchase 13,233 - - 13,233 - - 13,233
-------------------------------------------------------------------------------
Total interest-bearing liabilities 224,230 66,341 90,976 381,547 92,804 81,009 555,360
-------------------------------------------------------------------------------
Interest sensitivity gap $(42,868) $ (5,612) $ 13,646 $(34,834) $ 100,066 $ 14,356 $ 79,588
-------------------------------------------------------------------------------
Cumulative interest sensitivity gap $(42,868) $(48,480) $(34,834) $(34,834) $ 65,232
--------------------------------------------------------
Cumulative interest sensitivity gap as a
percentage of total assets (6.4)% (7.2)% (5.2)% (5.2)% 9.7%
<FN>
- ----------------------
(1) Excludes nonaccrual loans of $292,000
(2) Excludes $64.5 million of noninterest-bearing deposits.
</FN>
40
The following table provides information about the Company's financial
instruments that are sensitive to changes in interest rates as of December 31,
1999, based on the information and assumptions set forth in the notes to the
table. Totals as of December 31, 1998 are included for comparative purposes. The
Company had no derivative financial instruments, foreign currency exposure or
trading portfolio as of December 31, 1999 and 1998. The amounts included under
each expected maturity date for loans, mortgage-backed certificates, and other
investments were calculated by adjusting the instrument's contractual maturity
date for expectations of prepayments, as set forth in the notes to the table.
Similarly, expected maturity date amounts for interest-bearing core deposits
were calculated based upon estimates of the period over which the deposits would
be outstanding as set forth in the notes. With respect to the Company's
adjustable rate instruments, amounts included under each expected maturity date
were measured by adjusting the instrument's contractual maturity date for
expectations of prepayments, as set forth in the notes.
The interest-earning assets maturing in one year decreased while those
maturing after five years increased at December 31, 1999 compared to December
31, 1998. This was due primarily to a decrease in the loan prepayment rate
assumptions at December 31, 1999. Prepayment rates decreased at December 31,
1999 due to a higher interest rate environment at the end of 1999 compared to
1998. The interest-earning assets maturing in three years increased at December
31, 1999 primarily the result of additional investment purchases in 1999 with
three year remaining maturities at the end of 1999. The average interest rate on
interest-earning assets decreased at December 31, 1999. The decrease was
primarily the result of lower rates on a higher volume of mortgage-backed
certificates.
The interest-bearing liabilities maturing in one year increased at December
31, 1999 as compared to 1998. A callable fixed rate advance of $60 million, in
the four year category at December 31, 1998, was called and converted to an
adjustable rate advance at December 31, 1999. Accordingly, the $60 million
advance moved to the one year category at December 31, 1999. Additionally,
adjustable rate advances increased at December 31, 1999 in order to fund the
purchase of mortgage-backed certificates and offset the decrease in
interest-bearing deposits. Both the rate and balance of advances were higher at
December 31, 1999 than at December 31, 1998, contributing to the higher rate on
interest-bearing liabilities at December 31, 1999 compared to December 31, 1998.
41
Amount maturing in:
There- Fair
(Dollars in thousands) 1 Year 2 Years 3 Years 4 Years 5 Years after Total Value
------ ------- ------- ------- ------- ----- ----- -----
Interest-earning assets:
Loans (1) (2)
Fixed rate $ 44,170 $ 29,354 $ 18,866 $ 11,718 $ 8,063 $ 23,645 $135,816 $133,669
Average interest rate 7.98% 7.96% 7.89% 7.75% 7.63% 7.32% 7.81%
Adjustable rate 141,254 61,499 40,098 29,142 21,318 47,515 340,826 340,207
Average interest rate 8.18% 7.75% 7.63% 7.62% 7.61% 7.41% 7.85%
Mortgage-backed certificates (3)
Fixed rate 10,027 8,563 7,366 6,391 5,602 1,201 39,150 39,150
Average interest rate 6.95% 6.95% 6.95% 6.95% 6.95% 6.95% 6.95%
Adjustable rate 13,022 9,217 6,636 4,793 3,476 6,469 43,613 43,613
Average interest rate 6.65% 6.76% 6.76% 6.76% 6.76% 6.76% 6.76%
Investments (4) 22,271 13,003 26,111 1,000 - 250 62,635 62,635
Average interest rate 6.63% 5.37% 5.55% 6.00% -% 9.25% 5.93%
Federal funds sold 12,908 - - - - - 12,908 12,908
Average interest rate 5.50% -% -% -% -% -% 5.50%
-------------------------------------------------------------------------------------
Total - December 31, 1999 $243,652 $121,636 $ 99,077 $ 53,044 $ 38,459 $ 79,080 $634,948 632,182
Average interest rate 7.72% 7.41% 7.02% 7.46% 7.44% 7.33% 7.47%
-------------------------------------------------------------------------------------
Total - December 31, 1998 $290,320 $122,896 $ 66,174 $ 42,589 $ 25,290 $ 57,344 $604,613 $609,428
Average interest rate 7.33% 7.55% 7.52% 7.68% 7.96% 7.92% 7.50%
-------------------------------------------------------------------------------------
Interest-bearing liabilities:
Interest-bearing deposits (5) (6) $241,314 $ 49,987 $ 27,817 $ 18,911 $ 18,935 $ 43,163 $400,127 $400,690
Average interest rate 4.68% 3.99% 3.55% 3.22% 3.70% 2.38% 4.15%
Borrowings (7) 140,233 15,000 - - - - 155,233 155,233
Average interest rate 5.51% 4.84% -% -% -% -% 5.44%
-------------------------------------------------------------------------------------
Total - December 31, 1999 $381,547 $ 64,987 $ 27,817 $ 18,911 $ 18,935 $ 43,163 $555,360 $555,923
Average interest rate 5.51% 4.19% 3.55% 3.22% 3.70% 2.38% 4.51%
-------------------------------------------------------------------------------------
Total - December 31, 1998 $265,755 $ 56,012 $ 29,433 $ 94,997 $ 15,203 $ 44,744 $506,144 $510,161
Average interest rate 4.72% 4.54% 3.62% 4.76% 3.22% 2.30% 4.38%
-------------------------------------------------------------------------------------
<FN>
(1) Assumes the following annual prepayment rates:
-For single-family residential adjustable loans which adjust based upon
changes in the one-year constant maturity treasury index, 28%;
-For single-family fixed-rate first mortgage loans, from 6% to 48%;
-For commercial real estate loans, an average of 22%;
-For consumer loans, an average of 29%; and -For most other loans, from
2% to 66%.
(2) Excludes nonaccrual loans of $292,000.
(3) Assumes average prepayment rates for adjustable mortgage-backed
certificates of 28% and for fixed-rate mortgage-backed certificates of 17%.
(4) Totals include the Company's investment in FHLB Stock. Investment
securities with call features are reflected in the maturity period in which
the security is expected to be called based on interest rates at December
31, 1999.
(5) For money market deposits, savings and checking accounts, assumes annual
decay rates of 31%, 14% and 18%, respectively. These estimated rates are
those last published by the Office of Thrift Supervision in November, 1994.
(6) Excludes $64.5 million of noninterest-bearing deposits.
(7) The estimated expected maturity at December 31, 1999 of the $15 million of
convertible FHLB advances is 1.7 years based on information from FHLB.
</FN>
42
Impact of Inflation and Changing Prices
The Consolidated Financial Statements and Notes presented herein have been
prepared in accordance with accounting principles generally accepted in the
United States, which generally require the measurement of financial position and
operating results in terms of historical dollars without considering the changes
in the relative purchasing power of money over time due to inflation. The impact
of inflation is reflected in the increased cost of the Company's operations.
Unlike most industrial companies, nearly all of the assets and liabilities of
the Company are monetary. As a result, interest rates have a greater impact on
the Company's performance than do the effects of general levels of inflation.
Impact of New Accounting Standards
In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 133, Accounting for Derivative Instruments and Hedging Activities. As
amended, the statement becomes effective for fiscal years beginning after June
15, 2000 and will not be applied retroactively. This statement establishes
accounting and reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts, and for hedging activities.
This Statement is not currently applicable to the Company, because the Company
does not have any derivative instruments and is not involved in hedging
activities.
Impact of the Year 2000 Issue
The Year 2000 Issue was the result of computer programs being written using
two digits rather than four to define the applicable year. As a result, such
computer programs would not recognize the correct date after December 31, 1999.
Also, systems and equipment that were not typically thought of as "computer
related" (referred to as "non-IT") contained imbedded hardware or software that
may have had a time element.
In 1997, the Company implemented a four phase project of inventory,
assessment, renovation and testing/implementation to address the Year 2000
Issue. The scope of the project included: ensuring the compliance of all
applications, operating systems and hardware on the mainframe, PC and LAN
systems; addressing issues related to non-IT embedded software and equipment;
and addressing the compliance of the Company's significant borrowers and third
party providers.
As of the issuance of the Company's financial statements for the year ended
December 31, 1999, there were no Year 2000 failures that have occurred with
respect to the Company's critical systems. The Company's significant borrowers
and third party providers were not impacted by the century date change in any
way that adversely affected the Company.
The Company estimates that total costs related to the Year 2000 project were
approximately $1,050,000. The Company estimates that approximately 84% of these
costs were related to the redeployment of existing personnel to address Year
2000 Issues, while approximately 16% of these costs represented incremental
expenses to the Company. Of the $1,050,000 of Year 2000 project costs,
approximately $545,000, $345,000 and $160,000 were incurred in 1999, 1998, and
1997, respectively. Some computer related initiatives were delayed due to the
allocation of resources towards Year 2000 issues. Management believes there was
not an adverse impact on the Company's financial condition or day to day
operations as a result of computer projects being deferred due to reallocation
of resources to the Year 2000 project.
Safe Harbor Statement Under the Private Securities Litigation Reform Act of 1995
Information contained in the above discussions titled, "Report to Our
Stockholders" and "Management's Discussion and Analysis of Financial Condition
and Results of Operations," other than historical information, may contain
forward-looking statements that involve risks and uncertainties including, but
not limited to: (a) management's goals to improve interest rate margins and
increase the loan portfolio, and (b) the Company's interest rate risk position
and future credit and economic trends, including inflation and changing prices.
These statements are made pursuant to the safe harbor provisions of the Private
Litigation Reform Act of 1995, and are provided to assist the reader in
understanding anticipated future financial and operational results. Although the
Company believes that the assumptions underlying the forward-looking statements
contained herein are reasonable, any of these assumptions could ultimately prove
to be inaccurate. The Company's actual results may differ materially from those
projected in forward-looking statements.
43
Item 7A - Quantitative and Qualitative Disclosures About Market Risk
See Item 7 - "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Market Risk Management" on pages 38 to 42.
Item 8 - Financial Statements and Supplementary Data
Index to Financial Statements
Page
Financial Statements:
Report of Independent Accountants............................................45
Consolidated Statement of Financial Condition as of December 31, 1999 and
December 31, 1998............................................................46
Consolidated Statement of Operations for the three years ended December 31,
1999.........................................................................47
Consolidated Statement of Comprehensive Income for the three years ended
December 1999................................................................48
Consolidated Statement of Changes in Stockholders' Equity for the three years
ended December 31, 1999......................................................49
Consolidated Statement of Cash Flows for the three years ended December 31,
1999.........................................................................50
Notes to Consolidated Financial Statements...................................51
Financial Statement Schedules:
All schedules are omitted because they are not applicable or the required
information is shown in the financial statements or notes thereto.
44
Report of Independent Accountants
[GRAPHIC OMITTED]
To the Board of Directors and
Stockholders of CENIT Bancorp, Inc.
Norfolk, Virginia
In our opinion, the accompanying consolidated statement of financial condition
and the related consolidated statements of operations, of comprehensive income,
of changes in stockholders' equity and of cash flows present fairly, in all
material respects, the financial position of CENIT Bancorp, Inc. and its
subsidiary at December 31, 1999 and 1998, and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 1999, in conformity with accounting principles generally accepted in the
United States. 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 of the
financial statements of CENIT Bancorp, Inc. in accordance with auditing
standards generally accepted in the United States which 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, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for the opinion expressed
above.
PricewaterhouseCoopers LLP
Virginia Beach, Virginia
February 10, 2000
45
Consolidated Statement of Financial Condition
(Dollars in thousands, except per share data)
December 31,
1999 1998
---------------------------
Assets
Cash $ 17,554 $ 14,656
Federal funds sold 12,908 42,289
Securities available for sale at fair value (adjusted cost
of $139,386 and $64,327, respectively) 138,298 65,136
Loans, net:
Held for investment 469,618 484,783
Held for sale 3,456 3,878
Interest receivable 4,067 3,723
Real estate owned, net 218 377
Federal Home Loan Bank stock, at cost 7,100 5,066
Property and equipment, net 13,757 13,002
Goodwill and other intangibles, net 3,293 3,647
Other assets 3,944 4,499
----------------------------
Total assets $ 674,213 $ 641,056
----------------------------
Liabilities and Stockholders' Equity
Liabilities:
Deposits:
Noninterest-bearing $ 64,491 $ 78,712
Interest-bearing 400,127 418,060
----------------------------
Total deposits 464,618 496,772
Advances from the Federal Home Loan Bank 142,000 75,000
Securities sold under agreements to repurchase 13,233 13,084
Advance payments by borrowers for taxes and insurance 565 599
Other liabilities 2,532 5,525
----------------------------
Total liabilities 622,948 590,980
----------------------------
Commitments (Note 17)
Stockholders' equity:
Preferred stock, $.01 par value; authorized 3,000,000
shares; none outstanding -- --
Common stock, $.01 par value; authorized 7,000,000 shares;
issued and outstanding 4,751,644 and 4,808,806, at
December 31, 1999 and December 31, 1998, respectively 48 48
Additional paid-in capital 12,964 14,177
Retained earnings - substantially restricted 42,914 39,600
Common stock acquired by Employees Stock
Ownership Plan (ESOP) (3,862) (4,052)
Common stock acquired by Management
Recognition Plan (MRP) (125) (199)
Net unrealized gain on securities available for sale,
net of income taxes (674) 502
----------------------------
Total stockholders' equity 51,265 50,076
----------------------------
$ 674,213 $ 641,056
----------------------------
<FN>
The notes to consolidated financial statements are an integral part of this
statement.
</FN>
46
Consolidated Statement of Operations
(Dollars in thousands, except per share data)
Year Ended December 31,
1999 1998 1997
-------------------------------------------
Interest and fees on loans $ 36,506 $ 39,931 $ 30,220
Interest on mortgage-backed certificates 2,533 3,208 8,685
Interest on investment securities 3,237 2,664 2,775
Dividends and other interest income 1,036 1,228 1,096
-------------------------------------------
Total interest income 43,312 47,031 50,776
-------------------------------------------
Interest on deposits 16,737 19,571 20,972
Interest on borrowings 5,243 6,234 8,338
-------------------------------------------
Total interest expense 21,980 25,805 29,310
-------------------------------------------
Net interest income 21,332 21,226 21,466
Provision for loan losses 98 510 600
-------------------------------------------
Net interest income after provision for loan losses 21,234 20,716 20,866
-------------------------------------------
Other income:
Deposit fees 2,511 2,454 2,040
Gains on sales of:
Securities, net -- 72 84
Loans, net 748 1,030 548
Loan servicing fees and late charges 277 318 322
Other 3,596 3,139 2,719
-------------------------------------------
Total other income 7,132 7,013 5,713
-------------------------------------------
Other expenses:
Salaries and employee benefits 8,524 8,301 8,313
Equipment, data processing, and supplies 2,992 2,861 2,703
Federal deposit insurance premiums 241 260 277
Expenses related to proxy contest and other
matters -- -- 405
Other 7,142 6,775 5,614
-------------------------------------------
Total other expenses 18,899 18,197 17,312
-------------------------------------------
Income before income taxes 9,467 9,532 9,267
Provision for income taxes 3,408 3,417 3,264
-------------------------------------------
Net income $ 6,059 $ 6,115 $ 6,003
-------------------------------------------
Earnings per share:
Basic $ 1.32 $ 1.30 $ 1.24
-------------------------------------------
Diluted $ 1.30 $ 1.27 $ 1.20
-------------------------------------------
Dividends per common share $ .60 $ .41 $ .33
-------------------------------------------
<FN>
The notes to consolidated financial statements are an integral part of this
statement.
</FN>
47
Consolidated Statement of Comprehensive Income
(Dollars in thousands)
Year Ended December 31,
1999 1998 1997
------------------------------------------
Net income $ 6,059 $ 6,115 $ 6,003
------------------------------------------
Other comprehensive loss, before income taxes:
Unrealized losses on securities available for sale
Unrealized holding losses arising during the period (1,897) (445) (233)
Less: reclassification adjustment for gains included in
net income -- (72) (84)
------------------------------------------
Other comprehensive loss, before income taxes (1,897) (517) (317)
Income tax benefit related to items of other
comprehensive loss 721 164 109
------------------------------------------
Other comprehensive loss, net of income taxes (1,176) (353) (208)
-------------------------------------------
Comprehensive income $ 4,883 $ 5,762 $ 5,795
--------------------------------------------
<FN>
The notes to consolidated financial statements are an integral part of this
statement.
</FN>
48
Consolidated Statement of Changes in Stockholders' Equity
(Dollars in thousands)
Common Accumulated
Stock Other
Common Common Additional Acquired Comprehensive
Stock Stock Paid-In Retained by ESOP Income (Loss),Net
Shares Amount Capital Earnings and MRP of Income Total
----------------------------------------------------------------------------------------------
Balance, December 31, 1996 4,905,132 $ 49 $ 17,637 $ 31,040 $ (181) $ 1,063 $ 49,608
Comprehensive income -- -- -- 6,003 -- (208) 5,795
Cash dividends paid -- -- -- (1,627) -- -- (1,627)
Purchase of Common Stock
by ESOP -- -- -- -- (4,232) -- (4,232)
Exercise of stock options
and related tax benefits 66,111 1 482 -- -- -- 483
Other -- -- -- -- (90) -- (90)
----------------------------------------------------------------------------------------------
Balance, December 31, 1997 4,971,243 50 18,119 35,416 (4,503) 855 49,937
Comprehensive income -- -- -- 6,115 -- (353) 5,762
Cash dividends paid -- -- -- (1,931) -- -- (1,931)
Exercise of stock options
and related tax benefits 69,063 -- 602 -- -- -- 602
Stock repurchases (231,500) (2) (4,667) -- -- -- (4,669)
Other -- -- 123 -- 252 -- 375
----------------------------------------------------------------------------------------------
Balance, December 31, 1998 4,808,806 48 14,177 39,600 (4,251) 502 50,076
----------------------------------------------------------------------------------------------
Comprehensive income -- -- -- 6,059 -- (1,176) 4,883
Cash dividends paid -- -- -- (2,745) -- -- (2,745)
Exercise of stock options
and related tax benefits 23,168 -- 198 -- -- -- 198
Stock repurchases (80,330) -- (1,463) -- -- -- (1,463)
Other -- -- 52 -- 264 -- 316
----------------------------------------------------------------------------------------------
Balance, December 31, 1999 4,751,644 $ 48 $ 12,964 $ 42,914 $ (3,987) $(674) $ 51,265
----------------------------------------------------------------------------------------------
<FN>
The notes to consolidated financial statements are an integral part of this
statement.
</FN>
49
Consolidated Statement of Cash Flows
(Dollars in thousands)
Year Ended December 31,
1999 1998 1997
------------------------------------------------
Cash flows from operating activities:
Net income $ 6,059 $ 6,115 $ 6,003
Add (deduct) items not affecting cash during the year:
Provision for loan losses 98 510 600
Provision for losses on real estate owned 22 15 81
Amortization of loan yield adjustments 743 381 158
Depreciation, amortization and accretion, net 1,727 1,930 2,593
Net (gains) losses on sales/disposals of:
Securities -- (72) (84)
Loans (748) (1,030) (548)
Real estate, property and equipment (345) 36 16
Proceeds from sales of loans held for sale 55,651 82,893 45,338
Originations of loans held for sale (54,509) (82,608) (46,097)
Change in assets/liabilities, net
Decrease (increase) in interest receivable and other assets 430 1,168 (1,121)
(Decrease) increase in other liabilities (1,944) 3,176 (46)
------------------------------------------------
Net cash provided by operating activities 7,184 12,514 6,893
------------------------------------------------
Cash flows from investing activities:
Purchases of securities available for sale (100,965) (48,237) (16,087)
Proceeds from sales of securities available for sale -- 66,660 35,447
Principal repayments on securities available for sale 10,517 34,855 49,243
Proceeds from maturities and calls of securities available
for sale 15,350 18,000 17,000
Net decrease (increase) in loans held for investment 14,263 2,307 (64,572)
Net proceeds on sales of real estate owned 223 597 1,224
Additions to real estate owned (24) (86) (129)
Purchases of Federal Home Loan Bank stock
and Federal Reserve Bank stock (4,700) (1,650) (1,850)
Redemption of Federal Home Loan Bank stock 2,666 5,295 1,000
Purchases of property and equipment (2,215) (1,273) (2,727)
Proceeds from sales of property and equipment 327 453 10
------------------------------------------------
Net cash (used for) provided by investing activities (64,558) 76,921 18,559
------------------------------------------------
Cash flows from financing activities:
Proceeds from exercise of stock options 138 173 357
Net (decrease) increase in deposits (32,154) (10,898) 8,705
Proceeds from Federal Home Loan Bank advances 194,000 587,000 1,255,000
Repayment of Federal Home Loan Bank advances (127,000) (657,000) (1,258,000)
Proceeds from other borrowings -- -- 4,000
Repayment of other borrowings -- (2,575) (1,425)
Net increase in securities sold under agreement to repurchase 149 3,420 2,526
Cash dividends paid (2,745) (1,931) (1,627)
Purchase of common stock by ESOP -- -- (4,232)
Common stock repurchases (1,463) (4,669) --
Other, net (34) (121) (123)
------------------------------------------------
Net cash provided by (used for) financing activities 30,891 (86,601) 5,181
------------------------------------------------
(Decrease) increase in cash and cash equivalents (26,483) 2,834 30,633
Cash and cash equivalents, beginning of year 56,945 54,111 23,478
------------------------------------------------
Cash and cash equivalents, end of year $ 30,462 $ 56,945 $ 54,111
------------------------------------------------
Supplemental disclosures of cash flow information:
Cash paid during the year for interest $ 6,770 $ 8,910 $ 11,624
Cash paid during the year for income taxes 3,247 2,855 2,820
Schedule of noncash investing and financing activities:
Real estate acquired in settlement of loans 342 312 1,603
Loans to facilitate sale of real estate owned 281 470 2,058
Loan to facilitate sale of property -- 1,336 --
<FN>
The notes to consolidated financial statements are an integral part of this
statement.
</FN>
50
Notes To Consolidated Financial Statements
Note 1
Summary of Significant Accounting Policies
CENIT Bancorp, Inc. (the "Holding Company" or the "Company") is a Delaware
corporation that owns CENIT Bank (the "Bank"), a federally chartered stock
savings bank.
The Company operates in one business segment, providing retail and
commercial banking services to customers within its market area.
The preparation of the financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the date of the financial
statements and that affect the reported amounts of income and expenses during
the reporting period. Actual results could differ from those estimates.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company,
its wholly-owned subsidiary, the Bank, and the Bank's wholly-owned subsidiaries.
All significant intercompany balances and transactions have been eliminated.
Investment Securities
Investment securities are accounted for in accordance with Statement of
Financial Accounting Standards No. 115 (FAS 115), "Accounting for Certain
Investments in Debt and Equity Securities." FAS 115 requires that certain
securities be classified into one of three categories: held to maturity,
available for sale, or trading. Securities classified as held to maturity are
carried at amortized cost; securities classified as available for sale are
carried at their fair value with the amount of unrealized gains and losses, net
of income taxes, reported as a separate component of stockholders' equity; and
securities classified as trading are carried at fair value with the unrealized
gains and losses included in earnings.
Premium amortization and discount accretion are included in interest income
and are calculated using the interest method over the period to maturity of the
related asset. The adjusted cost of specific securities sold is used to compute
realized gain or loss on sale. The gain or loss realized on sale is recognized
on the trade date.
Loans
Loans held for investment are carried at their outstanding principal
balance. Unearned discounts, premiums, deferred loan fees and costs, and the
allowance for loan losses are treated as adjustments of loans in the
consolidated statement of financial condition.
At December 31, 1999 and 1998, approximately seventy-nine percent and
seventy-five percent, respectively, of the principal balance of the Bank's real
estate loans were to residents of or secured by properties located in Virginia.
This geographic concentration is also considered in management's establishment
of loan loss reserves.
Interest on loans is credited to income as earned. Interest receivable is
accrued only if deemed collectible. Generally, interest is not accrued on loans
over ninety days past due. Uncollectible interest on loans that are
contractually past due is charged-off or an allowance is established based on
management's periodic evaluation. The allowance is established by a charge to
interest income equal to all interest previously accrued, and income is
subsequently recognized only to the extent that cash payments are received
until, in management's judgment, the borrower has reestablished the ability to
make periodic interest and principal payments, in which case the loan is
returned to accrual status. Interest income is recognized on loans which are
ninety days or more past due only if management considers the principal and
interest balance to be fully collectible. Loan origination and commitment fees
and certain direct loan origination costs and premiums and discounts related to
purchased loans are deferred and amortized as an adjustment of yield over the
contractual life of the related loan. The unamortized portion of net deferred
fees is recognized in income if loans prepay or if commitments expire unfunded.
The amortization of net fees or costs is included in interest and fees on loans
in the consolidated statement of operations.
51
Loans held for sale are carried at the lower of cost or market on an
aggregate basis. Loan fees collected and direct origination costs incurred with
respect to loans held for sale are deferred as an adjustment of the carrying
value of the loans and are included in the determination of gain or loss on
sale.
Impaired 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 the
financial strength of the borrower and the fair value of the collateral.
Impaired loans are measured and reported based on the present value of expected
cash flows discounted at the loan's effective interest rate, or at the fair
value of the loan's collateral if the loan is deemed "collateral dependent." A
valuation allowance is required to the extent that the measure of the impaired
loans is less than the recorded investment.
Allowance for Loan Losses
The allowance for loan losses represents management's estimate of an amount
adequate to absorb potential losses on loans that may become uncollectible.
Factors considered in the establishment of the allowance for loan losses include
management's evaluation of specific loans, the level and composition of
classified loans, historical loan loss experience, concentrations of credit, the
relative inherent risk of loan types that comprise the loan portfolio, and other
judgmental factors. The allowance for loan losses is increased by charges to
income and decreased by charge-offs, net of recoveries. Actual future losses may
differ from estimates as a result of unforeseen events.
Real Estate Owned
Real estate acquired in settlement of loans is recorded at the lower of the
unpaid loan balance or estimated fair value less estimated costs of sale at the
date of foreclosure. Subsequent valuations are periodically performed and
valuation allowances are established if the carrying value of the real estate
exceeds estimated fair value less estimated costs of sale. Costs related to
development and improvement of real estate are capitalized. Net costs related to
holding assets are expensed.
Property and Equipment
Property and equipment are stated at cost less accumulated depreciation and
amortization. Major renewals or betterments are capitalized and depreciated over
their estimated useful lives. Repairs and maintenance are charged to expense in
the year incurred. Depreciation and amortization are computed principally on the
straight-line basis over the estimated useful lives of the related assets.
Goodwill and other intangibles
Goodwill represents the excess of cost over the fair value of net assets
acquired and is amortized on a straight-line basis over 15 years. The core
deposit intangible represents the estimated fair value of certain customer
relationships acquired and is amortized on an accelerated basis over 10 years.
Long-Lived Assets
Long-lived assets to be held and those to be disposed of and certain other
intangibles are evaluated for impairment using the guidance of Statement of
Financial Accounting Standards No. 121 (FAS 121), "Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," which was
adopted by the Company on January 1, 1996. FAS 121 establishes when an
impairment loss should be recognized and how an impairment loss should be
measured. The adoption of FAS 121 did not have a significant impact on the
financial statements of the Company.
Deposits
Interest on deposits is accrued and compounded according to the contractual
term of the deposit account and either paid to the depositor or added to the
deposit account. On term accounts, the forfeiture of interest (because of
withdrawal prior to maturity) is offset as of the date of withdrawal against
interest expense.
52
Securities Sold Under Agreements to Repurchase
The Bank enters into sales of securities under agreements to repurchase
(reverse repurchase agreements). Fixed-coupon reverse repurchase agreements are
treated as financing transactions, and the obligations to repurchase securities
sold are reflected as liabilities in the statement of financial condition. The
securities underlying the agreements continue to be recorded as assets.
Income Taxes
The provision for income taxes is based upon income taxes estimated to be
currently payable and certain changes in deferred income tax assets and
liabilities. The deferred tax assets and liabilities relate principally to the
use of different reporting methods for bad debts, depreciation, and Federal Home
Loan Bank stock dividends.
Statement of Cash Flows
For purposes of the statement of cash flows, the Company considers cash and
federal funds sold to be cash and cash equivalents.
Earnings Per Share
Basic earnings per share for the years ended December 31, 1999, 1998, and
1997 were determined by dividing net income for the respective year by 4,581,574
shares, 4,715,697 shares, and 4,853,484 shares, respectively. Diluted earnings
per share for the years ended December 31, 1999, 1998, and 1997 were determined
by dividing net income for the respective year by 4,659,103 shares, 4,829,641
shares, and 4,986,066 shares, respectively. The difference in the number of
shares used for basic earnings per share and diluted earnings per share
calculations for each of the three years results solely from the dilutive effect
of stock options. Options on approximately 131,000 and 65,000 shares were not
included in computing diluted earnings per share for the years ended December
31, 1999 and December 31, 1998, respectively, because their effects were
antidilutive. There were no options on shares at December 31, 1997 that were
antidilutive.
Note 2
Cash
The Bank is required by the Federal Reserve Bank to maintain average
reserve balances. The average amount of these reserve balances for the year
ended December 31, 1999 was $7,029,000. On December 31, 1999, the reserve
balance was $7,877,000.
53
Note 3
Intangible Assets
Goodwill and core deposit intangibles, and the related amortization, are as
follows (in thousands):
Core Deposit
Goodwill Intangible Total
-------------------------------------
Balance, December 31, 1997 $ 3,654 $ 356 $ 4,010
Amortization (290) (73) (363)
-------------------------------------
Balance, December 31, 1998 3,364 283 3,647
Amortization (290) (64) (354)
-------------------------------------
Balance, December 31, 1999 $ 3,074 $ 219 $ 3,293
-------------------------------------
At December 31, 1999, the Company had recorded $1,516,000 of accumulated
amortization.
54
Note 4
Securities Available for Sale
Securities available for sale are as follows (in thousands):
December 31,
1999 1998
----------------------------------------- -----------------------------------------------
Gross Gross Gross Gross
Amortized Unrealized Unrealized Fair Amortized Unrealized Unrealized Fair
Cost Gains Losses Value Cost Gains Losses Value
----------------------------------------- -----------------------------------------------
U.S. Treasury securities $ 14,004 $ 11 $ (11) $ 14,004 $ 26,043 $ 353 $ - $ 26,396
----------- ----------- ----------- ----------- ----------- ---------------------- -----------
Other U. S. Government agency
securities 42,114 - (833) 41,281 21,344 134 (7) 21,471
----------- ----------- ----------- ----------- ----------- ---------------------- -----------
Other debt security 250 - - 250 250 - - 250
----------- ----------- ----------- ----------- ----------- ---------------------- -----------
Mortgage-backed certificates:
Federal Home Loan
Mortgage Corporation
participation certificates 41,768 177 (149) 41,796 11,445 214 - 11,659
Federal National Mortgage
Association pass-through
certificates 38,670 31 (337) 38,364 3,293 53 (1) 3,345
Government National
Mortgage Association
pass-through certificates 2,580 23 - 2,603 1,952 63 - 2,015
----------- ----------- ----------- ----------- ----------- ---------------------- -----------
Total mortgage-backed
certificates 83,018 231 (486) 82,763 16,690 330 (1) 17,019
----------- ----------- ----------- ----------- ----------- ---------------------- -----------
$ 139,386 $ 242 $ (1,330) $ 138,298 $ 64,327 $ 817$ (8) $ 65,136
----------- ----------- ----------- ----------- ----------- ---------------------- -----------
During 1999, the Company did not sell any available for sale securities. During
1998 and 1997, the Company recognized gross gains of $143,000 and gross losses
of $71,000 on the sale of available for sale securities.
The amortized cost and fair value of securities available for sale at
December 31, 1999 are shown below by contractual maturity (in thousands):
Amortized Fair
Cost Value
Due in one year or less $ 16,003 $ 15,996
Due after 1 year through 5 years 40,115 39,289
Due after 5 years 250 250
Mortgage-backed certificates 83,018 82,763
---------------------------
$ 139,386 $ 138,298
---------------------------
55
Note 5
Loans
Loans held for investment consist of the following (in thousands):
December 31,
1999 1998
--------------------
First mortgage loans:
Single family $ 221,041 $ 251,117
Multi-family 8,082 7,874
Construction:
Residential 58,528 66,853
Nonresidential 7,685 4,101
Commercial real estate 81,724 76,611
Consumer lots 3,566 3,703
Acquisition and development 18,065 11,444
Equity and second mortgage 56,469 52,845
Purchased mobile home 31 52
Boat 2,855 4,275
Other consumer 11,937 10,537
Commercial business 36,739 33,485
---------------------------
506,722 522,897
Undisbursed portion of construction
and acquisition and development loans (34,714) (35,463)
Allowance for loan losses (3,860) (4,024)
Unearned discounts, premiums, and loan
fees, net 1,470 1,373
---------------------------
$ 469,618 $ 484,783
---------------------------
At December 31, 1999, the Company's gross loan portfolio contained $188,400
of adjustable-rate mortgage loans and $50,880 of loans which are callable or
balloon at various dates over the next seven years. Prime-based loans, net of
the undisbursed portion of construction and acquisition and development loans,
totaled $90,915 at December 31, 1999.
56
Nonaccrual loans are as follows (in thousands):
December 31,
1999 1998 1997
---------------------------------------
Single family $ 103 $ 416 $ 528
Land acquisition 48 - 200
Purchased mobile home 20 15 48
Other consumer 10 68 24
Commercial business 111 64 240
---------------------------------------
$ 292 $ 563 $ 1,040
---------------------------------------
Interest income that would have been recorded under the contractual terms of
such nonaccrual loans and the interest income actually recognized are summarized
as follows (in thousands):
Year Ended December 31,
1999 1998 1997
----------------------------------------
Interest income based on contractual terms $ 33 $ 61 $ 92
Interest income recognized 22 36 30
----------------------------------------
Interest income foregone $ 11 $ 25 $ 62
----------------------------------------
Changes in the allowance for loan losses are as follows (in thousands):
Year Ended December 31,
1999 1998 1997
------------------------------------------
Balance at beginning of year $ 4,024 $ 3,783 $ 3,806
Provision for loan losses 98 510 600
Losses charged to allowance (358) (382) (836)
Recovery of prior losses 96 113 213
-------------------------------------------
Balance at end of year $ 3,860 $ 4,024 $ 3,783
-------------------------------------------
There were no impaired loans at December 31, 1999 and 1998.
Loans serviced for others approximate $11,967,000 at December 31, 1999,
$13,826,000 at December 31, 1998, and $16,013,000 at December 31, 1997.
57
Note 6
Interest Receivable
The components of interest receivable are as follows (in thousands):
December 31,
1999 1998
--------------------
Interest on loans $ 2,523 $ 2,766
Interest on mortgage-backed certificates 628 178
Interest on investments and interest-bearing
deposits 931 819
--------------------
4,082 3,763
Less: Allowance for uncollected interest (15) (40)
--------------------
$ 4,067 $ 3,723
--------------------
Note 7
Real Estate Owned
Real estate owned is as follows (in thousands):
December 31,
1999 1998
--------------------
Residential - Single family $ 123 $ 325
Land 105 105
--------------------
228 430
Less: Valuation allowance (10) (53)
--------------------
$ 218 $ 377
--------------------
Changes in the valuation allowance for real estate owned are as follows (in
thousands):
Year Ended December 31,
1999 1998 1997
----------------------------
Balance at beginning of year $ 53 $ 106 $ 200
Provision for losses 22 15 81
Losses charged to allowance (65) (68) (175)
-----------------------------
Balance at end of year $ 10 $ 53 $ 106
-----------------------------
The provision for losses on real estate owned is included in other expense
in the accompanying Consolidated Statement of Operations.
58
Note 8
Federal Home Loan Bank Stock
Investment in the stock of the Federal Home Loan Bank (FHLB) is required by
law for federally insured savings associations such as the Bank. No ready market
exists for the stock and it has no quoted market value. The FHLB is required
under the Financial Institutions Reform, Recovery and Enforcement Act of 1989
("FIRREA") to use its future earnings in various government-mandated programs
including low to moderate income housing. These programs and other uses of the
FHLB's future earnings could impair its ability to pay dividends to the Company
on this investment.
Note 9
Property and Equipment
Property and equipment consist of the following (in thousands):
December 31,
1999 1998
--------------------
Buildings and leasehold improvements $ 11,265 $ 9,857
Furniture and equipment 10,042 9,845
--------------------
21,307 19,702
Less: Accumulated depreciation and amortization (10,527) (9,404)
--------------------
10,780 10,298
Land 2,977 2,704
--------------------
$ 13,757 $13,002
--------------------
Depreciation and amortization expense is $1,261,000, $1,251,000, and
$1,154,000 for the years ended December 31, 1999, 1998 and 1997, respectively.
In December 1998, the Company sold its corporate office building and leased
back a portion of the building over a three-year period that ends December 31,
2001. The transaction was accounted for as a sale-leaseback. Accordingly, gain
on the sale of $404,000 was deferred and is recognized in proportion to the
related gross rent charged to expense over the lease term. During 1999, $202,000
of the deferred gain on the sale was recognized.
59
Note 10
Deposits
Deposit balances by type and range of interest rates at December 31, 1999
and 1998 are as follows (in thousands):
December 31,
1999 1998
---------------------------
Noninterest-bearing:
Commercial checking $ 55,568 $ 69,801
Personal checking 8,923 8,911
---------------------------
Total noninterest-bearing deposits 64,491 78,712
---------------------------
Interest-bearing:
Passbook and statement savings
(interest rates of 2.41% at 1999 and
2.46% at 1998) 32,191 36,588
Checking accounts (interest rates of 1.52% at
1999 and 1.43% at 1998) 43,909 41,762
Money market deposits (interest rates of
3.56% at 1999 and 3.36% at 1998) 76,342 73,896
Certificates:
3.99% or less 52 345
4.00% to 4.99% 159,000 121,862
5.00% to 5.99% 67,257 113,417
6.00% to 6.99% 13,908 18,818
7.00% to 7.99% 7,312 9,958
8.00% to 8.99% 156 294
9.00% to 9.99% - 1,120
---------------------------
Total certificates 247,685 265,814
---------------------------
Total interest-bearing deposits 400,127 418,060
---------------------------
Total deposits $ 464,618 $ 496,772
---------------------------
Certificates in denominations greater than $100,000 aggregated $26,417,000
and $24,940,000 at December 31, 1999 and 1998, respectively. The weighted
average cost of deposits approximated 4.13% and 4.54% for the years ended
December 31, 1999 and 1998, respectively.
60
The following is a summary of interest expense on deposits (in thousands):
Year Ended December 31,
1999 1998 1997
----------------------------------------
Passbook and statement savings $ 830 $ 1,235 $ 1,522
Checking accounts 579 605 602
Money market deposits 2,614 2,412 1,566
Certificates 12,751 15,373 17,351
Less: Early withdrawal penalties (37) (54) (69)
- ----
-----------------------------------------
$ 16,737 $ 19,571 $ 20,972
-----------------------------------------
At December 31, 1999, remaining maturities on certificates are as follows (in
thousands):
2000 $ 205,000
2001 23,237
2002 7,904
2003 3,958
2004 7,586
-----------
$ 247,685
-----------
At December 31, 1999, the Bank has pledged mortgage-backed certificates, U.
S. Treasury securities, and other U. S. Government agency securities with a
total carrying value of $2,458,000 to the State Treasury Board and $200,000 to
the Federal Court as collateral for certain public deposits.
Note 11
Advances from the Federal Home Loan Bank
At December 31, 1999, advances from the Federal Home Loan Bank (FHLB)
consist of $127,000,000 of short-term variable advances and a $15,000,000
convertible fixed-rate advance with an interest rate of 4.84%. The $15,000,000
fixed-rate advance matures in December 2003 and is subject, in December 2001, to
a one-time option by the FHLB to convert to an adjustable-rate advance. These
advances are collateralized by mortgage-backed certificates with a net book
value of approximately $1,881,000 and by first mortgage loans with a net book
value of approximately $218,136,000.
The weighted average cost of advances from the FHLB is 5.23% and 5.43% for
the years ended December 31, 1999 and 1998, respectively.
61
Note 12
Securities Sold under Agreements to Repurchase
At December 31, 1999, U. S. Treasury securities, U. S. Government agency
securities and mortgage-backed certificates sold under agreements to repurchase
had a carrying value of $13,605,000 and a market value of $13,498,000. The
mortgage-backed certificates underlying these repurchase agreements were
delivered to a branch of the Federal Reserve Bank which is acting as custodian
in the transaction. The Company enters into reverse repurchase agreements with
dealers and certain commercial deposit customers. The reverse repurchase
agreements executed with commercial deposit customers do not constitute savings
accounts or deposits and are not insured by the Federal Deposit Insurance
Corporation. At December 31, 1999, all of the Company's reverse repurchase
agreements were with commercial customers.
The following is a summary of certain information regarding the Company's
reverse repurchase agreements (dollars in thousands):
December 31,
1999 1998
---------------------------
Balance at end of year $ 13,233 $ 13,084
Average amount outstanding during the year 15,711 12,026
Maximum amount outstanding at any month end 20,755 22,913
Weighted average interest rate during the year 4.08% 4.45%
Weighted average interest rate at end of year 3.78% 3.96%
Weighted average maturity at end of year daily daily
Note 13
Other Income and Other Expense
The components of other income and other expense are as follows (in thousands):
Year Ended December 31,
1999 1998 1997
-------------------------------------------
Other income:
Brokerage fees $ 168 $ 468 $ 850
Merchant processing fees 2,464 2,062 1,391
Other miscellaneous 964 609 478
-------------------------------------------
$ 3,596 $ 3,139 $ 2,719
-------------------------------------------
Other expense:
Net occupancy expense of premises $ 2,154 $ 1,901 $ 1,848
Professional fees 678 611 345
Expenses, gains/losses on sales,
and provision for losses on real
estate owned, net 44 89 215
Merchant processing 1,953 1,766 1,130
Other miscellaneous 2,313 2,408 2,076
-------------------------------------------
$ 7,142 $ 6,775 $ 5,614
-------------------------------------------
62
Note 14
Income Taxes
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial and income
tax reporting purposes.
Significant components of the Company's deferred tax assets and liabilities are
as follows (in thousands):
December 31,
1999 1998 1997
-------------------------------------------
Deferred tax assets:
Bad debt reserves $ 1,353 $ 1,474 $ 1,251
Unrealized losses on securities
available for sale 413 - -
Other 298 324 219
-------------------------------------------
2,064 1,798 1,470
-------------------------------------------
Deferred tax liabilities:
Federal Home Loan Bank
stock dividends (660) (696) (696)
Unrealized gains on securities
available for sale - (308) (472)
Depreciation (303) (344) (296)
Other (250) (251) (299)
--------------------------------------------
(1,213) (1,599) (1,763)
--------------------------------------------
Net deferred tax asset (liability) $ 851 $ 199 $ (293)
--------------------------------------------
63
The provision for income taxes consists of the following (in thousands):
Year Ended December 31,
1999 1998 1997
-------------------------------------------
Current:
Federal $ 2,997 $ 3,452 $ 3,109
State 343 294 131
-------------------------------------------
3,340 3,746 3,240
-------------------------------------------
Deferred:
Federal 57 (277) 20
State 11 (52) 4
-------------------------------------------
68 (329) 24
-------------------------------------------
$ 3,408 $ 3,417 $ 3,264
-------------------------------------------
The reconciliation of "expected" federal income tax computed at the statutory
rate (34%) to the reported provision for income taxes is as follows (in
thousands):
Year Ended December 31,
1999 1998 1997
-------------------------------------------
Computed "expected" tax provision $ 3,219 $ 3,241 $ 3,151
Increase (decrease) in taxes
resulting from:
State income taxes, net of federal
tax benefit 235 194 86
Other (46) (18) 27
--------------------------------------------
Provision for income taxes $ 3,408 $ 3,417 $ 3,264
--------------------------------------------
For tax purposes, the Bank may only deduct bad debts as charged off. This
amount may differ significantly from the amount deducted for book purposes.
Retained earnings at December 31, 1999 includes $6,134,000 representing that
portion of the Bank's tax bad debt allowance for which no provision for income
taxes has been made. This amount would be subject to federal income taxes if the
Bank were to use the reserve for purposes other than to absorb losses.
64
Note 15
Employee Benefit Plans
Employees Stock Ownership Plan
The following summarizes information relating to the Company's Employee
Stock Ownership Plan, which covers substantially all employees after they have
met certain eligibility requirements.
Stock Purchase - 1992
In 1999, 1998 and 1997, dividends received by the ESOP, all of which
related to allocated shares, were first used for administrative expenses, and
dividends remaining were distributed to plan participants. Dividends received on
allocated shares in 1999 totaled $124,000, of which $111,000 was distributed to
participants; in 1998 totaled $93,000, of which $72,000 was distributed to
participants; and in 1997 totaled $81,000, of which $63,000 was distributed to
participants. At December 31, 1999, the ESOP has 198,335 allocated shares. A
total of 18,564 shares were distributed in 1999 to terminated employees. All
shares held by the ESOP relating to the 1992 stock purchase are considered
outstanding for earnings per share calculations.
Stock Purchase - 1997
The Company recognizes compensation expense on an accrual basis based upon
the estimated annual number of shares to be released valued at the shares' fair
value. ESOP related compensation expense recognized by the Company totaled
$299,200 in 1999 and $467,933 in 1998.
The loan between the ESOP and the holding company has a fifteen-year term
with monthly principal and interest payments which commenced as of January 1998.
Shares are released and allocated to eligible participants annually. The number
of shares released and allocated annually is based upon the pro rata amount of
the total principal and interest paid in that year as compared to the total
estimated principal and interest to be paid over the entire term of the loan.
Dividends received on unallocated shares were used for debt service.
Of the 248,157 shares purchased in 1997, 211,202 were unallocated at
December 31, 1999. In 1999 and 1998, 16,246 and 20,709 shares were allocated and
were included in earnings per share calculations. A total of 145 shares were
distributed in 1999 to terminated employees. At December 31, 1999, the fair
value of unearned shares approximated $3,656,000.
401(k) Plan
The Company has a 401(k) plan to which eligible employees may contribute a
specified percentage of their gross earnings each year. For the years ended
December 31, 1999, 1998 and 1997, the maximum percentage that could be
contributed by employees was 15%, 15%, and 10%, respectively. The Company
contributed a total of $207,000 to this plan during the year ended December 31,
1997. In 1999 and 1998, no contributions were made.
Postretirement Benefit Plan
The Company sponsors a postretirement health care and life insurance
benefit plan. This plan is unfunded and the Company retains the right to modify
or eliminate these benefits. Participating retirees and eligible dependents
under the age of 65 are covered under the Company's regular medical and dental
plans. Participating retirees and eligible dependents age 65 or older are
eligible for a Medicare supplement plan. The medical portion of the plan is
contributory for retirees, with retiree contributions adjusted annually, and
contains other cost-sharing features such as deductibles and copays. The life
insurance portion of the plan is noncontributory.
As permitted by FAS 106, the Company elected to amortize its unrecognized
transition obligation over 20 years. At December 31, 1999 and December 31, 1998,
the Company's unfunded accumulated postretirement benefit obligation totaled
$815,000 and $804,000, respectively, and the accrued postretirement benefit cost
recognized in the Statement of Financial Condition totaled $218,000 and
$177,000, respectively. Postretirement benefit cost was $96,000, $97,000, and
$69,000 in 1999, 1998 and 1997, respectively.
65
Note 16
Stock Options and Awards
At December 31, 1999, the Company has two stock-based compensation plans,
the CENIT Stock Option Plan and the Management Recognition Plan, which are
described below. The Company has elected not to adopt the recognition provisions
of Statement of Financial Accounting Standards No. 123 (FAS 123), "Accounting
for Stock-Based Compensation," which requires a fair-value based method of
accounting for stock options and similar equity awards, and will continue to
follow Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued
to Employees," and related Interpretations to account for its stock-based
compensation plans.
Stock Option Plans
In conjunction with the Bank's 1992 conversion, the Company adopted the
CENIT Stock Option Plan for the benefit of non- employee directors and key
officers. During the period 1992-1997, the Company granted options relating to
370,875 shares of common stock, which is the total number of shares reserved for
issuance under the Stock Option Plan. Options granted in 1992 in connection with
the conversion became exercisable in full from two to five years after the date
of grant, options granted in 1993 became exercisable in full, two years after
the date of grant, and options granted in 1994, 1995, 1996 and 1997 are
exercisable 25% each year over the four-year period after the applicable date of
grant. In addition, limited stock appreciation rights were granted with the
options issued under the Stock Option Plan. These rights may be exercised in
lieu of the related stock options only in the event of a change in control of
the Company, as defined in the Stock Option Plan.
In 1998, the Company adopted the CENIT Long-Term Incentive Plan for the
benefit of non-employee directors and key officers and employees. The total
number of shares of common stock reserved for issuance under the Long-Term
Incentive Plan is 251,238. Options granted in 1999 and 1998 are exercisable 25%
each year over the four-year period after the date of grant.
Under both the Stock Option Plan and the Long-Term Incentive Plan, the
option price cannot be less than the fair market value of the common stock on
the date of the grant, and options expire no later than ten years after the date
of the grant.
66
Year Ended December 31,
1999 1998 1997
----------------------------------------------------------------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
------ --------------- ------ ----------- ------ -----------
Outstanding at beginning
of year 249,110 $ 10.50 271,938 $ 6.09 343,149 $ 5.40
Granted 66,000 18.00 67,000 22.25 12,705 15.00
Exercised (27,278) 5.07 (84,798) 5.31 (83,916) 4.63
Forfeited - - (5,030) 15.65 - -
-------- -------- --------
Outstanding at end of year 287,832 12.73 249,110 10.50 271,938 6.09
-------- -------- --------
Options exercisable at
year end 173,574 164,331 233,424
The weighted average fair value of options granted during 1999, 1998 and
1997 was $5.32, $6.09 and $4.89, respectively.
The weighted average fair value of all of the options granted during the
period 1995 through 1999 has been estimated using the Black-Scholes
option-pricing model with the following weighted average assumptions:
Year Ended December 31,
1999 1998 1997
--------------------------------------------------------------------
Annual dividend yield 3.33% 2.70% 2.22%
Weighted average risk-free interest rate 6.46% 4.76% 6.47%
Weighted average expected volatility 31.00% 29.00% 28.00%
Weighted average expected life in years 6.0 6.0 6.3
The provisions of FAS 123 require pro forma disclosure of compensation
expense for the Company based on the fair value of the awards at the date of the
grant. Under those provisions, the Company's net income and earnings per share
would have been reduced to the following pro forma amounts (in thousands, except
per share data):
Year Ended December 31,
1999 1998 1997
----------------------------------------------------------------------
Net income:
As reported $ 6,059 $ 6,115 $ 6,003
Pro forma 5,960 6,071 5,973
Basic earnings per share:
As reported $ 1.32 $ 1.30 $ 1.24
Pro forma 1.30 1.29 1.23
Diluted earnings per share:
As reported $ 1.30 $ 1.27 $ 1.20
Pro forma 1.28 1.26 1.20
67
The following table summarizes information about the options outstanding
at December 31, 1999:
Options Outstanding Options Exercisable
--------------------------------------------------------- --------------------------------------
Weighted
Average Weighted Weighted
Remaining Average Average
Range of Number Contractual Exercise Number Exercise
Exercise Prices Outstanding Life Price Exercisable Price
- ----------------------- ------------------ ----------------- ---------------- ----------- -----------------
$3.84 92,716 2.58 $ 3.84 92,716 $ 3.84
$5.95 8,703 0.83 5.95 8,703 5.95
$7.09 to $7.73 16,152 4.23 7.49 16,152 7.49
$11.55 to $12.34 29,004 6.54 11.95 25,077 12.01
$15.00 10,257 7.17 15.00 4,926 15.00
$18.00 66,000 9.75 18.00 - 18.00
$22.25 65,000 8.45 22.25 26,000 22.25
--------- --------
287,832 6.15 12.73 173,574 8.54
--------- --------
Management Recognition Plan
The objective of the MRP is to enable the Company to retain personnel of
experience and ability in key positions of responsibility. The MRP was
authorized to acquire up to 2% of the shares of common stock of the Company
issued in the conversion. The Bank contributed $247,250 to the MRP to enable the
MRP trustees to acquire a total of 64,500 shares of the common stock in the
conversion at $3.84 per share. As a result of an oversubscription in the
subscription offering, the MRP was able to acquire only 45,000 shares in the
conversion. In 1997, the MRP purchased 14,118 additional shares at an average
price of approximately $15.13 per share. No shares were purchased in 1999 or
1998.
A total of 37,086 shares were granted in 1992 and vested 20% each year over
five years beginning in 1993. The shares granted in 1996 and 1997 vest at the
end of three to five years. Compensation expense, which is recognized as shares
vest, totaled $73,000, $72,000, and 122,000 for 1999, 1998 and 1997,
respectively. The unamortized cost of the shares purchased, which represents
deferred compensation, is reflected as a reduction of stockholders' equity in
the Company's consolidated statement of financial condition.
A summary of MRP grants is as follows:
Year Ended December 31,
1999 1998 1997
-----------------------------------------------
Outstanding at beginning of year 31,275 34,182 30,393
Granted - - 14,118
Exercised (6,183) (2,907) (10,329)
--------------------------------------------------
Outstanding at end of year 25,092 31,275 34,182
--------------------------------------------------
No grants were forfeited during 1999 and 1997 and no grants were
exercisable at December 31, 1999, 1998, and 1997. During 1998, 3,783 shares were
forfeited and returned to the outstanding balance. At December 31, 1999, the
weighted average period until the awards become vested is approximately one
year. The weighted average fair value of shares granted in 1997 was $15.00.
68
Note 17
Commitments and Financial Instruments With Off-Balance Sheet Credit Risk
The Company is a party to financial instruments with off-balance sheet
credit risk in the normal course of business to meet the financing needs of its
customers and, to a lesser extent, to reduce its own exposure to fluctuations in
interest rates. These financial instruments include commitments to extend credit
in the form of loans or through letters of credit, interest rate caps and
interest rate swaps. At December 31, 1999, financial instruments with
off-balance sheet risk are limited to outstanding loan commitments and letters
of credit. There are no open interest rate cap or interest rate swap positions
at December 31, 1999.
Loan commitments are agreements to extend credit to a customer provided
that there are no violations of the terms of the contracts prior to funding.
Commitments generally have fixed expiration dates or other termination clauses
and may require payment of a fee by the customer. Because certain of the
commitments are expected to be withdrawn or expire unused, the total commitment
amount does not necessarily represent future cash requirements. The Company
evaluates each customer's creditworthiness on a case- by-case basis. The type
and amount of collateral obtained varies but generally includes real estate or
personal property.
The Company had loan commitments, excluding the undisbursed portion of
construction and acquisition and development loans, as follows (in thousands):
December 31,
1999 1998
---------------------------
Commitments outstanding:
Mortgage loans:
Fixed rate (rates between 7.75% and 11.23% at
1999 and between 6.00% and 8.25% at 1998) $ 2,938 $ 4,615
Variable rate 3,766 1,219
Commercial business loans 3,448 5,617
---------------------------
$ 10,152 $ 11,451
---------------------------
At December 31, 1999, the Company has granted unused consumer and
commercial lines of credit of $31,864,000 and $15,752,000, respectively, and has
commitments to purchase loans totaling $850,000.
Standby letters of credit are written unconditional commitments issued to
guarantee the performance of a customer to a third party and total approximately
$6,526,000 at December 31, 1999. The credit risk involved in issuing standby
letters of credit is essentially the same as that involved in extending a loan
and the collateral obtained, if any, varies but generally includes real estate
or personal property. Because most of these letters of credit expire without
being drawn upon, they do not necessarily represent future cash requirements.
Commitments to purchase securities are contracts for delayed delivery of
securities in which the seller agrees to make delivery on a specified future
date of a specified instrument, with a specified coupon, for a specified price.
At December 31, 1999, the Company had no such commitments.
Rent expense under long-term operating leases for property approximates
$1,015,000, $713,000, and $709,000 for the years ended December 31, 1999, 1998
and 1997, respectively. The minimum rental commitments under noncancelable
leases with an initial term of more than one year for the years ending December
31, are as follows (in thousands):
2000 $ 848
2001 724
2002 506
2003 448
2004 443
Thereafter 1,168
-----------
$ 4,137
-----------
69
Note 18
Regulatory matters
Capital Adequacy
The Bank is subject to various regulatory capital requirements administered
by the Office of Thrift Supervision ("OTS"). 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 Company'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
classifications are also subject to qualitative judgments by regulators about
components, risk weighting and other factors.
As set forth in the table below, quantitative measures established by
regulation to ensure capital adequacy require the Bank to maintain minimum
amounts and ratios of tier 1 (core) capital to adjusted total assets, of tier 1
risk-based and total risk-based capital to risk-weighted assets and tangible
equity capital to adjusted total assets. As of December 31, 1999, the Bank
exceeded all capital adequacy requirements to which it is subject.
As of December 31, 1999, the most recent notification from the OTS
categorized the Bank as "well capitalized" under the framework for prompt
corrective action. To be considered well capitalized under prompt corrective
action provisions, the Bank must maintain capital ratios as set forth in the
following table. There are no conditions or events since that notification that
management believes have changed the Bank's categorizations.
The Bank's actual capital amounts and ratios are as follows (dollars in
thousands):
Required for
Actual Required Well Capitalized
---------------------------- ----------------------- ----------------------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
As of December 31, 1999:
Tier 1 (core) capital $ 47,444 7.1% $ 26,877 4.0% $ 33,597 5.0%
Tier 1 risk-based capital 47,444 10.8 17,603 4.0 26,405 6.0
Total risk-based capital 51,271 11.7 35,207 8.0 44,008 10.0
Tangible equity capital 47,444 7.1 13,439 2.0 - -
As of December 31, 1998:
Core capital $ 45,271 7.1% $ 25,481 4.0% $ 31,851 5.0%
Tier 1 risk-based capital 45,271 10.5 17,221 4.0 25,832 6.0
Total risk-based capital 49,074 11.4 34,442 8.0 43,053 10.0
Tangible capital 45,271 7.1 12,740 2.0 - -
70
Dividend Restrictions
The Bank's capital exceeds all of the capital requirements imposed by
FIRREA. OTS regulations provide that an association whose (i) proposed capital
distribution does not exceed the retained earnings for that year combined with
the retained earnings of the preceding two years, and (ii)exceeds all fully
phased-in capital requirements before and after a proposed capital distribution
can, after prior notice but without the approval by the OTS, make capital
distributions during the calendar year. Any additional capital distributions
require prior regulatory approval.
The Company is subject to the restrictions of Delaware law, which generally
limit dividends to the amount of a corporation's surplus or, in the case where
no such surplus exists, the amount of a corporation's net profits for the fiscal
year in which the dividend is declared and/or the preceding fiscal year.
Note 19
Stockholders' Equity
As part of the Bank's conversion from a federally chartered mutual savings
bank to a federally chartered stock savings bank, the Bank established a
liquidation account for the benefit of eligible depositors who continue to
maintain their deposit accounts in the Company after conversion. In the unlikely
event of a complete liquidation of the Bank, each eligible depositor will be
entitled to receive a liquidation distribution from the liquidation account, in
the proportionate amount of the then current adjusted balance for deposit
accounts held, before distribution may be made with respect to the Bank's
capital stock. The Bank may not declare or pay a cash dividend to the Company
on, or repurchase any of, its capital stock if the effect thereof would cause
the retained earnings of the Bank to be reduced below the amount required for
the liquidation account. Except for such restrictions, the existence of the
liqui dation account does not restrict the use or application of the Bank's
retained earnings. At December 31, 1999, the liquidation account balance was
$2,747,000.
Note 20
Related Party Transactions
The Company has made loans to executive officers, directors, and to
companies in which the executive officers and directors have a financial
interest. The following is a summary of related party loans (in thousands):
Balance at January 1, 1999 $ 4,295
Originations - 1999 1,980
Repayments - 1999 (1,459)
----------
Balance at December 31, 1999 $ 4,816
----------
Under the Company's current policy, related party loans are made on
substantially the same terms, including interest rate and collateral
requirements, as are available to the general public. The Company believes loans
to related parties do not involve more than the normal risk of collectibility.
Commitments to extend credit and letters of credit to related parties totaled
$1,566,000 at December 31, 1999.
Note 21
Disclosures About Fair Value of Financial Instruments
The following summary presents the methodologies and assumptions used to
estimate the fair value of the Company's financial instruments presented below.
The Company operates as a going concern and except for its investment securities
portfolio and certain residential loans, no active market exists for its
financial instruments. Much of the information used to determine fair value is
highly subjective and judgmental in nature and therefore the results may not be
precise. The subjective factors include, among other things, estimates of cash
flows, risk characteristics, credit quality, and interest rates, all of which
are subject to change. Since the fair value is estimated as of December 31,
1999, the amounts which will actually be realized or paid upon settlement or
maturity of the various instruments could be significantly different.
Cash and Federal Funds Sold
For cash and federal funds sold, the carrying amount is a reasonable
estimate of fair value.
71
Investment Securities
Fair values are based on quoted market prices or dealer quotes for U.S.
Treasury securities, other U.S. government agency securities, and
mortgage-backed certificates. As required by FAS 115, securities available for
sale are recorded at fair value.
Loans
The fair value of loans is estimated by discounting the future cash flows
using the current rates at which similar loans would be made to borrowers with
similar credit ratings for the same remaining maturities, or based on quoted
market prices for mortgage-backed certificates securitized by similar loans,
adjusted for differences in loan characteristics. The risk of default is
measured as an adjustment to the discount rate, and no future interest income is
assumed for nonaccrual loans.
The fair value of loans does not include the value of the customer
relationship or the right to fees generated by the account.
Federal Home Loan Bank Stock
The carrying value of Federal Home Loan Bank stock is a reasonable estimate
of the fair value.
Deposit Liabilities
The fair value of deposits with no stated maturities (which includes demand
deposits, savings accounts, and money market depos its) is the amount payable on
demand at the reporting date. The fair value of fixed-maturity certificates of
deposit is estimated using a discounted cash flow model based on the rates
currently offered for deposits of similar maturities.
FAS 107 requires deposit liabilities with no stated maturity to be reported
at the amount payable on demand without regard for the inherent funding value of
these instruments. The Company believes that significant value exists in this
funding source.
Short-term Borrowings
For short-term borrowings (which include short-term advances from the
Federal Home Loan Bank and securities sold under agreements to repurchase), the
carrying amount is a reasonable estimate of fair value.
Long-term Borrowings
Rates currently available to the Company for borrowings with similar terms
and remaining maturities are used to estimate fair value of existing borrowings.
Loan Commitments and Standby Letters of Credit
The Company has reviewed its loan commitments and standby letters of credit
and determined that differences between the fair value and notional principal
amounts are not significant.
72
The estimated fair values of the Company's financial instruments that differ
from their carrying amount are as follows (in thousands):
December 31,
1999 1998
--------------------------- ---------------------------
Carrying Fair Carrying Fair Value
Amount Value Amount
--------------------------- ---------------------------
Financial assets:
Loans held for investment, net $ 469,618 $ 466,852 $ 484,783 $ 489,598
Financial liabilities:
Deposits with stated maturities 247,685 248,248 265,814 267,603
Long-term borrowings 15,000 14,491 75,000 77,228
As mentioned in the assumptions above, the estimated fair value of loans
and deposits does not include any value for the customer relationship or the
right to future fee income which may be generated by these relationships.
Note 22
Condensed Parent Company Only Financial Statements
The following condensed financial statements for CENIT Bancorp, Inc. should
be read in conjunction with the consolidated financial statements and the notes
thereto.
Condensed Statement of Financial Condition
(In thousands)
December 31,
1999 1998
---------------------------
Assets:
Cash $ 53 $ 56
Securities available for sale at fair value 250 250
Equity in net assets of the Bank 50,064 49,420
Other assets 1,216 776
---------------------------
$ 51,583 $ 50,502
---------------------------
Liabilities:
Other liabilities $ 318 $ 426
---------------------------
---------------------------
Stockholders' equity 51,265 50,076
---------------------------
$ 51,583 $ 50,502
---------------------------
73
Condensed Statement of Operations
(In thousands)
Year Ended December 31,
1999 1998 1997
-------------------------------------------
Equity in earnings of the Bank $ 6,293 $ 6,520 $ 6,767
Interest income 23 22 -
Interest expense - (76) (110)
Salaries and employee benefits (118) (296) (349)
Expenses related to proxy contest and
other matters - - (405)
Professional fees (182) (202) (247)
Other expenses (88) (86) (87)
-------------------------------------------
Income before income taxes 5,928 5,882 5,569
Benefit from income taxes 131 233 434
-------------------------------------------
Net income $ 6,059 $ 6,115 $ 6,003
-------------------------------------------
Condensed Statement of Cash Flows
(In thousands)
Year Ended December 31,
1999 1998 1997
-------------------------------------------
Cash flows from operating activities:
Net income $ 6,059 $ 6,115 $ 6,003
Add (deduct) items not affecting cash:
(Undisbursed earnings)distributions in
excess of earnings of the Bank (1,819) 1,399 (3,157)
Amortization - 6 3
(Increase) decrease in other assets (138) 1,860 (114)
(Decrease) increase in liabilities (34) (73) 189
--------------------------------------------
Net cash provided by operations 4,068 9,307 2,924
--------------------------------------------
Cash flows from investing activities:
Purchase of securities available for sale - (250) -
-------------------------------------------
Net cash used for investing activities - (250) -
-------------------------------------------
Cash flows from financing activities:
Cash dividends paid (2,745) (1,931) (1,627)
Net proceeds from issuance of common stock 137 173 357
Increase in other borrowings - - 4,000
Principal payments on other borrowings - (2,575) (1,425)
Common stock repurchases (1,463) (4,669) -
Purchase of common stock by ESOP - - (4,232)
--------------------------------------------
Net cash used for financing activities (4,071) (9,002) (2,927)
--------------------------------------------
Net (decrease) increase in cash and cash
equivalents (3) 55 (3)
Cash and cash equivalents at beginning of period 56 1 4
--------------------------------------------
Cash and cash equivalents at end of period $ 53 $ 56 $ 1
--------------------------------------------
74
Note 23
Quarterly Results of Operations (Unaudited)
(Dollars in thousands, except per share data)
Year Ended December 31, 1999
First Second Third Fourth
Quarter Quarter Quarter Quarter
------------------------------------------------------------
Total interest income $ 10,727 $ 10,568 $ 10,690 $ 11,327
Total interest expense 5,380 5,324 5,448 5,829
-----------------------------------------------------------
Net interest income 5,347 5,244 5,242 5,498
Provision for loan losses 14 22 39 23
-----------------------------------------------------------
Net interest income after provision
for loan losses 5,333 5,222 5,203 5,475
Other income 1,831 1,824 1,891 1,587
Other expenses 4,875 4,840 4,549 4,634
-----------------------------------------------------------
Income before income taxes 2,289 2,206 2,545 2,428
Provision for income taxes 824 794 916 874
-----------------------------------------------------------
Net income $ 1,465 $ 1,412 $ 1,629 $ 1,554
-----------------------------------------------------------
Earnings per share:
Basic $ .32 $ .31 $ .35 $ .34
-----------------------------------------------------------
Diluted $ .31 $ .30 $ .35 $ .33
-----------------------------------------------------------
Dividends per common share $ .15 $ .15 $ .15 $ .15
-----------------------------------------------------------
Year Ended December 31, 1998
First Second Third Fourth
Quarter Quarter Quarter Quarter
-----------------------------------------------------------
Total interest income $ 12,564 $ 12,317 $ 11,367 $ 10,783
Total interest expense 7,177 7,014 6,006 5,608
-----------------------------------------------------------
Net interest income 5,387 5,303 5,361 5,175
Provision for loan losses 204 136 100 70
-----------------------------------------------------------
Net interest income after provision
for loan losses 5,183 5,167 5,261 5,105
Other income 1,565 1,869 1,803 1,776
Other expenses 4,498 4,701 4,506 4,492
-----------------------------------------------------------
Income before income taxes 2,250 2,335 2,558 2,389
Provision for income taxes 793 831 934 860
-----------------------------------------------------------
Net income $ 1,457 $ 1,504 $ 1,624 $ 1,529
-----------------------------------------------------------
Earnings per share:
Basic $ .31 $ .32 $ .34 $ .33
-----------------------------------------------------------
Diluted $ .30 $ .31 $ .33 $ .33
-----------------------------------------------------------
Dividends per common share $ .10 $ .10 $ .10 $ .11
-----------------------------------------------------------
<FN>
NOTE: May not add to total for year due to rounding.
</FN>
75
Item 9 - Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
PART III
Item 10 - Directors and Executive Officers of the Registrant
The information contained under the caption "Election of Directors" to appear
in the Company's definitive proxy statement relating to the Company's 2000
Annual Meeting of Stockholders, which definitive proxy statement will be filed
with the Securities and Exchange Commission not later than 120 days after the
end of the Company's fiscal year covered by this report on Form 10-K
(hereinafter referred to as the "Annual Meeting Proxy Statement"), is
incorporated herein by reference. Information concerning the executive officers
of the Company is included in Part I of this Report on Form 10-K.
Item 11 - Executive Compensation
The information contained under the caption "Directors' Fees" and "Executive
Compensation" to appear in the Annual Meeting Proxy Statement is incorporated
herein by reference.
Item 12 - Security Ownership of Certain Beneficial Owners and Management
The information contained under the caption "Security Ownership of Certain
Beneficial Owners" and "Information with Respect to Nominees and Continuing
Directors" to appear in the Annual Meeting Proxy Statement is incorporated
herein by reference.
Item 13 - Certain Relationships and Related Transactions
The information contained under the captions "Transactions with Certain
Related Persons" and "Compensation Committee Interlocks and Insider
Participation" to appear in the Annual Meeting Proxy Statement is incorporated
herein by reference.
PART IV
Item 14 - Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) (1) Financial Statements
(a) (2) Financial Statement Schedules
See Item 8 - Financial Statements and Supplementary Data
(a) (3) Exhibits
The following exhibits are either filed as part of this report or are
incorporated herein by reference:
Exhibit No. 3 Certificate of Incorporation, incorporated herein by reference
to this report from the Exhibits to Form S-1, Registration Statement filed on
July 31, 1991, Registration No. 33-41848 and Amendment No. 2 to Form S-1
Registration Statement, filed on June 11, 1992, Exhibits to Form 10-Q filed
on November 3, 1997, and Exhibits to Form 8-K filed December 31, 1998.
3.1 Certificate of Incorporation of CENIT Bancorp, Inc.
3.3 Certificate of Amendment to Certificate of Incorporation of CENIT
Bancorp, Inc.
3.4 Amended Bylaws of CENIT Bancorp, Inc.
76
Exhibit No. 10. Material Contracts, incorporated herein by reference to this
document from the Exhibits to Form S-1, Registration Statement, as amended,
filed on July 31, 1991, Registration No. 33-41848, Exhibits to Amendment No.
1 to Form S-1 filed on April 29, 1992, Exhibits to Amendment No. 2 to Form
S-1 filed on June 11, 1992, Exhibits to Form 8-K filed on October 22, 1993,
Exhibits to Form 8-K filed on November 18, 1994, Exhibits to Form S-4 filed
on April 4, 1995, Registration No. 033- 90922, Exhibits to Form 10-Q filed
on November 14, 1995, Exhibits to Form 8-K filed on July 9, 1996, Exhibits
to Form 10-K filed on March 25, 1997, and Exhibits to Form 10-Q filed on May
5, 1998.
10.1 Employment Agreement with Michael S. Ives
10.2 CENIT Stock Option Plan
10.3 CENIT Employees Stock Ownership Plan and Trust Agreement
10.4 ESOP Loan Commitment Letter
10.5 CENIT Management Recognition Plan
10.6 ESOP Loan Agreement
10.7 Agreement and Plan of Reorganization between Princess Anne Company and
CENIT Bancorp, Inc.
10.9 Branch Purchase and Deposit Assumption Agreement between CENIT
Bancorp, Inc. and Essex Savings Bank, F.S.B.
10.10 Amendment to Employment Agreement with Michael S. Ives
10.12 Consulting Agreement with J. Morgan Davis
10.13 Non-Competition and Non-Disclosure Agreement with J. Morgan Davis
Exhibit 10.14 Employment Agreement with Michael S. Ives
The Employment Agreement with Michael S. Ives is attached as
Exhibit 10.14
Exhibit 10.15 CENIT Long Term Incentive Plan
The CENIT Long Term Incentive Plan is attached as Exhibit 10.15
Exhibit 10.16 Key Executive Change of Control Agreement with Barry L. French
The Key Executive Change of Control Agreement with Barry L. French is
attached as Exhibit 10.16
Exhibit 10.17 Key Executive Change of Control Agreement with John O. Guthrie
The Key Executive Change of Control Agreement with John O. Guthrie is
attached as Exhibit 10.17
Exhibit 10.18 Key Executive Change of Control Agreement with Roger J.
Lambert
The Key Executive Change of Control Agreement with Roger J. Lambert
is attached as Exhibit 10.18
Exhibit 10.19 Key Executive Change of Control Agreement with Alvin D. Woods
The Key Executive Change of Control Agreement with Alvin D. Woods
is attached as Exhibit 10.19
Exhibit 10.20 Alternative Stock Appreciation Rights Program for Non-Employee
Directors
The Alternative Stock Appreciation Rights Program for Non-Employee
Directors is attached as Exhibit 10.20
Exhibit 10.21 Alternative Stock Appreciation Right Agreement (officers)
with Michael S. Ives
The Alternative Stock Appreciation Right Agreement (officers) with
Michael S. Ives is attached as Exhibit 10.21
Exhibit 10.22 Alternative Stock Appreciation Right Agreement (officers)
with Barry L. French
The Alternative Stock Appreciation Right Agreement (officers) with
Barry L. French is attached as Exhibit 10.22
Exhibit 10.23 Alternative Stock Appreciation Right Agreement (officers)
with John O. Guthrie
The Alternative Stock Appreciation Right Agreement (officers) with
John O. Guthrie is attached as Exhibit 10.23
Exhibit 10.24 Alternative Stock Appreciation Right Agreement (officers)
with Roger J. Lambert
The Alternative Stock Appreciation Right Agreement (officers) with
Roger J. Lambert is attached as Exhibit 10.24
Exhibit 10.25 Alternative Stock Appreciation Right Agreement (officers)
with Alvin D Woods
The Alternative Stock Appreciation Right Agreement (officers) with
Alvin D. Woods is attached as Exhibit 10.21
Exhibit No. 11 Statement Re: Computation of Per Share Earnings
The 1999 statement Re: Computation of per share earnings is attached
as Exhibit 11
Exhibit No. 21 Subsidiaries of the Registrant
CENIT Bank is the only subsidiary of the Registrant. Information
regarding CENIT Bank is included in Part I, Item 1 under the captions
"Activities of Subsidiary Companies of CENIT Bank" which is
incorporated by reference
Exhibit No. 23.1 Consent of Independent Accountants.
The consent of PricewaterhouseCoopers LLP, independent accountants
for the Company, is attached as Exhibit 23.1
77
Exhibit No. 27 Financial Data Schedule Article 9
The Financial Data Schedule is attached as Exhibit 27
(b) Reports on Form 8-K filed in the fourth quarter of 1999
None
(c) Exhibits
Exhibits to this Form 10-K are either filed as part of this Report or are
incorporated herein by reference.
(d) Financial Statements Excluded from Annual Report to Shareholders pursuant to
Rule 14a3(b)
Not applicable.
Supplemental Information
As of the date of filing of this report on Form 10-K, no annual report or
proxy material has been sent to security holders. Such material will be
furnished to security holders and the Securities and Exchange Commission
subsequent to the filing of this report on Form 10-K.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
CENIT Bancorp, Inc.
By: /s/ Michael S. Ives
-----------------------
Michael S. Ives, President
and Chief Executive Officer
March 30, 2000
-------------------
(Date)
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
By: /s/ John O. Guthrie March 30, 2000
----------------------------------- ---------------------
John O. Guthrie (Date)
Senior Vice President and
Chief Financial Officer
By: /s/ Winfred O. Stant, Jr. March 30, 2000
------------------------------------- ---------------------
Winfred O. Stant, Jr. (Date)
First Vice President and
Chief Accounting Officer
By: /s/ Charles R. Malbon, Jr. March 30, 2000
------------------------------------- ---------------------
Charles R. Malbon, Jr. (Date)
Chairman of the Board/Director
By: /s/ Michael S. Ives March 30, 2000
------------------------------------ ---------------------
Michael S. Ives Date)
Director
By: /s/ David L. Bernd March 30, 2000
----------------------------------- ---------------------
David L. Bernd (Date)
Director
78
By: /s/ Patrick E. Corbin March 30, 2000
------------------------------------- ---------------------
Patrick E. Corbin (Date)
Director
By: /s/ William J. Davenport, III March 30, 2000
-------------------------------------- ---------------------
William J. Davenport, III (Date)
Director
By: /s/ John F. Harris March 30, 2000
------------------------------------- ---------------------
John F. Harris (Date)
Director
By: /s/ William H. Hodges March 30, 2000
------------------------------------ -----------------------
William H. Hodges (Date)
Director
By: /s/ Roger C. Reinhold March 30, 2000
------------------------------------- -----------------------
Roger C. Reinhold (Date)
Director
By: /s/ David R. Tynch March 30, 2000
----------------------------------- -----------------------
David R. Tynch (Date)
Director
79