SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A
[ X ] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the fiscal year ended December 31, 2000
[ ] 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
- ------------------------- -------------------------------------
(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 $14.56 of the registrant's common stock on
February 28, 2001, 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 $54,418,359. 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
28, 2001 was 4,430,171.
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, 2000, the Company had total
deposits of $494.5 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, 2000, the Company had total assets of $632.2 million and
total stockholders' equity of $51.5 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 28th largest MSA in the United States and the fifth
largest MSA in the southeastern United States with a population in 2000 of
approximately 1.5 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. Significant
cutbacks in defense spending and 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, 2000, 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,
----------------------------------------------------------------------------------------
1998 1999 2000
----------------------------------------------------------------------------------------
Average Yield/ Average Yield/ Average Yield/
Balance Interest Cost Balance Interest Cost Balance Interest Cost
------- -------- ------ ------- -------- ------ ------- -------- ------
(Dollars in Thousands)
Interest-earning assets:
Loans (1) $507,694 $ 39,931 7.87% $480,627 $ 36,506 7.60% $474,381 $ 37,680 7.94%
Mortgage-backed certificates 46,967 3,208 6.83 36,300 2,533 6.98 76,465 5,244 6.86
U.S. Treasury, other U.S.
Government agency and other
debt securities 44,542 2,664 5.98 56,556 3,237 5.72 42,932 2,411 5.62
Federal funds sold 13,292 705 5.30 13,894 683 4.92 9,614 601 6.25
Federal Home Loan Bank stock 7,078 523 7.39 4,666 353 7.57 5,651 438 7.75
-------- ------- -------- ------- -------- --------
Total interest-earning assets 619,573 47,031 7.59 592,043 43,312 7.32 609,043 46,374 7.61
-------- ------- -------- ------- -------- --------
Noninterest-earning assets:
REO 710 314 107
Other 41,095 38,232 38,151
-------- -------- --------
Total noninterest-earning assets 41,805 38,546 38,258
-------- -------- --------
Total assets $661,378 $630,589 $647,301
======== ======== ========
Interest-bearing liabilities:
Passbook and statement savings $ 39,700 1,250 3.15 $ 34,500 841 2.44 $ 31,307 747 2.39
Checking accounts 34,861 606 1.74 40,633 579 1.42 43,192 597 1.38
Money market deposit accounts 64,109 2,397 3.74 75,442 2,604 3.45 82,381 3,106 3.77
Certificates of deposit 292,456 15,318 5.24 255,142 12,713 4.98 249,038 13,549 5.44
-------- ------- -------- ------- -------- --------
Total interest-bearing deposits 431,126 19,571 4.54 405,717 16,737 4.13 405,918 17,999 4.43
Advances from the Federal Home
Loan Bank 103,592 5,622 5.43 87,921 4,602 5.23 98,071 6,043 6.16
Other borrowings 1,008 77 7.64 - - - - - -
Securities sold under agreements
to repurchase 12,026 535 4.45 15,711 641 4.08 15,361 819 5.33
-------- ------- -------- ------- -------- --------
Total interest-bearing liabilities 547,752 25,805 4.71 509,349 21,980 4.32 519,350 24,861 4.79
-------- -------- -------- ------- -------- --------
Noninterest-bearing liabilities:
Deposits 56,407 65,730 71,922
Other liabilities 6,413 4,909 5,268
--------- -------- --------
Total noninterest-bearing liabilities 62,820 70,639 77,190
--------- -------- --------
Total liabilities 610,572 579,988 596,540
Stockholders' equity 50,806 50,601 50,761
--------- -------- --------
Total liabilities and
stockholders' equity $661,378 $630,589 $647,301
======== ======== ========
Net interest income/interest
rate spread $ 21,226 2.88% $ 21,332 3.00% $ 21,513 2.82%
======== ==== ======== ==== ======== ====
Net interest position/net
interest margin $ 71,821 3.43% $ 82,694 3.60% $ 89,693 3.53%
======== ==== ======== ==== ======== ====
Ratio of average interest-earning
assets to average interest-
bearing liabilities 113.11% 116.24% 117.27%
====== ====== ======
<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,
1998 vs. 1999 1999 vs. 2000
------------------------------- ---------------------------------
Increase (decrease) Increase (decrease)
due to due to
------------------------------- ---------------------------------
Volume Rate Net Volume Rate Net
------ ---- --- ------ ---- ---
(Dollars in Thousands)
Interest Income:
Loans (1) $(2,084) $(1,341) $(3,425) $ (479) $ 1,653 $ 1,174
Mortgage-backed certificates (743) 68 (675) 2,755 (44) 2,711
U.S. Treasury, other U.S.
Government agency and other
debt securities 692 (119) 573 (766) (60) (826)
Federal funds sold 31 (53) (22) (241) 159 (82)
Federal Home Loan Bank stock (182) 12 (170) 76 9 85
------- ------- ------- ------ ------- -------
Total interest income (2,286) (1,433) (3,719) 1,345 1,717 3,062
------- ------- ------- ------ ------- -------
Interest Expense:
Passbook and statement savings (150) (259) (409) (76) (18) (94)
Checking accounts 92 (119) (27) 36 (18) 18
Money market deposit accounts 401 (194) 207 251 251 502
Certificates of deposit (1,886) (719) (2,605) (310) 1,146 836
Advances from the Federal Home Loan Bank (826) (194) (1,020) 568 873 1,441
Other borrowings (77) - (77) - - -
Securities sold under agreements to
repurchase 153 (47) 106 (15) 193 178
------- ------- ------- ------ ------- -------
Total interest expense (2,293) (1,532) (3,825) 454 2,427 2,881
------- ------- ------- ------ ------- -------
Net interest income $ 7 $ 99 $ 106 $ 891 $ (710) $ 181
======= ======= ======= ====== ======= =======
<FN>
- ---------------------------
(1) Includes nonaccrual loans and loans held for sale. Net loan fees are
included in loan interest income; however, they are not considered material.
</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, 2000, the Company's total gross
loans held for investment in all categories equaled $521.1 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,
-------------------------------------------------------------------------------------
1996 1997 1998 1999 2000
-------------- -------------- --------------- --------------- ---------------
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ ------- ------ ------- ------ -------
(Dollars in Thousands)
Real estate loans:
Residential permanent 1- to 4-family:
Adjustable rate $157,542 33.63% $213,682 40.20% $181,104 34.63% $149,163 29.44% $139,663 26.80%
Fixed rate
Conventional 98,952 21.12 89,356 16.81 66,041 12.63 69,055 13.63 63,324 12.15
Guaranteed by VA or insured by FHA 7,004 1.50 5,487 1.03 3,972 0.76 2,823 0.56 2,276 0.44
-------- ------ -------- ----- -------- ----- -------- ----- -------- -----
Total permanent 1- to 4-family 263,498 56.25 308,525 58.04 251,117 48.02 221,041 43.63 205,263 39.39
-------- ------ -------- ----- ------- ----- ------- ----- -------- -----
Residential permanent 5 or more family 7,100 1.52 6,374 1.20 7,874 1.51 8,082 1.59 7,620 1.46
-------- ------ -------- ----- ------- ----- ------- ----- -------- -----
Total permanent residential loans 270,598 57.77 314,899 59.24 258,991 49.53 229,123 45.22 212,883 40.85
-------- ------ -------- ----- ------- ----- ------- ----- ------- -----
Commercial real estate loans:
Hotels 9,651 2.06 10,240 1.93 9,208 1.76 10,711 2.11 6,513 1.25
Office and warehouse facilities 27,178 5.80 26,710 5.02 36,659 7.01 38,908 7.68 42,974 8.25
Retail facilities 18,181 3.88 18,249 3.43 22,823 4.37 22,098 4.36 26,402 5.07
Other 3,304 0.71 2,714 0.51 7,921 1.51 10,007 1.97 9,007 1.73
-------- ------ -------- ----- ------- ----- ------- ----- -------- -----
Total commercial real estate loans 58,314 12.45 57,913 10.89 76,611 14.65 81,724 16.12 84,896 16.30
-------- ------ -------- ----- ------- ----- ------- ----- -------- -----
Construction loans:
Residential 1- to 4-family 43,807 9.35 44,208 8.32 47,232 9.03 48,912 9.65 43,968 8.43
Residential 5 or more family 8,855 1.89 12,784 2.40 19,621 3.75 9,616 1.90 9,323 1.79
Nonresidential 3,365 0.72 1,420 0.27 4,101 0.79 7,685 1.52 25,471 4.89
-------- ------ -------- ----- ------- ----- ------- ----- -------- -----
Total construction loans 56,027 11.96 58,412 10.99 70,954 13.57 66,213 13.07 78,762 15.11
-------- ------ -------- ----- ------- ----- ------- ----- -------- -----
Land acquisition and development loans:
Consumer lots 5,396 1.15 4,573 0.86 3,703 0.71 3,566 0.70 3,654 0.70
Acquisition and development 16,010 3.42 13,327 2.51 11,444 2.19 18,065 3.57 19,175 3.68
-------- ------ -------- ----- ------- ----- ------- ----- -------- -----
Total land acquisition and
development loans 21,406 4.57 17,900 3.37 15,147 2.90 21,631 4.27 22,829 4.38
-------- ------ -------- ----- ------- ----- ------- ----- -------- -----
Total real estate loans 406,345 86.75 449,124 84.49 421,703 80.65 398,691 78.68 399,370 76.64
-------- ------ -------- ----- ------- ----- ------- ----- -------- -----
Consumer loans:
Boats 7,814 1.67 5,685 1.07 4,275 0.82 2,855 0.56 2,010 0.39
Home equity and second mortgage 29,578 6.31 45,194 8.50 52,845 10.11 56,469 11.14 60,343 11.58
Other 6,743 1.44 7,345 1.38 10,589 2.02 11,968 2.37 12,594 2.41
-------- ------ -------- ----- ------- ----- ------- ----- -------- -----
Total consumer loans 44,135 9.42 58,224 10.95 67,709 12.95 71,292 14.07 74,947 14.38
-------- ------ -------- ----- ------- ----- ------- ----- -------- ------
Commercial business loans 17,922 3.83 24,222 4.56 33,485 6.40 36,739 7.25 46,780 8.98
-------- ------ -------- ----- ------- ----- ------- ----- -------- ------
Total loans 468,402 100.00% 531,570 100.00% 522,897 100.00% 506,722 100.00% 521,097 100.00%
-------- ====== -------- ====== ------- ====== ------- ====== ------- ======
Less:
Allowance for loan losses 3,806 3,783 4,024 3,860 3,804
Undisbursed portion of construction and
acquisition and development loans 42,309 42,067 35,463 34,714 46,241
Unearned discounts, premiums, and
loan fees, net 68 (767) (1,373) (1,470) (1,464)
-------- -------- ------- ------- -------
46,183 45,083 38,114 37,104 48,581
-------- -------- ------- ------- ------
Total loans, net $422,219 $486,487 $484,783 $469,618 $472,516
======== ======== ======== ======== ========
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, 2000. 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 $ 6,676 $ 26,443 $34,503 $ 77,751 $ 59,890 $205,263
Permanent 5 or more family 373 2,113 2,585 2,549 - 7,620
Commercial real estate 8,020 25,514 24,539 26,622 201 84,896
Construction 78,762 - - - - 78,762
Land acquisition and development 19,148 743 642 1,289 1,007 22,829
Consumer 37,449 19,830 9,178 6,586 1,904 74,947
Commercial business 32,549 12,492 877 862 - 46,780
-------- -------- ------- -------- -------- --------
Total $182,977 $ 87,135 $72,324 $115,659 $ 63,002 $521,097
======== ======== ======= ======== ======== ========
Maturity after December 31,
----------------------------------------------------------------------------
Floating
or
Fixed Adjustable
Rates Rates Calls Total
----- --------- ------- -------
(Dollars in Thousands)
Permanent 1- to 4-family $39,611 $137,176 $21,800 $198,587
Permanent 5- or more family 38 6,434 775 7,247
Commercial real estate 16,190 36,030 24,656 76,876
Construction - - - -
Land acquisition and development 624 29 3,028 3,681
Consumer 29,990 1,403 6,105 37,498
Commercial business 11,477 1,726 1,028 14,231
------ -------- ------- -------
Total $97,930 $182,798 $57,392 $338,120
======= ======== ======= ========
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 may be
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.
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. 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 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. Generally, the
maximum loan-to-value ratio 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. 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. 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 lesser 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. 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 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
10
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.
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,
experienced developers and others 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 generally, 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. The Company also 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. 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 a lesser rate. 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 variable amount equal
to accrued interest on the outstanding principal plus three fourths of one
percent of the outstanding principal.
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.
11
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.
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 generally by 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,
------------------------------------------------------------------
1996 1997 1998 1999 2000
---- ---- ---- ---- ----
(Dollars in Thousands)
Nonperforming loans:
Real estate loans:
Permanent residential 1- to 4-family:
Nonaccrual $ 1,172 $ 528 $ 359 $ 54 $ 1,379
Accruing loans 90 days or more past due 246 53 511 87 -
-------- -------- -------- -------- --------
Total 1,418 581 870 141 1,379
-------- -------- -------- -------- --------
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 - 48 46
-------- -------- -------- -------- --------
Total 200 200 - 48 46
-------- -------- -------- -------- --------
Consumer loans:
Nonaccrual
Boats - 10 37 10 5
Home equity and second mortgage - - 57 49 34
Other 100 62 46 20 14
Accruing loans 90 days or more past due 9 5 2 - -
-------- -------- -------- -------- --------
Total 109 77 142 79 53
-------- -------- -------- -------- --------
Commercial business loans:
Nonaccrual 483 240 64 111 202
Accruing loans 90 days or more past due - 5 - - -
-------- -------- -------- -------- --------
Total 483 245 64 111 202
-------- -------- -------- -------- --------
Total nonperforming loans:
Nonaccrual 2,412 1,040 563 292 1,680
Accruing loans 90 days or more past due 425 63 513 87 -
-------- -------- -------- -------- --------
Total 2,837 1,103 1,076 379 1,680
Real estate owned, net 2,769 1,098 377 218 -
Other repossessed assets, net 55 228 21 6 -
-------- -------- -------- -------- --------
Total nonperforming assets, net 5,661 2,429 1,474 603 1,680
Total troubled debt restructurings - - - - -
-------- -------- -------- -------- --------
Total nonperforming assets, net, and
troubled debt restructurings $ 5,661 $ 2,429 $ 1,474 $ 603 $ 1,680
======== ======== ======== ======== ========
Total nonperforming assets, net, and troubled
debt restructurings, to total assets .80% .34% .23% .09% .27%
=== === === === ===
13
Nonperforming Loans. The increase in nonperforming loans from December 31,
1999 to December 31, 2000 was primarily due to the addition of two residential
single-family properties serviced by a third party, totaling $856,000 and seven
residential single-family properties serviced by the Bank, totaling $557,000.
Interest income on nonaccrual loans for the year ended December 31, 2000 would
have approximated $141,000, if such loans had been current and performing under
their stated, contractual terms throughout the year. Interest income actually
recognized on nonaccrual loans for the year ended December 31, 2000 approximated
$56,000.
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, 2000, the Company had $2.4 million of assets classified
as substandard, and $80,000 of assets classified as doubtful. There were no
assets classified as loss. These amounts compare with $677,000, $34,000 and
$14,000 of assets classified as substandard, doubtful, and loss, respectively,
at December 31, 1999.
Assets classified as substandard at December 31, 2000 were comprised of
$914,000 (four loans) of land, construction, and commercial business loans, $1.5
million (ten loans) of permanent one- to four-family real estate loans, and
$19,000 (five loans) of consumer loans. Assets classified as doubtful at
December 31, 2000 were comprised of two commercial business loans.
During the first quarter of 2001, an $866,000 one- to four-family real estate
loan was placed on nonaccrual status and classified as substandard. The Company
believes the allowance for loan losses as of December 31, 2000 is sufficient to
absorb any loss related to this loan.
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, 2000, the Company had an allowance for loan losses of $3.8
million and nonperforming loans of $1.7 million which resulted in a coverage
ratio of approximately two times the nonperforming loans. 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.
14
The following table sets forth an analysis of the Company's allowance for
loan losses for the periods indicated.
Year ended December 31,
------------------------------------------------------------------------------
1996 1997 1998 1999 2000
---- ---- ---- ---- ----
(Dollars in Thousands)
Balance at beginning of year $ 3,696 $ 3,806 $ 3,783 $ 4,024 $ 3,860
------- ------- ------- -------- -------
Charge-offs:
Real estate:
Residential 312 359 173 184 91
Commercial 75 181 - - -
Other consumer 249 202 169 113 138
Commercial 102 94 40 61 46
------- ------- ------- -------- -------
Total charge-offs 738 836 382 358 275
Recoveries 471 213 113 96 171
------ ------- ------ ------- ------
Total charge-offs, net 267 623 269 262 104
Provision for loan losses 377 600 510 98 48
------ ------- ------ ------- ------
Balance at end of year $ 3,806 $ 3,783 $ 4,024 $ 3,860 $ 3,804
======= ======= ======== ========= ========
Ratio of net charge-offs during the year to
average loans receivable during the year 0.08% 0.13% 0.05% 0.05% 0.02%
Ratio of allowance for loan losses to total
outstanding loans (gross) at end of year 0.81% 0.71% 0.77% 0.76% 0.73%
Allowance for loan losses as a percentage
of nonperforming loans 134.16% 342.97% 373.98% 1,018.47% 226.43%
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,
---------------------------------------------------------------------------------------
1996 1997 1998 1999 2000
---------------- ---------------- ---------------- ---------------- ---------------
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 $ 512 62.56% $ 484 66.54% $ 350 58.13% $ 416 54.77% $ 629 50.97%
Residential 5 or more family 21 1.52 25 1.20 6 1.51 81 1.59 76 1.46
Commercial real estate 799 12.45 698 10.89 824 14.65 817 16.12 849 16.30
Construction loans:
Residential 1- to 4-family 251 9.35 243 8.32 472 9.03 223 9.65 206 8.43
Residential 5 or more family 89 1.89 128 2.40 196 3.75 85 1.90 55 1.79
Nonresidential 34 .72 14 .27 41 .79 51 1.52 128 4.89
Land acquisition:
Individual lots 23 1.15 20 .86 37 .71 42 .70 43 0.70
Acquisition and development 127 3.42 133 2.51 114 2.19 143 3.57 153 3.68
Consumer loans 326 3.11 201 2.45 123 2.84 500 2.93 499 2.80
Commercial business loans 316 3.83 342 4.56 237 6.40 420 7.25 623 8.98
Unallocated 1,308 - 1,495 - 1,624 - 1,082 - 543 -
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
$3,806 100.00% $3,783 100.00% $4,024 100.00% $3,860 100.00% $3,804 100.00%
====== ====== ====== ====== ====== ====== ====== ====== ====== ======
16
Mortgage-Backed Certificates
The Company invests in mortgage-backed certificates that are insured or
guaranteed by FNMA, FHLMC, or GNMA.
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,
----------------------------------------------------------------------------------
1998 1999 2000
----------------------------------------------------------------------------------
Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ -------
(Dollars in Thousands)
FHLMC $ 11,659 68.51% $ 41,796 50.50% $ 30,792 31.09%
FNMA 3,345 19.65 38,364 46.35 33,815 34.15
GNMA 2,015 11.84 2,603 3.15 34,425 34.76
-------- ------ -------- ------ -------- ------
Total mortgage-backed
certificates $ 17,019 100.00% $ 82,763 100.00% $ 99,032 100.00%
======== ====== ======== ====== ======== ======
- ---------------
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."
The following table sets forth certain yield, maturity and market value
information concerning the Company's mortgage-backed certificates at December
31, 2000:
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 2000 Maturity
-------- ---------- ------- --------- -------- ---------- --------
(Dollars in Thousands) (years)
FHLMC $ 5,797 $ 16,273 $ 7,142 $ 1,580 $ 30,792 $ 30,792 3.2
FNMA 5,952 20,557 6,216 1,090 33,815 33,815 2.9
GNMA 8,893 18,916 6,616 - 34,425 34,425 2.5
-------- -------- --------- ------- --------- --------
Total $ 20,642 $ 55,746 $19,974 $ 2,670 $ 99,032 $ 99,032 2.8
======== ======== ======= ======= ========= ========
Weighted average yield 6.48% 6.58% 6.54% 6.75% 6.56%
- ---------------
<FN>
(1) Reflects estimated average life to maturity based on recent prepayment experience of the Company (approximately 8% to 25%).
</FN>
17
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.
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."
The following table sets forth certain information concerning the Company's
investment portfolio (exclusive of mortgage-backed certificates) at the dates
and for the years indicated.
At or for the year ended December 31,
----------------------------------------------------------------------
1998 1999 2000
------------------- -------------------- --------------------
(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 $ 26,396 6.07% $ 14,004 6.13% $ - -%
Other U.S. Government agency securities 21,471 5.71 41,281 5.49 - -
Other debt security 250 9.26 250 9.25 230 9.25
Federal funds sold 42,289 5.30 12,908 4.91 8,646 6.25
Federal Home Loan Bank stock 5,066 7.39 7,100 7.58 5,050 7.75
-------- -------- -------
Total investments $ 95,472 6.00 $ 75,543 5.69 $13,926 6.85
======== ======== =======
----------
<FN>
(1) Yields are calculated during the years indicated.
</FN>
The carrying value of the other debt security approximates the fair market
value and its maturity is greater than ten years.
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.
18
The following table sets forth the average balance distribution and the
weighted average interest rates of the Company's deposit accounts at the dates
indicated.
For the year ended December 31,
---------------------------------------------------------------------------------------------------
1998 1999 2000
------------------------------- ------------------------------- ---------------------------------
Percent of Weighted Percent of Weighted Percent of Weighted
Total Average Total Average Total Average
Average Average Nominal Average Average Nominal Average Average Nominal
Deposits Deposits Rate Deposits Deposits Rate Deposits Deposits Rate
-------- -------- ---- -------- -------- ---- -------- -------- ----
(Dollars in Thousands)
Noninterest-bearing checking $ 56,407 11.57% -% $ 65,730 13.94% - $ 71,922 15.05% -%
Interest-bearing checking 34,861 7.15 1.18 40,633 8.62 1.26 43,192 9.04 1.05
Passbook and statement savings 39,700 8.14 2.46 34,500 7.32 2.41 31,307 6.55 2.37
Money market deposits 64,109 13.15 3.36 75,442 16.00 3.56 82,381 17.24 4.23
-------- ----- -------- ----- ------- -----
Subtotal 195,077 40.01 1.72 216,305 45.88 1.92 228,802 47.88 2.01
Certificates of deposit 292,456 59.99 5.21 255,142 54.12 5.03 249,038 52.12 5.78
-------- ----- -------- ----- ------- -----
Total deposits $487,533 100.00% 3.59 $471,447 100.00% 3.58 $477,840 100.00% 3.86
======== ====== ======== ====== ======= ======
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, 2000.
At December 31, At December 31, 2000, Maturing in
------------------------------ ---------------------------------------------------
Greater
One year than three
1998 1999 2000 or less Two years Three years years
-------- -------- -------- --------- --------- ----------- -----------
(Dollars in Thousands)
Certificate accounts:
3.99% or less $ 345 $ 52 $ 37 $ 7 $ - $ - 30
4.00% to 4.99% 121,862 159,000 33,418 31,294 736 514 874
5.00% to 5.99% 113,417 67,257 93,690 74,972 8,510 3,439 6,769
6.00% to 6.99% 18,818 13,908 110,304 81,453 8,578 1,078 19,195
7.00% to 7.99% 9,958 7,312 5,594 4,411 867 195 121
8.00% to 8.99% 294 156 - - - - -
9.00% to 9.99% 1,120 - 31 31 - - -
-------- -------- -------- -------- ------ ------ -------
Total certificates $265,814 $247,685 $243,074 $192,168 $18,691 $5,226 $26,989
======== ======== ======== ======== ======= ====== =======
19
At December 31, 2000, the Company had outstanding $28,696,000 in certificate
accounts in amounts greater than $100,000 maturing as follows (which amount
includes $2,000,000 of jumbo certificates of deposit with negotiated rates of
interest):
Amount
------------------------
(Dollars in Thousands)
Three months or less $ 6,258
Over three months to six months 5,221
Over six months to twelve months 11,410
Over twelve months 5,807
--------
Total $ 28,696
========
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, 2000, the Company had $70.0 million of outstanding advances
from the FHLB.
The following table sets forth certain information regarding FHLB advances at
the dates indicated:
At or for the year ended December 31,
------------------------------------------------------------------
1998 1999 2000
------------ ------------ ------------
(Dollars in Thousands)
Adjustable-rate advances:
One year or less $ - $127,000 $ -
Fixed-rate advances:
One year or less - - -
Over one year 75,000 15,000 70,000
-------- -------- --------
Total advances $ 75,000 $142,000 $ 70,000
======== ======== ========
Maximum balance outstanding at any month-end $158,000 $142,000 $133,000
Average amount outstanding during the year $103,592 $ 87,921 $ 98,071
Weighted average cost of advances for the year 5.43% 5.23% 6.16%
At December 31, 2000, fixed-rate advances from the FHLB consist of the following
which were convertible, at the option of the FHLB, to an adjustable rate advance
on the dates specified:
Amount Maturity Interest Rate Convertible
------ -------- ------------- -----------
$ 25,000 July 7, 2003 6.19% On January 8, 2001 and every 3 months
thereafter until maturity
$ 15,000 December 3, 2003 4.84% One-time on December 3, 2001
$ 30,000 December 20, 2010 4.68% On December 20, 2001 and every 3
--------- months thereafter until maturity
$ 70,000
=========
These advances are collateralized by first mortgage loans with a net book value
of approximately $200,672,000 and by FHLB stock.
20
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. 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. See Note 12 of the Consolidated 2000 Financial Statements filed with
this report.
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, 2000, the Bank's initial investment in and loans outstanding to its
service corporations totaled $1.6 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 of America 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, 2000, 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,
2000, the Bank's initial investment in 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, 2000, CENIT Equity held no REO, and the
Bank's initial investment in and loans outstanding to CENIT Equity amounted to
$1.5 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, 2000, 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, 2000, 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,
21
Princess Anne Equity became a wholly-owned subsidiary of the Bank. At December
31, 2000, Princess Anne Equity held no REO and the Bank's initial investment and
loans outstanding amounted to $31,000.
Personnel. At December 31, 2000, the Company and its subsidiary had 220
full-time and 54 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.
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
22
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. 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. On June 1, 2000, the federal banking agencies adopted a
joint final rule regarding the privacy of customer financial information. This
joint final rule became effective on November 13, 2000, with mandatory
compliance after July 1, 2001. Pursuant to this joint final rule, the Bank has
adopted a privacy policy concerning the collection and disclosure of customer
financial information.
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 September, 2000. 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.
23
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 imposing 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 Banking agency. These publicly available reports must
include (a) annual financial statements prepared in accordance with accounting
principles generally accepted in the United States of America and such other
disclosure requirements as required by the FDIC or the appropriate Banking
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) 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 of
America for attestation engagements. At January 1, 2000, the Bank's assets
exceeded $500 million; accordingly, the Bank is required to prepare the
aforementioned reports for 2000.
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.
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, 2000, the Bank had no borrowers to which it had
outstanding loans in excess of its loans-to-one-borrower limit.
24
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, 2000, the Bank exceeded all minimum levels of regulatory capital.
See Note 18 of the Consolidated 2000 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, 2000.
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.
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, 2000, 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, 2000, the Bank was in compliance with these
requirements, and exceeded the required liquid asset ratio.
25
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 rate for the annual 2000 period was set at 0.021% for both
BIF-assessable deposits and SAIF-assessable deposits. These rates may be
adjusted quarterly to reflect changes in assessment bases for the BIF and SAIF.
There was no FDIC assessment for either SAIF-assessable or BIF-assessable
deposits for the annual 2000 period.
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.
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,
2000, the Bank held $5.1 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, 2000, 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.
26
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 1997 through 1999 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.
Thrift Charter Conversion. The Bank's retained earnings at December 31,
2000 included $6.1 million 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 the Bank 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
27
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.
EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth information with respect to the executive
officers of the Bank as of December 31, 2000.
Name Age Position Held
---- ------- ---------------------------
Michael S. Ives 48 President/Chief Executive
Officer/Director
Barry L. French 57 Senior Vice President/
Retail Banking Group Manager
John O. Guthrie 51 Senior Vice President/
Chief Financial Officer and
Finance and Administration
Group Manager
Roger J. Lambert 51 Senior Vice President/
Information Services Group Manager
Alvin D. Woods 56 Senior Vice President/
Credit Policy and Administration
Chief Lending Officer and
Lending Group Manager
Winfred O. Stant, Jr. 47 Senior 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.
28
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.
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., a Senior Vice President, has served as 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.
29
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, 2000.
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 3520 High Street
Norfolk, Virginia Leased Portsmouth, Virginia Owned
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 Yorktown, 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
<FN>
*To be consolidated with banking office at 2205 Executive Drive on or about
April 30, 2001.
</FN>
30
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, 2000, 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 2000 and 1999.
2000 1999
------------------------- ------------------
Quarter High (1) Low (1) High (1) Low (1)
------- ---- --- ---- ---
First $17.25 $10.19 $23.13 $19.38
Second 13.00 10.13 20.88 18.00
Third 15.63 11.50 19.50 16.50
Fourth 16.13 11.31 19.00 16.88
(1) The source for the high and low sales prices by quarter is The Nasdaq Stock
Market (R).
The Company paid a quarterly cash dividend on its Common Stock of $.15 per
share for each quarter of 2000 and 1999. The Company also declared quarterly
cash dividends of $.16 per share for the first quarter of 2001. If the Company
experiences quarterly results in line with projections, the Company intends to
continue the quarterly dividend at $.16 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 19 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 5, 2001, there were approximately 1,054 holders of record of
the Company's Common Stock.
31
Item 6 - Selected Financial Data
The following table presents selected financial data for the five years
ended December 31, 2000.
At or for the year ended December 31,
2000 1999 1998 1997 1996
--------------------------------------------------------------------
(Dollars in thousands, except per share)
Financial Condition Data:
Total assets $ 632,229 $ 674,213 $641,056 $ 718,083 $ 707,100
Securities available for sale:
U.S. Treasury, other U.S. Government agency
and other debt securities, net 230 55,535 48,117 45,347 46,305
Mortgage-backed certificates, net 99,032 82,763 17,019 91,841 177,706
Loans held for investment, net 472,516 469,618 484,783 486,487 422,219
Real estate owned, net - 218 377 1,098 2,769
Deposits 494,484 464,618 496,772 507,670 498,965
Borrowings 83,369 155,233 88,084 157,239 155,138
Stockholders' equity 51,453 51,265 50,076 49,937 49,608
Operating Data:
Interest income $ 46,374 $ 43,312 $ 47,031 $ 50,776 $ 48,171
Interest expense 24,861 21,980 25,805 29,310 28,087
----------------------------------------------------------------------
Net interest income 21,513 21,332 21,226 21,466 20,084
Provision for loan losses 48 98 510 600 377
----------------------------------------------------------------------
Net interest income after provision for loan losses 21,465 21,234 20,716 20,866
19,707
Other income 6,659 7,132 7,013 5,713 3,894
Other expenses 19,247 18,899 18,197 17,312 18,172
----------------------------------------------------------------------
Income before income taxes 8,877 9,467 9,532 9,267 5,429
Provision for income taxes 3,196 3,408 3,417 3,264 1,821
----------------------------------------------------------------------
Net income $ 5,681 $ 6,059 $ 6,115 $ 6,003 $ 3,608
Earnings per share:
Basic $ 1.29 $ 1.32 $ 1.30 $ 1.24 $ .74
Diluted $ 1.27 $ 1.30 $ 1.27 $ 1.20 $ .72
Cash dividends per share $ .60 $ .60 $ .41 $ .33 $ .25
Selected Financial Ratios and Other Data:
Return on average assets 0.88% (1) 0.96% 0.92% 0.86% (4) 0.54% (5)
Return on average stockholders' equity 11.19 (1) 11.97 12.04 12.00 (4) 7.56 (5)
Average stockholders' equity to average assets 7.84 8.02 7.68 7.17 7.20
Stockholders' equity to total assets at year end 8.14 7.60 7.81 6.95 7.02
Interest rate spread 2.82 3.00 2.88 2.85 2.83
Net interest margin 3.53 3.60 3.43 3.27 3.22
Other expenses to average assets 2.97 (1) 3.00 2.75 2.48 (4) 2.74 (5)
Net interest income to other expenses 111.77 (1) 112.87 116.65 123.99 (4) 110.52 (5)
Nonperforming assets to total assets .27 .09 .23 .34 .80
Allowance for loan losses to total net loans .81 .82 .83 .78 .90
Dividend payout ratio (3) 46.51 45.45 31.54 26.95 33.63
Book value per share $ 12.11 (2) $ 11.29 (2) $ 10.93 (2) $ 10.57 $ 10.11
Tangible book value per share 11.42 (2) 10.57 (2) 10.13 (2) 9.72 9.22
Number of retail branch offices 20 20 20 20 19
- --------
<FN>
(1) Exclusive of the $616 of expenses related to branch consolidation, loss on
the sale of securities and other special charges and the related tax
effect, the return on average assets and return on average stockholders'
equity for the year ended December 31, 2000 would have been .94% and
11.97%, respectively. Exclusive of the $418 of expenses related to branch
consolidation and other special charges, the ratio of other expenses to
average assets and net interest income to other expenses would have been
2.91% and 114.25%, respectively.
(2) 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, 2000 were $11.58 and $10.92, at December
31, 1999, were $10.79 and $10.10, respectively, and at December 31, 1998
were $10.41 and $9.65, respectively.
(3) Represents dividends per share divided by basic income per share.
Dividends per share represent historical dividends declared by the
Company.
(4) 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.
(5) 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.
</FN>
32
Item 7 - Management's Discussion and Analysis of Financial Condition and Results
of Operations
- -------------------------------------------------------------------------------
Financial Condition of the Company
Total Assets. At December 31, 2000, the Company's total assets decreased
$42.0 million, or six percent compared to total assets at the end of 1999. The
decrease in assets was primarily the result of a reduction of $39.0 million in
securities available for sale to reduce Federal Home Bank ("FHLB") advances.
Securities Available For Sale. During 2000, the Company changed the
composition and balance of its securities available for sale portfolio in order
to improve the portfolio's yield. The balance of $55.3 million of U. S. Treasury
and agency securities at the end of 1999 was eliminated as a result of
maturities and sales during 2000. The mortgage-backed certificate portfolio
increased to $99.0 million at December 31, 2000 compared to a balance of $82.8
million a year earlier. The growth in the mortgage-backed certificate portfolio
was due to the purchase of Government National Mortgage Association (GNMA)
pass-through certificates with variable rates. The Company's portfolio
restructuring resulted in a net pretax loss of $182,000 on the sale of
securities during 2000.
Loans. A strategic initiative of the Company has been to change the
composition of the loan portfolio by reducing the amount of first mortgage
single-family loans while increasing the balance of the remainder of the loan
portfolio ("core banking loans"). At December 31, 2000, first mortgage
single-family loans totaled $205.3 million or 43.2% of the loan portfolio while
core banking loans were $269.6 million or 56.8% of the loan portfolio. Core
banking loans increased by $18.6 million or 7.4% during 2000.
Asset Quality. The Company's total nonperforming assets increased to $1.7
million, or .27% of assets, at December 31, 2000 compared to $603,000, or .09%
of assets, at December 31, 1999. At December 31, 2000, nonperforming assets
includes $1.4 million of first mortgage single-family loans. Historically, such
loans have presented little risk of material loss to the Company. At the end of
1999, nonperforming assets included $141,000 of first mortgage single-family
loans. There was no real estate owned ("REO") at the end of 2000 compared to
$218,000 of REO at the end of 1999. The percentage of the allowance for loan
losses to total net loans was .81% and .82% at December 31, 2000 and 1999,
respectively, resulting in a coverage ratio of 10.2 times nonperforming loans at
the end of 1999 and 2.2 times nonperforming loans at the end of 2000.
Deposits. Another of the Company's strategic initiatives has been to improve
the mix of deposits by reducing the balance of certificates of deposit which
have a higher funding cost and increasing the balance of checking, savings, and
money market deposits (collectively "transaction deposits") which have a lower
funding cost. At the end of 2000, deposits consisted of 50.8%, or $251.4 million
of transaction deposits and 49.2%, or $243.1 million of certificates of deposit.
Transaction deposits at the end of 2000 increased $34.5 million compared to the
balance of transaction deposits at the end of 1999 when they represented 46.7%
of deposits. The average balance of deposits for 2000 consisted of 47.9%, or
$228.8 million of transaction deposits and 52.1%, or $249.0 million of
certificates of deposit. Average transaction deposits increased $12.5 million in
2000 compared to the average balance of transaction deposits for 1999 when they
represented 45.9% of average deposits.
Borrowed Funds. The Company's borrowed funds consist of advances from the
FHLB and securities sold to customers of the Company under agreements to
repurchase ("repos"). The balance of customer repos remained relatively constant
between the end of 2000 and 1999. Advances from the FHLB were reduced from
$142.0 million at December 31, 1999 to $70.0 million at December 31, 2000. This
reduction is primarily the result of the reduction of the securities available
for sale portfolio and increases in deposits being applied to FHLB advances.
Capital. The Company's equity position increased slightly between December
31, 1999 and 2000. Equity increased primarily as a result of the Company's
comprehensive income in 2000 of $6.8 million and was reduced by cash dividends
paid to stockholders of $2.7 million and by $4.2 million used to repurchase
approximately 321,000 shares of the Company's outstanding common stock at an
average price of $13.10 per share. The Company's and CENIT Bank's (the "Bank")
capital ratios exceeded applicable regulatory requirements at both December 31,
2000 and 1999.
Comparison of Operating Results for the Years Ended December 31, 2000 and 1999
General. The Company's pre-tax income was $8.9 million for the year ended
December 31, 2000, compared to $9.5 million in 1999, a decrease of $.6 million.
During 2000, net interest income after the provision for loan losses increased
by $231,000, other income decreased by $473,000 and other expenses increased by
$348,000. Net income decreased $378,000, or 6.2%, in 2000 compared to 1999,
while diluted earnings per share decreased $.03, or 2.3% per share in 2000.
Diluted earnings per share was positively impacted by the reduction of
approximately 198,000 average shares outstanding in 2000 due primarily to the
repurchase of common shares.
33
During the fourth quarter of 2000, the Company incurred $394,000 of special
charges, after income tax benefits. These special charges include $134,000,
after tax, to consolidate the Company's retail offices in Hampton, Virginia, a
loss of $127,000, after tax, on the sale of securities to restructure the
portfolio, and aggregate other special charges of $133,000, after tax. Excluding
these special charges in 2000, the Company's net income would have been $6.1
million in 2000, the same as 1999's net income.
Net Interest Income. The Company's net interest income before provision for
loan losses increased by $181,000 for the year ended December 31, 2000. This
increase resulted from a $3.1 million increase in interest income, which was
offset by a $2.9 million increase in interest expense.
Interest on loans increased by $1.2 million, or 3.2%, from $36.5 million in
the year ended 1999 to $37.7 million in 2000. This increase was attributable to
a $6.2 million decrease in the average balance of loans, offset by an increase
in the yield on the Company's loan portfolio from 7.60% in 1999 to 7.94% in
2000. 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 fourth quarter of 2000 increased to 8.07% as a result of
increases in the balances of core banking loans during the period.
Interest on investment securities decreased $826,000 in 2000 compared to
1999. This decrease resulted primarily from a decrease in the average balance of
the portfolio from $56.6 million in 1999 to $42.9 million in 2000. Interest on
mortgage-backed certificates increased $2.7 million, primarily the result of an
increase in average balances from $36.3 million in 1999 to $76.5 million in
2000.
The Company's interest expense increased by $2.9 million, as a result of an
increase in interest on both deposits and borrowings. The average balance of
interest-bearing deposits increased by $201,000 in 2000 compared to 1999, while
the average cost of interest-bearing deposits increased from 4.13% in 1999 to
4.43% in 2000. The average balance of borrowings increased by $9.8 million in
2000 compared to 1999, while the average cost of the borrowings increased from
5.06% in 1999 to 6.05% in 2000.
The Company's net interest margin decreased from 3.60% for the year ended
December 31, 1999 to 3.53% for the year ended December 31, 2000. For the fourth
quarter of 2000, the Company's net interest margin was 3.59% compared to 3.58%
in the fourth quarter of 1999. The Company's interest rate spread decreased from
3.00% in the year ended December 31, 1999 to 2.82% in the comparable 2000
period. The decrease in the Company's interest rate spread occurred because the
Company's overall yield on its interest-earning assets increased from 7.32% to
7.61%, while the overall cost of its interest-bearing liabilities increased by a
greater amount from 4.32% in 1999 to 4.79% in 2000. The Company's net interest
spread in the fourth quarter of 2000 was 2.80% compared to 2.98% in the fourth
quarter of 1999. The Company's calculations of interest rate spread and net
interest margin include nonaccrual loans as interest-earning assets.
Provision for Loan Losses. The Company's provision for loan losses decreased
from $98,000 in 1999 to $48,000 in 2000. The difference between the provision
for loan losses and net loans charged-off during 2000 relates primarily to loan
types in which the Company is no longer active and for which provisions for loan
losses have previously been made. Net chargeoffs totaled $104,000 in 2000
compared to $262,000 in 1999. The ratio of net chargeoffs to average loans was
.02% in 2000 compared to .05% in 1999.
Other Income. Total other income decreased by 6.6%, from $7.1 million in 1999
to $6.7 million in 2000. Gain on sales of loans decreased $31,000 in 2000 due
primarily to the decreased volume of mortgage loan originations. Deposit fees
increased by $188,000 as a result of additional transaction accounts and
increases in the Company's deposit fee schedule. Merchant processing fees
decreased in 2000 by $167,000, offset by a $179,000 decrease in merchant
processing expense as the Company restructured its merchant portfolio. Brokerage
fees recognized by the Bank's commercial mortgage loan brokerage subsidiary
increased by $39,000 in 2000 compared to 1999, as a result of an increase in the
volume of brokerage activity. The Company sold approximately $36.0 million of
federal agency securities in December of 2000 and incurred a pretax loss of
$182,000. The proceeds were invested in GNMA adjustable-rate mortgage-backed
securities.
Other Expenses. Total other expenses increased from $18.9 million in the year
ended December 31, 1999 to $19.2 million in 2000. Equipment, data processing and
supply expenses increased by $159,000 in 2000, reflecting increases primarily in
depreciation and maintenance. Salaries and employee benefits remained the same
at $8.5 million for both 2000 and 1999. Net occupancy expense increased by
$186,000 in 2000 compared to 1999, the result of additions to the retail branch
system. In the fourth quarter of 2000, the Company incurred a pretax charge of
$210,000 to consolidate its retail offices in Hampton, Virginia.
Income Taxes. The Company's income tax expense for the year ended December
31, 2000 was $3.2 million, compared to $3.4 million in 1999, which represented
an effective tax rate of approximately 36.0% for each year.
34
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.
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 cost 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 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.
35
Liquidity
The principal sources of funds for the Company for the year ended December
31, 2000, included $360.0 million in proceeds from FHLB advances, $15.4 million
in principal repayments of securities available for sale, $63.1 million in
proceeds from sales, maturities and calls of securities available for sale,
$29.9 million in deposit increases, and $45.2 million in proceeds from the sale
of loans. Funds were used primarily to repay FHLB advances totaling $432.0
million, to fund purchases of investment securities available for sale totaling
$37.9 million, and to originate loans held for sale of $43.6 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 4.0% and 10.0%) depending upon economic conditions and savings
flows of all savings institutions. At the present time, the required liquid
asset ratio is 4.0%. The Bank's liquid asset ratio exceeded regulatory
requirements at December 31, 2000 and 1999.
At December 31, 2000, the Company had outstanding mortgage and nonmortgage
loan commitments, including unused lines of credit of $70.4 million and
outstanding commitments to sell mortgage loans of $3.4 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
$192.2 million at December 31, 2000. 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, 2000, the Company's one year "positive
gap" (interest-earning assets maturing within a period exceed interest-bearing
liabilities repricing within the same period) was approximately $70.3 million,
or 11.1% of total assets. Thus, during periods of rising interest rates, this
implies that the Company's net interest income would be positively affected
because the yield of the Company's interest-earning assets is likely to rise
faster 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, 2000. 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, 2000.
At December 31, 1999, the Company's one year "negative gap" was approximately
$34.8 million, or 5.2% of total assets. The change in the one year gap of
approximately $105.2 million was primarily the result of: (a) slower prepayment
assumptions in 2000 regarding prepayment of loans which has resulted in a
decrease in one year interest sensitive loans of $30.3 million, (b) an increase
in securities available for sale with one year interest sensitivity of $18.5
million due primarily to purchase of adjustable rate mortgage-backed
certificates, (c) a decrease of $9.4 million of one year interest sensitive
deposits due primarily to a decrease in the outstanding
36
balances of certificates of deposit and, (d) a decrease of $112.0 million in one
year interest sensitive advances from the FHLB due to paydowns of short-term
advances during 2000 and advances being extended to maturities over one year.
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, 2000 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
2000 prepayment experience of the Company. Loans with call or balloon provisions
are included in the period in which they balloon or may first be called.
Additionally, advances from the Federal Home Loan Bank are included in the
period of their estimated expected maturity based on information from the FHLB.
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.
37
Interest Sensitivity Analysis
December 31, 2000
(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) $159,980 $41,499 $ 56,940 $258,419 $ 108,373 $110,384 $477,176
Securities available for sale:
Other debt security -- -- -- -- -- 230 230
Mortgage-backed certificates 23,400 4,181 36,006 63,587 20,011 15,434 99,032
Federal funds sold 8,646 -- -- 8,646 -- -- 8,646
Federal Home Loan Bank stock -- -- -- -- -- 5,050 5,050
---------------------------------------------------------------------------------
Total interest-earning assets 192,026 45,680 92,946 330,652 128,384 131,098 590,134
---------------------------------------------------------------------------------
Liabilities
Interest-bearing liabilities:
Interest-bearing deposits:
Passbook, statement savings
and checking accounts (2) 3,070 3,070 6,141 12,281 18,808 44,054 75,143
Money market deposits 6,876 6,876 13,751 27,503 31,794 28,222 87,519
Certificates of deposits 47,652 51,712 92,804 192,168 23,917 26,989 243,074
---------------------------------------------------------------------------------
Total interest-bearing deposits 57,598 61,658 112,696 231,952 74,519 99,265 405,736
Advances from the Federal
Home Loan Bank -- -- 15,000 15,000 55,000 -- 70,000
Securities sold under
agreements to repurchase 13,369 -- -- 13,369 -- -- 13,369
---------------------------------------------------------------------------------
Total interest-bearing liabilities 70,967 61,658 127,696 260,321 129,519 99,265 489,105
---------------------------------------------------------------------------------
Interest sensitivity gap $121,059 $(15,978) $(34,750) $ 70,331 $ (1,135) $ 31,833 $101,029
---------------------------------------------------------------------------------
Cumulative interest sensitivity gap $121,059 $105,081 $70,331 $ 70,331 $ 69,196
---------------------------------------------------------
Cumulative interest sensitivity gap as
percentage of total assets 19.1% 16.6% 11.1% 11.1% 10.9%
- ----------------------
<FN>
(1) Excludes nonaccrual loans of $1,680,000
(2) Excludes $88.7 million of noninterest-bearing deposits.
</FN>
38
The following table provides information about the Company's financial
instruments that are sensitive to changes in interest rates as of December 31,
2000, based on the information and assumptions set forth in the notes to the
table. Totals as of December 31, 1999 are included for comparative purposes. The
Company had no derivative financial instruments, foreign currency exposure or
trading portfolio as of December 31, 2000 and 1999. 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 total interest-earning assets maturing in the year one, year two, and
year three periods decreased by $105.2 million in 2000 compared to those three
periods at December 31, 1999. This is primarily the result of two factors.
First, investments decreased by $56.3 million in the first, second and third
year periods due to the sale and maturity of U. S. Treasury and Agency
securities during 2000. Second, loans decreased by $43.0 million during these
first three periods. This was due primarily to a lowering of some loan
prepayment rate assumptions at December 31, 2000 compared to the same date in
1999 due to the increase in interest rates in 2000. Lower prepayment rates also
resulted in an increase of $43.8 million in loans maturing after five years as
of December 31, 2000 compared to the same date in 1999.
The interest-bearing liabilities maturing in one year decreased by $121.2
million at December 31, 2000 as compared to December 31, 1999. This was
primarily due to a decrease of $111.9 million in borrowings between year end
2000 and 1999. At December 31, 2000 there were no overnight advances that mature
daily compared to $127.0 million of such advances at December 31, 1999. Included
in the one year borrowing maturities at year end 2000 is a $15.0 million advance
from the FHLB that has a one-time call in December 2001.
39
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 $ 31,584 $ 21,871 $ 15,559 $ 10,734 $ 10,356 $ 49,546 $ 139,650 $138,249
Average interest rate 8.22% 8.20% 8.08% 7.90% 7.88% 7.79% 8.00%
Adjustable rate 139,825 48,644 34,752 27,138 21,731 65,436 337,526 337,173
Average interest rate 8.95% 8.34% 8.21% 8.17% 8.14% 7.90% 8.47%
Mortgage-backed certificates (3)
Fixed rate 6,574 6,192 7,049 5,361 5,217 4,604 34,997 34,997
Average interest rate 6.95% 6.95% 6.96% 6.95% 6.95% 6.94% 6.95%
Adjustable rate 14,068 10,898 8,633 6,876 5,520 18,040 64,035 64,035
Average interest rate 6.26% 6.28% 6.30% 6.32% 6.35% 6.47% 6.34%
Investments (4) 5,050 - - - - 230 5,280 5,280
Average interest rate 7.75% -% -% -% -% 9.25% 7.82%
Federal funds sold 8,646 - - - - - 8,646 8,646
Average interest rate 6.24% -% -% -% -% -% 6.24%
-------------------------------------------------------------------------------------
Total - December 31, 2000 $205,747 $ 87,605 $ 65,933 $ 50,109 $ 42,824 $137,856 $ 590,134 $588,380
Average interest rate 8.45% 7.95% 7.80% 7.73% 7.70% 7.64% 8.00%
=====================================================================================
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%
=====================================================================================
Interest-bearing liabilities:
Interest-bearing deposits (5) (6) $231,952 $ 47,802 $ 26,717 $ 21,366 $ 33,697 $ 44,202 $ 405,736 $407,834
Average interest rate 5.29% 4.30% 3.63% 3.62% 5.27% 2.53% 4.67%
Borrowings (7) 28,369 25,000 30,000 - - - 83,369 83,611
Average interest rate 5.18% 6.19% 4.68% -% -% -% 5.30%
=====================================================================================
Total - December 31, 2000 $260,321 $ 72,802 $ 56,717 $ 21,366 $ 33,697 $ 44,202 $ 489,105 $491,445
Average interest rate 5.28% 4.95% 4.19% 3.62% 5.27% 2.53% 4.78%
=====================================================================================
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%
=====================================================================================
- --------------------
<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, 21%;
-For single-family fixed-rate first mortgage loans, from 4% to 50%;
-For commercial real estate loans, an average of 13%;
-For consumer loans, an average of 35%; and -For most other loans, from 3%
to 66%.
(2) Excludes nonaccrual loans of $1,680,000.
(3) Assumes average prepayment rates for adjustable mortgage-backed
certificates of 21% and for fixed-rate mortgage-backed certificates of 9%.
(4) Totals include the Company's investment in FHLB Stock.
(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 $88.7 million of noninterest-bearing deposits.
(7) The estimated expected maturity at December 31, 2000 of convertible FHLB
advances is .99 years for $15.0 million, 1.84 years for $25.0 million, and
2.16 years for $30.0 million, based on information from FHLB.
</FN>
40
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 of America, 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 became 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.
In September 2000, the FASB issued SFAS No. 140, Transfer and Servicing of
Financial Assets and Extinguishments of Liabilities. This statement replaces
FASB Statement No. 125, Accounting for Transfer and Servicing of Financial
Assets and Extinguishments of Liabilities. It revises the standards for
accounting for securitizations and other transfers of financial assets and
collateral and requires certain disclosures, but it carries over most of
Statement No. 125's provisions without reconsideration. The Company does not
expect this statement will have a material impact on its financial reporting.
Safe Harbor Statement Under the Private Securities Litigation Reform Act of 1995
The above discussion titled "Management's Discussion and Analysis of
Financial Condition and Results of Operations" (Discussion) contains
forward-looking statements with respect to the goals, plans, objectives,
intentions, expectations, financial condition, results of operations, future
performance and business of the Company, including, without limitation,
statements relating to the earnings outlook of the Company. These
forward-looking statements may be preceded by, followed by or include the words
"may", "could", "would", "should", "believes", "expects", "anticipates",
"estimates", "intends", "plans" or similar expressions. These forward-looking
statements involve risks and uncertainties that are subject to change based on
various factors, many of which are beyond the Company's control. Some of these
factors include (1) the strength of the U. S. economy in general and the
strength of the local economy in which the Company conducts its operations,
which may be different than expected and which may result in, among other
things, deterioration in credit quality or reduced demand for credit; (2) the
effects of, and changes in, the interest rate policies of the board of governors
of the Federal Reserve system, which may be different from those anticipated by
the Company in this Discussion; (3) legislation or regulatory changes that
adversely affect the businesses in which the Company is engaged; (4) changes in
accounting principles, practices, policies or guidelines; and (5) changes in the
real estate market generally and in the markets in which the Company conducts
its operations, which may affect the demand for mortgages and other real
estate-based loans. This Discussion including the forward-looking statements
contained herein, speaks only as of the date hereof, and the Company disclaims
any obligation to update or revise the statements contained in this Discussion
following the date hereof.
41
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 36 to 40.
Item 8 - Financial Statements and Supplementary Data
Index to Financial Statements
Page
Financial Statements:
Independent Auditors' Reports...............................................43
Consolidated Statements of Financial Condition as of December 31, 2000 and
December 31, 1999......................................................45
Consolidated Statements of Income for the three years ended
December 31, 2000......................................................46
Consolidated Statements of Comprehensive Income for the three years ended
December 2000..........................................................47
Consolidated Statements of Changes in Stockholders' Equity for the three
years ended December 31, 2000..........................................48
Consolidated Statements of Cash Flows for the three years ended
December 31, 2000......................................................49
Notes to Consolidated Financial Statements..................................50
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.
42
Independent Auditors' Report
[GRAPHIC OMITTED]
To the Board of Directors
CENIT Bancorp, Inc.
We have audited the accompanying consolidated statement of financial condition
of CENIT Bancorp, Inc. and subsidiary (Company) as of December 31, 2000, and the
related consolidated statements of income, comprehensive income, changes in
stockholders' equity, and cash flows for the year then ended. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of CENIT Bancorp, Inc.
and its subsidiary as of December 31, 2000, and the results of their operations
and their cash flows for the year then ended in conformity with accounting
principles generally accepted in the United States of America.
KPMG LLP
Norfolk, Virginia
January 19, 2001
43
Independent Auditors' Report
[GRAPHIC OMITTED]
To the Board of Directors and
Stockholders of CENIT Bancorp, Inc.
Norfolk, Virginia
In our opinion, the consolidated statement of financial condition as of December
31, 1999 and the related consolidated statements of income, of comprehensive
income, of changes in stockholders' equity and of cash flows for each of the two
years in the period ended December 31, 1999 present fairly, in all material
respects, the financial position, results of operations and cash flows of CENIT
Bancorp, Inc. and its subsidiary at December 31, 1999 and for each of the two
years in the period ended December 31, 1999, in conformity with accounting
principles generally accepted in the United States of America. 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 these statements in accordance with
auditing standards generally accepted in the United States of America, 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 our opinion. We have not audited the consolidated financial
statements of CENIT Bancorp, Inc. for any period subsequent to December 31,
1999.
PricewaterhouseCoopers LLP
Virginia Beach, Virginia
February 10, 2000
44
Consolidated Statements of Financial Condition
(Dollars in thousands, except per share data)
December 31,
2000 1999
---------------------------
Assets
Cash $ 20,904 $ 17,554
Federal funds sold 8,646 12,908
Securities available for sale at fair value (adjusted cost
of $98,611 and $139,386, respectively) 99,262 138,298
Loans, net:
Held for investment 472,516 469,618
Held for sale 2,536 3,456
Interest receivable 3,546 4,067
Real estate owned, net -- 218
Federal Home Loan Bank stock, at cost 5,050 7,100
Property and equipment, net 13,087 13,757
Goodwill and other intangibles, net 2,946 3,293
Other assets 3,736 3,944
---------------------------
Total assets $632,229 $674,213
===========================
Liabilities and Stockholders' Equity
Liabilities:
Deposits:
Noninterest-bearing $ 88,748 $ 64,491
Interest-bearing 405,736 400,127
---------------------------
Total deposits 494,484 464,618
Advances from the Federal Home Loan Bank 70,000 142,000
Securities sold under agreements to repurchase 13,369 13,233
Advance payments by borrowers for taxes and insurance 528 565
Other liabilities 2,395 2,532
---------------------------
Total liabilities 580,776 622,948
---------------------------
Commitments
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 4,443,271 and 4,751,644, at
December 31, 2000 and December 31, 1999, respectively 44 48
Additional paid-in capital 8,798 12,964
Retained earnings - substantially restricted 45,944 42,914
Common stock acquired by Employees Stock
Ownership Plan (ESOP) (3,658) (3,862)
Common stock acquired by Management
Recognition Plan (MRP) (78) (125)
Accumulated other comprehensive income (loss) 403 (674)
---------------------------
Total stockholders' equity 51,453 51,265
---------------------------
$632,229 $674,213
===========================
<FN>
The notes to consolidated financial statements are an integral part of these
statements.
</FN>
45
Consolidated Statements of Income
(Dollars in thousands, except per share data)
Year Ended December 31,
2000 1999 1998
-------------------------------------------
Interest and fees on loans $ 37,680 $ 36,506 $ 39,931
Interest on mortgage-backed certificates 5,244 2,533 3,208
Interest on investment securities 2,411 3,237 2,664
Dividends and other interest income 1,039 1,036 1,228
-------------------------------------------
Total interest income 46,374 43,312 47,031
-------------------------------------------
Interest on deposits 17,999 16,737 19,571
Interest on borrowings 6,862 5,243 6,234
-------------------------------------------
Total interest expense 24,861 21,980 25,805
-------------------------------------------
Net interest income 21,513 21,332 21,226
Provision for loan losses 48 98 510
-------------------------------------------
Net interest income after provision for loan losses 21,465 21,234 20,716
-------------------------------------------
Other income:
Deposit fees 2,699 2,511 2,454
Gains (losses) on sales of:
Securities, net (182) -- 72
Loans, net 717 748 1,030
Loan servicing fees and late charges 293 277 318
Other 3,132 3,596 3,139
-------------------------------------------
Total other income 6,659 7,132 7,013
-------------------------------------------
Other expenses:
Salaries and employee benefits 8,542 8,524 8,301
Equipment, data processing, and supplies 3,151 2,992 2,861
Federal deposit insurance premiums 98 241 260
Other 7,456 7,142 6,775
-------------------------------------------
Total other expenses 19,247 18,899 18,197
-------------------------------------------
Income before income taxes 8,877 9,467 9,532
Provision for income taxes 3,196 3,408 3,417
-------------------------------------------
Net income $ 5,681 $ 6,059 $ 6,115
===========================================
Earnings per share:
Basic $ 1.29 $ 1.32 $ 1.30
===========================================
Diluted $ 1.27 $ 1.30 $ 1.27
===========================================
Dividends per common share $ .60 $ .60 $ .41
===========================================
<FN>
The notes to consolidated financial statements are an integral part of these
statements.
</FN>
46
Consolidated Statements of Comprehensive Income
(Dollars in thousands)
Year Ended December 31,
2000 1999 1998
------------------------------------------
Net income $ 5,681 $ 6,059 $ 6,115
------------------------------------------
Other comprehensive income (loss), before income taxes:
Unrealized gains (losses) on securities available for sale
Unrealized holding gains (losses) arising during the period 1,557 (1,897) (445)
Reclassification adjustment for losses (gains) included
in net income 182 -- (72)
------------------------------------------
Other comprehensive income (loss), before income taxes 1,739 (1,897) (517)
Income tax (provision) benefit related to items of other
comprehensive (loss) income (662) 721 164
------------------------------------------
Other comprehensive income (loss), net of income taxes 1,077 (1,176) (353)
------------------------------------------
Comprehensive income $ 6,758 $ 4,883 $ 5,762
==========================================
<FN>
The notes to consolidated financial statements are an integral part of these
statements.
</FN>
47
Consolidated Statements 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 Taxes Total
------------------------------------------------------------------------------------------------
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
Comprehensive income -- -- -- 5,681 -- 1,077 6,758
Cash dividends paid -- -- -- (2,651) -- -- (2,651)
Exercise of stock options
and related tax benefits 12,910 -- 102 -- -- -- 102
Stock repurchases (321,283) (4) (4,205) -- -- -- (4,209)
Other -- -- (63) -- 251 -- 188
------------------------------------------------------------------------------------------------
Balance, December 31, 2000 4,443,271 $ 44 $ 8,798 $ 45,944 $ (3,736) $ 403 $ 51,453
================================================================================================
<FN>
The notes to consolidated financial statements are an integral part of these
statements.
</FN>
48
Consolidated Statements of Cash Flows
(Dollars in thousands)
Year Ended December 31,
2000 1999 1998
-------------------------------------------------
Cash flows from operating activities:
Net income $ 5,681 $ 6,059 $ 6,115
Add (deduct) items not affecting cash during the year:
Provision for loan losses 48 98 510
Provision for losses on real estate owned 26 22 15
Amortization of loan yield adjustments 980 743 381
Depreciation, amortization and accretion, net 1,765 1,727 1,930
Exercise of stock options tax benefit 49 159 543
Net (gains) losses on sales/disposals of:
Securities 182 -- (72)
Loans (717) (748) (1,030)
Real estate, property and equipment (100) (345) 36
Proceeds from sales of loans held for sale 45,187 55,651 82,893
Originations of loans held for sale (43,569) (54,509) (82,608)
Change in assets/liabilities, net
Decrease in interest receivable and other assets 953 430 1,168
(Decrease) increase in other liabilities (781) (2,103) 2,633
------------------------------------------------
Net cash provided by operating activities 9,704 7,184 12,514
------------------------------------------------
Cash flows from investing activities:
Purchases of securities available for sale (37,884) (100,965) (48,237)
Proceeds from sales of securities available for sale 54,119 -- 66,660
Principal repayments on securities available for sale 15,363 10,517 34,855
Proceeds from maturities and calls of securities available
for sale 9,000 15,350 18,000
Net (increase) decrease in loans held for investment (3,695) 14,263 2,307
Net proceeds on sales of real estate owned -- 223 597
Additions to real estate owned (39) (24) (86)
Purchases of Federal Home Loan Bank stock (250) (4,700) (1,650)
Redemption of Federal Home Loan Bank stock 2,300 2,666 5,295
Purchases of property and equipment (722) (2,215) (1,273)
Proceeds from sales of property and equipment 13 327 453
------------------------------------------------
Net cash provided by (used for) investing activities 38,205 (64,558) 76,921
------------------------------------------------
Cash flows from financing activities:
Proceeds from exercise of stock options 74 138 173
Net increase (decrease) in deposits 29,866 (32,154) (10,898)
Proceeds from Federal Home Loan Bank advances 360,000 194,000 587,000
Repayment of Federal Home Loan Bank advances (432,000) (127,000) (657,000)
Repayment of other borrowings -- -- (2,575)
Net increase in securities sold under agreement to repurchase 136 149 3,420
Cash dividends paid (2,651) (2,745) (1,931)
Common stock repurchases (4,209) (1,463) (4,669)
Other, net (37) (34) (121)
------------------------------------------------
Net cash (used for) provided by financing activities (48,821) 30,891 (86,601)
------------------------------------------------
(Decrease) increase in cash and cash equivalents (912) (26,483) 2,834
Cash and cash equivalents, beginning of year 30,462 56,945 54,111
------------------------------------------------
Cash and cash equivalents, end of year $ 29,550 $ 30,462 $ 56,945
------------------------------------------------
Supplemental disclosures of cash flow information:
Cash paid during the year for interest $ 8,365 $ 6,770 $ 8,910
Cash paid during the year for income taxes 3,417 3,247 2,855
Schedule of noncash investing and financing activities:
Real estate acquired in settlement of loans 214 342 312
Loans to facilitate sale of real estate owned 445 281 470
Loan to facilitate sale of property -- -- 1,336
<FN>
The notes to consolidated financial statements are an integral part of these
statements.
</FN>
49
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 of America 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 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 statements of financial condition.
At December 31, 2000 and 1999, approximately eighty-three percent and
seventy-nine 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 without regard to anticipated prepayments.
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 statements of
income.
50
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. Generally, payments are applied in
accordance with the contractual terms of the note or as a reduction of
principal.
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, generally as determined by
appraisal, 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.
Depreciable lives for buildings and leasehold improvements are generally 5 to 40
years and for furniture and equipment are generally 3 to 7 years.
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.
Management reviews goodwill for impairment whenever facts and circumstances
warrant. The impairment would be determined by an undiscounted cash flow method.
Securities Sold Under Agreements to Repurchase
The Bank enters into sales of securities under agreements to repurchase
(reverse repurchase agreements) with customers. Fixed-coupon reverse repurchase
agreements are treated as financing transactions, and the obligations to
repurchase securities sold are reflected as liabilities in the statements of
financial condition. The securities underlying the agreements continue to be
recorded as assets.
51
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.
Statements of Cash Flows
For purposes of the statements 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, 2000, 1999, and
1998 were determined by dividing net income for the respective year by 4,410,988
shares, 4,581,574 shares, 4,715,697 shares, respectively. Diluted earnings per
share for the years ended December 31, 2000, 1999, and 1998 were determined by
dividing net income for the respective year by 4,461,025 shares, 4,659,103
shares, 4,829,641 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 141,000 shares, 131,000 shares, and 65,000 shares were not
included in computing diluted earnings per share for the years ended December
31, 2000, 1999 and 1998, respectively, because their effects were antidilutive.
Comparative Financial Statements
The financial statements for 1999 and 1998 have been reclassified to
conform to the 2000 presentation. Such reclassifications had no impact on
previously reported net income.
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 years
ended December 31, 2000 and 1999 were $7,652,000 and $7,029,000, respectively.
On December 31, 2000, the reserve balance was $8,300,000.
52
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, 1998 $ 3,364 $ 283 $ 3,647
Amortization (290) (64) (354)
---------------------------------------
Balance, December 31, 1999 3,074 219 3,293
Amortization (290) (57) (347)
---------------------------------------
Balance, December 31, 2000 $ 2,784 $ 162 $ 2,946
=======================================
At December 31, 2000, the Company had recorded $1,863,000 of accumulated
amortization.
Note 4
Securities Available for Sale
Securities available for sale are as follows (in thousands):
December 31,
2000 1999
-------------------------------------------- -----------------------------------------------
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
-------------------------------------------- ------------------------------------------------
Other U. S. Government agency
securities - - - - 42,114 - (833) 41,281
-------------------------------------------- ------------------------------------------------
Other debt security 250 - (20) 230 250 - - 250
-------------------------------------------- ------------------------------------------------
Mortgage-backed certificates:
Federal Home Loan
Mortgage Corporation
participation certificates 30,546 246 - 30,792 41,768 177 (149) 41,796
Federal National Mortgage
Association pass-through
certificates 33,499 316 - 33,815 38,670 31 (337) 38,364
Government National
Mortgage Association
pass-through certificates 34,316 109 - 34,425 2,580 23 - 2,603
-------------------------------------------- ------------------------------------------------
Total mortgage-backed
certificates 98,361 671 - 99,032 83,018 231 (486) 82,763
-------------------------------------------- ------------------------------------------------
$ 98,611 $ 671 $ (20) $99,262 $139,386 $ 242 $(1,330) $138,298
============================================ ================================================
During 2000, the Company recognized gross gains of $69,000 and gross losses
of $251,000 on the sale of available for sale securities. During 1999, the
Company did not sell any available for sale securities. During 1998, 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, 2000 are shown below by contractual maturity (in thousands):
Amortized Fair
Cost Value
--------------------------
Due in one year or less $ - $ -
Due after 1 year through 5 years - -
Due after 5 years 250 230
Mortgage-backed certificates 98,361 99,032
--------------------------
$ 98,611 $ 99,262
==========================
53
Note 5
Loans
Loans held for investment consist of the following (in thousands):
December 31,
2000 1999
-----------------------
First mortgage loans:
Single family $ 205,263 $ 221,041
Multi-family 7,620 8,082
Construction:
Residential 53,291 58,528
Nonresidential 25,471 7,685
Commercial real estate 84,896 81,724
Consumer lots 3,654 3,566
Acquisition and development 19,175 18,065
Equity and second mortgage 60,343 56,469
Boat 2,010 2,855
Other consumer 12,594 11,968
Commercial business 46,780 36,739
----------------------
521,097 506,722
Undisbursed portion of construction
and acquisition and development loans (46,241) (34,714)
Allowance for loan losses (3,804) (3,860)
Unearned discounts, premiums, and loan
fees, net 1,464 1,470
----------------------
$ 472,516 $ 469,618
======================
At December 31, 2000, the Company's gross loan portfolio contained
$185,470,000 of adjustable-rate mortgage loans and $58,922,000 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 $88,544,000 at December 31, 2000.
54
Nonaccrual loans are as follows (in thousands):
December 31,
2000 1999 1998
--------------------------------------
Single family $ 1,413 $ 103 $ 416
Land acquisition 46 48 --
Other consumer 19 30 83
Commercial business 202 111 64
--------------------------------------
$ 1,680 $ 292 $ 563
======================================
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,
2000 1999 1998
--------------------------
Interest income based on contractual
terms $ 141 $ 33 $ 61
Interest income recognized 56 22 36
-------------------------
Interest income foregone $ 85 $ 11 $ 25
=========================
Changes in the allowance for loan losses are as follows (in thousands):
Year Ended December 31,
2000 1999 1998
--------------------------
Balance at beginning of year $3,860 $4,024 $3,783
Provision for loan losses 48 98 510
Losses charged to allowance (275) (358) (382)
Recovery of prior losses 171 96 113
--------------------------
Balance at end of year $3,804 $3,860 $4,024
==========================
There were no impaired loans at or for the years ended December 31, 2000,
1999 and 1998.
Loans serviced for others approximate $9,381,000 at December 31, 2000,
$11,967,000 at December 31, 1999, and $13,826,000 at December 31, 1998.
55
Note 6
Interest Receivable
The components of interest receivable are as follows (in thousands):
December 31,
2000 1999
----------------------
Interest on loans $ 2,874 $ 2,523
Interest on mortgage-backed certificates 656 628
Interest on investments and interest-bearing
deposits 108 931
----------------------
3,638 4,082
Less: Allowance for uncollected interest (92) (15)
----------------------
$ 3,546 $ 4,067
======================
Note 7
Real Estate Owned
Real estate owned is as follows (in thousands):
December 31,
2000 1999
--------------------------
Residential - Single family $ -- $ 123
Land -- 105
--------------------------
-- 228
Less: Valuation allowance -- (10)
--------------------------
$ -- $ 218
==========================
Changes in the valuation allowance for real estate owned are as follows (in
thousands):
Year Ended December 31,
2000 1999 1998
--------------------------------
Balance at beginning of year $ 10 $ 53 $ 106
Provision for losses 26 22 15
Losses charged to allowance (36) (65) (68)
---------------------------------
Balance at end of year $ -- $ 10 $ 53
=================================
The provision for losses on real estate owned is included in other expense
in the accompanying consolidated statements of income.
56
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 stock is carried at
cost. 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,
2000 1999
--------------------------
Buildings and leasehold improvements $ 11,547 $ 11,265
Furniture and equipment 10,383 10,042
--------------------------
21,930 21,307
Less: Accumulated depreciation and
amortization (11,820) (10,527)
--------------------------
10,110 10,780
Land 2,977 2,977
--------------------------
$ 13,087 $ 13,757
==========================
Depreciation and amortization expense is $1,378,000, $1,261,000, and
$1,251,000 for the years ended December 31, 2000, 1999 and 1998, 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.
In December 2000, the Company implemented a plan to close a retail branch
in Hampton, Virginia and consolidate it with the Company's other Hampton branch.
The Company expects this consolidation to be completed in the second quarter of
2001. Property, furniture and equipment for this branch has a carrying value of
$602,000 at December 31, 2000. The Company expects to realize a loss on the
disposal of this property, furniture and equipment of $210,000, before the
related tax effect, and has recognized an expense for this amount in 2000 which
is included in other expense in the accompanying consolidated statements of
income.
57
Note 10
Deposits
Deposit balances by type and range of interest rates at December 31, 2000 and
1999 are as follows (in thousands):
December 31,
2000 1999
-------------------
Noninterest-bearing:
Commercial checking $ 76,305 $ 55,568
Personal checking 12,443 8,923
------------------
Total noninterest-bearing deposits 88,748 64,491
------------------
Interest-bearing:
Passbook and statement savings 29,516 32,191
Checking accounts 45,627 43,909
Money market deposits 87,519 76,342
Certificates: 243,074 247,685
Total interest-bearing deposits 405,736 400,127
--------------------
Total deposits $494,484 $464,618
====================
Certificates in denominations greater than $100,000 aggregated $28,696,000
and $26,417,000 at December 31, 2000 and 1999, respectively.
58
The following is a summary of interest expense on deposits (in thousands):
Year Ended December 31,
2000 1999 1998
------------------------
Passbook and statement savings $ 747 $ 830 $1,235
Checking accounts 597 579 605
Money market deposits 3,106 2,614 2,412
Certificates 13,594 12,751 15,373
Less: Early withdrawal penalties (45) (37) (54)
------------------------
$17,999 $16,737 $19,571
=========================
At December 31, 2000, remaining maturities on certificates are as follows (in
thousands):
2001 $ 192,168
2001 18,693
2003 5,226
2004 5,347
2005 21,640
------------
$ 243,074
============
At December 31, 2000, the Bank has pledged mortgage-backed certificates
with a total carrying value of $11,085,000 to the State Treasury Board as
collateral for certain public deposits.
Note 11
Advances from the Federal Home Loan Bank
At December 31, 2000, advances from the FHLB consist of the following
fixed-rate advances which are convertible, at the option of the FHLB, to an
adjustable rate advance on the dates specified (dollars in thousands):
Interest
Amount Maturity Rate Convertible
-------------------------------------------------------------------------------
$25,000 July 7, 2003 6.19% On January 8, 2001 and every 3 months
thereafter until maturity
15,000 December 3, 2003 4.84% One-time on December 3, 2001
30,000 December 20, 2010 4.68% On December 20, 2001 and every 3
------- months thereafter until maturity
$70,000
=======
These advances are collateralized by first mortgage loans with a net book
value of approximately $200,672,000 and by FHLB stock.
The weighted average cost of advances from the FHLB is 6.16% and 5.23% for
the years ended December 31, 2000 and 1999, respectively.
Interest expense on advances from the FHLB, included in interest on
borrowings in the accompanying consolidated statements of income, was
$6,043,000, $4,602,000 and $5,622,000 for the years ended December 31, 2000,
1999 and 1998, respectively.
59
Note 12
Securities Sold under Agreements to Repurchase
At December 31, 2000, mortgage-backed certificates sold under agreements to
repurchase had a carrying value of $13,538,000 and a market value of
$13,636,000. 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.
The following is a summary of certain information regarding the Company's
reverse repurchase agreements (dollars in thousands):
December 31,
2000 1999 1998
------------------------------
Balance at end of year $ 13,369 $ 13,233 $ 13,084
Average amount outstanding during the year 15,361 15,711 12,026
Interest expense for the year 819 641 535
Maximum amount outstanding at any month end 16,454 20,755 22,913
Weighted average interest rate during the year 5.33% 4.08% 4.45%
Weighted average interest rate at end of year 5.59% 3.78% 3.96%
Weighted average maturity at end of year daily 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,
2000 1999 1998
----------------------------------
Other income:
Brokerage fees $ 207 $ 168 $ 468
Merchant processing fees 2,297 2,464 2,062
Other miscellaneous 628 964 609
----------------------------------
$ 3,132 $ 3,596 $ 3,139
==================================
Other expense:
Net occupancy expense of premises $ 2,340 $ 2,154 $ 1,901
Professional fees 741 678 611
Expenses, gains/losses on sales,
and provision for losses on
real estate owned, net 42 44 89
Merchant processing 1,774 1,953 1,766
Other miscellaneous 2,559 2,313 2,408
----------------------------------
$ 7,456 $ 7,142 $ 6,775
==================================
60
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. The net deferred tax asset is included in other assets
in the statements of financial condition.
Significant components of the Company's deferred tax assets and liabilities are
as follows (in thousands):
December 31,
2000 1999 1998
----------------------------------
Deferred tax assets:
Bad debt reserves $ 1,344 $ 1,353 $ 1,474
Unrealized losses on securities
available for sale -- 413 --
Other 332 298 324
----------------------------------
1,676 2,064 1,798
----------------------------------
Deferred tax liabilities:
FHLB stock dividends (660) (660) (696)
Unrealized gains on securities (249) -- (308)
available for sale
Depreciation (231) (303) (344)
Other (197) (250) (251)
-----------------------------------
(1,337) (1,213) (1,599)
-----------------------------------
Net deferred tax asset $ 339 $ 851 $ 199
===================================
61
The provision for income taxes consists of the following (in thousands):
Year Ended December 31,
2000 1999 1998
--------------------------------------------
Current:
Federal $ 2,965 $ 2,997 $ 3,452
State 379 343 294
------------------------------------------
3,344 3,340 3,746
--------------------------------------------
Deferred:
Federal (125) 57 (277)
State (23) 11 (52)
--------------------------------------------
(148) 68 (329)
--------------------------------------------
$ 3,196 $ 3,408 $ 3,417
============================================
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,
2000 1999 1998
-------------------------------
Computed "expected" tax provision $ 3,018 $ 3,219 $ 3,241
Increase (decrease) in taxes resulting from:
State income taxes, net of federal 235 235 194
tax benefit
Other (57) (46) (18)
-------------------------------
Provision for income taxes $ 3,196 $ 3,408 $ 3,417
===============================
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, 2000 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.
62
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 2000, 1999 and 1998, 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 2000 totaled $114,000, of which $100,000 was distributed to
participants; in 1999 totaled $124,000, of which $111,000 was distributed to
participants; and in 1998 totaled $93,000, of which $72,000 was distributed to
participants. At December 31, 2000, the ESOP has 181,119 allocated shares. A
total of 17,216 shares were distributed in 2000 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
$191,600 in 2000, $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 shares were used for debt service.
Of the 248,157 shares purchased in 1997, 194,956 were unallocated at
December 31, 2000. In 2000, 1999 and 1998, 16,246, 16,246 and 20,709 shares were
allocated and were included in earnings per share calculations. A total of 2,705
shares were distributed in 2000 to terminated employees. At December 31, 2000,
the fair value of unearned shares approximated $2,388,000.
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, 2000, 1999, and 1998, the maximum percentage that could be
contributed by employees was 15%. No contributions were made by the Company to
the plan in 2000, 1999 and 1998.
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. The Company has elected to
amortize its unrecognized transition obligation over 20 years.
63
The following table sets forth the plan's benefit obligations, fair value of
plan assets and funded status at January 1, 2000 and 1999 (in thousands).
At or for the plan years
ended January 1,
2000 1999
------------------------
Change in benefit obligation:
Benefit obligation at beginning of year $ 815 $ 804
Service cost 4 4
Interest cost 54 54
Actuarial loss (gain) (63) 8
Benefits paid (56) (55)
------------------------
Benefit obligation at end of year 754 815
------------------------
Change in plan assets:
Fair value of plan assets at beginning of year -- --
Employer contribution 56 55
Benefits paid (56) (55)
------------------------
Fair value of plan assets at end of year -- --
------------------------
Funded status (754) (815)
Unrecognized net actuarial loss 83 150
Unrecognized prior service cost 453 488
------------------------
Accrued benefit cost in the consolidated
statements of financial condition $ (218) $ (177)
========================
The components of net periodic postretirement benefit cost are as follows (in
thousands):
For the years ended December 31,
2000 1999 1998
---------------------------------------
Service cost $ 3 $ 4 $ 4
Interest cost 54 54 54
Amortization of prior service costs 35 35 35
Recognized net actuarial loss -- 4 4
---------------------------------------
$ 92 $ 97 $ 97
=======================================
For the years ended December 31, 2000, 1999 and 1998, actuarial assumptions
include an assumed discount rate on benefit obligations of 7.50%, 7.00% and
7.00%, respectively.
Medical and dental trends used for 2000 were 7.00% for the active medical and
dental plan and 6.00% for the medicare supplement. These rates trend down to
5.00% and 4.00%, respectively, in 2004.
The effect of a 1% change in health care trend assumptions are as follows (in
thousands):
1% Increase 1% Decrease
-------------------------------
Aggregate service and interest cost $ 3 $ (3)
Benefit obligation $ 41 $ (35)
64
Note 16
Stock Options and Awards
At December 31, 2000, 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
The Company adopted, in 1992, 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 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 225,000. Options granted in 2000 and 1999 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.
65
Year Ended December 31,
2000 1999 1998
------------------------------------------------------- --------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
---------- --------- --------- ------------ ---------- ---------
Outstanding at beginning
of year 287,832 $ 12.73 249,110 $ 10.50 271,938 $ 6.09
Granted 68,000 13.38 66,000 18.00 67,000 22.25
Exercised (14,538) 5.10 (27,278) 5.07 (84,798) 5.31
Forfeited (2,000) -- -- -- (5,030) 15.65
-------- ------- --------
Outstanding at end of year 339,294 13.14 287,832 12.73 249,110 10.50
======= ======= =======
Options exercisable at
year end 189,130 10.28 173,574 8.54 164,331 5.49
The weighted average fair value of options granted during 2000, 1999 and
1998 was $3.20, $5.32 and $6.09, respectively.
The weighted average fair value of all of the options granted during the
period 1995 through 2000 has been estimated using the Black-Scholes
option-pricing model with the following weighted average assumptions:
Year Ended December 31,
2000 1999 1998
-------------------------------------
Annual dividend yield 4.49% 3.33% 2.70%
Weighted average risk-free interest rate 5.93% 6.46% 4.76%
Weighted average expected volatility 29.00% 31.00% 29.00%
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,
2000 1999 1998
---------------------------------------
Net income:
As reported $ 5,681 $ 6,059 $ 6,115
Pro forma 5,545 5,960 6,071
Basic earnings per share:
As reported $ 1.29 $ 1.32 $ 1.30
Pro forma 1.26 1.30 1.29
Diluted earnings per share:
As reported $ 1.27 $ 1.30 $ 1.27
Pro forma 1.24 1.28 1.26
66
The following table summarizes information about the options
outstanding at December 31, 2000:
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 86,881 1.58 $ 3.84 86,881 $ 3.84
$7.09 to $7.73 16,152 3.23 7.49 16,152 7.49
$1.55 to $12.34 29,004 5.54 11.95 29,004 11.95
$13.38 68,000 10.68 13.38 - 13.38
$15.00 10,257 6.17 15.00 7,593 15.00
$18.00 65,000 8.75 18.00 17,000 18.00
$22.25 64,000 7.75 22.25 32,500 22.25
------- -------
339,294 6.50 13.14 189,130 10.28
======= =======
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 (See Note 19). 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
2000, 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 $47,000, $73,000, and $72,000 for 2000, 1999 and 1998,
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 statements of financial condition.
A summary of MRP activity is as follows:
Year Ended December 31,
2000 1999 1998
-------------------------------
Outstanding at beginning of year 25,092 31,275 34,182
Granted -- -- --
Vested (8,100) (6,183) (2,907)
--------------------------------
Outstanding at end of year 16,992 25,092 31,275
================================
During 1998, 3,783 shares were forfeited, of which 2,916 were reissued in
2000. The shares reissued in 2000 vest in 2005. At December 31, 2000, the
weighted average period until the awards become vested is approximately 1.6
years.
67
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.
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,
2000 1999
-------------------------
Commitments outstanding:
Mortgage loans:
Fixed rate (rates between 7.75% and 9.99% at
2000 and between 7.75% and 11.23% at 1999) $ 1,910 $ 2,938
Variable rate 607 3,766
Commercial business loans 5,223 3,448
-------------------------
$ 7,740 $ 10,152
=========================
At December 31, 2000, the Company has granted unused consumer and
commercial lines of credit of $41,539,000 and $21,139,000, respectively.
Standby letters of credit are written unconditional commitments issued to
guarantee the performance of a customer to a third party and total approximately
$6,522,000 at December 31, 2000. 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.
At December 31, 2000, commitments to sell loans were $3,409,000.
Rent expense under long-term operating leases for property approximates
$1,032,000, $1,015,000, and $713,000 for the years ended December 31, 2000, 1999
and 1998, 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):
2001 $ 901
2002 556
2003 487
2004 481
2005 292
Thereafter 581
-------
$ 3,298
=======
68
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, 2000, 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, 2000:
Tier 1 (core) capital $ 46,642 7.4% $ 25,144 4.0% $ 31,430 5.0%
Tier 1 risk-based capital 46,642 10.3 18,061 4.0 27,091 6.0
Total risk-based capital 49,756 11.0 36,121 8.0 45,151 10.0
Tangible equity capital 46,642 7.4 12,572 2.0 -- --
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 11.4 35,207 8.0 44,008 10.0
Tangible equity capital 47,444 7.1 13,439 2.0 -- --
69
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
liquidation account does not restrict the use or application of the Bank's
retained earnings. At December 31, 2000, the liquidation account balance was
$2,323,000.
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, 2000 $ 4,816
Originations 10,264
Repayments (2,669)
--------
Balance at December 31, $ 12,411
========
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
$2,902,000 at December 31, 2000.
Deposits from related parties held by the Company at December 31, 2000
amounted to $13,315,000.
70
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,
2000, 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.
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. 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.
Deposit Liabilities
The fair value of deposits with no stated maturities (which includes demand
deposits, savings accounts, and money market deposits) 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.
Deposit liabilities with no stated maturity are 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. The fair value of deposits does not include the value of the customer
relationship or the rights to fees generated by the account.
Borrowings
For short-term borrowings (which include overnight advances from the FHLB
and securities sold under agreements to repurchase), the carrying amount is a
reasonable estimate of fair value.
For long-term borrowings (which include advances from the FHLB other than
overnight advances), rates currently available to the Company for borrowings
with similar terms and remaining maturities are used to estimate fair value of
existing borrowings.
Other
The carrying value of interest receivable, FHLB stock and interest payable
is a reasonable estimate of the fair value.
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.
71
The following table presents the carrying amounts and estimated fair values of
the Company's financial instruments at December 31, 2000 and 1999. The fair
value of a financial instrument is the amount at which the instrument could be
exchanged in a current transaction between willing parties.
December 31,
2000 1999
---------------------------- ---------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
---------------------------- ---------------------------
Financial assets:
Cash $ 20,904 $ 20,904 $ 17,554 $ 17,554
Federal funds sold 8,646 8,646 12,908 12,908
Securities available for sale 99,262 99,262 138,298 138,298
Loans held for investment 472,516 470,776 469,618 466,852
Loans held for sale 2,536 2,536 3,456 3,456
Interest receivable 3,546 3,546 4,067 4,067
FHLB stock 5,050 5,050 7,100 7,100
Financial liabilities:
Deposits 494,484 496,582 464,618 465,181
Advances from the FHLB 70,000 70,242 142,000 141,491
Securities sold under agreements 13,369 13,369 13,233 13,233
to repurchase
Interest payable (included in other 600 600 510 510
liabilities)
The carrying amounts shown in the table are included in the consolidated
statements of financial condition under the included captions.
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 Statements of Financial Condition
(In thousands)
December 31,
2000 1999
----------------------------
Assets:
Cash $ 48 $ 53
Securities available for sale at fair value 230 250
Equity in net assets of the Bank 50,004 50,064
Other assets 1,357 1,216
---------------------------
$ 51,639 $ 51,583
===========================
Liabilities:
Other liabilities $ 186 $ 318
---------------------------
Stockholders' equity 51,453 51,265
---------------------------
$ 51,639 $ 51,583
===========================
72
Condensed Statements of Operations
(In thousands)
Year Ended December 31,
2000 1999 1998
-----------------------------------------
Equity in earnings of the Bank $ 5,821 $ 6,293 $ 6,520
Interest income 23 23 22
Interest expense -- -- (76)
Salaries and employee benefits (6) (118) (296)
Professional fees (141) (182) (202)
Other expenses (94) (88) (86)
-----------------------------------------
Income before income taxes 5,603 5,928 5,882
Benefit from income taxes 78 131 233
-----------------------------------------
Net income $ 5,681 $ 6,059 $ 6,115
=========================================
Condensed Statements of Cash Flows
(In thousands)
Year Ended December 31,
2000 1999 1998
----------------------------------------
Net cash provided by operations $ 6,781 $ 4,068 $ 9,307
----------------------------------------
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 (2,651) (2,745) (1,931)
Net proceeds from issuance of common stock 74 137 173
Principal payments on other borrowings -- -- (2,575)
Common stock repurchases (4,209) (1,463) (4,669)
Net cash used for financing activities (6,786) (4,071) (9,002)
------------------------------------------
Net (decrease) increase in cash and cash
equivalents (5) (3) 55
Cash and cash equivalents at beginning of year 53 56 1
------------------------------------------
Cash and cash equivalents at end of year $ 48 $ 53 $ 56
==========================================
73
Note 23
Quarterly Results of Operations (Unaudited)
(Dollars in thousands, except per share data)
Year Ended December 31, 2000
First Second Third Fourth
Quarter Quarter Quarter Quarter
------------------------------------------------------------
Total interest income $ 11,598 $ 11,651 $ 11,634 $ 11,491
Total interest expense 6,204 6,268 6,223 6,166
------------------------------------------------------------
Net interest income 5,394 5,383 5,411 5,325
Provision for loan losses 29 - 19 -
------------------------------------------------------------
Net interest income after provision 5,365 5,383 5,392 5,325
for loan losses
Other income 1,593 1,636 1,932 1,498
Other expenses 4,787 4,608 4,777 5,074
------------------------------------------------------------
Income before income taxes 2,171 2,411 2,547 1,749
Provision for income taxes 782 868 917 630
------------------------------------------------------------
Net income $ 1,389 $ 1,543 $ 1,630 $ 1,119
============================================================
Earnings per share:
Basic $ .31 $ .34 $ .37 $ .26
============================================================
Diluted $ .30 $ .34 $ .37 $ .26
============================================================
Dividends per common share $ .15 $ .15 $ .15 $ .15
============================================================
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 5,333 5,222 5,203 5,475
for loan losses
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
============================================================
<FN>
NOTE: May not add to total for year due to rounding.
</FN>
74
Item 9 - Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
"Changes in Registrant's Certifying Accountant" is incorporated herein by
reference to this report from Form 8-K, Item 4 filed September 26, 2000.
PART III
Item 10 - Directors and Executive Officers of the Registrant
Information with Respect to Directors.
The following table sets forth, as of April 17, 2001, the names of the
directors of the Company, their ages, the year in which their terms as directors
of the Company expire, and the year in which they became a director of the
Company. Information concerning the executive officers of the Company is
included in Part I of this Report on Form 10-K/A.
Expiration of Term Director of
Positions Held as Company the Company
Name with the Company Age Director Since
- ---------------------- ---------------- --- ---------- ------------
Nominees
John F. Harris Director 63 2001 1998
William H. Hodges Director 71 2001 1991
Roger C. Reinhold Director 59 2001 1994
Continuing Directors
William J. Davenport, III Director 53 2002 1998
Michael S. Ives President/Chief 48 2002 1991
Executive Officer/
Director
Charles R. Malbon, Jr. Director 51 2002 1998
David L. Bernd Director 52 2003 1991
Anne B. Shumadine Director 58 2003 1991
David R. Tynch Director 53 2003 1994
Set forth below is certain information with respect to the directors of 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.
David L. Bernd has been a director of the Bank since 1984. Mr. Bernd is
presently Chief Executive Officer of Sentara Healthcare, a regional health
services corporation where he has been employed since 1973.
William J. Davenport, III, has been a director of CENIT Bank or its
predecessor bank since 1985. He is and has been a private investor and realtor
for several years.
John F. Harris has been a director of CENIT Bank or its predecessor bank
since 1987. He is President of Affordable Homes, Inc., a developer of
residential housing in the Hampton Roads, Virginia, area.
William H. Hodges has served as a director of the Bank since 1989, when he
retired as a judge of the Virginia Court of Appeals. Judge Hodges had served on
the Court of Appeals since his appointment to that position in 1985, and had
previously served as a state circuit court judge.
Michael S. Ives has been a director of the Bank and has been the President
and Chief Executive Officer of the Bank since January, 1987.
Charles R. Malbon, Jr., serves as Chairman of the Board and has been a
director of CENIT Bank or its predecessor bank since 1993. He is Vice President
of Tank Lines, Inc.
Roger C. Reinhold became a director of the Company and the Bank on April 1,
1994. Prior to April 1, 1994, Mr. Reinhold had been President and Chief
Executive Officer of Homestead Savings Bank, F.S.B. ("Homestead") since 1982. He
joined Homestead in 1972.
Anne B. Shumadine was elected as a director of the Bank in 1991. Mrs.
Shumadine is President of Signature Financial Management, Inc., a financial
planning firm. She is also an attorney.
David R. Tynch became a director of the Company and the Bank on April 1,
1994. Mr. Tynch is President and Managing Partner of the law firm of Cooper,
Spong & Davis, P.C. in Portsmouth, Virginia. He joined that firm in 1986. Prior
to April 1, 1994, Mr. Tynch had been a director of Homestead since 1985.
Compliance with Section 16(a) of the Securities Exchange Act of 1934.
Section 16(a) of the Exchange Act requires the Company's officers and
directors, and persons who own more than ten percent of a registered class of
the Company's equity securities, to file reports of ownership and changes in
ownership with the Securities and Exchange Commission ("SEC") and the National
Association of Securities Dealers. Officers and directors and greater than ten
percent stockholders are required by SEC regulation to furnish the Company with
copies of all Section 16(a) forms they file.
Based solely on its review of the copies of such forms received by it, the
Company believes that during 2000 its officers and directors and greater than
ten percent stockholders complied with all applicable Section 16(a) filing
requirements, except for Charles R. Malbon, Jr who filed a report in June 2000
that should have been filed in May 2000, and corrected Forms 4 for July 2000 and
October 2000 in February 2001, Patrick L. Hillard, who filed a report in June
2000 that should have been filed in May 2000, and corrected Forms 4 for October
1999 and April 2000 in February 2001, and David L. Bernd, who filed a corrected
Form 5 for December 2000 in March 2001.
Item 11 - Executive Compensation
Directors' Fees.
Each of the Company's directors, other than the President of the Company,
receives a director's fee of $300 per month. The Chairman of the Board of the
Company receives an additional fee of $900 per month. Each of the Bank's
directors, other than the President of the Bank, receives a director's fee of
$1,200 per month plus an attendance fee of $300 for each of the 12 regular
monthly meetings. Mr. Ives, as an employee, does not receive director's fees
from any entity.
The chairman of each committee receives a $300 per meeting attendance fee,
and each member receives a $150 per meeting attendance fee. Directors do not
receive fees for serving on the Nominating Committee.
Executive Compensation.
The following table provides certain summary information concerning the
compensation of the Company's chief executive officer and the four other most
highly compensated executive officers of the Company and the Bank during 2000
(together, the "named executive officers").
SUMMARY COMPENSATION TABLE
Long-Term Compensation
Annual Compensation Awards
Securities
Underlying
Options/ All Other
Name and Principal Restricted SARs Compensation
Position Year Salary Bonus Stock Award (#) (3)
- -------------------------- ---- -- ------- -- ------ ----------- ----------- -----------
Michael S. Ives 2000 $260,000 $ - $ - 40,000 $ 8,298
President and 1999 260,000 - - 40,000 10,636
CEO, CENIT Bancorp, Inc. 1998 220,000 50,000 - 40,000 16,387
and CENIT Bank
Barry L. French 2000 130,000 - - 3,500 $ 7,046
Senior Vice President/ 1999 125,000 - - 3,500 8,878
Retail Banking Group 1998 97,750 17,200 - 3,000 12,767
Mgr., CENIT Bank
John O. Guthrie 2000 119,375 - - 3,500 $ 6,718
Senior Vice President/ 1999 110,000 - - 3,500 8,248
CFO/Corporate Secretary 1998 101,500 24,200 - 3,000 13,667
CENIT Bancorp, Inc.,
and CENIT Bank
Roger J. Lambert 2000 119,375 5,000 39,002(1)(2) 3,500 $ 6,870
Senior Vice President/ 1999 110,000 - - 3,500 8,246
Information Services 1998 93,000 10,000 - 3,000 11,667
Group Mgr., CENIT
Bank
Alvin D. Woods 2000 130,000 - - 3,500 $ 7,046
Senior Vice President/ 1999 125,000 - - 3,500 8,783
Credit Policy & Admin. 1998 97,750 26,200 - 3,000 13,519
CENIT Bancorp, Inc.,
Senior Vice President,
Chief Lending Officer
CENIT Bank
---------------
(1) Represents 2,916 shares awarded to Mr. Lambert under the MRP valued at
$13.375 per share as of September 5, 2000, the date on which the grant was
effective. Under this grant, Mr. Lambert's shares become fully vested on
September 5, 2005.
(2) The shares held in the MRP Trust will vest in full on the occurrence of
certain other events, including a change in control of the Company or the
executive's death or disability. Regardless of vesting, Mr. Lambert is
entitled to receive all dividends payable on the restricted shares, and to
direct the MRP trustees as to the manner in which the shares are to be
voted, until the shares are distributed to the executives or are forfeited.
At December 31, 2000, based on the closing stock price of $12.25 on that
date, the value of the remaining restricted stock held on Mr. Lambert's
behalf in the MRP Trust was $54,096.
(3) Includes 432, 442 and 623 shares held in the ESOP Trust allocated to Mr.
Ives in 2000, 1999, and 1998, respectively; and $3,000, $3,000, and $3,000
representing taxable compensation received by Mr. Ives related to an
automobile allowance in 2000, 1999, and 1998, respectively.
Includes 330, 340, and 454 shares held in the ESOP Trust allocated to Mr.
French in 2000, 1999 and 1998, respectively; and $3,000, $3,000 and $3,000
representing taxable compensation received by Mr. French related to an
automobile allowance in 2000, 1999 and 1998, respectively.
Includes 304, 303 and 496 shares held in the ESOP Trust allocated to Mr.
Guthrie in 2000, 1999 and 1998, respectively; and $3,000, $3,000, and
$3,000 representing taxable compensation received by Mr. Guthrie related to
an automobile allowance in 2000, 1999 and 1998, respectively.
Includes 316, 303 and 403 shares held in the ESOP Trust allocated to Mr.
Lambert in 2000, 1999 and 1998, respectively; and $3,000, $3,000 and $3,000
representing taxable compensation received by Mr. Lambert related to an
automobile allowance in 2000, 1999 and 1998; respectively.
Includes 330, 334 and 489 shares held in the ESOP Trust allocated to Mr.
Woods in 2000, 1999 and 1998, respectively; and $3,000, $3,000, and $3,000
representing taxable compensation received by Mr. Woods related to an
automobile allowance in 2000, 1999 and 1998, respectively.
The following table provides information on stock option/stock appreciation
rights ("SAR") grants to the Company's named executive officers during 2000.
OPTION/SAR GRANTS IN LAST FISCAL YEAR
Potential realizable value
at assumed annual rates of
stock price appreciation
for option
Individual Grants term (3)
---------------------------------------------------------------------------------------
Number of Percent of
securities total options
underlying granted to
options employees Exercise or
granted (#) in fiscal year base price Expiration
Name (1) (2) ($/Sh) date 5% ($) 10% ($)
----- ------- ------------ ---------- --------- -------- ---------
Michael S. Ives 40,000 74.0% $13.375 9/5/10 $336,459 $852,652
Barry L. French 3,500 6.5% 13.375 9/5/10 29,440 74,607
John O. Guthrie 3,500 6.5% 13.375 9/5/10 29,440 74,607
Roger J. Lambert 3,500 6.5% 13.375 9/5/10 29,440 74,607
Alvin D. Woods 3,500 6.5% 13.375 9/5/10 29,440 74,607
- ---------------
(1) The options granted to Messrs. Ives, French, Guthrie, Lambert and Woods
vest over a four-year period, with one-fourth of the options granted
becoming exercisable on each September 5 commencing September 5, 2001. The
options may become exercisable earlier than such dates upon a "change of
control" as defined in the Company's Long-Term Incentive Plan, which was
adopted in 1998, or upon the grantee's retirement, disability or death.
(2) Excludes from percentage calculations grants to non-employee directors.
(3) Represents gain that will be realized assuming the options were held for
the entire ten-year period and the price of Common Stock increased at
compounded rates of 5% and 10% from the exercise price of $13.375 per
share. Potential realizable values per option or per share under these
rates of stock price appreciation would be $8.41 and $21.32, respectively.
However, these amounts represent assumed rates of appreciation only. Actual
gains, if any, on stock option exercises and common stockholdings will be
dependent on overall market conditions and on the future performance of the
Company and the Common Stock. There can be no assurance that the amounts
reflected in this table will be achieved.
The following table provides information on the number of shares acquired
on exercise and on the value of unexercised stock options/SARs held by the
Company's Chief Executive Officer and certain other executive officers at
December 31, 2000.
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION/SAR VALUES
Number of Securities Value of Unexercised
Underlying Unexercised In-the-Money Stock Options/
Stock Options/SARS at SARs At
Shares Acquired Value End of Fiscal Year End of Fiscal Year
Name on Exercise (#) Realized ($) Exercisable/ Unexercisable Exercisable/ Unexercisable
- --------------- ------------------ --------------- --------------------------- --------------------------
Michael S. Ives - $ - 136,881 / 91,239 $789,503 / $ - (1)
Barry L. French - - 13,599 / 8,033 27,816 / - (2)
John O. Guthrie - - 10,849 / 8,033 13,510 / - (3)
Roger J. Lambert - - 2,375 / 7,625 - / -
Alvin D. Woods - - 5,591 / 8,033 840 / - (4)
(1) The market value of Common Stock at December 31, 2000 was $12.25 per share,
and the exercise price for in-the-money options/SARs is $3.84 per share on
81,261 shares, $7.67 on 7,302 shares, and $11.55 on 7,302 shares.
(2) The market value of Common Stock at December 31, 2000 was $12.25 per share,
and the exercise price for in-the-money options/SARs is $7.09 on 4,000
shares, $7.67 on 1,200 shares, and $11.55 on 2,400 shares.
(3) The market value of Common Stock at December 31, 2000 was $12.25, and the
exercise price for in-the-money options/SARs is $7.09 on 1,050 shares,
$7.67 on 1,400 shares, and $11.55 on 2,400 shares.
(4) The market value of Common Stock at December 31, 2000 was $12.25, and the
exercise price for in-the-money options/SARs is $11.55 on 1,200 shares.
Compensation Committee Report on Executive Compensation.
The Compensation Committee, which is composed of the nonemployee Directors
of the Company listed below, recommends to the Board of Directors of the Bank
the annual salary levels and any bonuses to be paid to the Bank's executive
officers. All salaries and bonuses paid to the Company's executive officers are
received by them from the Bank in their capacities as its officers. The members
of the Committee also serve as the committee with authority to make Long-Term
Incentive Plan awards, and this report covers the Committee members' policies
and actions in that capacity.
The Committee recommended the 2000 salaries for executive officers based on
its subjective determination of a reasonable salary level for each officer
relative to each individual's particular responsibilities and past performance.
Mr. Ives' salary for 2000 continued at the 1999 level of $260,000.
In 2000, the Bank paid no bonuses to executive officers pursuant to the
Bank's Key Executive Incentive Plan ("Incentive Plan") because the Company did
not achieve the threshold level of earnings per share during 1999.
In 2000, the Committee granted stock option awards under the Long-Term
Incentive Plan, continuing the Committee's policy of making annual grants with
the objective of providing competitive long-term incentives to the executive
officers. The Committee generally makes grants on a substantially consistent
basis resulting in approximately the same total awards each year, but subject to
annual discretion and change and to periodic review for competitiveness. When
compared to the 1999 awards (which were based on an overall executive
compensation review conducted in 1998), the amounts of the 2000 Long-Term
Incentive Plan awards to the executive officers were identical in the case of
Mr. Ives and the other officers. In 2000, the Committee also granted 2,916
shares under the MRP to an officer, based on its subjective consideration of his
responsibilities, performance and prior grants of stock compensation.
COMPENSATION COMMITTEE
Anne B. Shumadine, Chair
William J. Davenport, III
Charles R. Malbon, Jr.
Roger C. Reinhold
David R. Tynch
Neither the Compensation Committee report above nor the stock performance
graph that follows is incorporated by reference in any prior or future SEC
filings, directly or by reference to the incorporation of proxy statements of
the Company, unless such filing specifically incorporates the report or the
stock performance graph. SEC rules provide that the Compensation Committee
report and the stock performance graph are not deemed to constitute "soliciting
material" or to be filed with the SEC, and are not subject to SEC Regulations
14A or 14C, except as provided in SEC regulations, or to the liabilities under
Section 18 of the Exchange Act.
Stock Performance Graph.
The following graph provides a comparison with the stated indices of the
percentage change in the Company's cumulative total stockholder return on its
Common Stock for the period beginning December 31, 1995. The Company's stock
performance is compared to the Center for Research in Securities Prices ("CRSP")
Total Return Index for The Nasdaq Stock Market (U.S. Companies) which is a broad
market equity index calculated by CRSP at the University of Chicago. This index
comprises all domestic common shares traded on The Nasdaq Stock Market and The
Nasdaq Small Cap Market.
In addition, the Company's stock performance is compared to The Nasdaq
Total Return Industry Index of Savings Institutions (SIC Code 603). This
industry index has also been calculated by the CRSP.
It should be noted that in light of the short period of time reflected by
this graph, there is no reason to assume that the performance of the Company's
Common Stock for the period shown on the graph will be reflective of long-term
performance. In any event, the following graph is designed to be only a general
depiction of one measure of corporate performance to be used by stockholders in
evaluating the performance of the Company.
Comparison of Cumulative Total Return Among CENIT Bancorp, Inc., CRSP
Total Return Index for the Nasdaq Stock Market(R)(US Companies) and
CRSP Total Return Index for Nasdaq Savings Institutions (SIC Code 603)
[GRAPH APPEARS HERE]
12/29/95 12/31/96 12/31/97 12/31/98 12/31/99 12/29/00
CENIT Bancorp, Inc. 100.0 115.4 225.6 186.3 154.7 114.3
CRSP Index for The Nasdaq 100.0 123.0 150.7 212.5 394.9 237.7
Stock Market
CRSP Index for Savings 100.0 128.0 221.8 203.6 174.7 225.1
Institutions
Notes:
A. The lines represent monthly index levels derived from compounded daily
returns that include all dividends.
B. The indexes are reweighted daily, using the market capitalization on the
previous trading day.
C. If the monthly interval, based on the fiscal year-end, is not a trading
day, the preceding trading day is used.
D. The index level for all series was set to $100.00 on 12/29/95.
Employment Agreements and Change of Control Arrangements.
President and Chief Executive Officer of the Company and the Bank. Pursuant
to an employment agreement (the "Agreement") entered into between the Company
and Michael S. Ives on November 1, 1997, Mr. Ives is employed as the President
and Chief Executive Officer of the Company and the Bank. The current term of the
Agreement expires December 31, 2000, and the Agreement may be extended by the
Board of Directors of the Company after its review of Mr. Ives' performance for
purposes of determining whether to extend the term.
The Agreement provides for Mr. Ives to be paid a base salary subject to
increases approved at the discretion of the Company, and for Mr. Ives to
participate in all Company benefit and compensation plans available to senior
executives. For the year ended December 31, 2000, Mr. Ives received total base
salary in the amount of $260,000. Mr. Ives did not receive a bonus in 2000 for
services rendered in 1999.
The Agreement provides for termination of Mr. Ives' employment for "cause"
(as defined in the Agreement) at any time or in certain events specified by
banking regulations. In the event that Mr. Ives' employment is terminated for
reasons other than cause or upon a voluntary resignation by Mr. Ives for good
reason, including his assignment to render services other than in a senior
management or executive capacity or a material reduction in base salary, Mr.
Ives would be entitled to continue to receive his base salary for one year from
the date of termination. The Company is also required to continue Mr. Ives'
benefits plans for a period of one year following a termination without cause.
In addition, if a "change of control" of the Company occurs, Mr. Ives will be
entitled to additional compensation if within 12 months thereafter his
employment is terminated without cause or he voluntarily terminates his
employment. In these circumstances, Mr. Ives will be entitled to receive, in
lieu of any salary continuation otherwise payable under the Agreement, a lump
sum payment equal to 2.99 times Mr. Ives' average annual compensation received
during the five years next ending prior to the date of the change of control. A
"change of control" is defined in the Agreement to occur upon any of the
following events: (a) the acquisition by any person or group, as beneficial
owner, of 20% or more of the outstanding shares or the voting power of the
outstanding securities of the Company; (b) either a majority of the directors of
Company at the annual stockholders meeting has been nominated other than by or
at the direction of the incumbent directors of the Company's Board of Directors,
or the incumbent directors cease to constitute a majority of the Company's Board
of Directors; (c) the Company's shareholders approve a merger or other business
combination pursuant to which the outstanding common stock of the Company no
longer represents more than 50% of the combined entity after the transaction;
(d) the Company's shareholders approve a plan of complete liquidation or an
agreement for the sale or disposition of all or substantially all of the
Company's assets; or (e) any other event or circumstance determined by the
Company's Board of Directors to affect control of the Company and designated by
resolution of the Board of Directors as a change of control.
If a change of control of the Company were to occur during 2000, Mr. Ives
would be entitled to a severance payment of $1,295,041 in addition to certain
stock option and related stock appreciation rights and restricted stock
acceleration rights, subject to reduction in coordination with Section 280G of
the Internal Revenue Code. Under Section 280G, assuming that Mr. Ives' severance
payment and the value of his stock options, stock appreciation rights and
restricted stock acceleration contingent upon the change of control equaled or
exceeded three times his average W-2 compensation for the five tax years
immediately preceding the change of control, the payment and benefits would
constitute "parachute payments." As a result, the amount by which the severance
payment and benefits exceeded Mr. Ives' average annual W-2 compensation for the
five-year period would be deemed to be "excess parachute payments," a 20% excise
tax on the excess parachute payments would be imposed on Mr. Ives, and the
Company would not be entitled to deduct the excess parachute payments. Mr. Ives'
Agreement provides that if his severance payment would otherwise result in
excess parachute payments in the opinion of the Company's independent
accountants, then the Company will reduce the severance payment to an amount
that would not give rise to excess parachute payments.
The Agreement also restricts the ability of Mr. Ives to compete with the
Company or the Bank for a period of 12 months after the termination of his
employment under the Agreement, but this non-competition provision is not
operative following any change of control.
Senior Vice President/Information Services of the Bank. Roger J. Lambert,
Senior Vice President/Information Services of the Bank, is employed pursuant to
an employment agreement (the "Lambert Agreement") entered into between Mr.
Lambert and the Company as of October 1, 2000. Under the Lambert Agreement, Mr.
Lambert is employed for a term ending on September 30, 2003. The Lambert
Agreement is renewable by the Company's Board of Directors for successive
periods of one (1) year.
The Lambert Agreement provides for a base salary of $130,000, subject to
increases approved in the discretion of the Company's Board of Directors, and
for Mr. Lambert's participation in fringe benefit and other plans offered to
other senior officers of the Company.
The Lambert Agreement provides for termination of Mr. Lambert's employment
for "cause" (as defined in the Lambert Agreement). If Mr. Lambert's employment
is terminated by the Company for reasons other than cause, including voluntary
resignation by Mr. Lambert upon a change in his services from a senior
management, executive or other appropriate capacity, a material reduction in his
base salary or the Company's failure to renew the Lambert Agreement at the end
of its term, Mr. Lambert will be entitled to receive his salary and benefits for
a period of one year following termination. The Lambert Agreement also provides
for the Company to make a severance payment to Mr. Lambert as described below
with respect to Change of Control Arrangements if a "change of control" of the
Company (as defined above) and certain other circumstances occur.
The Lambert Agreement also restricts the ability of Mr. Lambert to compete
with the Company and the Bank for a period of 12 months after the termination of
his employment, but this non-competition provision is not operative following
any change of control.
Change of Control Arrangements. Pursuant to agreements (the "Change of
Control Agreements") entered into between the Company and Barry L. French, John
O. Guthrie, and Alvin D. Woods on December 18, 1998, the Company agreed to make
payments to these officers under certain circumstances if a "change of control"
of the Company (as defined above) occurs. Each such officer will be entitled to
a severance payment if within 12 months after a change of control of the
Company, the officer's employment is terminated without cause or the officer
voluntarily terminates his employment (other than after circumstances
constituting cause). The severance payment will be a lump sum amount generally
equal to 12 months' base salary plus an additional month's salary for each of
the officer's years of service up to 12 years. Under the Change of Control
Agreements, if the Company commits to employ the officer during a designated
transition period of up to 6 months after the change of control without
reduction of his base salary and without requiring his relocation outside the
Company's headquarters area, the officer will receive the severance payment upon
his voluntary resignation only if the resignation occurs after the transition
period. The Change of Control Agreements provide the same limitations on "excess
parachute payments" as are described above with respect to Mr. Ives' Agreement.
Compensation Committee Interlocks.
There are no known interlocks involving Compensation Committee members and
executive officers of the Company.
Item 12 - Security Ownership of Certain Beneficial Owners and Management
Securities Ownership of Certain Beneficial Owners.
The following table sets forth certain information about those persons
known by management to be beneficial owners of more than 5% of the shares of
Common Stock outstanding on April 17, 2001. Persons and groups owning in excess
of 5% of the Company's Common Stock are required to file certain reports
regarding such ownership with the Company and with the Securities and Exchange
Commission (the "SEC") in accordance with Sections 13(d) and 13(g) of the
Securities Exchange Act of 1934 (the "Exchange Act").
Amount and Nature
of Reported
Beneficial Percent of
Title of Class Name and Address of Beneficial Owner Ownership Class(1)
- -------------- ------------------------------------ ---------- ---------
Common Stock Mid-Atlantic Investors ("Mid-Atlantic") 478,560 (2) 10.8%
and related parties
P. O. Box 7574
Columbia, South Carolina 29202
Common Stock CENIT Employees Stock 426,426 (3) 9.6%
Ownership Plan and Trust
("ESOP")
Main Street Tower
300 East Main Street, Suite 1350
Norfolk, Virginia 23510
(1) The total number of shares of Common Stock outstanding at April 17, 2001
was 4,430,171 shares.
(2) This information on beneficial ownership is based solely on information
supplied by Mid-Atlantic Investors, H. Jerry Shearer and Jerry Zucker (the
"Mid-Atlantic Group") which the Company has not independently verified. Mr.
Zucker disclosed that he has sole dispositive and voting power over 325,752
shares. Mr. Shearer disclosed that he has sole dispositive and voting power
over 2,808 shares. All parties report shared dispositive and voting power
over 150,000 shares.
(3) Michael S. Ives and John O. Guthrie administer the ESOP in their capacity
as trustees of the CENIT Employees Stock Ownership Trust (the "ESOP
Trust"). As of the Record Date, 231,470 shares of Common Stock in the ESOP
had been allocated to participating employees, and the trustees must vote
all allocated shares held in the ESOP in accordance with the instructions
of the participating employees. Under the ESOP, the ESOP trustees have
discretionary voting rights as to allocated shares for which no voting
instructions have been received.
The following table sets forth certain information, as of April 17, 2001,
about beneficial ownership of the Common Stock of the Company for each director,
director nominee, certain executive officers and for all directors, director
nominees and executive officers of the Company as a group.
Number of Shares of
Common Stock
Name Beneficially Owned(1)(2) Percent of Class
- ---------------------------- -------------------------- ----------------
David L. Bernd 21,289 *
William J. Davenport, III 9,438 *
John F. Harris 9,615 *
William H. Hodges 14,265 *
Michael S. Ives 220,367 4.78%
Charles R. Malbon, Jr. 13,971 *
Roger C. Reinhold 10,920 *
Anne B. Shumadine 40,945 *
David R. Tynch 21,358 *
Barry L. French 41,935 *
John O. Guthrie 50,298 1.09%
Roger J. Lambert 13,579 *
Alvin D. Woods 19,964 *
All directors, director nominees and 492,586 (3) 10.69%
executive officers as a group (4)
*Represents less than 1% of the outstanding shares of Common Stock.
(1) All shares shown as beneficially owned are owned directly or held by
spouses or children of the named persons, unless otherwise indicated.
(2) Includes 2,520, 2,520, 4,416 and 2,520 shares held in the Management
Recognition Plan ("MRP") Trust as described elsewhere in this proxy
statement on behalf of Messrs. French, Guthrie, Lambert and Woods,
respectively; 14,960, 7,979, 8,894, 6,788 and 7,550 shares held in the ESOP
Trust and allocated to Messrs. Ives, French, Guthrie, Lambert and Woods,
respectively; and 138,120, 14,007, 11,257, 2,375, 5,999 and 750 shares
which Messrs. Ives, French, Guthrie, Lambert, Woods and each other
director, respectively, could acquire within 60 days of April 17, 2001,
through the exercise of stock options.
(3) Includes 1,795 shares held in the ESOP Trust allocated to an executive
officer other than Messrs. Ives, French, Guthrie, Lambert and Woods.
(4) Includes 177,758 shares of Common Stock which such persons could acquire
within 60 days of April 17, 2001, through the exercise of stock options.
The total number of shares of Common Stock outstanding at April 17, 2001
was 4,430,171 shares.
Item 13 - Certain Relationships and Related Transactions
Insider Participation.
During 2000, members of the Compensation Committee engaged in the following
transactions with the Company and its subsidiaries:
Churchland Branch Lease. The Bank completed construction of a new office in
the Churchland area in December, 1999. This new office replaced the former
branch in Churchland which was leased from T.R.&T., a general partnership of
which Roger C. Reinhold and David R. Tynch are two of the partners. The replaced
branch was formerly operated by Homestead. Based on a review of the lease in
September, 1985, the predecessor of the Office of Thrift Supervision approved
the lease in accordance with federal regulations. The total rent paid for the
year ended December 31, 2000, was $47,379 and the lease terminated at the end of
the year.
Transactions with Certain Related Persons.
A number of the Company's directors, director nominees, and officers and
their associates are customers of the Company's bank subsidiary. Except as
indicated below, extensions of credit made to them are in the ordinary course of
business, are substantially on the same terms, including interest rates and
collateral, as those prevailing at the same time for comparable transactions
with others, and do not involve more than normal risk of collectibility or
present other unfavorable features. None of such credits are classified as
nonaccrual, past due, restructured or potential problem. All outstanding loans
to such officers, directors, director nominees, and their associates are current
as to principal and interest. As of March 31, 2001, loans to directors, director
nominees, executive officers and their interests who had loans at any time
during 2000 in excess of $60,000 totaled approximately $4.3 million.
Other Potential Conflicts. Management of the Company does not believe that any
director or officer or affiliate of the Company, or any record or beneficial
owner of more than 5% of the Common Stock of the Company, or any associate of
any such director, officer, affiliate or stockholder, is a party adverse to the
Company or any of its subsidiaries or has a material interest adverse to the
Company or any of its subsidiaries in any material proceeding.
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.
75
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, Exhibits to Form 10-Q filed on May 5,
1998, and Exhibit to Form 10-Q filed on November 9, 2000.
10.1 CENIT Stock Option Plan
10.2 CENIT Employees Stock Ownership Plan and Trust Agreement
10.3 ESOP Loan Commitment Letter
10.4 CENIT Management Recognition Plan
10.5 ESOP Loan Agreement
10.6 Agreement and Plan of Reorganization between Princess Anne Company
and CENIT Bancorp, Inc.
10.7 Branch Purchase and Deposit Assumption Agreement between CENIT
Bancorp, Inc. and Essex Savings Bank, F.S.B.
10.8 Employment Agreement with Michael S. Ives
10.9 CENIT Long Term Incentive Plan
10.10 Key Executive Change of Control Agreement with Barry L. French
10.11 Key Executive Change of Control Agreement with John O. Guthrie
10.12 Key Executive Change of Control Agreement with Roger J. Lambert
10.13 Key Executive Change of Control Agreement with Alvin D. Woods
10.14 Alternative Stock Appreciation Rights Program for Non-Employee
Directors
10.15 Alternative Stock Appreciation Right Agreement (officers) with
Michael S. Ives
10.16 Alternative Stock Appreciation Right Agreement (officers) with
Barry L. French
10.17 Alternative Stock Appreciation Right Agreement (officers) with
John O. Guthrie
10.18 Alternative Stock Appreciation Right Agreement (officers) with
Roger J. Lambert
10.19 Alternative Stock Appreciation Right Agreement (officers) with
Alvin D Woods
10.20 Employment Agreement with Roger J. Lambert
Exhibit No. 11 Statement Re: Computation of Per Share Earnings
The 2000 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
caption "Activities of Subsidiary Companies of CENIT Bank"
which is incorporated by reference
Exhibit No. 23.1 Consent of Independent Accountants
The consent of KPMG LLP, independent accountants for the Company, is
attached as Exhibit 23.1
Exhibit No. 23.2 Consent of Independent Accountants
The consent of PricewaterhouseCoopers LLP, former independent
accountants for the Company, is attached as Exhibit 23.2
(b) Reports on Form 8-K filed in the fourth quarter of 2000
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/A, no annual report or
proxy material has been sent to security holders. This material will be
furnished to security holders and the Securities and Exchange Commission
subsequent to the filing of this report on Form 10-K/A.
76
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
April 30, 2001
---------------------------
(Date)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following person(s) on behalf of the registrant and
in the capacities and on the dates indicated.
By: /s/ John O. Guthrie April 30, 2001
-------------------------- ---------------------------
John O. Guthrie (Date)
Senior Vice President and
Chief Financial Officer
EX-11
Statement Re: Computation of Per Share Earnings
(Dollars in thousands, except per share)
Year ended December 31,
------------------------------------------------
2000 1999 1998
--------- --------- ---------
Net income $ 5,681 $ 6,059 $ 6,115
========= ========= =========
BASIC
Average shares outstanding 4,410,988 4,581,574 4,715,697
========= ========= =========
Earnings per share $ 1.29 $ 1.32 $ 1.30
========= ========= =========
DILUTED
Average shares outstanding 4,410,988 4,581,574 4,715,697
Net effect of the assumed exercise of
stock options - based on the treasury
stock method using average market price 50,037 77,529 113,944
--------- --------- ---------
Total average shares outstanding 4,461,025 4,659,103 4,829,641
========= ========= =========
Earnings per share $ 1.27 $ 1.30 $ 1.27
========= ========= =========
EX-23.1
The Board of Directors
CENIT Bancorp, Incl:
Consent of Independent Accountants
We consent to incorporation by reference in the registration statement (No.
33-93978) on Form S-8 of CENIT Bancorp, Inc. (CENIT) of our report dated January
19, 2001, relating to the consolidated statement of financial condition of CENIT
as of December 31, 2000, and the related consolidated statements of income,
comprehensive income, changes in stockholders' equity, and cash flows for the
year ended December 31, 2000, which report appears in the December 31, 2000
annual report on Form 10-K of CENIT.
/s/ KPMG LLP
- ------------------------------
KPMG LLP
March 30, 2001
EX-23.2
Consent of Independent Accountants
We hereby consent to the incorporation by reference in the Registration
Statement on Form S-8 (No. 33-93978) of CENIT Bancorp, Inc. of our report dated
February 10, 2000, appearing on page 44 of this Form 10-K.
/s/ PricewaterhouseCoopers LLP
- ------------------------------
PricewaterhouseCoopers LLP
March 30, 2001