SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-K
[ X ] Annual Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the fiscal year ended December 31, 1997
[ ] 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) (I.R.S. Employe
225 West Olney Road
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 $71.25 of the registrant's common stock on
February 27, 1998, 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 $98,482,605. 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 27, 1998 was 1,659,107.
DOCUMENTS INCORPORATED BY REFERENCE
The Registrant's Definitive Proxy Statement for its 1998 Annual Meeting of
Stockholders will be filed with the Securities and Exchange Commission not later
than 120 days after the end of the fiscal year covered by this Form 10-K
pursuant to Rule G(3) of the General Instructions for Form 10-K. Information
from such Definitive Proxy Statement is hereby incorporated by reference into
Part III, Items 10,11, 12 and 13 hereof.
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, FSB ("CENIT Bank"). On July 28, 1992, the
members of CENIT Bank adopted a plan of conversion pursuant to which CENIT Bank
converted, effective August 5, 1992, from a federally chartered mutual savings
bank to a federally chartered stock savings bank (the "Conversion") with the
concurrent issuance of all of the capital stock of CENIT Bank to the Company. On
August 5, 1992, the Company issued and sold 1,236,250 shares of common stock to
subscribers in a Subscription and Community Offering. The Company used $11.7
million of the net proceeds to acquire all the capital stock of CENIT Bank.
Prior to the Conversion, the Company did not engage in any business, other than
that of an organizational nature.
On September 26, 1996 and November 7, 1996, CENIT Bank assumed the deposits
of five Essex Savings Bank, FSB ("Essex") branches pursuant to a Branch Purchase
and Deposit Assumption Agreement dated July 2, 1996. As part of these
transactions, CENIT Bank assumed approximately $68.1 million of deposits,
acquired certain other assets and liabilities, and received approximately $65.5
million of cash. See Note 3 of the Notes to Consolidated 1997 Financial
Statements filed with this report.
On August 1, 1995, the Company and Princess Anne Bank ("Princess Anne"), a
Virginia commercial bank, became affiliated pursuant to a definitive agreement
entered into in November 1994. Under the terms of the agreement, Princess Anne's
shareholders received 0.3364 shares of CENIT Bancorp common stock for each share
of Princess Anne common stock. This resulted in the issuance of 353,779 shares
of CENIT Bancorp common stock. This combination was accounted for as a pooling
of interests. As part of this transaction, effective August 1, 1995, Princess
Anne began operating as a wholly-owned subsidiary of the Company. At August 1,
1995, Princess Anne reported total assets of $94.1 million and stockholders'
equity of $6.9 million. Effective February 6, 1998, Princess Anne changed its
name to CENIT Bank. In this report, however, that bank continues to be referred
to as Princess Anne. See Note 2 of the Notes to Consolidated Financial
Statements filed with this report.
As a result of the Princess Anne merger, the Company became a bank holding
company subject to the Bank Holding Company Act of 1956 (the "BHCA"), as
amended, and became subject to regulation by the Federal Reserve Board (the
"Federal Reserve"). The BHCA generally limits the activities of a bank holding
company and its subsidiaries to that of banking, managing or controlling banks,
or any other activity which is so closely related to banking or to managing or
controlling banks as to be a proper incident thereto. See "Regulation and
Supervision--Regulation of the Company--Bank Holding Company Regulations."
Currently the Company does not transact any material business other than through
its two subsidiaries, CENIT Bank and Princess Anne (the "Banks"). Throughout
this report, the combined operations, policies, and practices of the Banks are
often referred to as the operations, policies and practices of the Company.
On March 24, 25, and 26, 1998, the Boards of Directors of CENIT Bank and
Princess Anne, as well as the Board of Directors of the Company, as the sole
shareholder of the Banks, voted to merge Princess Anne into CENIT Bank.
Following the merger, which is expected to be completed during the second
quarter of 1998, the Company will cease to be regulated by the Federal Reserve,
and will be a registered savings and loan holding company regulated pursuant to
the Homeowner's Loan Act, as amended (the "HOLA"). As such, the Company will be
subject to OTS regulation, examination, supervision and reporting requirements.
See "Regulation and Supervision--Regulation of the Company--General."
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. At December 31, 1997, the
Company had total deposits of $507.7 million. CENIT 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"). CENIT Bank
is regulated by the Office of Thrift Supervision (the "OTS"). Princess Anne's
deposits are insured up to the maximum allowable amount by the FDIC through the
Bank Insurance Fund ("BIF") and the SAIF. Princess Anne is regulated principally
at the federal level by the Federal Reserve Board and at the state level by the
Virginia State Corporation Commission (the "SCC"). The Banks are members of the
Federal Home Loan Bank of Atlanta (the "FHLB-Atlanta") and are also regulated by
the FDIC. The Banks are further subject to regulations of the Board of
2
Governors of the Federal Reserve Board concerning reserves required to be
maintained against deposits and certain other matters. The Company is also
regulated by the Securities and Exchange Commission (the "SEC").
At December 31, 1997, the Company had total assets of $718.1 million and
total stockholders' equity of $49.9 million. The Company's office is located at
the corporate headquarters of CENIT Bank at 225 West Olney Road, Norfolk,
Virginia, 23510. The telephone number is (757) 446-6600.
Market Area
The Company is located in the Norfolk-Virginia Beach-Newport News
Metropolitan Statistical Area ("MSA"), which extends approximately 65 miles from
Williamsburg, Virginia to Virginia Beach, Virginia, and Currituck County, North
Carolina. This MSA is the 27th largest MSA in the United States and the fourth
largest MSA in the southeastern United States with a population in 1993 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 Banks
currently have a total of twenty retail offices and twenty automated teller
machines located in the cities of Norfolk, Portsmouth, Virginia Beach,
Chesapeake, Hampton, Newport News and in York County, Virginia. In addition, the
Company has a mortgage loan origination office located in the city of
Chesapeake. One of the Company's York County retail offices also includes a
mortgage loan origination office.
Although the Hampton Roads area supports a wide range of industrial and
commercial activities, the area's principal employer is the United States Navy
and other branches of the Armed Forces of the United States. Recent cutbacks in
defense spending and the realignment of domestic military installations have not
had an adverse impact on the Company's market area. However, future significant
cutbacks in defense spending and future consolidations of domestic military
installations could affect the general economy of the Company's market area.
Depending on whether the Hampton Roads area experiences an overall increase or
decrease in military and federal wages and salaries, the potential future impact
of any such cutbacks or consolidations could be either favorable or unfavorable.
Competition
The Company faces significant competition both in making loans and in
attracting deposits. The Company's competition for loans comes from commercial
banks, savings banks, mortgage banking subsidiaries of regional commercial
banks, national mortgage bankers, insurance companies, and other institutional
lenders. The Company's most direct competition for deposits has historically
come from savings banks, commercial banks, credit unions and other financial
institutions. Based upon total combined assets at December 31, 1997, the Banks
together constitute the second largest bank or thrift institution with their
parent company headquartered in their 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.
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.
3
Year ended December 31,
1995 1996 1997
Average Yield/ Average Yield/ Average Yield/
Balance Interest Cost Balance Interest Cost Balance Interest Cost
(Dollars in Thousands)
Interest-earning assets:
Loans (1) $324,316 $28,907 8.91% $352,153 $30,243 8.59% $470,594 $38,220 8.12%
Mortgage-backed certificates 181,154 11,406 6.30 197,562 13,224 6.69 124,761 8,685 6.96
U.S. Treasury and other U.S.
Government agency securities 64,640 4,046 6.26 56,826 3,657 6.44 44,399 2,775 6.25
Federal funds sold 11,384 653 5.74 7,618 405 5.32 8,109 450 5.55
Federal Home Loan Bank and
Federal Reserve Bank stock 7,091 515 7.26 8,913 642 7.20 8,959 646 7.21
----- --- ----- --- ----- ---
Total interest-earning assets 588,585 45,527 7.73 623,072 48,171 7.73 656,822 50,776 7.73
------- ------ ------- ------ ------- ------
Noninterest-earning assets:
REO 2,879 2,015 1,794
Other 24,062 38,178 38,874
------ ------ ------
Total noninterest-earning assets 26,941 40,193 40,668
------ ------ ------
Total assets $615,526 $663,265 $697,490
======== ======== ========
Interest-bearing liabilities:
Passbook and statement savings $ 44,758 1,561 3.49 $ 45,816 1,558 3.40 $ 45,050 1,522 3.38
Checking accounts 28,151 767 2.72 26,951 677 2.51 29,167 602 2.06
Money market deposit accounts 43,847 1,506 3.43 43,057 1,398 3.25 46,790 1,566 3.35
Certificates of deposit 287,042 15,548 5.42 293,336 15,607 5.32 329,477 17,282 5.25
------- ------ ------- ------ ------- ------
Total interest-bearing deposits 403,798 19,382 4.80 409,160 19,240 4.70 450,484 20,972 4.66
Advances from the Federal Home
Loan Bank 128,499 7,910 6.16 154,854 8,423 5.44 140,077 7,819 5.58
Other borrowings 817 62 7.59 295 22 7.46 1,461 110 7.53
Securities sold under agreements
to repurchase 2,543 122 4.80 8,616 402 4.67 8,893 409 4.60
----- --- ----- --- ----- ---
Total interest-bearing liabilities 535,657 27,476 5.13 572,925 28,087 4.90 600,915 29,310 4.88
------- ------ ------- ------ ------- ------
Noninterest-bearing liabilities:
Deposits 31,308 38,133 42,725
Other liabilities 4,182 4,477 3,832
----- ----- -----
Total noninterest-bearing liabilities 35,490 42,610 46,557
------ ------ ------
Total liabilities 571,147 615,535 647,472
Stockholders' equity 44,379 47,730 50,018
------ ------ ------
Total liabilities and stockholders' equity $615,526 $663,265 $697,490
======== ======== ========
Net interest income/interest rate spread $18,051 2.60% $20,084 2.83% $21,466 2.85%
======= ==== ======= ==== ======= ====
Net interest position/net interest margin $ 52,928 3.07% $ 50,147 3.22% $ 55,907 3.27%
======== ==== ======== ==== ======== ====
Ratio of average interest-earning assets to
average interest-bearing liabilities 109.88% 108.75% 109.30%
====== ====== ======
<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,
--------------------------------------------------------------------------
1995 vs. 1996 1996 vs. 1997
------------------------------- ----------------------------------
Increase (decrease) Increase (decrease)
due to due to
------------------------------- ----------------------------------
Volume Rate Net Volume Rate Net
------ ---- --- ------ ---- ---
(Dollars in Thousands)
Interest Income:
Loans (1) $ 2,417 $(1,081) $ 1,336 $9,697 $(1,720) $ 7,977
Mortgage-backed certificates 1,072 746 1,818 (5,049) 510 (4,539)
U.S. Treasury and other U.S.
Government agency securities (500) 111 (389) (779) (103) (882)
Federal funds sold (203) (45) (248) 27 18 45
Federal Home Loan Bank and
Federal Reserve Bank stock 131 (4) 127 4 - 4
--- -- --- - -
Total interest income 2,917 (273) 2,644 3,900 (1,295) 2,605
----- ---- ----- ----- ------ -----
Interest Expense:
Passbook and statement savings 36 (39) (3) (26) (10) (36)
Checking accounts (32) (58) (90) 53 (128) (75)
Money market deposit accounts (28) (80) (108) 124 44 168
Certificates of deposit 338 (279) 59 1,900 (225) 1,675
Advances from the Federal Home Loan Bank 1,502 (989) 513 (820) 216 (604)
Other borrowings (39) (1) (40) 88 - 88
Securities sold under agreements to
repurchase 283 (3) 280 13 (6) 7
--- -- --- -- -- -
Total interest expense 2,060 (1,449) 611 1,332 (109) 1,223
----- ------ --- ----- ---- -----
Net interest income $ 857 $ 1,176 $ 2,033 $2,568 $(1,186) $ 1,382
======= ======= ======= ====== ======= =======
<FN>
___________________________
(1) Includes nonaccrual loans and loans held for sale.
</FN>
5
Interest Rate Risk Management
For discussion, See Item 7 - "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Market Risk Management."
Lending Activities
General. The Company engages in a wide range of lending activities, which
include the origination, primarily in its market area, of one to four-family and
multi-family residential mortgage loans, commercial real estate loans,
construction loans, land acquisition and development loans, consumer loans, and
commercial business loans and the bulk purchase of residential loans outside its
market area. At December 31, 1997, the Company's total gross loans held for
investment in all categories equaled $531.6 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,
--------------------------------------------------------------------------------------
1993 1994 1995 1996 1997
---------------- -------------- ---------------- --------------- ----------------
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
---------------- --------------- ---------------- --------------- ----------------
(Dollars in Thousands)
Real estate loans:
Residential permanent 1- to 4-family:
Adjustable rate $ 56,658 19.79% $91,657 26.28% $ 98,093 27.44% $157,542 33.63% $213,682 40.20%
Fixed rate
Conventional 37,291 13.03 48,241 13.83 47,633 13.32 98,952 21.12 89,356 16.81
Guaranteed by VA or insured by FHA 9,932 3.47 8,594 2.46 7,691 2.15 7,004 1.50 5,487 1.03
----- ---- ----- ---- ----- ---- ----- ---- ----- ----
Total permanent 1- to 4-family 103,881 36.29 148,492 42.57 153,417 42.91 263,498 56.25 308,525 58.04
- - ------- ----- ------- ----- ------- ----- ------- ----- ------- -----
Residential permanent 5 or more family 10,678 3.73 11,043 3.16 9,343 2.61 7,100 1.52 6,374 1.20
- ------ ---- ------ ---- ----- ---- ----- ---- ----- ----
Total permanent residential loans 114,559 40.02 159,535 45.73 162,760 45.52 270,598 57.77 314,899 59.24
------- ----- ------- ----- ------- ----- ------- ----- ------- -----
Commercial real estate loans:
Hotels 9,059 3.17 6,303 1.81 9,652 2.70 9,651 2.06 10,240 1.93
Office and warehouse facilities 25,224 8.81 27,153 7.78 30,483 8.52 27,178 5.80 26,710 5.02
Retail facilities 15,278 5.34 16,987 4.87 17,450 4.88 18,181 3.88 18,249 3.43
Other 581 0.20 1,983 0.57 5,459 1.53 3,304 0.71 2,714 0.51
--- ---- ----- ---- ----- ---- ----- ---- ----- ----
Total commercial real estate loans 50,142 17.52 52,426 15.03 63,044 17.63 58,314 12.45 57,913 10.89
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
Construction loans:
Residential 1- to 4-family 35,327 12.34 53,900 15.45 51,637 14.44 43,807 9.35 44,208 8.32
Residential 5 or more family 1,475 0.52 2,234 0.64 4,224 1.18 8,855 1.89 12,784 2.40
Nonresidential 1,125 0.39 50 0.02 50 0.02 3,365 0.72 1,420 0.27
----- ---- -- ---- -- ---- ----- ---- ----- ----
Total construction loans 37,927 13.25 56,184 16.11 55,911 15.64 56,027 11.96 58,412 10.99
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
Land acquisition and development loans:
Consumer lots 8,707 3.04 5,906 1.69 5,646 1.58 5,396 1.15 4,573 0.86
Acquisition and development 5,641 1.97 14,950 4.29 14,961 4.18 16,010 3.42 13,327 2.51
----- ---- ------ ---- ------ ---- ------ ---- ------ ----
Total land acquisition and
development loans 14,348 5.01 20,856 5.98 20,607 5.76 21,406 4.57 17,900 3.37
------ ---- ------ ---- ------ ---- ------ ---- ------ ----
Total real estate loans 216,976 75.80 289,001 82.85 302,322 84.55 406,345 86.75 449,124 84.49
------- ----- ------- ----- ------- ----- ------- ----- ------- -----
Consumer loans:
Boats 15,266 5.33 12,004 3.44 9,766 2.73 7,814 1.67 5,685 1.07
Home equity and second mortgage 19,742 6.90 23,252 6.67 20,811 5.82 29,578 6.31 45,194 8.50
Mobile homes 8,011 2.80 392 0.11 206 0.06 137 0.03 95 0.02
Other 7,449 2.60 7,052 2.02 5,211 1.46 6,606 1.41 7,250 1.36
----- ---- ----- ---- ----- ---- ----- ---- ----- ----
Total consumer loans 50,468 17.63 42,700 12.24 35,994 10.07 44,135 9.42 58,224 10.95
------ ----- ------ ----- ------ ----- ------ ---- ------ -----
Commercial business loans 18,812 6.57 17,129 4.91 19,259 5.38 17,922 3.83 24,222 4.56
------ ---- ------ ---- ------ ---- ------ ---- ------ ----
Total loans 286,256 100.00% 348,830 100.00% 357,575 100.00% 468,402 100.00% 531,570 100.00%
======= ====== ======= ====== ======= ====== ======= ====== ======= ======
Less:
Allowance for loan losses 4,039 3,789 3,696 3,806 3,783
Loans in process 23,397 39,397 34,728 42,309 42,067
Unearned discounts, premiums, and
loan fees, net 216 66 (43) 68 (767)
--- -- --- -- ----
27,652 43,252 38,381 46,183 45,083
------ ------ ------ ------ ------
Total loans, net $258,604 $305,578 $319,194 $422,219 $486,487
======== ======== ======== ======== ========
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, 1997. Loans shown in the 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 $12,787 $40,102 $41,671 $104,172 $109,793 $308,525
Permanent 5 or more family 244 1,336 1,783 2,709 302 6,374
Commercial real estate 5,103 14,121 16,297 20,571 1,821 57,913
Construction 58,412 - - - - 58,412
Land acquisition and development 13,833 654 699 1,729 985 17,900
Consumer 10,242 22,606 12,036 8,533 4,807 58,224
Commercial business 16,780 6,610 344 413 75 24,222
------ ----- --- --- -- ------
Total $117,401 $85,429 $72,830 $138,127 $117,783 $531,570
======== ======= ======= ======== ======== ========
Maturity after December 31, 1998:
---------------------------------------------------------------------------
Floating
or
Fixed Adjustable
Rates Rates Calls Total
----- ---------- ----- -----
(Dollars in Thousands)
Permanent 1- to 4-family $65,728 $209,901 $20,109 $295,738
Permanent 5- or more family 316 3,476 2,338 6,130
Commercial real estate 8,410 23,983 20,417 52,810
Construction - - - -
Land acquisition and development 98 99 3,870 4,067
Consumer 17,399 21,662 8,921 47,982
Commercial business 5,436 2,006 - 7,442
----- ----- -----
Total $97,387 $261,127 $55,655 $414,169
======= ======== ======= ========
CENIT Bancorp Credit Policy. The Company's credit policy establishes
minimum requirements for subsidiary banks' individual credit policies 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
Origination, Purchase, and Sale of Loans. The Company originates
residential mortgage loans both for investment and for sale in the secondary
mortgage market. The Company originates permanent residential ARM loans secured
by one- to four-family residences ("residential ARM loans") generally for
investment because the adjustable interest rate feature is compatible with the
Company's interest rate risk management program. The Company also originates
permanent residential fixed-rate mortgage loans secured by one-to four-family
residences ("residential fixed-rate mortgage loans") generally for sale in the
secondary mortgage market. This lending activity enables the Company to offer
its customers a more complete range of mortgage loan products while reducing the
Company's exposure to interest rate risk and also enabling the Company to
continue to make certain types of mortgage loans for which funds would not
otherwise be available. Generally, residential fixed-rate mortgage loans sold in
the secondary mortgage market are sold for cash to private institutional
investors or to government agencies. When the Company originates and sells
residential fixed-rate mortgage loans in the secondary mortgage market, the
Company acts as a mortgage broker rather than as a mortgage banker. This
arrangement between the Company and its correspondents in the secondary mortgage
market protects the Company from changes in interest rates after a mortgage
customer accepts a commitment from the Company for a residential fixed- rate
mortgage loan. This enables the Company to offer residential fixed-rate mortgage
loans to its customers with little risk to the Company. The Company's general
practice is to sell most residential fixed-rate mortgage loans on a
servicing-released basis, which results in the payment of a premium to the
Company that the Company accounts for as a gain on mortgage loans sold.
In 1997, the Company purchased a total of approximately $78.9 million in
residential mortgage loans which included $45.5 million of loans which were
purchased on a bulk basis from three other financial institutions. The loans
acquired on a bulk basis consisted of adjustable-rate residential mortgage loans
secured by real estate located outside the Company's primary market area.
The Company will continue to make bulk purchases of single family
residential mortgage loans located outside its market area for investment, as
needed, to supplement its origination of mortgage loans. In February 1998, the
Company purchased $46.1 million of residential single-family mortgage loans
secured by real estate located outside the Company's primary market area.
9
The following table sets forth information about originations, purchases,
sales, and principal reductions for the Company's loans for the years indicated:
Year ended December 31,
--------------------------------------------
1995 1996 1997
---- ---- ----
(Dollars in Thousands)
Loans originated:
Real estate:
Permanent:
Residential 1- to 4-family $51,500 $ 73,949 $ 71,802
Residential 5 or more family 1,588 - 840
----- ---
Total 53,088 73,949 72,642
------ ------ ------
Commercial real estate 14,938 5,622 8,450
------ ----- -----
Construction:
Residential 1- to 4-family 19,984 17,938 14,200
Residential 5 or more family 2,000 4,094 2,772
Nonresidential - 3,487 1,249
------ ----- -----
Total 21,984 25,519 18,221
------ ------ ------
Land acquisition:
Consumer lots 2,276 1,176 584
Acquisition and development 4,786 3,756 6,646
----- ----- -----
Total 7,062 4,932 7,230
----- ----- -----
Total real estate loans originated 97,072 110,022 106,543
------ ------- -------
Consumer:
Home equity and second mortgage 8,066 19,909 32,715
Other 3,640 5,357 6,422
----- ----- -----
Total 11,706 25,266 39,137
------ ------ ------
Commercial business 21,401 34,978 38,896
------ ------ ------
Total loans originated 130,179 170,266 184,576
Loans purchased 6,474 105,889 83,584
----- ------- ------
Total loans originated and purchased 136,653 276,155 268,160
------- ------- -------
Reclassification of insubstance foreclosure loans from Real Estate
Owned to Loans as a result of the adoption of FAS 114 3,430 - -
----- ------- -------
Principal reductions:
Repayments and other principal reductions 89,583 120,322 158,565
Real estate loans sold 38,174 46,085 45,184
Consumer loans sold 7,709 - -
----- ------- -------
Total principal reductions 135,466 166,407 203,749
------- ------- -------
Net increase in total loans $ 4,617 $109,748 $ 64,411
======= ======== ========
Net increase (decrease) in loans held for sale $(4,128) $ (1,079) $ 1,243
Net increase in gross loans held for investment 8,745 110,827 63,168
----- ------- ------
$ 4,617 $109,748 $ 64,411
======= ======== ========
10
Residential Mortgage Lending. A major lending activity of the Company is
the origination of residential mortgage loans secured by properties located in
its primary market area in southeastern Virginia. Originations are supplemented
by the bulk purchase of residential mortgage loans outside of the Company's
market area. The Company originates mortgage loans through its branch managers
and its loan officers. The Company currently offers both fixed-rate and
adjustable-rate mortgage loans. At December 31, 1997, $308.5 million were
invested in one- to four-family residential mortgage loans. Of these residential
mortgage loans, $213.7 million or 69.3% were invested in ARM loans and $94.8
million or 30.7% were invested in fixed-rate mortgage loans.
Fixed-rate mortgage loans are offered with 15-year and 30-year terms and
are underwritten by the Company on terms consistent with prevailing secondary
mortgage market standards. The Company's current policy is to sell the majority
of the fixed-rate mortgage loans that it originates to private institutional
investors and government agencies in the secondary mortgage market. See -
"Origination, Purchase, and Sale of Loans" above.
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 has established written, non-discriminatory loan origination
and underwriting policies for residential mortgage loans. Before making a
residential mortgage loan, the Company assesses the applicant's ability to repay
the loan and the value of the property securing the loan. The Company offers ARM
loans with an interest rate during the first year of the loan that is generally
one and one half to three percentage points below the interest rate for a
similar fixed-rate mortgage loan in order to encourage public acceptance of such
ARM loans. For one-year ARM loans that the Company intends to retain in its loan
portfolio, however, the Company generally qualifies an applicant based on the
applicant's ability to repay the loan at the initial index rate plus 2.75% (this
is also known as the fully-indexed rate). For ARM loans that the Company intends
to sell in the secondary mortgage market, the Company qualifies the applicant
based on the applicable underwriting criteria established by the investor. The
Company obtains a detailed, written loan application to determine a borrower's
ability to repay the loan and verifies the more significant items on the loan
application through the use of credit reports, financial statements, and
employment and income verifications.
The Company requires appraisals or evaluations on all property securing
residential first mortgage loans. The Company has specific appraisal guidelines
for use by appraisers evaluating real property securing residential mortgage
loans made by the Company. Appraisals are performed by outside appraisers
approved by the Company. The Company's policy is also to obtain a physical
survey and a title insurance policy on all residential first mortgage loans.
Borrowers must obtain paid hazard insurance policies before closing as well as
paid flood insurance policies before closing when the real property that secures
the loan is located in a designated flood plain. In addition to the monthly
payment of principal and interest, borrowers are generally required to pay on a
monthly basis money sufficient to fund a mortgage escrow account from which the
Company makes disbursements for items such as real estate taxes and hazard and
flood insurance.
The Company's policy is generally to make residential mortgage loans in
amounts up to 80% of the appraised value of the real property securing the loan
where such properties are to be occupied by the borrower and up to 75% of the
appraised value of the real property securing the loan where the property will
not be occupied by the borrower. When the loan-to-value ratio for a residential
mortgage loan exceeds these amounts, the Company generally requires the borrower
to purchase private mortgage insurance to secure further the repayment of the
loan.
11
The Bank's Loan Committees review and approve mortgage loan applications on
conforming and nonconforming residential mortgage loans above certain amounts
designated by the Boards of Directors of the Banks. Conforming refers to
standard guidelines for underwriting and loan-to-value ratios that are approved
by the Federal Home Loan Mortgage Corporation ("FHLMC"), the Federal National
Mortgage Association ("FNMA") or private investors. Conforming and nonconforming
loans less than the amounts designated by the Boards of Directors of the Banks
may be approved by a residential underwriter; however, the residential
underwriter must have the additional approval of a chief lending officer or the
manager of the Mortgage Loan Department of CENIT Bank on nonconforming loans.
The Company also originates residential mortgage loans through its private
banking groups. These loans are generally nonconforming jumbos (in excess of
$227,150) to high income and/or net worth borrowers.
Construction Lending. At December 31, 1997, $58.4 million of the Company's
total loans held for investment were construction loans, of which $35.8 million
were undisbursed loan proceeds. Of these construction loans, $44.2 million were
for one- to four-family residences. The following is a discussion of the Banks'
construction lending programs.
CENIT Bank Construction Lending. CENIT Bank has an active construction
lending program. CENIT Bank makes loans for the construction of one- to
four-family residences and, to a lesser extent, multi-family dwellings. CENIT
Bank also makes construction loans for office and warehouse facilities and other
nonresidential projects generally only if the borrowers present substantial
business opportunities for CENIT Bank.
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. In
general, however, CENIT Bank's construction loans to residential builders, made
on a revolving line of credit basis, do not exceed $2.0 million for any one
builder, and CENIT Bank's construction loans to builders for individual
residences do not usually exceed $175,000 per residence. The term for CENIT
Bank'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. Revolving construction lines of
credit are reviewed annually by CENIT Bank to determine whether the line of
credit should be renewed. CENIT Bank does not typically amortize its
construction loans, and the borrower pays interest monthly on the outstanding
principal balance of the loan. CENIT Bank's construction loans generally have a
floating or variable rate of interest plus a margin and occasionally have a
fixed interest rate subject to call or other means of interest rate adjustment.
CENIT Bank's construction loans are almost always further secured by one or more
unconditional personal guarantees. CENIT Bank does not generally finance the
construction of commercial real estate projects built on a speculative basis and
will only finance a limited number of models or speculative units for a
residential builder, the exact number depending on the builder's financial
strength, past success and track record, and other factors. CENIT Bank may also
limit the number of starts ahead of sales that a borrower may undertake. The
maximum loan-to-value ratio established by CENIT Bank 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 CENIT Bank. For larger projects where unit absorption or
leasing is a concern, CENIT Bank also obtains 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. CENIT Bank
has adopted a detailed, written appraisal policy that appraisers must follow,
and it periodically approves appraisers who are qualified to perform appraisals
for CENIT Bank, and monitors and reviews the appraisals which they submit.
In addition to CENIT Bank's loans-to-one borrower limitations, which are
applicable to each of CENIT Bank's borrowers, CENIT Bank has established an
aggregate limit of $5.0 million as the maximum amount of credit that it will
extend to all borrowers with respect to improvements to be constructed in any
one actual or proposed subdivision or project. CENIT Bank has adopted this
policy in order to avoid concentrations of credit in any particular location.
As in the case of residential mortgage lending, CENIT Bank has established
written, non-discriminatory loan origination and underwriting policies for
construction loans made by CENIT Bank. Although some of these policies and
procedures are similar to those for residential mortgage lending, CENIT Bank's
construction loan policies and procedures require more detailed examination of
the reputation, financial condition and creditworthiness of the borrower and all
guarantors of the loan, the value and condition of the property securing the
loan before improvements are made, the nature and quality of the improvements to
be made by the borrower, and the value of and market for the property after
construction is completed. Construction loan applications are reviewed and
approved by CENIT Bank's Loan Committee. CENIT Bank's loan officer principally
responsible for residential construction lending
12
also has the authority to approve individual, residential one- to four-family
construction loans where there is a binding commitment for a permanent loan upon
completion of construction.
Construction loans for nonresidential projects and multi-unit residential
projects are generally larger and involve a greater degree of risk to CENIT Bank
than residential mortgage loans. CENIT Bank attempts to minimize such risks by
making construction loans in accordance with CENIT Bank's underwriting standards
to established customers in its primary market area and by monitoring the
quality, progress, and cost of construction. The maximum loan-to-value
established by CENIT Bank for non-residential projects and multi-unit
residential projects is 75%.
Princess Anne Construction Lending. Construction lending activity at
Princess Anne is generally limited to the following situations:
Through Princess Anne's Private Banking area, Princess Anne will make loans
for the construction of one- to four-family residences when Princess Anne
retains the permanent financing for its own portfolio. In most cases, the
loans are to affluent, high net worth borrowers on nonconforming jumbo
mortgages.
Princess Anne makes construction loans to experienced builders of more
expensive homes for affluent individuals. These loans are typically limited
to single units on a speculative basis which gives Princess Anne's Private
Banking area the opportunity to develop the total bank relationship with
the ultimate purchaser by providing the opportunity for permanent
financing, and marketing other banking services.
Commercial construction financing is provided for owner occupied office,
warehouses, and manufacturing facilities where Princess Anne will also
provide the mini-permanent financing based upon three- to five-year
maturities on full amortization of up to twenty years.
Princess Anne will also consider making commercial construction loans under
certain other circumstances if the borrower is in strong financial
condition and represents a substantial business opportunity for Princess
Anne.
The amount, interest rate, and terms of these loans vary, depending upon
market conditions, the size and complexity of the project, and the financial
strength of borrowers and guarantors of the loans. The maximum loan to value
ratio for commercial construction loans is 80% and 85% for residential
construction loans. The fair market value of a project is determined by an
independent appraisal of the property by an outside appraiser which is subject
to review and valuation by Princess Anne. Princess Anne periodically reviews
residential and commercial appraisers who are qualified to perform appraisals
for the Company.
All loans in excess of $300,000 must be approved by Princess Anne's Board
of Directors.
Commercial Real Estate Lending. At December 31, 1997, the Company had $57.9
million of commercial real estate loans. The following is a discussion of the
Banks' commercial real estate lending programs.
The Banks' 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 Banks' 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 Banks will also consider making
commercial real estate loans under the following two conditions. First, the
Banks 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 Banks. Second, the Banks will consider making
commercial real estate loans to creditworthy borrowers who have substantially
pre-leased the improvements to recognized credit quality tenants. Generally,
such loans require full amortization over a fifteen-year term compared to the
normal twenty-five year amortization period.
The Banks have established written, non-discriminatory loan origination and
underwriting policies for commercial real estate loans. These policies and
procedures are similar in philosophy to those for construction loans. As is the
case with most construction loans, the Banks require specific information about
the financial condition and creditworthiness of the borrower and all guarantors
of the loan. The Banks also require the borrower to provide detailed information
about the cost of the project, the estimated remaining
13
useful life and replacement costs for the property, the operating history of the
project, the revenues, receipts, and operating expenses for the project, current
and projected occupancy rates, verification of leases where appropriate, and
such other information as is necessary to demonstrate the ability of the project
to generate sufficient cash flows to cover both the operating expenses and the
repayment of the loan.
The Banks' commercial real estate loans generally range in amount from
$150,000 to $1.5 million. 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 three years to five
years. The Banks' maximum loan-to-value ratio for a commercial real estate
loan is 80%. Most commercial real estate loans are further secured by one
or more unconditional personal guarantees. CENIT's commercial real estate
loans are approved by CENIT Bank's Loan Committee. Princess Anne's
commercial real estate loans are approved by the consensus of two senior
lenders and the President for loans less than $300,000, and by the Board of
Directors for loans of $300,000 or more.
In recent years, CENIT Bank has structured virtually all 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 CENIT
Bank's assessment of the loan and the degree of risk involved. If the borrower
prefers a fixed rate of interest, CENIT Bank 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, CENIT
Bank 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, CENIT Bank usually offers a loan with an interest
rate indexed to CENIT Bank's prime rate or CENIT Bank'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 CENIT Bank believes that shorter maturities for commercial real estate loans
are necessary to give CENIT Bank 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
CENIT Bank with an opportunity to adjust the interest rate on this type of
interest-earning asset in accordance with CENIT Bank'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 Banks, such as a downturn in the local economy, could adversely affect the
performance of the Banks commercial real estate loan portfolio. The Banks seek
to minimize these risks by lending to established customers and generally
restricting its commercial real estate loans to its primary market area.
Emphasis is placed on the income producing characteristics and capacity of the
collateral.
Consumer Lot Lending. Consumer lot loans are loans made to individuals for
personal use for the purpose of acquiring an unimproved building site for the
construction of a residence to be occupied by the borrower. At December 31,
1997, the Company had $4.6 million of consumer lot loans. Consumer lot loans are
made only to individual borrowers, and each borrower generally must certify to
the Company his intention to build and occupy a single-family residence on his
lot generally within three or five years of the date of origination of the loan.
These loans typically have a maximum term of either three or five years with a
balloon payment of the entire balance of the loan being due in full at the end
of the initial term. The interest rate for these loans is usually a fixed rate
that is slightly higher than prevailing fixed rates for one- to four-family
residential mortgage loans. The maximum loan-to-value ratio for a consumer lot
loan is 80% of the fair market value of the lot determined in accordance with
the Company's appraisal or evaluation policies. Consumer lot loans up to
$100,000 may be approved by designated residential underwriters. CENIT Bank
consumer lot loans over $100,000 and up to $175,000 must be approved by one of
CENIT Bank's residential underwriters and CENIT Bank's chief lending officer or
the manager of the Mortgage Loan Department. CENIT Bank consumer lot loans in
excess of $175,000 must be approved by CENIT Bank's Loan Committee. Consumer lot
loans over $100,000 and up to $300,000 can be approved by designated loan
officers at Princess Anne; consumer lot loans over $300,000 require Princess
Anne Board of Director approval. 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. Typically, land acquisition and
development loans are made by CENIT Bank. Princess Anne generally refers its
requests for this type lending to CENIT Bank. 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,
14
residential housing subdivisions, multi-family dwellings, and a variety of
commercial uses. At December 31, 1997, the Company had $17.9 million of land
acquisition and development loans, of which $6.3 million were undisbursed loan
proceeds. The Company's present policy is to make land loans to borrowers for
the purpose of acquiring developed lots for single-family, townhouse or
condominium construction or to facilitate the sale of real estate owned ("REO").
The Company will also make land acquisition and development loans to residential
builders and to experienced developers in strong financial condition in order to
provide additional construction and mortgage lending opportunities for the
Company. The land acquisition and development loans that the Company does
consider making typically range in amount from $250,000 to $1.5 million.
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 term of land acquisition and development loans
ranges from a maximum of two years for loans relating to the acquisition of
unimproved land to a maximum of five years for other types of projects. All land
acquisition and development loans are generally further secured by one or more
unconditional personal guarantees, and all land acquisition and development
loans are approved by CENIT's Loan Committee. Because these loans are usually in
a larger amount and involve more risk than consumer lot loans, the Company
carefully evaluates the borrower's assumptions and projections about market
conditions and absorption rates in the community in which the property is
located and the borrower's ability to carry the loan if the borrower's
assumptions prove inaccurate.
Consumer Lending. The Company offers a variety of consumer loans, including
home equity and second mortgage loans, and other consumer loans, which include
automobile, personal (secured and unsecured), credit card, and loans secured by
savings accounts or certificates of deposit. At December 31, 1997, the balance
of all consumer loans was $58.2 million. The Company offers consumer loans to
its customers as part of its consumer and small business banking strategy and
because the shorter terms and generally higher interest rates on such loans help
the Company maintain a profitable spread between its average loan yield and its
cost of funds. The Company's underwriting standards for consumer loans (other
than loans secured by savings accounts or certificates of deposit) include
detailed, written loan applications, a determination of the applicant's payment
history on other debts, and an assessment of the borrower's ability to meet
existing obligations and payments on the proposed loan. CENIT Bank consumer
loans in excess of $100,000 must be approved by CENIT Bank's Loan Committee, and
consumer loans in excess of $400,000 require prior approval by CENIT Bank's
Board of Directors. At Princess Anne, consumer loans up to $300,000 may be
approved by designated officers, and consumer loans in excess of $300,000 must
be approved by Princess Anne's Board of Directors.
Consumer loans generally have shorter terms and higher interest rates than
residential mortgage loans. Consumer loans secured by collateral other than a
personal residence generally involve more credit risk than residential mortgage
loans because of the type and nature of the collateral or, in certain cases, the
absence of collateral. However, the Company believes the higher yields generally
earned on such loans compensate for the increased credit risk associated with
such loans. Home equity loans, second mortgage loans, and other consumer loans
secured by a personal residence do not present as much risk to the Company as
other types of consumer loans.
Boat Loans. At December 31, 1997, the Company had a portfolio of boat loans
totaling $5.7 million. The Company's portfolio of boat loans consists of loans
made by the Company predominantly in its local market area. These loans were
made with fixed or adjustable interest rates and with terms ranging from five to
fifteen years. In the last several years, the Company has made boat loans
primarily to its existing customers and has not marketed or promoted its boat
loan programs at the same level as it once did. 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 6.99%. 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. The balance of the home equity line of
credit or second mortgage loan, when combined with the balance of the first
mortgage loan, generally may not exceed 80% (90% if the borrower purchases
private mortgage insurance) of the appraised value of the property at the time
the loan commitment is made. 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
15
percent of the outstanding principal. Underwriting procedures similar to those
used for first mortgage loans are followed for all home equity loans and second
mortgage loans. At December 31, 1997, the Company's outstanding home equity and
second mortgage loans totaled $45.2 million.
Commercial Business Lending. Commercial business loan products include
revolving lines of credit to provide working capital, term loans to finance the
purchase of vehicles and equipment, letters of credit to guarantee payment and
performance, and other commercial loans. In general, all of these credit
facilities carry the unconditional guaranty of owners/stockholders. As of
December 31, 1997, the Company had a total of $24.2 million of commercial
business loans.
Revolving, operating lines of credit are typically secured by all current
assets of the borrower, provide for the acceleration of repayment upon any event
of default, are monitored monthly or quarterly to ensure compliance with
borrowing base, and are re- underwritten/renewed annually. Interest rates
generally will float at a spread tied to the originating Bank'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. Loan covenants and cross default
triggers to other bank indebtedness are often established. General business
assets of the borrower may also secure these loans.
The Company's commercial business loan program is administered pursuant to
written, non-discriminatory loan origination and underwriting policies adopted
by the Banks' Boards of Directors. Commercial business loan applications for
loans are generally approved by the Banks' loan committee or the Banks' Board of
Directors.
Asset Quality
Each month management of the Company and the Banks prepares detailed
written reports for the Company's and the Banks' Boards of Directors. These
reports contain information about loan production, loan maturities, delinquent
loans, nonperforming loans, and REO and other repossessed assets. These reports
also provide information about the steps management is taking or intends to take
with respect to the collection of delinquent and nonperforming loans and the
disposition of REO and other repossessed assets. 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.
Loan Collection. When a borrower fails to make a required payment on a
loan, the Company takes a number of steps to have the borrower cure the
delinquency and restore the loan to current status. In the case of residential
mortgage loans and consumer loans, the Company generally sends the borrower a
written notice of nonpayment after the loan is first past due. Following the
mailing of written notice, if the loan is still past due, the Company generally
attempts to contact the borrower by telephone. If the loan is not brought
current and it becomes necessary for the Company to take legal action, the
Company will generally commence foreclosure proceedings against any real
property that secures the loan and attempt to repossess any personal property
that secures a consumer loan. If a foreclosure action is instituted and the loan
is not brought current, paid in full, or refinanced before the foreclosure sale,
the real property securing the loan is sold at foreclosure, at which time the
real property may be purchased by one of the Company's service corporations.
In the case of commercial real estate loans, construction loans, land
acquisition and development loans, and commercial business loans, the Company
generally attempts to contact the borrower by telephone after any loan payment
is seven days past due. Because these loans are often larger in amount and more
complex than residential mortgage loans or consumer loans, the loan officer for
the delinquent account is usually involved in all collection efforts from the
time the loan first becomes delinquent. Decisions on when to commence
foreclosure actions for commercial real estate loans, other commercial loans,
and construction loans are made on a case by case basis. The Company will
consider loan work-out arrangements with commercial customers in appropriate
cases.
16
Delinquent Loans. The following table sets forth certain information at the
dates indicated relating to delinquent loans and the percentage of such loans to
total loans held for investment. The information presented below excludes
matured loans for which the borrowers are still making required monthly payments
of interest or principal and interest. At December 31, 1997, such amounts
totaled $6,000 for 90 days and over. At December 31, 1996, such amounts totaled
$185,000 for loans 30-59 days delinquent. There were no such loans at December
31, 1995.
At December 31,
----------------------------------------------------------------------------------------------
1995 1996 1997
---------------------- ---------------------- -----------------------
(Dollars in Thousands)
Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ -------
30-59 days $1,765 0.49% $1,004 0.21% $ 729 0.14%
60-89 days 67 0.02 727 0.16 859 0.16
90 days and over 1,028 0.29 2,822 0.60 1,097 0.21
----- ---- ----- ---- ----- ----
Total $2,860 0.80% $4,553 0.97% $2,685 0.51%
====== ==== ====== ==== ====== ====
Nonperforming Assets. The Company's nonperforming assets include
nonperforming loans, REO, and other repossessed assets. The Company does not
generally accrue interest on loans that are 90 days or more past due and does
not include in its interest income interest on such loans that accrued during
the first 90 days after the loan became delinquent (with the exception of
certain VA- guaranteed or FHA-insured one- to four-family permanent mortgage
loans, certain credit card loans, and matured loans for which the borrowers are
still making required monthly payments of interest, or principal and interest,
and with respect to which the Company is negotiating extensions or refinancings
with the borrowers).
Real property purchased or acquired by foreclosure or by deed in lieu of
foreclosure is classified as REO until sold. REO is recorded at the lower of
cost or estimated fair value as determined by independent appraisals. If the
fair value of REO is less than the book value of the loan formerly secured by
such REO, the fair value becomes the new cost basis of the REO, and the
difference is charged against the allowance for loan losses on the date of
foreclosure or completion of the appraisal. Subsequent valuations are
periodically performed and valuation allowances are established if the carrying
value of the real estate exceeds estimated fair value less estimated costs of
sales. Other repossessed assets (boats, mobile homes, automobiles, etc.) are
carried at the lower of cost or estimated fair value as determined by
independent surveys or appraisals at the time of repossession. If the fair value
of the repossessed asset is less than the book value of the loan formerly
secured by such repossessed asset, the difference between the book value and the
fair value is charged to the allowance for loan losses on the date of
repossession.
17
The following table sets forth information about the Company's
nonperforming loans, REO, other repossessed assets, and troubled debt
restructurings at the dates indicated. Effective January 1, 1995, the Company
adopted Statement of Financial Accounting Standards No. 114 (FAS 114),
"Accounting by Creditors for Impairment of a Loan." The effect of this adoption
was to reclassify $3.4 million of insubstance foreclosure loans which were
previously classified as real estate owned (REO) to loans.
At December 31,
------------------------------------------------------------------
1993 1994 1995 1996 1997
---- ---- ---- ---- ----
(Dollars in Thousands)
Nonperforming loans:
Real estate loans:
Permanent residential 1- to 4-family:
Nonaccrual $ 395 $ 437 $ 420 $ 1,172 $ 528
Accruing loans 90 days or more past due 370 490 77 246 53
-------------------------------------------------------------------
Total 765 927 497 1,418 581
-------------------------------------------------------------------
Permanent residential 5 or more family:
Nonaccrual - 90 - - -
Accruing loans 90 days or more past due - 46 - - -
-------------------------------------------------------------------
Total - 136 - - -
-------------------------------------------------------------------
Commercial real estate:
Nonaccrual - 139 - 457 -
Accruing loans 90 days or more past due - - - - -
Total - 139 - 457 -
Construction:
Nonaccrual - 53 - - -
Accruing loans 90 days or more past due - - - 170 -
-------------------------------------------------------------------
Total - 53 - 170 -
-------------------------------------------------------------------
Land acquisition and development:
Nonaccrual 199 527 200 200 200
Accruing loans 90 days or more past due - - - - -
Total 199 527 200 200 200
-------------------------------------------------------------------
Consumer loans:
Boats - - - - 10
Home equity and second mortgage 80 18 107 - -
Mobile homes 274 310 134 83 48
Credit cards (accruing loans 90 days or
more past due) 31 23 13 9 5
Other - - 3 17 14
-------------------------------------------------------------------
Total 385 351 257 109 77
-------------------------------------------------------------------
Commercial business loans:
Nonaccrual 144 65 70 483 240
Accruing loans 90 days or more past due - 16 4 - 5
-------------------------------------------------------------------
Total 144 81 74 483 245
-------------------------------------------------------------------
Total nonperforming loans:
Nonaccrual 1,092 1,639 934 2,412 1,040
Accruing loans 90 days or more past due 401 575 94 425 63
-------------------------------------------------------------------
Total 1,493 2,214 1,028 2,837 1,103
Real estate owned, net 3,575 5,718 1,828 2,769 1,098
Other repossessed assets, net 85 233 1 55 228
-------------------------------------------------------------------
Total nonperforming assets, net 5,153 8,165 2,857 5,661 2,429
Total troubled debt restructurings - - - - -
-------------------------------------------------------------------
Total nonperforming assets, net, and
troubled debt restructurings $ 5,153 $ 8,165 $ 2,857 $ 5,661 $ 2,429
===================================================================
Total nonperforming assets, net, and troubled
debt restructurings, to total assets 1.01% 1.42% .45% .80% .34%
===================================================================
18
Nonperforming Loans. At December 31, 1997, the Company's nonaccrual loans
totaled $1.0 million. This was comprised of $528,000 of single family loans
(eight loans), a $200,000 land acquisition loan, $48,000 of purchased mobile
home loans (six loans), $240,000 of commercial business loans (seven loans), and
$24,000 of other consumer loans (three loans). Total nonperforming loans were
$1.1 million at December 31, 1997. Interest income on nonaccrual loans at
December 31, 1997 would have approximated $92,000 for the year ended December
31, 1997, if such loans had been current and performing under their stated,
contractual terms throughout the year. Interest income actually recognized on
nonaccrual loans at December 31, 1997 approximated $30,000.
Real Estate Owned and Other Repossessed Assets. The Company's REO includes
real estate acquired by foreclosure or deed in lieu of foreclosure. The
Company's REO decreased from $2.8 million at December 31, 1996 to $1.1 million
at December 31, 1997. REO at December 31, 1997 is comprised of thirteen
residential single-family properties.
Repossessed assets at December 31, 1997 totaled $228,000 and is comprised
primarily of a boat. The boat is under contract for sale and no significant loss
is anticipated. Repossessed assets at December 31, 1996 totaled $55,000.
Classified Assets. In accordance with applicable regulations and
guidelines, each Bank has adopted a detailed, written policy (the
"Classification Policy") concerning the internal review and classification of
assets. Pursuant to these policies, 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 Banks' Internal Review Committee meets each quarter to identify any
assets that have undergone a change in circumstances. The Banks' objective is to
identify problem loans early in order to minimize losses. Assets that are
classified by the Banks 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, 1997, the Company had $4.3 million of assets classified
as substandard, including $1.3 million of REO and other repossessed assets,
$97,000 of assets classified as doubtful, and $90,000 of assets classified as
loss. All assets classified as loss have been fully reserved. These amounts
compare with $8.2 million, $98,000 and $124,000 of assets classified as
substandard, doubtful, and loss, respectively, at December 31, 1996.
Assets classified as substandard at December 31, 1997 included three
relationships with total loans over $500,000. First, the Company had a loan to a
borrower for $600,000 at December 31, 1997 that was first classified in 1994 as
substandard due to deterioration in the financial condition of the tenant that
leases the property and is the primary source of repayment. The loan is
collateralized by a first deed of trust on a special use property located in
Virginia Beach, Virginia, with a $1,200,000 appraised value as of March, 1995.
The loan is also collateralized by all furniture, fixtures and equipment of the
special use property and is guaranteed by individuals believed to have
substantial net worth. The Company will continue to monitor the financial
condition of the tenant and the value and condition of the property that
collateralizes this loan. A second loan to this borrower, with a balance at
December 31, 1997 of $170,000, was classified at December 31, 1996, but is no
longer classified as a result of significant loan balance reductions during the
year and adequate collateral, including a second mortgage on the borrower's
residence. Both loans were current at December 31, 1997.
The Company also has a loan totaling $908,000 at December 31, 1997 that was
classified as substandard due to the financial difficulty of the borrower. In
October 1997, three former loans were consolidated into this one loan. The loan
is collateralized by 14 residential rental properties located in Suffolk,
Virginia. The Company estimates the current value of the collateral is
approximately $1.1 million based on current internal valuations and $1.3 million
based on an external appraisal performed in April 1990. Principals of the
borrower filed for reorganization under Chapter 11 of the U. S. Bankruptcy Code
on December 30, 1996. The borrower and the Company subsequently executed a
consent order on February 11, 1997 whereby the borrower agreed to pay to the
Company all rents received from rental properties collateralizing the loans
after deduction for certain direct operating expenses associated with each of
the properties. The borrower is currently attempting to refinance other debt
with other lenders. The effect would be to strengthen the financial position of
the borrower. The loan is currently being serviced as agreed and is current at
December 31, 1997. The Company will continue to monitor the borrower's ability
to repay the loan.
19
Finally, the Company had a total of six loans to one borrower or related
entities and/or individuals with $528,000 outstanding at December 31, 1997. The
relationship consists of a $275,000 commercial real estate loan, two commercial
loans totaling $196,000, a $42,000 construction loan and two automobile loans
totaling $15,000. At December 31, 1997, $92,000 of the loans were classified as
doubtful with the remainder classified as substandard. Of the total, $253,000 of
the loans are nonperforming at December 31, 1997.
One of the borrower's companies suffered a severe cash flow drain in the
first half of 1996 and ceased operations in late July, 1996. The borrower has
been negotiating to sell a large parcel of land to an unrelated third party, the
proceeds of which would be used to pay down the loans. The sale has not
materialized. The Company believes that rents from the commercial real estate
property will be sufficient to cover the debt service on the $275,000 loan. The
Company expects to liquidate the remaining properties, and estimates a
deficiency of approximately $90,000.
Exclusive of nonperforming loans, REO and other repossessed assets, and the
loans described in detail above, the Company's remaining assets classified as
substandard were comprised of $612,000 of permanent one- to four-family real
estate loans (nine loans), $83,000 of consumer loans (five loans), and a $5,000
commercial business loan.
Allowance for Loan Losses. In establishing the allowance for loan losses,
CENIT Bank's current evaluation procedures segregate certain outstanding loans
into pools based on similar risk and loss characteristics. These pools of loans
are established with regard to the homogeneity of certain types of loans and
other factors such as the nature of the collateral and other specific risk
factors. Under the pool approach, management considers various risk factors and
attempts to estimate an allowance sufficient to provide for future losses in the
class being evaluated taken as whole. This allowance includes specific
allowances for assets criticized under CENIT Bank's Classification Policy, as
well as a general allowance for noncriticized assets in the pool based on
certain general risk factors, historical trends in the portfolio, and other
factors deemed relevant by CENIT Bank's Internal Review Committee. This
allowance also includes a specific allowance for those assets criticized as loss
under the Classification Policy. The specific allowances are established based
on a review of individual loans and the estimated fair value of the collateral
for those loans.
In addition to reviewing loans by pools based on similar risk and loss
characteristics, all of CENIT Bank's nonaccrual construction loans, commercial
real estate loans, acquisition and development loans, and commercial loans are
analyzed monthly on a loan-by-loan basis. In addition, all performing classified
assets of these loan types are analyzed at least quarterly. The loan-by-loan
method is utilized by CENIT Bank for these types of loans because such loans are
generally originated in greater principal amounts and the types of borrowers and
purpose of the loans are generally dissimilar. Management reviews the status of
these loans and any charge-offs included in these categories in the quarterly
meeting of the Internal Review Committee to establish general allowances and to
determine whether its existing allowances are adequate. Management also reviews
and evaluates local business and economic trends in its market area as part of
its analysis of the adequacy of its allowance for loan losses for these types of
loans. When necessary, specific allowances for loan losses relating to these
loans are established based on the fair values of the specific collateral.
In establishing its allowance for loan losses, Princess Anne includes
specific allowances for assets criticized under its classification policy as
well as a general allowance for noncriticized assets based on certain general
risk factors, historical trends in the portfolio, and other factors deemed
relevant by its Internal Review Committee.
At December 31, 1997, the Company had total valuation allowances of $3.8
million, including $90,000 of specific allowances. In evaluating the adequacy of
its allowance for loan losses, management takes into account the types of loans
the Company is presently making, the risks inherent in those types of loans,
specific delinquency and historical loss trends of which management is aware,
and future interest rate, economic, and other conditions that may adversely
affect the performance of the Company's loans.
The Company's provision for loan losses was $600,000 in 1997 compared to
$377,000 in 1996. Net chargeoffs increased from $267,000 in 1996 to $623,000 in
1997. The Company's 1996 provision for loan losses was positively impacted by a
$288,000 recovery received relating to one loan. In 1995, chargeoffs included
$157,000 relating to CENIT Bank's credit card and mobile home portfolios, which
were substantially sold at the end of 1995.
At December 31, 1997, the Company's total allowance for loan losses was
$3.8 million and nonperforming loans totaled $1.1 million, resulting in a
coverage ratio of 343.0%. At December 31, 1996, the Company's total allowance
for loan losses was $3.8 million and nonperforming loans totaled $2.8 million,
resulting in a coverage ratio of 134.2%. The Company's total allowance for loan
losses at December 31, 1996 included $1.3 million not specifically allocated to
a particular loan type, compared to $1.5 million not allocated to a particular
loan type at December 31, 1997.
20
The following table sets forth an analysis of the Company's allowance for
loan losses for the periods indicated.
Year ended December 31,
------------------------------------------------------------------------
1993 1994 1995 1996 1997
---- ---- ---- ---- ----
(Dollars in Thousands)
Balance at beginning of year $ 3,884 $ 4,039 $ 3,789 $ 3,696 $ 3,806
------- ------- ------- -------- -------
Charge-offs:
Real estate:
Residential 371 201 474 312 359
Commercial 23 - - 75 181
Mobile home 329 198 91 50 22
Other consumer 556 573 371 199 180
Commercial 482 52 59 102 94
--- -- -- --- --
Total charge-offs 1,761 1,024 995 738 836
Recoveries 249 127 205 471 213
--- --- --- --- ---
Total charge-offs, net 1,512 897 790 267 623
Allowance for loans acquired in business
combination - 157 - - -
Provision for loan losses 1,667 490 697 377 600
----- --- --- --- ---
Balance at end of year $ 4,039 $ 3,789 $ 3,696 $ 3,806 $ 3,783
======= ======= ======== ========= ========
Ratio of net charge-offs during the year to
average loans receivable during the year 0.55% 0.30% 0.24% 0.08% 0.13%
Ratio of allowance for loan losses to total
outstanding loans (gross) at end of year 1.41% 1.09% 1.03% 0.81% 0.71%
Allowance for loan losses as a percentage
of nonperforming loans 270.53% 171.14% 359.53% 134.16% 342.97%
21
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.
At December 31,
----------------------------------------------------------------------------------------
1993 1994 1995 1996 1997
----------------- --------------- ---------------- ---------------- ----------------
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 $ 519 36.29% $ 514 42.57% $ 451 42.91% $ 512 56.25% $ 484 58.04%
Residential 5 or more family 71 3.73 79 3.16 36 2.61 21 1.52 25 1.20
Commercial real estate 808 17.52 764 15.03 869 17.63 799 12.45 698 10.89
Construction loans:
Residential 1- to 4-family 236 12.34 329 15.45 337 14.44 251 9.35 243 8.32
Residential 5 or more family 69 .52 22 0.64 42 1.18 89 1.89 128 2.40
Nonresidential 11 .39 1 0.02 1 0.02 34 .72 14 .27
Land acquisition:
Individual lots 19 3.04 15 1.69 18 1.58 23 1.15 20 .86
Acquisition and development 387 1.97 178 4.29 137 4.18 127 3.42 133 2.51
Consumer loans:
Mobile homes 197 2.80 293 0.11 116 0.06 43 .03 40 .02
Other consumer 435 14.83 265 12.13 195 10.01 283 9.39 161 10.93
Commercial business loans 329 6.57 327 4.91 350 5.38 316 3.83 342 4.56
Unallocated 958 - 1,002 - 1,144 - 1,308 - 1,495 -
--- ----- ----- ----- ----- ----- ----- ----- ----- -----
$4,039 100.00% $3,789 100.00% $3,696 100.00% $3,806 100.00% $3,783 100.00%
====== ====== ====== ====== ====== ====== ====== ====== ====== ======
22
Mortgage-Backed Certificates
The Company invests in mortgage-backed certificates that are insured or
guaranteed by FNMA, FHLMC, or the Government National Mortgage Association
("GNMA"). On December 31, 1997, mortgage-backed certificates available for sale
totaled $91.8 million. The weighted average yield on the total mortgage-backed
certificate portfolio at December 31, 1997 was 7.01%.
The following table sets forth the composition of the Company's portfolio
of mortgage-backed certificates at the dates indicated.
At December 31,
-------------------------------------------------------------------------------------------------------
1993 1994 1995 1996 1997
----------------- ----------------- ---------------- ----------------- ------------------
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ ------- ------ ------- ------ -------
(Dollars in Thousands)
Mortgage-backed certificates
available for sale:
FHLMC:
Fixed rate $ 540 0.40% $ 342 0.19% $24,963(3) 12.29% $20,033(4) 11.27% $ 3,825(5) 4.16%
Adjustable rate - - - - 154,891 76.23 144,020 81.04 78,435 85.41
FNMA:
Fixed rate - - - - 965 0.48 830 0.47 727 .79
Adjustable rate - - - - 17,909 8.81 9,283 5.22 6,067 6.61
GNMA:
Fixed rate - - - - 4,448 2.19 3,540 2.00 2,787 3.03
Adjustable rate 11,904 8.76 - - - - - - - -
------ ---- ------- ---- ------ ----- ------ ------ ------
Total available for sale 12,444 9.16 342 0.19 203,176 100.00 177,706 100.00 91,841 100.00
------ ---- ------- ---- ------- ------ ------- ------ ------ ------
Mortgage-backed certificates
held to maturity:
FHLMC:
Fixed rate 86,565 (1)63.74 94,448 (2)53.74 - - - - - -
Adjustable rate 22,034 16.22 57,305 32.60 - - - - - -
FNMA:
Fixed rate 1,504 1.11 1,048 0.60 - - - - - -
Adjustable rate 6,859 5.05 17,686 10.06 - - - - - -
GNMA:
Fixed rate 6,406 4.72 4,934 2.81 - - - - - -
Adjustable rate - - - - - - - - - -
------ ----- ------- ----- --- --- --- --- --- ---
Total held to maturity 123,368 90.84 175,421 99.81 - - - - - -
------- ----- ------- ----- ------ ----- ------ ----- ------ -----
Total mortgage-backed
certificates $135,812 100.00% $175,763 100.00% $203,176 100.00% $177,706 100.00% $91,841 100.00%
======== ====== ======== ====== ======== ====== ======== ====== ======= ======
_______________
<FN>
(1) Includes $63.2 million and $18.7 million with five- and seven-year balloon provisions, respectively.
(2) Includes $77.6 million and $13.9 million with five- and seven-year balloon provisions, respectively.
(3) Includes $10.5 million and $11.9 million with five- and seven-year balloon provisions, respectively.
(4) Includes $7.7 million and $10.3 million with five- and seven-year balloon provisions, respectively.
(5) Includes $2.1 million and $6,000 with five and seven-year balloon provisions, respectively.
</FN>
Mortgage-backed certificates present limited credit risk to the Company
because of the insurance or guarantees that stand behind them. However, the
value of the Company's mortgage-backed certificates fluctuates in response to
changing economic and interest rate conditions and the rate of prepayment of the
underlying mortgages. It has been the Company's experience that most mortgage-
backed certificates prepay substantially in advance of their scheduled
amortizations. Mortgage-backed certificates can also be used as collateral for
borrowings. Mortgage-backed certificates constitute a "qualified thrift
investment" for purposes of the qualified thrift lender test and carry a
relatively low risk-weight for purposes of determining compliance with the
risk-based capital standard established by the Financial Institutions Reform,
Recovery, and Enforcement Act of 1989 ("FIRREA"). See "Regulation and
Supervision--Regulation of the Banks--Regulatory Capital Requirements" and
"--Qualified Thrift Lender Test."
23
The following table sets forth information about purchases, sales,
principal repayments, and changes in unrealized gains on securities available
for sale with respect to the Company's mortgage-backed certificates for the
periods indicated.
Year ended December 31,
--------------------------------------------------------------
1995 1996 1997
---- ---- ----
(Dollars in Thousands)
Mortgage-backed certificates purchased $ 114,506 $ 48,772 $ -
Mortgage-backed certificates sold (56,786) (6,739) (35,362)
Principal repayments and (amortization)/
accretion of (premiums)/discounts (31,918) (67,416) (50,104)
Change in unrealized gains (losses) on available
for sale securities 1,611 (87) (399)
----- --- ----
Net increase (decrease) in mortgage-backed certificates $ 27,413 $ (25,470) $ (85,865)
======== ======= =======
The following table sets forth certain yield, maturity and market value
information concerning the Company's mortgage-backed certificates at December
31, 1997:
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 1997 Maturity
--------- ----------- ---------- --------- -------- ------------ --------
(Dollars in Thousands) (years)
Held to maturity: $ - $ - $ - $ - $ - $ - -
Available for sale:
FHLMC:
Fixed rate 2,401 994 430 - 3,825 3,825 1.8
Adjustable rate 22,869 43,458 12,108 - 78,435 78,435 2.7
FNMA:
Fixed rate 96 372 259 - 727 727 4.1
Adjustable rate 2,058 3,377 632 - 6,067 6,067 2.3
GNMA:
Fixed rate 555 1,617 615 - 2,787 2,787 3.3
Adjustable rate - - - - - - -
------ ------ ------- ------- ------ -------
Total available for sale 27,979 49,818 14,044 - 91,841 91,841 2.7
------ ------ ------- ------- ------ ------
Total $ 27,979 $ 49,818 $ 14,044 $ - $ 91,841 $ 91,841 2.7
====== ====== ======= ======= ====== ======
Weighted average yield 6.93% 7.02% 7.06% -% 7.00%
_______________
<FN>
(1) Reflects estimated average life to maturity based on recent prepayment experience of the Company (approximately 12% to
32%). It has been the Company's experience that most mortgage-backed certificates prepay substantially in advance of their
scheduled amortizations.
</FN>
Investment Activities
The Banks are 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, and federal
funds. Subject to certain restrictions, the Banks may also invest their assets
in commercial paper, corporate debt securities, and mutual funds. The Banks'
investment policies do not permit investment in noninvestment grade bonds.
24
The Banks' investment policies were adopted by their Boards of Directors,
are approved annually, and authorize the Banks to invest in obligations issued
or guaranteed by the United States Government, and the agencies and
instrumentalities thereof, provided that the maturity of such obligations is
less than five years. At December 31, 1997, the Company's investment portfolio
totaled $91.2 million.
CENIT Bank's investment activities are structured in part to enable CENIT
Bank to meet the liquidity requirements mandated under OTS regulations. See
"Regulation and Supervision--Regulation of the Banks--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-- Interest Rate Risk Management."
The following table sets forth certain information concerning the Company's
investment portfolio at the dates and for the years indicated.
At or for the year ended December 31,
---------------------------------------------------------------------
1995 1996 1997
------------------- -------------------- -------------------
(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 $ 50,100 6.72% $ 40,296 6.45% $ 39,343 6.25%
Other U.S. Government agency securities 15,018 5.12 6,009 6.36 6,004 6.28
Federal funds sold 7,439 5.74 6,003 5.32 37,118 5.55
Federal Home Loan Bank and Federal
Reserve Bank stock 7,029 7.26 7,861 7.20 8,711 7.21
------- ------- -------
Total investments $ 79,586 6.27 $ 60,169 6.42 $ 91,176 6.30
======= ======= =======
__________
<FN>
(1) Yields are calculated during the years indicated.
</FN>
The following table presents certain yield, maturity, and market value data
for the U.S. Treasury securities and other U.S. Government agency securities in
the Company's investment portfolio at December 31, 1997. Investment securities
with "call" provisions that permit the issuer to demand payment on one or more
specified dates are included in the category in which they may first be called
by the issuer.
Over One Over Five After Total
One Year to Five to Ten Ten Carrying Market
or Less Years Years Years Value Value
-------- -------- --------- ------ -------- -----
(Dollars in Thousands)
Investment securities available for sale:
U.S. Treasury securities $ 14,040 $ 25,303 $ - $ - $ 39,343 $ 39,343
========= ========= ======== ======== ======== ========
Weighted average yield 6.22% 6.10% -% -% 6.14%
Other U.S. Government agency
securities $ 4,004 $ 2,000 $ - $ - $ 6,004 $ 6,004
========= ========= ======== ======== ======== ========
Weighted average yield 6.13% 5.88% -% -% 6.05%
25
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-Atlanta.
Deposits. The Company's primary market for attracting deposits is the
Hampton Roads area. The Company attracts short-term and long-term deposits from
the general public by offering a wide variety of deposit accounts, competitive
interest rates, and convenient office locations and service hours. The Company
offers savings accounts, personal and commercial checking accounts, money market
deposit accounts, and certificates of deposit with terms ranging from 180 days
to 60 months. The Company relies on deposits obtained on a retail basis through
its offices and does not rely significantly on jumbo deposits. Jumbo deposits
are viewed as a less reliable source of deposits because they tend to be more
sensitive to variations in the interest rates paid by the Company and its
competitors. As a matter of policy, the Company does not accept brokered
deposits, which management views to be a highly interest rate sensitive source
of funds.
The Company's ability to attract and maintain deposits at favorable rates
is affected by competitive interest rates in the Company's market area and
general economic conditions.
The following table sets forth the distribution and the weighted average
interest rates of the Company's deposit accounts at the dates indicated.
At December 31,
------------------------------------------------------------------------------------------------------------
1995 1996 1997
----------------------------------- -------------------------------- -------------------------------
Weighted Weighted Weighted
Percent of Average Percent of Average Percent of Average
Total Nominal Total Nominal Total Nominal
Amount Deposits Rate Amount Deposits Rate Amount Deposits Rate
------ -------- ---- ------ -------- ---- ------ -------- ----
(Dollars in Thousands)
Commercial checking $ 33,372 7.41% -% $ 40,130 8.04% -% $ 47,499 9.36% -%
Savings 45,433 10.09 3.48 48,042 9.62 3.38 44,118 8.69 3.34
Personal checking 35,075 7.78 2.39 36,290 7.29 2.24 40,129 7.90 2.05
Money market deposits 42,233 9.37 3.44 44,815 8.98 3.25 47,726 9.40 3.25
------ ---- ------ ---- ------ ----
Subtotal 156,113 34.65 2.48 169,277 33.93 2.30 179,472 35.35 2.14
Certificate accounts 294,417 65.35 5.59 329,688 66.07 5.37 328,198 64.65 5.41
------- ----- ------- ----- ------- -----
Total deposits $450,530 100.00% 4.51 $498,965 100.00% 4.33 $507,670 100.00% 4.26
======== ====== ======== ====== ======== ======
26
The following table sets forth the activity in the Company's deposits
during the periods indicated.
Year Ended December 31,
------------------------------------------------
1995 1996 1997
---- ---- ----
(Dollars in Thousands)
Beginning balance $420,422 $450,530 $498,965
-------- -------- --------
Deposits acquired - 68,101 -
Net increase (decrease) before interest credited 17,573 (35,692) (9,071)
Interest credited (1) 12,535 16,026 17,776
------ ------ ------
Net increase in savings deposits 30,108 48,435 8,705
------ ------ -----
Ending balance $450,530 $498,965 $507,670
======== ======== ========
_________________
<FN>
(1) Does not include interest on deposit accounts paid directly to
depositors and not credited to their deposit accounts.
</FN>
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, 1997.
At December 31, At December 31, 1997, Maturing in
-------------------------------- ----------------------------------------------------
Greater
One year than three
1995 1996 1997 or less Two years Three years years
---- ---- ---- -------- --------- ----------- --------
(Dollars in Thousands)
Certificate accounts:
3.99% or less $ 644 $ 451 $ 519 $ 517 $ 2 $ - $ -
4.00% to 4.99% 51,320 100,302 70,286 63,876 5,680 611 119
5.00% to 5.99% 133,573 179,399 218,016 185,434 17,060 4,869 10,653
6.00% to 6.99% 94,235 37,244 27,210 8,035 4,916 11,220 3,039
7.00% to 7.99% 14,010 10,280 10,369 643 2,447 6,937 342
8.00% to 8.99% 480 775 668 391 55 222 -
9.00% to 9.99% 155 1,237 1,130 - 1,130 - -
------ ----- ----- ----- ----- ----- -----
Total certificates $294,417 $329,688 $328,198 $258,896 $31,290 $23,859 $14,153
======== ======== ======== ======== ======= ======= =======
27
At December 31, 1997, the Company had outstanding $28.8 million in
certificate accounts in amounts greater than $100,000 maturing as follows (which
amount includes $2.1 million of jumbo certificates of deposit with negotiable
rates of interest):
Amount
------
(Dollars in Thousands)
Three months or less $ 9,295
Over three months to six months 4,849
Over six months to twelve months 10,717
Over twelve months 3,970
-----
Total $ 28,831
=========
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-Atlanta which can be collateralized by certain of its
mortgage loans or mortgage-backed certificates. See "Regulation and
Supervision--Regulation of the Banks--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-Atlanta will advance to member institutions, including the Banks,
fluctuates from time to time in accordance with the policies of the Federal Home
Financing Board and the FHLB-Atlanta and the current financial and operating
condition of the Banks.
CENIT Bank's and Princess Anne's current maximum credit availability from
the FHLB-Atlanta is $190.0 million and $58.0 million, respectively. The maximum
credit availability for the Banks is subject to an FHLB-Atlanta guideline which
limits total credit availability for the Company to 30% of the Company's assets
unless exception is made by the FHLB-Atlanta. At December 31, 1997, CENIT Bank
and Princess Anne had $125.0 million and $20.0 million, respectively, of
outstanding advances from the FHLB-Atlanta.
The following table sets forth certain information regarding FHLB advances
at the dates indicated:
At or for the year ended December 31,
------------------------------------------------------------
1995 1996 1997
---- ---- ----
(Dollars in Thousands)
Adjustable-rate advances:
One year or less $ 56,000 $ 123,000 $ 85,000
Fixed-rate advances:
One year or less 77,000 25,000 -
Over one year - - 60,000(1)
---------- ---------- ----------
Total advances $ 133,000 $ 148,000 $ 145,000
========== ========== ==========
Maximum balance outstanding at any month-end $ 152,000 $ 192,000 $ 156,000
Average amount outstanding during the year $ 128,499 $ 154,854 $ 140,077
Weighted average cost of advances for the year 6.16% 5.44% 5.58%
<FN>
(1) The $60,000,000 fixed-rate advance is convertible to an adjustable-rate advance at the option of the FHLB beginning in
September, 1998, and quarterly thereafter until the advance's maturity in September, 2007.
</FN>
In 1997, the Company borrowed $4,000,000 from an unrelated third party
lender for general corporate purposes. The loan balance is $2,575,000 at
December 31, 1997, and bears interest at a variable rate of one month LIBOR plus
1.75%, payable in monthly principal and interest installments of $61,116 based
on a seven-year amortization period. At December 31, 1997, the interest rate on
the loan was 7.72%. The remaining principal balance, if any, is due and payable
in August, 2004. The loan is unsecured and may be prepaid without penalty. The
loan agreement requires that the Company and the Banks maintain capital in
accordance with applicable regulatory guidelines sufficient to be considered
"well capitalized." The loan agreement also requires the Company to maintain
certain ratios regarding nonperforming loans to total loans and regarding the
allowance for loan losses to nonperforming loans. The covenants relating to
nonperforming loans and the allowance for loan losses expire when the
outstanding principal balance reaches $2,000,000.
28
Securities Sold Under Agreements to Repurchase. From time to time, the
Company enters into reverse repurchase agreements with nationally recognized
primary securities dealers and financial institutions. The Company also enters
into reverse repurchase agreements 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.
The following table presents certain information regarding reverse
repurchase agreements during the years indicated:
At or for the year ended December 31,
--------------------------------------------------
1995 1996 1997
---- ---- ----
(Dollars in Thousands)
Maximum amount outstanding at any month-end $ 4,871 $ 30,382 $ 12,199
Balance at end of year 4,871 7,138 9,664
Average amount outstanding during the year 2,543 8,616 8,893
Weighted average interest rate:
Amount outstanding at end of year 4.35% 4.40% 4.57%
Average amount outstanding during the year 4.80% 4.67% 4.60%
Activities of Subsidiary Companies of CENIT Bank
CENIT 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. CENIT 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, 1997, CENIT Bank's initial investment in and loans outstanding to
its service corporations totaled $2.9 million. These loans are primarily to
finance the acquisition of REO by CENIT Bank's subsidiaries and the sale of REO
by such subsidiaries and are eliminated in accordance with generally accepted
accounting principles on the Company's Consolidated Financial Statements.
CENIT Bank has a total of six 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; and
CENIT Commercial Mortgage Corporation ("CENIT Commercial Mortgage").
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 Banks.
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 acquired at foreclosure and subsequently sold a hotel
property. Additionally, 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 CENIT Bank in its retail branches.
Olney-Duke's 1997 activities consisted of transactions with L. M. Associates. At
December 31, 1997, CENIT Bank's initial investment in and loans outstanding to
Olney-Duke totaled $69,000.
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 CENIT Bank. CENIT Equity then
markets such REO for resale. At December 31, 1997, CENIT Equity held REO with a
total net book value of $1.1 million, and the Company's initial investment in
and loans outstanding to CENIT Equity amounted to $2.7 million.
29
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, CENIT 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 CENIT 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,
1997, 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, 1997, CENIT Bank's initial investment in CENIT Commercial
Mortgage was $50,000.
Activities of Subsidiary Company of Princess Anne
Princess Anne has one direct subsidiary, Princess Anne Equity.
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 on loans made by Princess Anne. Princess
Anne Equity then markets such REO for sale. At December 31, 1997, Princess Anne
Equity held no REO and its initial investment and loans outstanding amounted to
$23,000.
Personnel. At December 31, 1997, the Company and its subsidiaries had 208
full-time and 56 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, CENIT Bank and Princess Anne. 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 registered bank holding company subject to the
Bank Holding Company Act of 1956, as amended, and is subject to regulation by
the Federal Reserve. The BHCA generally limits the activities of a bank holding
company and its subsidiaries to that of banking, managing or controlling banks,
or any other activity which is so closely related to banking or to managing or
controlling banks as to be a proper incident thereto. 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
bank holding company, CENIT Bank is subject to certain restrictions in its
dealings with the Company and affiliates thereof.
On March 24, 25, and 26, 1998, the Boards of Directors of CENIT Bank and
Princess Anne, as well as the Board of Directors of the Company, as the sole
shareholder of the two banks, voted to merge Princess Anne into CENIT Bank.
Following the merger, which is expected to be completed during the second
quarter of 1998, the Company will cease to be regulated by the Federal Reserve,
and will be a registered savings and loan holding company regulated pursuant to
the HOLA. As such, the Company will be subject to OTS regulation, examination,
supervision and reporting requirements.
The Company is also registered in Virginia with the SCC under the financial
institution holding company laws of Virginia. Accordingly, the Company is
subject to regulation and supervision by the Virginia SCC.
Bank Holding Company Regulations. Bank holding companies are subject to
extensive regulation by the Federal Reserve as set forth in Regulation Y, 12
C.F.R. Part 225, as amended. Regulation Y establishes the registration,
reporting, examination, applications, acquisitions, control and divestiture,
change in bank control, appraisals, and change in director and senior executive
officers requirements applicable to bank holding companies. Regulation Y and the
interpretations and rulings issued by the Federal Reserve
30
thereunder identify various prohibited non-banking activities in which bank
holding companies and their subsidiaries may not engage as well as various
exempt activities in which a bank holding company and its subsidiaries may
engage either with or, in some cases, without prior Federal Reserve approval.
Regulation Y further confirms the authority of the Federal Reserve under the
BHCA to impose criminal and civil penalties for violations of the BHCA and the
regulations and orders issued thereunder and to issue cease and desist orders
when necessary in connection therewith.
There are a number of obligations and restrictions imposed on bank holding
companies and their depository institution subsidiaries that are designed to
reduce potential loss exposure to the depositors of the depository institutions
and to the FDIC insurance funds. For example, under a policy of the Federal
Reserve with respect to bank holding company operations, a bank holding company
is required to serve as a source of financial strength to its subsidiary
depository institutions and to commit resources to support such institutions in
circumstances where it might not do so absent such policy. In addition, the
"cross-guarantee" provisions of federal law require insured depository
institutions under common control to reimburse the FDIC for any loss suffered or
reasonably anticipated by either the SAIF or BIF as a result of the default of a
commonly controlled insured depository institution or for any assistance
provided by the FDIC to a commonly controlled insured depository institution in
danger of default. The FDIC may decline to enforce the cross-guarantee
provisions if it determines that a waiver is in the best interest of the SAIF or
the BIF or both. The FDIC's claim for damages is superior to claims of
stockholders of the insured depository institution or its holding company but is
subordinate to claims of depositors, secured creditors and holders of
subordinated debt (other than affiliates) of the commonly controlled insured
depository institutions.
Banking laws also provide that amounts received from the liquidation or
other resolution of any insured depository institution by any receiver must be
distributed (after payment of secured claims) to pay the deposit liabilities of
the institution prior to payment of any other general or unsecured senior
liability, subordinated liability, general creditor or stockholder. This
provision would give depositors a preference over general and subordinated
creditors and stockholders in the event a receiver is appointed to distribute
the asset of any bank or savings bank subsidiaries.
The restriction on interstate acquisitions by bank holding companies was
abolished effective September 1995, and bank holding companies from any state
are able to acquire banks and bank holding companies located in any other state,
subject to certain conditions, including nationwide and state imposed
concentration limits. Banks are able to branch across state lines by
acquisition, merger or de novo (unless state law would permit such interstate
branching at an earlier date), provided certain conditions are met, including
that applicable state law must expressly permit such interstate branching.
Limitations on Transactions with Affiliates. Transactions between financial
institutions such as the Banks 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
Banks. 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
31
$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. 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.
Savings and loan holding companies are prohibited from acquiring, without
prior approval of the director of the OTS (i) control of any other savings
association or savings and loan holding company or substantially all of the
assets thereof or (ii) more than 5% of the voting shares of a savings
association or holding company thereof that is not a subsidiary. The director of
the OTS may only approve acquisitions resulting in the formation of a multiple
savings and loan holding company that controls savings associations in more than
one state if (i) the multiple savings and loan holding company involved controls
a savings association that operated a home or branch office located in the state
of the association to be acquired as of March 5, 1987; (ii) the acquirer is
authorized to acquire control of the savings association pursuant to the
emergency acquisition provisions of the Federal Deposit Insurance Act; or (iii)
the statutes of the state in which the association to be acquired is located
specifically permit institutions to be acquired by state-chartered associations
or savings and loan holding companies located in the state where the acquiring
entity is located (or by a holding company that controls such state-chartered
savings associations).
Regulation of the Banks
General. CENIT Bank is a federally chartered savings bank and Princess Anne
is a Virginia state chartered commercial bank, and their deposit accounts are
insured up to applicable limits by the FDIC through the SAIF and BIF. The Banks
are subject to extensive regulation by the OTS, the SCC and the FDIC, and must
file reports with the OTS, Federal Reserve and, for Princess Anne, the SCC
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, FDIC, Federal
Reserve and the SCC conduct periodic examinations to test the Banks' compliance
with various regulatory requirements. The OTS completed its most recent regular
supervisory examination in April, 1997. The SCC completed its most recent
regular supervisory examination in February, 1996. The Federal Reserve completed
its most recent examination in January, 1997. In March, 1997, the Federal
Reserve completed a compliance examination of Princess Anne, and in February,
1998, a multi-agency compliance examination of CENIT Bank was completed. CENIT
Bank is also a member of the FHLB-Atlanta and is subject to certain limited
regulation by the Federal Reserve. Princess Anne is also a member of the
FHLB-Atlanta.
FIRREA. FIRREA, which was signed into law in 1989, substantially changed
the structure of regulatory oversight and supervision of all savings and banking
institutions, including the Banks, and of holding companies of savings
institutions and banks. Under FIRREA, most of the regulatory authority
previously exercised by the Federal Home Loan Bank Board (the "FHLBB") was
transferred 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 CENIT 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 enforcement authority available to regulators was substantially
enhanced by FIRREA. 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 CENIT Bank. The Federal Reserve,
as one of the primary regulators of banks, has extensive enforcement authority
over member banks and their holding companies, including the Company and
Princess Anne. 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.
32
The enforcement authority of the OTS and the Federal Reserve includes,
among other things, the ability to assess civil money penalties, to issue
cease-and-desist or removal orders and to initiate injunctive actions. Civil
penalties may be imposed in an amount not to exceed $25,000 a day unless a
finding of reckless disregard is made, in which case penalties may be as high as
$1 million a day. Criminal penalties for financial institution crimes may be as
long as 30 years. In addition, regulators are empowered to take enforcement
action against an institution that fails to comply with its regulatory
requirements, particularly with respect to capital. These enforcement actions
may be initiated for violations of laws and regulations and for unsafe or
unsound practices. Other actions or inactions may provide the basis for
enforcement action, including misleading or untimely reports filed with the OTS
or the Federal Reserve. FIRREA requires, except under certain circumstances,
public disclosure of final enforcement actions by the OTS or the Federal
Reserve. Possible enforcement action ranges from the imposition of a capital
plan to restrictions on operations and termination of deposit insurance. FIRREA
empowers the FDIC to recommend enforcement action to the director of OTS (the
"Director") and the Federal Reserve. If action is not taken by the regulators,
the FDIC has authority to compel such action under certain circumstances.
FDIC Improvement Act of 1991. On December 19, 1991, the FDIC Improvement
Act of 1991 (the "FDIC Improvement Act") became law. While the FDIC Improvement
Act primarily addressed additional sources of funding for the BIF, it also
imposed a number of mandatory supervisory measures on savings associations and
banks.
Improved Examinations. All insured institutions must now undergo a
full-scope, on site examination by their appropriate Federal banking agency
("appropriate agency") at least once every eighteen months. The cost of
examinations of insured depository institutions and any affiliates may be
assessed by the appropriate agency against each institution or affiliate as it
deems necessary or appropriate.
Financial Reporting. Insured institutions with $500 million or more in
total assets are required to submit independently audited annual reports to the
FDIC and the appropriate agency (and state supervisor when applicable). These
publicly available reports must include (a) annual financial statements prepared
in accordance with generally accepted accounting principles and such other
disclosure requirements as required by the FDIC or the appropriate agency and
(b) a management report signed by the Chief Executive Officer and the Chief
Financial Officer or Chief Accounting Officer of the institution that contains a
statement of the management's responsibilities for (i) 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 internal control
structure 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,
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 generally accepted auditing standards for attestation
engagements. The total assets of CENIT Bank and Princess Anne were each less
than $500 million at December 31, 1997. Accordingly, both banks are exempt from
the additional reporting requirements of this section.
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
relating to: (i) internal controls, information systems and audit systems; (ii)
loan documentation; (iii) audit underwriting; (iv) interest rate risk exposure;
(v) asset growth; and (vi) compensation, fees and benefits. The compensation
standards would prohibit employment contracts, compensation or benefit
arrangements, stock option plans, fee arrangements or other compensatory
arrangements that would provide excessive compensation, fees or benefits or
could lead to material financial loss. In addition, the federal banking
regulatory agencies would be required to prescribe by regulation standards
specifying: (i) maximum classified assets to capital ratios; (ii) minimum
earnings sufficient to absorb losses without impairing capital; and (iii) to the
extent feasible, a minimum ratio of market value to book value for publicly
traded shares of depository institutions and depository institution holding
companies.
On October 1, 1996, the banking agencies issued new guidelines amending the
Interagency Guidelines Establishing Standards for Safety and Soundness (the
"Guidelines") to include asset quality and earnings standards. The Guidelines
were adopted pursuant to the requirements of Section 39 of the Federal Deposit
Insurance Act. The Guidelines require financial institutions to identify problem
assets and estimate inherent losses. In order to comply with these Guidelines, a
financial institution shall (1) consider the
33
size and potential risks of material concentrations of credit risk; (2) compare
the level of problem assets to the level of capital and establish reserves
sufficient to absorb anticipated losses on those and other assets; (3) take
appropriate corrective action to resolve problem assets, as appropriate, and (4)
provide periodic asset quality reports to the board of directors to assess the
level of asset risk. The earnings standards specified by the Guidelines require
an institution to compare its earnings trends (relative to equity, assets, and
other common benchmarks) with its historical experience and with the earnings
trends of its peers. The Guidelines, relative to the earnings standards, require
the institution to: (1) evaluate the adequacy of earnings with regard to the
institution's relative size and complexity, and the risk profile of the
institution's assets and operations; (2) assess the source, volatility, and
sustainability of earnings; (3) evaluate the effect of nonrecurring or
extraordinary income or expense; (4) take steps to ensure that earnings are
sufficient to maintain adequate capital and reserves after considering asset
quality and the institution's rate of growth; and (5) provide periodic reports
with adequate information for management and the board of directors to assess
earnings performance. The Guidelines note that the complexity and sophistication
of an institution's monitoring, reporting systems, and corrective actions should
be commensurate with the size, nature and scope of the institution's operations.
Prompt Corrective Regulatory Action. The FDIC Improvement Act requires each
appropriate agency and the FDIC to take prompt corrective action to resolve the
problems of insured depository institutions that fall below a certain capital
ratio. Such action must be accomplished at the least possible long-term cost to
the appropriate deposit insurance fund.
In connection with such action, each agency promulgated regulations
defining the following five categories in which an insured depository
institution will be placed, based on the adequacy of their regulatory capital
level: well capitalized, adequately capitalized, undercapitalized, significantly
undercapitalized and critically undercapitalized. Based upon the applicable
regulations, at December 31, 1997, the Banks would be considered well
capitalized. The legislation requires a critical capital level in an amount that
is not less than 2% of total assets or more than 65% of the required minimum
leverage capital level. In addition to the various capital levels, the FDIC
Improvement Act provides additional noncapital levels whereby the appropriate
agency can treat an institution as if it were in the next lower category if the
appropriate agency determines (after notice and an opportunity for hearing) that
the institution is in an unsafe or unsound condition or is engaging in an unsafe
or unsound practice.
At each successive downward level of capital, institutions are subject to
more restrictions and regulators are given less flexibility in deciding how to
deal with the Company, thrift, or bank. For example, undercapitalized
institutions will be subject to asset growth restrictions and will be required
to obtain prior approval for acquisitions, branching and engaging in new lines
of business. Furthermore, except under limited circumstances, the appropriate
agency, not later than 90 days after an institution becomes critically
undercapitalized, shall appoint a conservator or receiver. All actions by the
appropriate agency must be undertaken at the least cost for the appropriate
insurance fund.
The legislation prohibits insured institutions from making capital
distributions to anyone or paying management fees to any persons having control
of the institution if after such transaction the institution would be
undercapitalized. Any undercapitalized institution must submit an acceptable
capital restoration plan to the appropriate agency within 45 days of becoming
undercapitalized.
In addition, each company controlling an undercapitalized institution must
guarantee that the institution will comply with the capital plan until the
institution has been adequately capitalized on an average during each of four
consecutive calendar quarters and provide adequate assurances of performance.
The aggregate liability of such guarantee is limited to the lesser of (a) an
amount equal to 5% of the institution's total assets at the time the institution
became undercapitalized or (b) the amount that is necessary to bring the
institution into compliance with all capital standards applicable with respect
to such institution as of the time the institution fails to comply with its
capital restoration plan.
Other Items. The FDIC Improvement Act also (i) prohibits the Federal
Reserve from making discount window loans to undercapitalized institutions for
more than 60 days in any 120 day period except under very limited circumstances;
(ii) limits the percentage of interest paid on brokered deposits and limits the
use of such deposits to only those institutions that are well-capitalized; (iii)
requires the FDIC to charge insurance premiums based on the riskiness of the
activities conducted by an individual institution; (iv) prohibits insured
state-chartered banks from engaging as principal in any type of activity that is
not permissible for a national bank unless the FDIC permits such activity and
the bank meets all of its regulatory capital requirements; (v) limits to the
first $100,000 the amount of insurance for pass-through bank investment
contracts (fixed-income products sold primarily to pension funds); (vi) provides
consumer-oriented incentives to banks and added consumer protections (reduced
insurance premiums for qualifying lifeline accounts, interest rate disclosure
and affordable housing, among others); (vii) limits extensions of credit to an
institution's executive officers, directors and greater than 10% stockholders by
that institution; (viii) modifies the QTL test for savings associations (see
34
"Regulation and Supervision--Regulation of the Banks --Qualified Thrift Lender
Test") by (a) decreasing the QTL percentage from 70% to 65% of a savings
association's portfolio assets on a monthly average basis in nine out of every
12 months, (b) increasing the amount of liquid assets excludable from portfolio
assets from 10% to 20%, and (c) adding to the definition of qualified thrift
assets shares of stock issued by any FHLB and shares of stock issued by the
FHLMC or the FNMA; (ix) increases the amount of consumer loans a federal
association can invest in from 30% to 35% of assets; (x) directs the appropriate
agency to determine the amount of readily marketable purchased mortgage
servicing rights that may be included in calculating such institution's
tangible, core and risk- based capital; (xi) provides that the limitation period
for any private civil action brought on or before June 19, 1991 and implied
under Section 10(b) of the Exchange Act shall be the limitation period provided
by the laws applicable in the jurisdiction; (xii) requires the apportionment of
insurance premiums in mergers and acquisitions of depository institutions that,
prior to the merger or acquisition, are insured by separate funds (BIF and
SAIF), said apportionment to be based on the amount of deposits insured by each
fund prior to the merger or acquisition; and (xiii) provides that, subject to
certain limitations, any federal savings association may acquire or be acquired
by any insured depository institution.
FIRREA and the FDIC Improvement Act revised many other substantive
requirements and limitations to which the Banks are subject. Certain of these
regulatory requirements and restrictions are discussed below.
Deposit Insurance Funds Act of 1996. One of the primary purposes of the
Deposit Insurance Funds Act of 1996 was to provide a means for recapitalizing
the SAIF. See"--Insurance of Accounts, Assessments and Regulation by the FDIC."
This act also had the effect of eliminating dual regulation of holding companies
like the Company. Prior to the adoption of this act, the Company was subject to
regulation both by the OTS as a savings and loan holding company and by the
Federal reserve as a bank holding company. After enactment of this law, the
Company is subject to the primary regulation of the Federal Reserve, which is
now the "appropriate banking agency" for the Company for purposes of many
federal banking regulations. However, upon completion of the merger of Princess
Anne into CENIT Bank, the OTS will become the "appropriate banking agency" for
the Company.
Equity Risk Investments. OTS regulations limit a savings institution's
ability to invest in "equity risk investments," which include investments in
equity securities, real estate, service corporations and operating subsidiaries,
as well as most land loans and nonresidential construction loans with
loan-to-value ratios in excess of 80%. The FDIC Improvement Act generally
provides that Princess Anne may not make or acquire any type of equity
investment that is not permissible for a national bank. At December 31, 1997,
the Banks were in compliance with such limitations.
Other Investment Limitations. Federally chartered savings institutions such
as CENIT Bank are also subject to various other restrictions on their investment
and lending activities. Federally chartered savings institutions may make
secured or unsecured loans for commercial, corporate, business or agricultural
purposes in an amount not in excess of 10% of the institution's assets. In
addition, the aggregate investment in nonresidential real estate loans may not
exceed 400% of a federally chartered savings institution's total capital;
however, an institution may be permitted to exceed the 400% limitation if the
OTS determines that any relief from this restriction poses no significant risk
to the safe and sound operations of the savings institution and is consistent
with prudent operating practices. Federally chartered savings institutions may
make loans for personal, family or household purposes, but such holdings and
investments may not exceed 35% of the savings institution's assets. State
chartered banks such as Princess Anne are also subject to various restrictions
and limitations on their investment and lending activities. Such restrictions
and limitations cover investments in real estate owned by the bank, investments
in stock or securities of service corporations and subsidiaries, loans secured
by real estate, construction loans, loans secured by stock or securities, and
other loans and investments. At December 31, 1997, the Banks were in compliance
with the above requirements.
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 now follows the national bank standard for all loans made
by savings associations, as compared to the pre-FIRREA rule which applied the
national bank standard only to commercial loans made by federally chartered
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. Virginia state chartered banks are also prohibited from making loans
to one borrower that exceed 15% of the bank's unimpaired capital and surplus. At
December 31, 1997, the Banks had no borrowers to which they had outstanding
loans in excess of their respective loans-to-one-borrower limit.
35
Regulatory Capital Requirements. Federally insured savings associations and
banks are required to maintain minimum levels of regulatory capital. Pursuant to
FIRREA, the OTS, the FDIC and the Federal Reserve have established capital
standards applicable to the Company and the Banks. The OTS and the Federal
Reserve also are authorized to impose capital requirements in excess of these
standards on individual institutions on a case-by-case basis.
CENIT Bank. Effective December 7, 1989, the Director of the OTS adopted new
capital standards that require savings associations to satisfy three different
capital requirements. Under these standards, savings associations must maintain
"tangible" capital equal to 1.5% of adjusted total assets, "core" capital equal
to 3% of adjusted total assets and "total" capital (a combination of core and
"supplementary" capital) equal to 8.0% of "risk-weighted" assets. For purposes
of the regulation, core capital is defined as common stockholders' equity
(including retained earnings), noncumulative perpetual preferred stock and
related surplus, minority interests in the equity accounts of fully consolidated
subsidiaries, certain nonwithdrawable accounts and pledged deposits and
"qualifying supervisory goodwill." Core capital is generally reduced by the
amount of a savings association's intangible assets for which no market exists.
Limited exceptions to the deduction of intangible assets are provided for
purchased mortgage servicing rights and qualifying supervisory goodwill.
Tangible capital is given the same definition as core capital but does not
include qualifying supervisory goodwill and is reduced by the amount of all the
savings association's intangible assets, with only a limited exception for
purchased mortgage servicing rights. At December 31, 1997, CENIT Bank had an
intangible asset totaling $4.0 million representing the unamortized portion of
goodwill recorded in connection with the Homestead merger and the goodwill and
core deposit intangible assets recorded in connection with the assumption of
deposits of five Essex branches. At December 31, 1997, CENIT Bank did not have
any purchased mortgage servicing rights or supervisory goodwill.
Both core and tangible capital are further reduced by an amount equal to a
savings association's debt and equity investments in subsidiaries engaged in
activities not permissible for national banks (other than subsidiaries engaged
in activities undertaken as agent for customers or in mortgage banking
activities and subsidiary depository institutions or their holding companies).
At December 31, 1997, the Company had no subsidiaries currently engaged in
activities not permissible for national banks.
Adjusted total assets are a savings association's total assets as
determined under generally accepted accounting principles, increased by certain
goodwill amounts and by a prorated portion of the assets of subsidiaries in
which the savings association holds a minority interest and that are not engaged
in activities for which the capital rules require the savings association to net
its debt and equity investments in such subsidiaries against capital. Adjusted
total assets are reduced by the amount of assets that have been deducted from
capital, the portion of a savings association's investments in subsidiaries that
must be netted against capital under the capital rules and, for purposes of the
core capital requirement, qualifying supervisory goodwill.
In determining compliance with the risk-based capital requirement, a
savings association and banks are allowed to include both core capital and
supplementary capital in its total capital, provided that the amount of
supplementary capital included does not exceed the savings association's core
capital. Supplementary capital consists of certain capital instruments that do
not qualify as core capital, and general valuation loan and lease loss
allowances up to a maximum of 1.25% of risk-weighted assets. Supplementary
capital may be used to satisfy the risk-based requirement only in an amount
equal to the amount of core capital. In determining the required amount of
risk-based capital, total assets, including certain off-balance sheet items, are
multiplied by a risk weight based on the risks inherent in the type of assets.
The risk weights assigned by the OTS for principal categories of assets are (i)
0% for cash on hand and securities issued by the U.S. Government or
unconditionally backed by the full faith and credit of the U.S. Government
including GNMA mortgage-backed securities; (ii) 20% for claims on FHLBs, claims
on domestic depository institutions, and securities (other than equity
securities) issued by U.S. Government sponsored agencies and mortgage-backed
securities issued by, or fully guaranteed as to principal and interest by, FNMA
or the FHLMC, except for those classes with residual characteristics or stripped
mortgage- related securities; (iii) 50% for prudently underwritten permanent
one- to four-family first lien mortgage loans not more than 90 days delinquent
and having a loan-to-value ratio of not more than 80% at origination unless
insured to such ratio by an insurer approved by the FNMA or the FHLMC; and (iv)
100% for all other loans and investments, including consumer loans, commercial
loans, and single-family residential real estate loans more than 90 days
delinquent, REO and other repossessed assets.
36
The FDIC Improvement Act required the federal banking regulatory agencies
to add an interest rate risk component to the risk- based capital requirements.
Thrift institutions with a greater than normal level of interest rate exposure
must take a deduction from the total capital available to meet their risk-based
capital requirement. The required deduction is equal to one-half of the
difference between the institution's actual measured exposure and the normal
level of exposure. An institution's actual measured interest rate risk is
expressed as the change that occurs in its net portfolio value (NPV) as a result
of a hypothetical 200 basis point increase or decrease in interest rates
(whichever leads to the lower NPV) divided by the estimated economic value of
its assets. An above normal decline in NPV is one that exceeds 2 percent of an
institution's assets expressed in terms of economic value.
The OTS calculates changes in an institution's NPV quarterly based on
financial data submitted by the institution and then provides the institution
with its interest rate risk capital requirement. The amount required to be
incorporated into each quarterly calculation is the lowest interest rate risk
capital requirement calculated by the OTS for the three prior quarter ends.
However, the OTS has delayed implementation of an automatic interest rate risk
capital deduction at this time. While the OTS calculates the interest rate risk
capital requirement, the interest rate risk capital requirement is currently
being waived by the OTS. As of the December 31, 1997 OTS calculations, no
deduction of risk-based capital would have been required if such regulation had
been effective as of such date.
37
The following table summarizes CENIT Bank's capital ratios and balances at
December 31, 1997 (dollars in thousands).
Capital Requirement Actual Capital Excess Capital
Percentage Amount Percentage Amount Percentage Amount
---------- ------ ---------- ------ ---------- ------
Core 3.0% $ 14,744 6.6% $ 32,302 3.6% $ 17,558
Tangible 1.5 7,372 6.6 32,302 5.1 24,930
Tier 1 risk-based 4.0 11,610 11.1 32,302 7.1 20,692
Total risk-based 8.0 23,221 12.0 34,799 4.0 11,578
Princess Anne. The FDIC has adopted capital guidelines to supplement the
existing definitions of capital for regulatory purposes and to establish minimum
capital standards. Specifically, the guidelines categorize assets and
off-balance sheet items into four risk- weighted categories. The minimum ratio
of qualifying total capital to risk-weighted assets is 8.0%, of which at least
5.0% generally must be Tier 1 capital, composed of common equity, retained
earnings and a limited amount of perpetual preferred stock, less certain
goodwill items. Princess Anne had a ratio of risk-weighted assets to total
capital of 12.4% at December 31, 1997 and a ratio of risk- weighted assets to
Tier 1 capital of 11.4%. Both of these exceed the capital requirements adopted
by the federal regulatory agencies.
In addition, the Board of Governors of the Federal Reserve System has
established minimum leverage ratio guidelines of Tier 1 Capital to adjusted
quarterly assets equal to 3.0% for banks that meet certain specified criteria.
All other banks will generally be required to maintain a leverage ratio ranging
from 4.0% to 5.0%. Princess Anne's leverage ratio at December 31, 1997 was 7.1%,
which exceeds the regulatory minimum.
The following table summarizes Princess Anne's capital ratios and balances
at December 31, 1997 (dollars in thousands).
Capital Requirement Actual Capital Excess Capital
Percentage Amount Percentage Amount Percentage Amount
---------- ------ ---------- ------ ---------- ------
Leverage 4.0% $ 7,931 7.1% $ 14,006 3.1% $ 6,075
Tier 1 risk-based 4.0 4,905 11.4 14,006 7.4 9,101
Total risk-based 8.0 9,810 12.4 15,184 4.4 5,374
On August 2, 1995, the Federal Reserve and the FDIC issued a final rule
entitled Risk-Based Capital Standards: Interest Rate Risk. The final rule
implements minimum capital standards for interest rate risk exposures in a
two-step process. The final rule implements the first step of that process by
revising the capital standards applicable to Princess Anne to explicitly include
a bank's exposure to declines in the economic value of its capital due to
changes in interest rates as a factor that the banking agencies are to consider
in evaluating a bank's capital adequacy. It is important to note that the
federal banking agencies intend to implement this rule on a case- by-case basis
during the examination process. Due to the subjective nature of this rule,
Princess Anne is unable to determine what effect, if any, this rule may have on
its regulatory capital requirements.
The Company. As a bank holding company, the Company is also subject to the
capital adequacy guidelines established by the Federal Reserve Board. The
following table summarizes the Company's capital ratios and balances at December
31, 1997 (dollars in thousands).
Capital Requirement Actual Capital Excess Capital
Percentage Amount Percentage Amount Percentage Amount
---------- ------ ---------- ------ ---------- ------
Leverage 4.0% $ 27,383 6.6% $ 45,071 2.6% $ 17,688
Tier 1 risk-based 4.0 16,632 10.8 45,071 6.8 28,439
Total risk-based 8.0 33,264 11.7 48,854 3.7 15,590
Proposed Regulatory Capital Requirements. In April 1991, the OTS proposed
to modify the 3% of adjusted total assets core capital requirement in the same
manner as was done by the Office of the Comptroller of the Currency for national
banks. Under the OTS proposal, only savings associations rated composite 1 under
the OTS MACRO rating system would be permitted to operate at the regulatory
minimum core capital ratio of 3%. For all other savings associations, the
minimum core capital ratio would be 3% plus at least an additional 100 to 200
basis points, which would increase the core capital ratio requirement to 4% to
5% of adjusted
38
total assets or more. In determining the amount of additional capital, the OTS
will assess both the quality of risk management systems and the level of overall
risk in each individual savings association through the supervisory process on a
case-by-case basis. There can be no assurance that this proposal, which could
increase CENIT Bank's regulatory capital requirements, will be adopted as
proposed or at all.
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. Generally, the regulation creates a safe
harbor for specified levels of capital distributions from savings institutions
meeting at least their minimum capital requirements, so long as such
institutions notify the OTS and receive no objection to the distribution from
the OTS. Savings institutions that do not qualify for the safe harbor are
required to obtain prior OTS approval before making any capital distributions.
Under the capital distribution regulation, an institution that has capital
at least equal to its fully phased-in capital requirement before and after
giving effect to the proposed capital distribution is a Tier 1 institution. An
institution that has capital at least equal to each of its minimum capital
requirements but fails to meet all of its fully phased-in capital requirements
is a Tier 2 institution. An institution having capital less than any of its
minimum regulatory capital requirements is a Tier 3 institution. CENIT Bank is
currently classified as a Tier 1 institution for these purposes.
A Tier 1 institution may make capital distributions during a calendar year
up to the greater of (i) 100 percent of its net income to date during the
calendar year plus the amount that would reduce by one-half its surplus capital
ratio at the beginning of the calendar year, or (ii) 75 percent of its net
income over the most recent four quarter period. The "surplus capital ratio" is
defined to mean the percentage by which the savings institution's ratio of total
capital to assets exceeds the ratio of its fully phased-in capital requirement
to assets and "fully phased-in capital requirement" is defined to mean a savings
institution's capital requirement under the statutory and regulatory standards
now applicable, as modified to reflect any applicable individual capital
requirement imposed upon the institution. A Tier 2 institution may make capital
distributions on the following basis: 75% of its net income over the most recent
four-quarter period, if its satisfies the risk-based capital requirement
applicable to it as of January 1, 1993 and 50% of its net income over the most
recent four-quarter period, if it satisfies the risk-based capital requirement
applicable to it as of January 1, 1991. A Tier 3 institution is not authorized
under the regulation to make any capital distributions without specific prior
regulatory approval unless the institution is in compliance with an approved
capital plan and the proposed distribution is consistent therewith. In order to
make distributions under these safe harbors, Tier 1 and Tier 2 institutions must
submit 30 days written notice to the OTS prior to making the distribution. The
OTS may object to the distribution during that 30-day period based on safety and
soundness concerns. The OTS may also determine to treat a Tier 1 institution as
a Tier 2 or Tier 3 institution if the institution is notified that it is in need
of more than normal supervision.
OTS regulations also prohibit CENIT Bank from declaring or paying any
dividends or from repurchasing any of its stock if, as a result, the regulatory
(or total) capital of CENIT Bank would be reduced below the amount required to
be maintained for the liquidation account established by it for certain
depositors in connection with its conversion from mutual to stock form. For
additional information, see note 21 of the Notes to the Consolidated Financial
Statements included with this report.
Similarly, Princess Anne is subject to legal limitations on capital
distributions including the payment of dividends, if, after making such
distribution, the institution would become "undercapitalized" (as such term is
used in the statute). For all state member banks of the Federal Reserve seeking
to pay dividends, the prior approval of the applicable Federal Reserve Bank is
required if the total of all dividends declared in any calendar year will exceed
the sum of the bank's net profits for that year and its retained net profits for
the preceding two calendar years. Federal law also generally prohibits a
depository institution from making any capital distribution (including payment
of a dividend or payment of a management fee to its holding company) if the
depository institution would thereafter fail to maintain capital above
regulatory minimums. Federal Reserve Banks are also authorized to limit the
payment of dividends by any state member bank if such payment may be deemed to
constitute an unsafe or unsound practice. In addition, under Virginia law, no
dividend may be declared or paid that would impair a Virginia chartered bank's
paid-in capital. The SCC has general authority to prohibit payment of dividends
by a Virginia chartered bank if it determines that the limitation is in the
public interest and is necessary to ensure the bank's financial soundness.
Qualified Thrift Lender Test. Effective December 19, 1991, the QTL test
applicable to CENIT Bank was amended to require that qualified thrift
investments represent 65% of portfolio assets, rather than 60% and 70% of
tangible assets as previously required before and after July 1, 1991,
respectively. For purposes of the current QTL test, portfolio assets are defined
as total assets less
39
intangibles, properties used to conduct the institution's business, and liquid
assets (up to 20% of total assets). The following assets may be included as
qualified thrift investments without limit: domestic residential housing or
manufactured housing loans; home equity loans and mortgage-backed securities
backed by residential housing or manufactured housing loans; FHLB stock; certain
obligations of the FSLIC, the FDIC, and certain other related entities; and REO
resulting from qualifying investments. Other qualifying assets, which may be
included up to an aggregate of 20% of portfolio assets, are: (i) 50% of
originated residential mortgage loans sold within 90 days of origination; (ii)
investments in debt or equity of service corporations that derive 80% of their
gross revenues from housing-related activities; (iii) 200% of certain loans to
and investments in low cost one- to four-family housing; (iv) 200% of loans for
residential real property, churches, nursing homes, schools and small businesses
in areas where the credit needs of low- to moderate-income families are not
being met; (v) other loans for churches, schools, nursing homes and hospitals;
and (vi) consumer and education loans up to 10% of total portfolio assets.
The penalties for failure to meet the QTL test are severe. 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. These restrictions
would limit the activities of the holding company to those activities that the
Federal Reserve has determined to be closely related and properly incident to
banking. See "--Regulation of the Company".
At December 31, 1997, approximately 87.4% of CENIT Bank's assets were
invested in qualified thrift investments, which was in excess of the percentage
required to qualify CENIT Bank under the QTL test in effect at that time. CENIT
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 CENIT 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%.
Liquid assets for purposes of this ratio include specified short-term
assets (e.g., cash, certain time deposits, certain bankers' acceptances and
short-term United States Treasury obligations), and long-term assets (e.g.,
United States Treasury obligations of more than one and less than five years,
Federal and state agency obligations with a minimum term of 18 months and
mortgage-backed certificates with maturities of five years or less). The
regulations governing liquidity requirements include as liquid assets debt
securities hedged with forward commitments obtained from, or debt securities
subject to repurchase agreements with, members of the Association of Primary
Dealers in United States Government Securities or banks whose accounts are
insured by the FDIC, debt securities directly hedged with a short financial
futures position, and debt securities that provide the holder with a right to
redeem the security at par value, regardless of the stated maturities of such
securities. FIRREA also authorizes the OTS to designate as liquid assets certain
mortgage-related securities and certain mortgage loans qualifying as backing for
certain mortgage-backed securities with less than one year to maturity.
Penalties may be imposed upon a savings institution for violations of liquidity
requirements. At December 31, 1997, CENIT Bank was in compliance with these
requirements, with an overall liquidity ratio of 8.8%.
State chartered banks such as Princess Anne are required to maintain
adequate reserves related to the demand deposits and time deposits held by the
bank. Such reserve requirements may be imposed by the Federal Reserve and by the
SCC under the Virginia Banking Act. At December 31, 1997, Princess Anne was
maintaining appropriate reserves as required by law with respect to its demand
deposits and time deposits.
Insurance of Accounts, Assessments and Regulation by the FDIC. The Banks'
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-
40
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
CENIT Bank, and through the BIF, the FDIC insures deposits at other financial
institutions (principally commercial banks, state-chartered banks such as
Princess Anne, and certain federally chartered savings banks).
Effective September 30, 1996, the Congress and the Clinton administration
completed the process of recapitalizing the SAIF by enacting into law the
Deposit Insurance Funds Act of 1996. This legislation established the method for
recapitalizing the SAIF and increasing its net worth to 1.25 percent of
SAIF-insured deposits as of March 31, 1995, phasing in the pro rata sharing of
Financing Corporation ("FICO") obligations between SAIF and BIF institutions,
and merging the SAIF and BIF into the Deposit Insurance Fund effective on
January 1, 1999. As a result of this legislation and the adoption by the FDIC of
a final rule effective October 8, 1996 establishing a special assessment for
SAIF institutions, CENIT Bank incurred a special, pre-tax deposit insurance
premium of $2.3 million for the SAIF assessable deposits that it held on March
31, 1995. At such time as the SAIF recapitalization reaches the 1.25 percent
target, SAIF deposit insurance premiums will drop substantially, placing SAIF
insured deposits on an equal footing with BIF insured deposits.
FICO assessment rates for the first semiannual period of 1998 were set at
.01256% annually for BIF-assessable deposits and .0628% annually for
SAIF-assessable deposits. These rates may be adjusted quarterly to reflect
changes in assessment bases for the BIF and SAIF. By law, the FICO rate on
BIF-assessable deposits must be one-fifth the rate on SAIF assessable deposits
until the insurance funds are merged or until January 1, 2000, whichever occurs
first. There was no FDIC assessment for either SAIF- assessable or
BIF-assessable deposits for the first semiannual period of 1998.
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 Banks
pay for federal deposit insurance may increase in future periods as a result of
such proposals. Such increases would adversely affect its operations.
The FDIC may terminate the deposit insurance of any depository institution,
including the Banks, if it determines, after a hearing, that the institution has
engaged or is engaging in unsafe or unsound practices, is in an unsafe or
unsound condition to continue operations or has violated any applicable law,
regulation, order or any condition imposed in writing by the FDIC. It also may
suspend deposit insurance temporarily during the hearing process for the
permanent termination of insurance, if the institution has no tangible capital.
If deposit insurance is terminated, the deposits at the institution at the time
of termination, less subsequent withdrawals, shall continue to be insured for a
period from six months to two years, as determined by the FDIC. Management is
aware of no existing circumstances that could result in termination of the
Banks' deposit insurance.
On December 20, 1996, the FDIC Board of Directors adopted the Federal
Financial Institutions Examination Council's updated statement of policy
entitled Uniform Financial Institutions Rating System ("UFIRS"). The updated
UFIRS replaces the previous rating system established in the 1979 statement of
policy, and was effective January 1, 1997. Under the previous UFIRS, each
financial institution is assigned a composite rating based on an evaluation and
rating of five essential components of an institution's financial condition and
operations. The five component areas are Capital adequacy, Asset quality,
Management, Earnings and Liquidity ("CAMEL"). The updated UFIRS indicates the
addition of a sixth component for Sensitivity to market risk ("CAMELS"). The new
sixth component addresses the degree to which changes in interest rates, foreign
exchange rates, commodity prices or equity prices can adversely affect a
financial institution's earnings or capital. The new component focuses on an
institution's ability to monitor and manage its market risk, and will provide an
institution's management with a clearer and more focused indication of
supervisory concerns in this area. The Banks do not believe that this statement
of policy will materially affect its operations.
Federal Home Loan Bank System. The Banks are members 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, CENIT Bank is
required to purchase and maintain stock in the FHLB-Atlanta 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. Princess Anne is
required to purchase and maintain stock in the FHLB-Atlanta 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 10% (or
41
such greater fraction as established by the FHLB) of its outstanding FHLB
advances. At December 31, 1997, CENIT Bank and Princess Anne held $6.5 million
and $1.9 million, respectively, in FHLB stock, which was in compliance with
these requirements.
Each FHLB serves as a reserve or central bank for its members within its
assigned region. The FHLBs are funded primarily from proceeds derived from the
sale of consolidated obligations of the FHLB system. Each FHLB makes loans
(i.e., advances) to members in accordance with policies and procedures
established by the board of directors of the FHLB. These polices and procedures
are subject to the regulation and oversight of the Federal Housing Finance
Board.
Pursuant to FIRREA, each FHLB is required to provide funds for the
resolution of troubled savings institutions and to establish programs for
affordable housing that involve interest subsidies from the FHLBs on advances to
members engaged in lending at subsidized interest rates for low- and
moderate-income, owner-occupied housing and affordable rental housing, and
certain other community purposes. These contributions are expected to affect
adversely the level of FHLB dividends paid and the value of FHLB stock, as well
as interest rates payable on, and availability of, advances from the FHLB in the
future. For the year ended December 31, 1997, dividends paid by FHLB-Atlanta to
the Company totaled $627,000.
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, 1997, the Banks were 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.
As a member of the Federal Reserve System, Princess Anne is required to
purchase shares of Federal Reserve Bank stock with a par value of $100 equal to
6.0% of the bank's capital and surplus. One-half of the amount of the bank's
subscription shall be paid to the Federal Reserve Bank and the remaining half
will be subject to call when deemed necessary by the Board of Governors of the
Federal Reserve System. At December 31, 1997, Princess Anne owned 6,218 shares
totaling $311,000 which was in compliance with these requirements.
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.
Accounting and Investment Portfolio Policy. FIRREA requires the federal
banking agencies to establish accounting standards to be applicable to all
financial institutions for purposes of complying with regulations, except to the
extent otherwise specified in the capital regulations. Such standards must
incorporate generally accepted accounting principles to the same degree as is
prescribed by the federal banking agencies for banks or may be more stringent
than such requirements.
Each of the federal banking agencies has adopted policies concerning (i)
procedures to be used in the selection of a securities dealer, (ii) the need to
document and implement prudent policies and strategies for securities, whether
held for investment, trading or for sale, and to establish systems and internal
controls to insure that securities activities are consistent with the financial
institution's policies and strategies, (iii) securities trading and sales
practices that may be unsuitable in connection with securities held in an
investment portfolio, (iv) high-risk mortgage securities that are not suitable
for investment portfolio holdings for financial institutions, and (v)
disproportionately large holdings of long-term, zero-coupon bonds that may
constitute an imprudent investment practice. These policies apply to investment
securities, high yield corporate debt securities, loans, mortgage-backed
securities, and derivative securities, and provides guidance concerning the
proper classification of an accounting for securities held for investment, sale,
and trading. Securities held for investment, sale or trading may be
differentiated based upon an institution's desire to earn an interest yield
(held for investment), to realize a holding gain from assets held for indefinite
periods of time (held for sale), or to earn a dealer's spread between the bid
and asked prices (held for trading). Depository institution investment
portfolios are maintained to provide earnings consistent with the safety factors
of quality, maturity, marketability, and risk diversification. Securities that
are purchased to accomplish these objectives may be reported at their amortized
cost only when the depository institution has both the intent and ability to
hold the assets for long-term investment purposes. Securities held for
investment purposes may be accounted for at amortized cost, securities held for
sale are to be accounted for at the lower of cost or market, and securities held
for trading are to be accounted for at market. The policies stress that it is
the substance of a financial institution's securities activities that determines
whether securities reported as held for investment are, in reality, held for
trading or for sale. The policies further require the Board
42
of Directors of a financial institution to adopt a portfolio policy describing
the financial institution's authorized securities investment, trading and held
for sale activities and the goals and objectives the financial institution
expects to achieve through such activities, and to take sufficient steps to
insure that securities activities are conducted in accordance with the financial
institution's portfolio policy and in a safe and sound matter. The Banks believe
that their investment activities are conducted in accordance with the applicable
policies concerning investments and securities and in accordance with generally
accepted accounting principles.
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.
The registration under the Securities Act of 1933 (the "Securities Act") of
shares of the Common Stock which were issued in the Conversion does not cover
the resale of such shares. Shares of the Common Stock purchased by persons who
are not affiliates of the Company may be resold without registration. Shares
purchased by an affiliate of the Company will be subject to the resale
restrictions of Rule 144 under the Securities Act. If the Company meets the
current public information requirements of Rule 144 under the Securities Act,
each affiliate of the Company who complies with the other conditions of Rule 144
(including those that require the affiliate's sale to be aggregated with those
of certain other persons) would be able to sell in the public market, without
registration, a number of shares not to exceed, in any three-month period, the
greater of (i) 1% of the outstanding shares of the Company or (ii) the average
weekly volume of trading in such shares during the preceding four calendar
weeks. Provision may be made in the future by the Company to permit affiliates
to have their shares registered for sale under the Securities Act under certain
circumstances.
FEDERAL AND STATE TAXATION
Federal Taxation
General. The Company and the Banks 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 Banks.
Under the applicable statutes of limitation, the Company's and Princess
Anne's federal income tax returns for 1994 through 1996 and 1994 through 1995,
respectively, 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 or Princess Anne'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 CENIT 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, CENIT Bank will only be eligible to claim tax deductions for
bad debts under the rules for banks. Because CENIT 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
requires 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. CENIT Bank is recapturing the excess reserve of approximately $139,000
over six years.
43
During 1995 the Company acquired all of the stock of Princess Anne, a
commercial bank registered in Virginia, and continues to operate it as a
wholly-owned subsidiary. As a member of the Company's consolidated tax return
group, Princess Anne has been considered a "large bank" since its acquisition,
and also must compute its bad debt deduction based on actual chargeoffs. Prior
to its acquisition, Princess Anne was not a "large bank," and was able to
compute its annual bad debt deduction under a reserve method. This reserve is
being recaptured over a four-year period beginning in 1995, the year it became a
member of the Company's consolidated group.
Thrift Charter Conversion. CENIT Bank's retained earnings at December 31,
1997 included $6,134,000 representing that portion of CENIT 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 CENIT Bank were to convert to, or merge with, a commercial bank. This
amount would be subject to federal income taxes if CENIT Bank were to use the
reserve for purposes other than to absorb losses.
Corporate Minimum Tax. The Company and its subsidiaries could be subject to
an alternative minimum tax ("AMT") which is imposed to the extent that it
exceeds the consolidated group's regular tax liability for a year. The
alternative minimum tax generally will apply at a rate of 20% to a base of
regular taxable income plus certain tax preferences and adjustments
("alternative minimum taxable income" or "AMTI"), less an exemption amount.
Currently no more than 90% of the AMTI may be offset by net operating losses (as
determined for AMTI purposes). Payment of the AMT may be used as a credit
against a portion of the regular tax liabilities in future years. The Code
provisions relating to the AMT also: (i) treat as a preference item interest on
certain tax-exempt private activity bonds issued on or after August 8, 1986; and
(ii) include in AMTI (for tax years beginning after 1989) an amount equal to 75%
of the amount by which a corporation's adjusted current earnings exceed its AMTI
(determined without regard to this preference and before reduction for the
alternative tax net operating losses). The consolidated group was not subject to
the AMT in 1997.
Distributions. If CENIT Bank's reserve for losses on qualifying real
property loans exceeds the amount that would have been allowed under the
Experience Method and makes a distribution to the Company that is considered to
be drawn from its excess bad debt reserve or from CENIT Bank's supplemental
reserve ("Excess Distributions"), then an amount based on the Excess
Distribution will be included in CENIT Bank's taxable income during the year of
distribution. Distributions by CENIT Bank in excess of its current and
accumulated earnings and profits and distributions in redemption of stock would
cause a portion of CENIT Bank's bad debt reserves to be recaptured into taxable
income. However, dividends paid out of CENIT 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 CENIT 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 CENIT Bank's level provided that
CENIT Bank's payment to the Company of funds used for such purposes did not
exceed the amount of CENIT Bank's available earnings and profits.
The amount of additional taxable income created in the event of a
distribution by CENIT Bank to the Company of an amount in excess of CENIT 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 CENIT 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 CENIT
Bank's capital stock (including distributions upon redemption or liquidation), a
portion of those distributions may be includable in CENIT Bank's gross income
for federal income tax purposes. Neither CENIT Bank nor the Company anticipates
paying dividends or making distributions with respect to CENIT Bank's capital
stock which would give rise to that type of federal tax liability. See
"Regulation and Supervision--Regulation of the Banks--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 Banks, and CENIT
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 Banks 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, CENIT Bank and its subsidiaries (other than CENIT Mortgage)
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, CENIT
Bank and its
44
subsidiaries (other than CENIT Mortgage) as reported for federal income tax
purposes with certain modifications. CENIT Mortgage is subject to North Carolina
corporate income taxes at an annual rate of 7.75% on its separately computed
federal taxable income with certain modifications.
Princess Anne is chartered as a bank under the laws of Virginia and,
accordingly, is not subject to the Virginia corporate income tax. It is instead
subject to Virginia's Bank Franchise Tax. Under this system, Princess Anne's net
capital is subject to tax at a rate of one percent. Net capital is composed
generally of the equity accounts (common stock, additional paid-in capital, and
retained earnings) adjusted for investments in real and personal property,
certain reserves, and certain securities exempt from state taxation.
Executive Officers of the Registrant
The following table sets forth information with respect to the executive
officers of the Banks as of December 31, 1997. Messrs. Ives, Foster, and Guthrie
hold substantially identical positions for both CENIT Bank and the Company. Mr.
Woods serves as Senior Vice President/Credit Policy and Administration for the
Company.
CENIT Bank
Name Age Position Held
Michael S. Ives 45 President/Chief Executive
Officer/Director
David A. Foster 37 First Vice President/Treasurer and
Principal Accounting Officer
Barry L. French 54 Senior Vice President/
Retail Banking Group Manager
John O. Guthrie 48 Senior Vice President/
Chief Financial Officer and
Finance Group Manager
Patrick L. Hillard 37 Senior Vice President/
CENIT Mortgage Company
Roger J. Lambert 48 Senior Vice President/
Information Services Group Manager
Barbara N. Lane 48 Senior Vice President/
Administrative Services
Group Manager
Alvin D. Woods 53 Senior Vice President/
Chief Lending Officer and
Lending Group Manager
Princess Anne
J. Morgan Davis 46 President/Chief Executive Officer/
Director
Winfred O. Stant, Jr. 44 Senior Vice President/
Chief Financial Officer
Set forth below is certain information with respect to the executive
officers of the Banks 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.
CENIT Bank
Michael S. Ives has been President and Chief Executive Officer of CENIT
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 CENIT Bank, Princess Anne, and the Company.
45
David A. Foster, a First Vice President, is CENIT Bank's Treasurer and
Principal Accounting Officer, and joined CENIT Bank in 1988 as an internal
auditor. He was coordinator of CENIT Bank's internal controls group from 1989 to
1990, and assumed his present position in June 1990. Before joining CENIT Bank
in 1988, he was an audit manager with Ernst & Young. Mr. Foster is also the
Company's Treasurer and Principal Accounting Officer.
Barry L. French joined CENIT 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 CENIT 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 CENIT Bank in 1972. He has served in a number of
capacities with CENIT Bank, and since 1988, has been Senior Vice President and
CENIT Bank's Chief Financial Officer. In his present position, he is responsible
for overseeing CENIT Bank's asset/liability and investment management, for
budgeting, and for administering CENIT Bank's external and internal reporting.
From 1983 to 1988, Mr. Guthrie served as Senior Vice President and Manager of
CENIT 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 and Secretary for the Company.
Patrick L. Hillard, a Senior Vice President, is Manager of CENIT Mortgage
Company. Mr. Hillard is responsible for all phases of the mortgage operation
including origination, secondary marketing and wholesale. Mr. Hillard joined
CENIT Bank through the merger with Homestead in April 1994. He had been employed
with Homestead since January 1985 and held several positions including Loan
Officer and Vice President. At the time of merger, Mr. Hillard served Homestead
as Senior Vice President/Manager of Mortgage Lending.
Roger J. Lambert joined CENIT 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.
Barbara N. Lane, who has been employed by CENIT Bank since 1969, is a
Senior Vice President and is CENIT Bank's Administrative Services Group Manager.
Before assuming this position in June 1989, Ms. Lane was CENIT Bank's Vice
President for Marketing Research from June 1988 through June 1989, and was an
Assistant Vice President and CENIT Bank's Planning and Procedures Coordinator
from 1984 until June 1988. Ms. Lane manages and coordinates the activities of
the departments and areas in the Administrative Operations group.
Alvin D. Woods, a Senior Vice President, joined CENIT Bank in March 1992
and is CENIT Bank's Chief Lending Officer and Lending Group Manager. Mr. Woods
is responsible for all lending activities of CENIT 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 CENIT Bank's residential construction and mortgage lending.
Before joining CENIT 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.
Princess Anne
J. Morgan Davis has been President and Chief Executive Officer of Princess
Anne since 1985. Mr. Davis is also a director of Princess Anne and the Company.
Winfred O. Stant, Jr. joined Princess Anne in May 1992 and serves as Senior
Vice President and Chief Financial Officer of Princess Anne. 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.
46
Item 2 - Properties
CENIT Bancorp neither owns nor leases any real property. CENIT Bancorp
currently uses the property and equipment of CENIT Bank without payment to CENIT
Bank.
The Company conducts its business through its corporate headquarters and
twenty retail branch offices, all of which are located in the Hampton Roads
area. The following table sets forth information about each of the Banks'
offices at December 31, 1997. The total net book value of the Banks' property
and equipment at December 31, 1997 was approximately $14.2 million.
47
Owned Expiration Net Book
or Date of Value
Location Year Office Opened Leased Lease (Dollars in thousands)
-------- ------------------ ------ ----------- ---------------------
Corporate Headquarters
225 W. Olney Road
Norfolk, Virginia 1979 Owned - $ 1,214
Retail Branch Offices - CENIT Bank
745 Duke Street
Norfolk, Virginia 1889 (Relocated in 1979) Owned - 820
2203 E. Little Creek Road
Norfolk, Virginia 1959 (Relocated in 1980) Owned - 310
300 E. Main Street
Norfolk, Virginia 1993 (Relocated in 1995) Leased June, 2005 105
3315 High Street
Portsmouth, Virginia 1955
(Relocated in 1989 and 1994) Leased August, 2000 70
675 N. Battlefield Blvd.
Chesapeake, Virginia 1989 Owned - 820
2600 Taylor Road
Chesapeake, Virginia 1988 Owned - 370
3220 Churchland Blvd.
Chesapeake, Virginia 1986 Leased December, 2000 33
2205 Executive Drive
Hampton, Virginia 1973 (Relocated in 1989) Owned - 777
110 Ottis Road
York County, Virginia 1994 Owned - 1,804
(Retail/Mortgage Office)
5007 Victory Boulevard
York County, Virginia 1995 Leased November, 2010 206
13307 Warwick Blvd.
Newport News, Virginia 1996 Owned 415
6101 Military Highway
Norfolk, Virginia 1996 Leased October, 2001 235
550 Settlers Landing Road
Hampton, Virginia 1996 Owned 628
Mortgage Branch Office - CENIT Bank
2612 Taylor Road
Chesapeake, Virginia 1993 Owned - 530
Retail Branch Offices - Princess Anne
1616 Laskin Road Land-
Virginia Beach, Virginia 1975 Leased June, 2005 -
Building and improvements owned 153
699 Independence Boulevard
Virginia Beach, Virginia 1975 Owned - 664
905 Kempsville Road
Virginia Beach, Virginia 1978 Owned - 393
641 Lynnhaven Parkway
Virginia Beach, Virginia 1985 Leased March, 2000 271
4801 Columbus Street
Virginia Beach, Virginia 1987 Leased March, 2003 35
3001 Shore Drive
Virginia Beach, Virginia 1989 (Relocated in 1996) Leased January, 2002 45
3901 Holland Road
Virginia Beach, Virginia 1997 Leased January, 2002 219
Other Real Property 939
----
Total Real Property 11,056
Other Fixed Assets
Furniture, fixtures, equipment and vehicles 3,174
----
Total $ 14,230
=========
48
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, 1997, 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 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 1997 and 1996.
1997 (2) 1996 (2)
--------------------- -----------------------
Quarter High (1) Low (1) High (1) Low (1)
------- ---- --- ---- ---
First $ 46 $ 40 $36 5/16 $ 33
Second 48 3/4 40 35 1/2 33
Third 61 3/4 48 1/2 41 1/4 31 3/4
Fourth 80 61 1/4 41 1/2 38 1/2
(1) The source for the high and low sales prices by quarter is Nasdaq.
(2) Sales prices have not been restated for the 3-for-1 stock split declared on
March 24, 1998.
The Company paid a quarterly cash dividend on its Common Stock of $.10,
$.20, $.20 and $.25 per share for the first, second, third and fourth quarters,
respectively, of 1996 and $.25 per share for each quarter in 1997. The Company
also declared quarterly cash dividends of $.30 per share for the first quarter
of 1998, and $.10 per share after giving effect to the 3-for-1 stock split for
the second quarter of 1998. If the Company experiences quarterly results in line
with projections, the Company intends to continue the quarterly dividend at $.10
per share after giving effect to the 3-for-1 stock split. See note 26 of the
Notes to the Consolidated Financial Statements filed with this report. 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 and the
Banks' 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
Banks 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. Also, capital distributions by Princess Anne are
subject to various limitations established by the Federal Reserve Board and the
Virginia State Corporation Commission. For information concerning these
regulations, see "Item 1.--Business-Regulation and Supervision--Regulation of
the Banks--Capital Distributions." Moreover, CENIT 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 CENIT Bank to be reduced below the
amount required for its liquidation account established in connection with the
Conversion. See note 21 of the Notes to the Consolidated Financial Statements
filed with this report.
Unlike the Banks, 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 Banks.
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 CENIT Bank to pay cash dividends to the Company
without the payment of income taxes by CENIT Bank on the amount deemed
distributed, which would include the amount of any federal income taxes
attributable to the distribution. Neither the Company nor CENIT Bank anticipates
creating federal tax liabilities in this manner. See "Item 1-Business--Federal
and State Taxation" and note 16 of the notes to Consolidated Financial
Statements filed with this report.
49
As of February 6, 1998, there were approximately 1,134 holders of record of
the Company's Common Stock.
Item 6 - Selected Financial Data
The following table presents selected financial data for the five years
ended December 31, 1997.
At or for the year ended December 31, (1)
1997 1996 1995 1994 1993
(Dollars in thousands, except per share)
Financial Condition Data:
Total assets $ 718,083 $ 707,100 $639,812 $ 575,675 $ 508,421
U.S. Treasury and other U.S. Government
agency securities, net 45,347 46,305 65,118 44,650 55,953
Loans held for investment, net 486,487 422,219 319,194 305,578 258,604
Mortgage-backed certificates, net 91,841 177,706 203,176 175,763 135,812
Real estate owned, net 1,098 2,769 1,828 5,718 3,575
Deposits 507,670 498,965 450,530 420,422 407,309
Borrowings 157,239 155,138 138,171 109,035 58,560
Stockholders' equity 49,937 49,608 46,729 42,217 39,810
Operating Data:
Interest income $ 50,776 $ 48,171 $ 45,527 $ 37,826 $ 34,004
Interest expense 29,310 28,087 27,476 19,496 16,910
-------------------------------------------------------------------
Net interest income 21,466 20,084 18,051 18,330 17,094
Provision for loan losses 600 377 697 490 1,667
-------------------------------------------------------------------
Net interest income after provision for loan losses 20,866 19,707 17,354 17,840 15,427
Other income 5,713 3,894 2,944 2,765 2,956
Other expenses 17,312 18,172 16,174 14,402 13,099
-------------------------------------------------------------------
Income before income taxes 9,267 5,429 4,124 6,203 5,284
Provision for income taxes 3,264 1,821 1,652 2,226 1,637
------------------------------------------------------------------
Net income $ 6,003 $ 3,608 $ 2,472 $ 3,977 $ 3,647
======================================================================
Earnings per share:
Basic $ 3.71 $ 2.23 $ 1.55 $ 2.53 $ 2.33
======================================================================
Diluted 3.61 2.17 1.50 2.46 2.30
======================================================================
Cash dividends per share $ 1.00 $ .75 $ .40 $ .36 $ .27
======================================================================
Pro forma earnings per share to reflect
3 for 1 stock split approved by Board
of Directors on March 24, 1998
Basic $ 1.24 $ .74 $ .52 $ .84 $ .78
=====================================================================
Diluted 1.20 .72 .50 .82 .77
=====================================================================
Selected Financial Ratios and Other Data:
Return on average assets .86% (2) 0.54% (3) 0.40% (4) 0.72% 0.76%
Return on average stockholders' equity 12.00 (2) 7.56 (3) 5.57 (4) 9.75 9.83
Average stockholders' equity to average assets 7.17 7.20 7.21 7.40 7.76
Stockholders' equity to total assets at year end 6.95 7.02 7.30 7.33 7.83
Interest rate spread 2.85 2.83 2.60 3.10 3.36
Net interest margin 3.27 3.22 3.07 3.47 3.78
Other expenses to average assets 2.48 (2) 2.74 (3) 2.63 (4) 2.61 2.76
Net interest income to other expenses 123.99 (2) 110.52 (3) 111.61 (4) 127.27 130.50
Nonperforming assets to total assets .34 .80 .45 1.42 1.01
Allowance for loan losses to total net loans .78 .90 1.16 1.24 1.56
Dividend payout ratio (5) 26.95 33.63 25.81 14.23 11.59
Book value per share $ 31.72 (6) $ 30.34 $ 29.27 $ 26.66 $ 25.41
Tangible book value per share 29.17 (6) 27.66 28.15 25.45 25.41
Number of retail branch offices 20 19 16 15 12
________
<FN>
(1) On August 1, 1995, Princess Anne became a wholly-owned subsidiary of the
Company in a merger accounted for by the pooling of interests method of
accounting. Accordingly, the consolidated financial data presented gives
effect to this merger and the accounts of Princess Anne have been combined
with those of the Company for all periods presented. Also, on April 1,
1994, CENIT Bank merged with Homestead Savings Bank, FSB ("Homestead").
This merger was accounted for by the purchase method of accounting. The
consolidated financial data presented above includes the results of
Homestead's operations and financial condition from the date of
acquisition.
(2) 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.
(3) 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.
50
(4) Exclusive of the $757 of merger expenses and the $563 loss on the sale of
securities and the related tax effect, the return on average assets and
return on average stockholders' equity for the year ended December 31, 1995
would have been .57% and 7.91%, respectively. Exclusive of the $757 of
merger expenses relating to the Princess Anne combination, the ratio of
other expenses to average assets and net interest income to other expenses
would have been 2.50% and 117.09%, respectively.
(5) Represents dividends per share divided by basic income per share. Dividends
per share represent historical dividends declared by the Company.
(6) 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, 1997, were $30.14 and $27.72, respectively.
</FN>
Item 7 - Management's Discussion and Analysis of Financial Condition and Results
of Operations
Financial Condition of the Company
Total assets. At December 31, 1997, the Company had total assets of $718.1
million, an increase of $11.0 million since December 31, 1996. This increase is
accounted for primarily by increases in residential single-family loans, home
equity and second mortgage loans and by an increase in federal funds sold, the
effect of which was partially offset by a decrease in securities available for
sale.
Securities Available For Sale. Securities available for sale totaled $137.2
million at December 31, 1997 compared to $224.0 million at December 31, 1996.
This decline resulted from the Company's effort to reinvest funds from the
securities available for sale portfolio to the loan portfolio. The net decrease
of $86.8 million from December 31, 1996 resulted primarily from the net effect
of $49.2 million of mortgage-backed certificate repayments, $17.0 million of
proceeds from the maturities or calls of securities, $16.1 million of U.S.
Treasury and other U.S. Government agency securities purchases, and $35.4
million of proceeds from the sale of securities.
The portfolio of securities available for sale at December 31, 1997 was
comprised of $6.0 million of other U.S. Government agency securities, $39.3
million of U.S. Treasury securities and $91.8 million of mortgage-backed
certificates.
Loans. The balance of net loans held for investment increased 15.2% from
$422.2 million at December 31, 1996 to $486.5 million at December 31, 1997.
Adjustable-rate residential single-family loans increased from $157.5
million at December 31, 1996 to $213.7 million at December 31, 1997. The
increase in adjustable-rate residential single-family loans resulted from both
the origination of loans by the Company and from the purchase of loans,
including bulk purchases totaling $45.5 million during 1997. These purchased
loans are secured by real estate located outside the Company's primary market
area. Bulk loan purchases for 1996 totaled $84.6 million. The Company will
continue to make bulk purchases of adjustable-rate single-family loans secured
by real estate located outside of its primary market area in 1998.
Home equity and second mortgage loans increased from $29.6 million at
December 31, 1996 to $45.2 million at December 31, 1997. This increase resulted
primarily from the continuation of a successful program added to the Company's
retail banking strategy in 1996, which was evidenced by a 64.3% increase in
originations from $19.9 million in 1996 to $32.7 million in 1997.
Deposits. During 1997, the Company's total deposits increased from $499.0
million at December 31, 1996 to $507.7 million at December 31, 1997. The
Company's noninterest-bearing deposits increased by 18.9% from $46.2 million at
December 31, 1996 to $54.9 million at December 31, 1997. This increase in
noninterest-bearing deposits resulted from the Company's ongoing strategy to
seek lower-cost deposits to further enhance the Company's profitability.
Borrowed Funds. The Company's borrowed funds, which include Federal Home
Loan Bank ("FHLB") advances, other borrowings, and securities sold under
agreements to repurchase, increased from $155.1 million at December 31, 1996 to
$157.2 million at December 31, 1997. FHLB advances decreased from $148.0 million
to $145.0 million during this period, while other borrowings and securities sold
under agreements to repurchase increased by $5.1 million. The Company may
continue to use FHLB advances to fund the purchase of residential mortgage
loans, U.S. Treasury or other U.S. Government agency securities with maturities
of three years or less, or mortgage-backed certificates.
Capital. The Company's and Banks' capital ratios significantly exceeded
applicable regulatory requirements at both December 31, 1997 and 1996.
Asset Quality. The Company's total nonperforming assets decreased by 57.1%,
to a total of $2.4 million, or .34% of assets, at December 31, 1997 compared to
$5.7 million, or .80% of assets, at December 31, 1996. Real estate owned ("REO")
and other
51
repossessed assets decreased by 53.0%, from $2.8 million at December 31, 1996 to
$1.3 million at December 31, 1997. Nonperforming loans decreased by 61.1%, from
$2.8 million at December 31, 1996 to $1.1 million at December 31, 1997.
Comparison of Operating Results for the Years Ended December 31, 1997 and
December 31, 1996
General. The Company's pre-tax income increased by 70.7% to $9.3 million
for the year ended December 31, 1997 from $5.4 million for 1996. This increase
was attributable primarily to a $1.4 million increase in net interest income, a
$1.8 million increase in other income and an $860,000 decrease in other
expenses, the effect of which more than offset a $223,000 increase in the
provision for loan losses. Other expenses decreased in 1997 primarily as a
result of a reduction in federal deposit insurance premiums. Expenses in 1996
included a one-time assessment of $2.3 million in connection with the federal
legislation to recapitalize SAIF.
Net Interest Income. The Company's net interest income before provision for
loan losses increased by $1.4 million for the year ended December 31, 1997, a
6.9% increase from 1996. This increase resulted from a $2.6 million increase in
interest income, which exceeded a $1.2 million increase in interest expense. The
increase in interest income was primarily attributable to an increase in the
average balance of loans.
Interest on the Company's portfolio of mortgage-backed certificates
decreased by approximately $4.5 million from $13.2 million for the year ended
December 31, 1996 to $8.7 million for the comparable 1997 period. The decrease
resulted from a $72.8 million decrease in the average balance of the portfolio
which was partially offset by an increase in the average yield of the portfolio
from 6.69% in 1996 to 6.96% in 1997. The decrease in the average balance was a
consequence of the Company's sale of mortgage-backed certificates and
repayments. No mortgage-backed certificates were purchased in 1997.
The mortgage-backed certificate portfolio at December 31, 1997 had a total
amortized cost of $90.7 million and had a weighted average yield of 7.01% for
the month of December, 1997. The portfolio includes $5.1 million, or 5.6% of the
total portfolio, of fixed- rate mortgage-backed certificates; $83.6 million, or
92.2% of the total portfolio, of adjustable-rate mortgage-backed certificates;
and $2.1 million, or 2.2% of the total portfolio, of fixed-rate mortgage-backed
certificates with balloon provisions. The weighted average yields for the month
of December 1997 for these three classifications were 8.43%, 6.94%, and 6.51%,
respectively.
Interest on loans increased by approximately $8.0 million, or 26.4%, from
$30.2 million in the year ended 1996 to $38.2 million in 1997. This increase was
attributable to a $118.4 million increase in the average balance of loans, the
effect of which more than offset a decrease in the yield on the Company's loan
portfolio from 8.59% in 1996 to 8.12% in 1997. The increase in the average
balance of loans resulted from both an increase in originations and from the
purchase of residential single-family loans. The weighted average yield on the
loan portfolio for the month of December 1997 was 8.17%.
Interest on investment securities decreased $882,000 in 1997 compared to
1996. This decrease resulted from a $12.4 million decrease in the average
balance of the portfolio and a decrease in the yield on the portfolio from 6.44%
in 1996 to 6.25% in 1997.
The Company's interest expense increased by $1.2 million, primarily as a
result of an increase in interest on deposits, the effect of which was partially
offset by a decrease in interest on borrowings. The average balance of interest
bearing deposits increased by $41.3 million in 1997 compared to 1996, while the
average costs of interest bearing deposits decreased from 4.70% in 1996 to 4.66%
in 1997. The average balance of borrowings decreased by $13.3 million in 1997
compared to 1996, while the average cost of the borrowings increased from 5.40%
in 1996 to 5.54% in 1997.
The Company's net interest margin increased from 3.22% for the year ended
December 31, 1996 to 3.27% for the year ended December 31, 1997. This increase
was the result of an increase in the Company's interest rate spread from 2.83%
in the year ended December 31, 1996 to 2.85% in the comparable 1997 period. The
increase in the Company's interest rate spread occurred because the Company's
overall yield on its interest-earning assets remained level at 7.73%, while the
overall cost of its interest-bearing liabilities decreased from 4.90% in 1996 to
4.88% in 1997. The Company's calculations of interest rate spread and net
interest rate margin include nonaccrual loans as interest-earning assets.
The Company's net interest margin remained substantially unchanged during
1997. For the three months ended December 31, 1997, the Company's net interest
margin was 3.31% and the interest rate spread was 2.86%. For the three months
ended December 31, 1996, the Company's net interest margin was 3.30% and the
interest rate spread was 2.91%.
Provision for Loan Losses. The Company's provision for loan losses
increased from $377,000 in 1996 to $600,000 in 1997. Net chargeoffs totaled
$623,000 in 1997 compared to $267,000 in 1996. The Company's 1996 provision for
loan losses was positively
52
impacted by a $288,000 recovery relating to one loan. At December 31, 1997, the
Company's total allowance for loan losses was $3.8 million and nonperforming
loans totaled $1.1 million, resulting in a coverage ratio of 343.0%.
Other Income. Total other income increased by 46.7%, from $3.9 million in
1996 to $5.7 million in 1997. Deposit fees and merchant processing fees
increased by $615,000 and $653,000, respectively, in 1997 compared to 1996.
Deposit fees increased in 1997 as a result of additional transaction accounts,
the addition of two ATMs, full implementation of ATM surcharges and increases in
the Company's deposit fee schedule. Merchant processing fees increased in 1997
as the Company continued to experience substantial growth in its merchant
portfolio. Brokerage fees recognized by CENIT Bank's commercial mortgage loan
brokerage subsidiary increased by $437,000 in 1997 compared to 1996.
Other Expenses. Total other expenses decreased from $18.2 million in the
year ended December 31, 1996 to $17.3 million in 1997. Total other expenses for
1996 includes the $2.3 million SAIF special assessment and for 1997 includes
$405,000 of expenses relating to the proxy contest and other matters. Exclusive
of the SAIF special assessment in 1996 and the proxy and other expenses in 1997,
total other expenses were $15.8 million in 1996 and $16.9 million in 1997.
Salaries and employee benefits increased by $551,000 in 1997 primarily as a
result of overall increases in wages and benefits, expansion of the retail
banking group, including the opening of two new Super Kmart offices, one in
August 1996 and one in November 1997, and additional commissions from CENIT
Bank's commercial mortgage loan brokerage subsidiary related to the increase in
mortgage loan brokerage revenue. Merchant processing expenses increased by
$544,000 in 1997 as a result of increased volume. Expenses related to real
estate owned increased by $177,000 during 1997 due to disposal of properties
during the year. Net occupancy expenses of premises increased by $133,000 in
1997, reflecting the incremental costs associated with additional retail
locations and the renovation of certain existing locations. The impact of the
increases in the above expenses was partially offset by a $570,000 decrease in
federal deposit insurance premiums in 1997 due primarily to lower premium rates,
and a $129,000 decrease in professional fees.
Income Taxes. The Company's income tax expense for the year ended
December 31, 1997 was $3.3 million, which represents an effective tax rate of
35.2%. The Company's income tax expense for 1996 was $1.8 million, which
represented an effective tax rate of 33.5%. The effective tax rate increased
during 1997 primarily as a result of the increase in the income of CENIT Bank
subject to state tax.
Comparison of Operating Results for the Years Ended December 31, 1996 and
December 31, 1995
General. The Company's pre-tax income increased to $5.4 million for the
year ended December 31, 1996 from $4.1 million for 1995. This increase was
attributable primarily to a $2.0 million increase in net interest income, a
$950,000 increase in other income and a $320,000 decrease in the provision for
loan losses, the effect of which more than offset a $2.0 million increase in
other expenses. Other expenses increased primarily as a result of the $2.3
million pretax charge against earnings relating to the special assessment
charged to the Company in connection with the federal legislation to
recapitalize the SAIF.
Net Interest Income. The Company's net interest income before provision for
loan losses increased by $2.0 million for the year ended December 31, 1996, an
11.3% increase from 1995. This increase resulted from a $2.6 million increase in
interest income, which exceeded a $611,000 increase in interest expense. The
increase in interest income was primarily attributable to an increase in the
average balance of loans and to an increase in the average balance and average
yield of the mortgage-backed certificate portfolio.
Interest on the Company's portfolio of mortgage-backed certificates
increased by approximately $1.8 million from $11.4 million for the year ended
December 31, 1995 to $13.2 million for the comparable 1996 period. This increase
resulted from both a $16.4 million increase in the average balance of the
portfolio and an increase in the average yield of the portfolio from 6.30% in
1995 to 6.69% in 1996. The increase in the average balance was a consequence of
the Company's purchase of mortgage-backed certificates in the latter part of
1995 and the first part of 1996 to increase income of the Company. The increase
in the yield on mortgage-backed certificates occurred primarily as a result of
the Company's December, 1995 sale of lower yielding mortgage-backed certificates
with five-year balloon provisions and the replacement of those assets in
December, 1995 and January, 1996 with higher-yielding, adjustable-rate
mortgage-backed certificates.
The mortgage-backed certificate portfolio at December 31, 1996 had a total
amortized cost of $176.2 million and had a weighted average yield of 6.85% for
the month of December, 1996. The portfolio was comprised of $18.0 million, or
10.2% of the total portfolio, of mortgage-backed certificates with five- and
seven-year balloon provisions; $151.9 million, or 86.2% of the total portfolio,
of adjustable-rate mortgage-backed certificates; and $6.3 million, or 3.6% of
the total portfolio, of fixed-rate mortgage-backed certificates.
53
Interest on loans increased by approximately $1.3 million from $28.9
million in 1995 to $30.2 million in 1996. This increase was attributable to a
$27.8 million increase in the average balance of loans, the effect of which more
than offset a decrease in the yield on the Company's loan portfolio from 8.91%
in 1995 to 8.59% in 1996. The increase in the average balance of loans resulted
from both an increase in originations and from the purchase of residential loans
discussed above.
Interest on investment securities decreased $389,000 in 1996 compared to
1995. This decrease resulted from a $7.8 million decrease in the average balance
of the portfolio, the effect of which more than offset an increase in the yield
on the portfolio from 6.26% in 1995 to 6.44% in 1996.
The Company's interest expense increased by $611,000 primarily as a result
of an increase in interest on borrowings. Interest on borrowings totaled $8.8
million in the year ended December 31, 1996 compared to $8.1 million in 1995.
The average balance of FHLB advances increased by $26.4 million in 1996 compared
to 1995 as the Company continued to utilize FHLB advances to fund a portion of
its growth. The impact of the increase in average balances of FHLB advances was
partially offset by a decrease in the average cost of the advances from 6.16% in
1995 to 5.44% in 1996.
The Company's net interest margin increased from 3.07% for the year ended
December 31, 1995 to 3.22% for the year ended December 31, 1996. This increase
was the result of an increase in the Company's interest rate spread from 2.60%
in the year ended December 31, 1995 to 2.83% in the comparable 1996 period. The
increase in the Company's interest rate spread occurred because the Company's
overall yield on its interest-earning assets remained level at 7.73%, while the
overall cost of its interest-bearing liabilities decreased from 5.13% in 1995 to
4.90% in 1996. The Company's calculations of interest rate spread and net
interest rate margin include nonaccrual loans as interest-earning assets.
The Company's net interest margin and interest rate spread gradually
increased during 1996. For the three months ended December 31, 1996, the
Company's net interest margin was 3.30% and the interest rate spread was 2.91%.
Provision for Loan Losses. The Company's provision for loan losses
decreased from $697,000 in 1995 to $377,000 in 1996. The Company's 1996
provision for loan losses was positively impacted by a $288,000 recovery
received relating to one loan. Net chargeoffs totaled $267,000 in 1996 compared
to $790,000 in 1995. At December 31, 1996, the Company's total allowance for
loan losses was $3.8 million and nonperforming loans totaled $2.8 million,
resulting in a coverage ratio of 134.2%.
Other Income. Total other income increased from $2.9 million in 1995 to
$3.9 million in 1996. Deposit fees and merchant processing fees increased by
$401,000 and $236,000, respectively, in 1996 compared to 1995. Deposit fees
increased in 1996 as a result of additional transaction accounts, the addition
of seven ATMs and increases in the Company's deposit fee schedule. Merchant
processing fees increased in 1996 as the Company continued to experience
substantial growth in its merchant portfolio. Gains on the sale of individual
loans and servicing from mortgage operations increased by $85,000 in 1996
compared to 1995, primarily as a result of an increase in the volume of loans
sold. Also, the Company recognized a net gain of $77,000 on the sale of
securities in 1996 compared to a loss of $563,000 in 1995. The effect of these
items was partially offset by a $303,000 decrease in brokerage fees recognized
by CENIT Bank's commercial mortgage loan brokerage subsidiary.
Other Expenses. Total other expenses increased from $16.2 million in the
year ended December 31, 1995 to $18.2 million in 1996. Total other expenses for
1996 includes the $2.3 million SAIF special assessment and for 1995 includes
$757,000 of expenses relating to the Princess Anne merger. Exclusive of the SAIF
special assessment in 1996 and the merger expenses in 1995, total other expenses
were $15.8 million and $15.4 million, respectively. Salaries and employee
benefits increased by $293,000 in 1996 primarily as a result of overall
increases in wages and benefits and CENIT Bank's opening of two new Super Kmart
offices, one in November, 1995 and one in August, 1996. The impact of the
increase in wages and benefits was partially offset by a $141,000 net decrease
in commissions in 1996. Net occupancy expense of premises increased by $311,000
in 1996 primarily as a result of incremental costs associated with the opening
of three new offices and the relocation of two offices. Merchant processing
expenses increased by $209,000 in 1996 as a result of increased volume. The
impact of the increases in the above expenses was partially offset by a $334,000
decrease in expenses, gains/losses, and provision for losses on real estate
owned and a $202,000 decrease in professional fees in 1996.
Income Taxes. The Company's income tax expense for the year ended
December 31, 1996 was $1.8 million, which represents an effective tax rate of
33.5%. The Company's income tax expense for 1995 was $1.7 million, which
represented an effective tax rate of 40.0%. The effective tax rate was higher in
the 1995 period due to the nondeductibility of certain merger expenses.
54
Liquidity
The Company's primary sources of funds are deposits, principal repayments
on loans and mortgage-backed certificates, FHLB advances, proceeds from
maturities of investment securities, short-term investments, and funds provided
by operations. While scheduled loan and mortgage-backed certificate amortization
and short-term investments are a relatively predictable source of funds, deposit
flows are greatly influenced by general interest rates, economic conditions, and
competition.
CENIT Bank is required to maintain specific levels of liquid investments.
Current regulations require CENIT Bank to maintain liquid assets, which include
short-term assets such as cash, certain time deposits and bankers' acceptances,
short-term U.S. Treasury obligations, and mortgage-backed certificates with
final maturities of five years or less, as well as certain long-term assets,
equal to not less than 5.0% of its net withdrawable accounts plus short-term
borrowings. CENIT Bank has generally maintained regulatory liquidity in excess
of its required levels. CENIT Bank's liquidity ratio was 8.8% and 9.5% at
December 31, 1997 and December 31, 1996, respectively. As a Virginia state
chartered bank, Princess Anne is not required by regulation to maintain specific
levels of liquid investments.
At December 31, 1997, the Company had outstanding mortgage and nonmortgage
loan commitments, including unused lines of credit, of $41.1 million,
outstanding commitments to purchase loans of $28.1 million, outstanding
commitments to purchase approximately $9.3 million of adjustable-rate
mortgage-backed certificates, and outstanding commitments to sell mortgage loans
of $3.9 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 $258.9 million at December 31, 1997. 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.
The Company's primary technique for 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, 1997, 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 $25.0 million,
or 3.5% 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
more quickly 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 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.
55
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.
As part of its borrowings, the Company may utilize from time-to-time,
convertible advances from the FHLB-Atlanta. Convertible advances generally
provide for a fixed-rate of interest for a portion of the term of the advance,
an ability for the FHLB-Atlanta to convert the advance from a fixed rate to an
adjustable rate at some predetermined time during the remaining term of the
advance (the "conversion" feature), and a concurrent opportunity for the Company
to prepay the advance with no prepayment penalty in the event the FHLB-Atlanta
elects to exercise the conversion feature. Changes in interest rates from those
at December 31, 1997 may result in a change in the estimated maturity of
convertible advances and, therefore, the Company's interest rate gap position.
Also, 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, 1997 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
1997 prepayment experience of the Company. Additionally, loans and securities
with call or balloon provisions are included in the period in which they balloon
or may first be called. Except as stated above, the amount of assets and
liabilities shown that reprice or mature during a particular period were
determined in accordance with the contractual terms of the asset or liability.
56
Interest Sensitivity Analysis
December 31, 1997
(Dollars in thousands)
Over Over
Total One Three
Within Year to Years or
0-3 4-6 7-12 One Three Non-
Months Months Months Year Years Sensitive Total
-------------------------------------------------------------------------------
Assets
Interest-earning assets:
Loans (1) $130,591 $ 51,440 $ 84,297 $ 266,328 $141,082 $ 84,987 $492,397
Securities available for sale:
U.S. Treasury securities 4,001 6,012 4,027 14,040 25,303 - 39,343
Other U.S. Government agency
securities - 1,000 3,004 4,004 2,000 - 6,004
Mortgage-backed certificates 25,187 24,440 36,906 86,533 1,677 3,631 91,841
Federal funds sold 37,118 - - 37,118 - - 37,118
Federal Home Loan Bank and Federal
Reserve Bank stock - - - - - 8,711 8,711
-------------------------------------------------------------------------------
Total interest-earning assets $196,897 $ 82,892 $128,234 $ 408,023 $170,062 $ 97,329 $675,414
===============================================================================
Liabilities
Interest-bearing liabilities:
Interest-bearing deposits:
Passbook, statement savings
and checking accounts (2) $ 2,987 $ 2,987 $ 5,974 $ 11,948 $ 18,552 $ 46,372 $ 76,872
Money market deposits 3,744 3,743 7,487 14,974 17,327 15,425 47,726
Certificates of deposits 95,871 67,422 95,603 258,896 55,149 14,153 328,198
-------------------------------------------------------------------------------
Total interest-bearing deposits 102,602 74,152 109,064 285,818 91,028 75,950 452,796
Advances from the Federal Home Loan Bank 85,000 - - 85,000 60,000 - 145,000
Other borrowings 2,575 - - 2,575 - - 2,575
Securities sold under
agreements to repurchase 9,664 - - 9,664 - - 9,664
-------------------------------------------------------------------------------
Total interest-bearing liabilities $199,841 $ 74,152 $109,064 $ 383,057 $151,028 $ 75,950 $610,035
===============================================================================
Interest sensitivity gap $ (2,944) $ 8,740 $ 19,170 $ 24,966 $ 19,034 $ 21,379 $ 65,379
===============================================================================
Cumulative interest sensitivity gap $ (2,944) $ 5,796 $ 24,966 $ 24,966 $ 44,000
=======================================================
Cumulative interest sensitivity gap as
a percentage of total assets (0.4%) 0.8% 3.5% 3.5% 6.1%
<FN>
(1) Excludes nonaccrual loans of $1.0 million.
(2) Excludes $54.9 million of noninterest-bearing deposits.
</FN>
57
The following table provides information about the Company's financial
instruments that are sensitive to changes in interest rates as of December 31,
1997, based on the information and assumptions set forth in the notes to the
table. The Company had no derivative financial instruments, foreign currency
exposure or trading portfolio as of December 31, 1997. 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. From a risk
management perspective, however, the Company believes that repricing dates, as
opposed to expected maturity dates, may be more relevant in analyzing the
interest sensitivity of such instruments.
58
EXPECTED MATURITY DATE - YEAR ENDED DECEMBER 31,
-----------------------------------------------------------------------------------
There- Fair
(Dollars in thousands) 1998 1999 2000 2001 2002 after Total Value
---- ---- ---- ---- ---- ------ ----- -----
ON-BALANCE SHEET
FINANCIAL INSTRUMENTS
Interest-earning assets:
Loans (1) (2)
Fixed rate $ 27,163 $ 16,776 $ 14,180 $ 10,656 $ 8,571 $ 30,529 $107,875 $109,993
Average interest rate 8.19% 8.55% 8.58% 8.56% 8.51% 8.54% 8.46%
Adjustable rate 120,101 61,945 45,568 32,812 24,821 99,275 384,522 390,124
Average interest rate 8.43% 8.02% 7.88% 7.97% 7.95% 7.94% 8.10%
Mortgage-backed certificates (3)
Fixed rate 3,052 874 776 699 634 1,304 7,339 7,339
Average interest rate 6.83% 8.43% 8.44% 8.44% 8.44% 8.47% 7.77%
Adjustable rate 24,927 17,898 12,881 9,304 6,752 12,740 84,502 84,502
Average interest rate 6.94% 6.94% 6.94% 6.93% 6.93% 6.92% 6.94%
Investments (4) 18,044 12,109 15,194 - - 8,711 54,058 54,058
Average interest rate 6.20% 5.99% 6.19% -% -% 7.21% 6.31%
Federal funds sold 37,118 - - - - - 37,118 37,118
Average interest rate 5.55% -% -% -% -% -% 5.55%
-------------------------------------------------------------------------------------
Total $230,405 $109,602 $ 88,599 $ 53,471 $ 40,778 $152,559 $675,414 $683,134
Average interest rate 7.58% 7.70% 7.57% 7.91% 7.91% 7.94% 7.73%
=====================================================================================
Interest-bearing liabilities:
Interest-bearing deposits (5) (6) $285,818 $ 51,634 $ 39,394 $ 20,763 $ 14,668 $ 40,519 $452,796 $454,912
Average interest rate 5.06% 4.65% 5.09% 4.07% 4.03% 2.93% 4.75%
Borrowings (7) 97,239 - 60,000 - - - 157,239 157,816
Average interest rate 5.56% -% 5.18% -% -% -% 5.41%
-------------------------------------------------------------------------------------
Total $383,057 $ 51,634 $ 99,394 $ 20,763 $ 14,668 $ 40,519 $610,035 $612,728
Average interest rate 5.19% 4.65% 5.14% 4.07% 4.03% 2.93% 4.92%
=====================================================================================
____________________
<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, from
14% to 25%;
-For single-family fixed-rate first mortgage loans, from 11% to 17%;
-For commercial real estate loans, an average of 12%;
-For consumer loans, an average of 41%; and
-For most other loans, from 3% to 71%.
(2) Excludes nonaccrual loans of $1.0 million.
(3) Assumes prepayment rates for adjustable mortgage-backed certificates of
25-32% and for fixed-rate mortgage-backed certificates of 12% to 15%.
(4) Totals include the Company's investment in FHLB and Federal Reserve Bank
Stock. Investment securities with call features are reflected in the
maturity period in which the security is expected to be called based on
interest rates at December 31, 1997.
(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 $54.9 million of noninterest-bearing deposits.
(7) For the $60 million FHLB convertible fixed-rate advance with an interest
rate of 5.18%, which is convertible at the option of the FHLB to an
adjustable-rate advance beginning in September, 1998 and quarterly
thereafter until the advance's maturity in September, 2007, the estimated
expected maturity at December 31, 1997 is 2.5 years based on information
from FHLB-Atlanta.
</FN>
59
Impact of Inflation and Changing Prices
The Consolidated Financial Statements and Notes presented herein have been
prepared in accordance with generally accepted accounting principles, 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 1997, Statement of Financial Accounting Standards No. 130,
"Reporting Comprehensive Income" ("FAS 130"), was issued and establishes
standards for reporting and displaying comprehensive income and its components.
FAS 130 requires comprehensive income and its components, as recognized under
the accounting standards, to be displayed in a financial statement with the same
prominence as other financial statements. The Company plans to adopt the
standard, as required, beginning in 1998; adoption is not expected to have a
material impact on the Company.
Statement of Financial Accounting Standards No. 131, "Disclosures about
Segments of an Enterprise and Related Information," also issued in June 1997,
establishes new standards for reporting information about operating segments in
annual and interim financial statements. The standard also requires descriptive
information about the determination of operating segments, the products and
services provided by the segments and the nature of differences between
reportable segment measurements and those used for the consolidated enterprise.
This standard is effective for years beginning after December 15, 1997. Adoption
in interim financial statements is not required until the year after initial
adoption; however, comparative prior period information is required. The Company
is evaluating the standard and plans adoption as required in 1998; adoption is
not expected to have a significant financial impact on the Company.
Impact of the Year 2000 Issue
The Year 2000 Issue is the result of computer programs being written using
two digits rather than four to define the applicable year. As a result, such
computer programs will not recognize the correct date after December 31, 1999.
In 1997, the Company implemented a process of software inventory, analysis,
modification and testing to address the Year 2000 Issue. This process is
currently underway and the Company expects to substantially complete its Year
2000 software conversion project by the end of 1998.
Based on its most recent assessment, management of the Company believes
that modification of the Company's software will be completed in a timely manner
for its computer systems to properly utilize dates beyond December 31, 1999. The
Company estimates that the cost to modify its computer systems will be between
$500,000 and $600,000. These costs will not be incremental costs to the Company,
but rather will represent the redeployment of existing information technology
resources.
The potential impact of the Year 2000 Issue will depend not only on the
corrective measures the Company will undertake but also on other entities who
provide data to or receive data from the Company and on those whose operational
capability or financial condition are important to the Company, including the
Company's borrowers, lenders, suppliers and service providers. The Company has
communicated with some of these parties to ensure their awareness of the Year
2000 Issue. The plans of such parties to address the Year 2000 Issue will be
monitored, and any fundamental impact on the Company will be evaluated. At this
time, however, the Company is not able to determine whether the failure to
address the Year 2000 Issue by any of its borrowers, lenders, suppliers or
service providers will affect the Company's operations or financial condition.
Safe Harbor Statement Under the Private Securities Litigation Reform Act of 1995
The above discussion contains certain forward looking statements that
involve potential risk and uncertainties. The Company's future results could
differ materially from those discussed herein. Readers should not place undue
reliance on these forward looking statements which are applicable only as of the
date hereof.
60
Item 8 - Financial Statements and Supplementary Data
Index to Financial Statements
Page
Financial Statements:
Report of Independent Accountants............................................62
Consolidated Statement of Financial Condition as of December 31, 1997 and
December 31, 1996..........................................................63
Consolidated Statement of Operations for the three years ended December 31,
1997.......................................................................64
Consolidated Statement of Cash Flows for the three years ended December 31,
1997.......................................................................65
Consolidated Statement of Changes in Stockholders' Equity for the three years
ended December 31, 1997....................................................66
Notes to Consolidated Financial Statements...................................67
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.
61
Report of Independent Accountants
To the Board of Directors and Stockholders of CENIT Bancorp, Inc.
Norfolk, Virginia
In our opinion, the accompanying consolidated statements of financial condition
and the related consolidated statements of operations, of changes in
stockholders' equity and of cash flows present fairly, in all material respects,
the financial position of CENIT Bancorp, Inc. and its subsidiaries at
December 31, 1997 and 1996, and the results of their operations and their cash
flows for each of the three years in the period ended December 31, 1997, in
conformity with generally accepted accounting principles. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of the financial statements of CENIT
Bancorp, Inc. in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
PRICE WATERHOUSE LLP
Norfolk, Virginia
January 30, 1998
62
Consolidated Statement of Financial Condition
(Dollars in thousands, except per share data)
December 31,
1997 1996
---------------------------
Assets
Cash $ 16,993 $ 17,475
Federal funds sold 37,118 6,003
Securities available for sale at fair value (adjusted cost
of $135,861 and $222,367, respectively) 137,188 224,011
Loans, net:
Held for investment 486,487 422,219
Held for sale 3,167 1,900
Interest receivable 4,888 5,456
Real estate owned, net 1,098 2,769
Federal Home Loan Bank and Federal Reserve
Bank stock, at cost 8,711 7,861
Property and equipment, net 14,230 12,664
Goodwill and other intangibles, net 4,010 4,381
Other assets 4,193 2,361
---------------------------
Total assets $ 718,083 $ 707,100
===========================
Liabilities and Stockholders' Equity
Liabilities:
Deposits:
Noninterest-bearing $ 54,874 $ 46,154
Interest-bearing 452,796 452,811
---------------------------
Total deposits 507,670 498,965
Advances from the Federal Home Loan Bank 145,000 148,000
Other borrowings 2,575 ---
Securities sold under agreements to repurchase 9,664 7,138
Advance payments by borrowers for taxes and insurance 720 631
Other liabilities 2,517 2,758
---------------------------
Total liabilities 668,146 657,492
---------------------------
Commitments (Note 19)
Stockholders' equity: (Note 26)
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 1,657,081
and 1,635,044, respectively 17 16
Additional paid-in capital 18,152 17,670
Retained earnings - substantially restricted 35,416 31,040
Common stock acquired by Employees Stock
Ownership Plan (ESOP) (4,232) -
Common stock acquired by Management
Recognition Plan (MRP) (271) (181)
Net unrealized gain on securities available for sale,
net of income taxes 855 1,063
---------------------------
Total stockholders' equity 49,937 49,608
---------------------------
$ 718,083 $ 707,100
===========================
<FN>
The notes to consolidated financial statements are an integral part of this
statement.
</FN>
63
Consolidated Statement of Operations
(Dollars in thousands, except per share data)
Year Ended December 31,
1997 1996 1995
---------- ---------- ----------
Interest and fees on loans $ 38,220 $ 30,243 $ 28,907
Interest on mortgage-backed certificates 8,685 13,224 11,406
Interest on investment securities 2,775 3,657 4,046
Dividends and other interest income 1,096 1,047 1,168
-------------------------------------------
Total interest income 50,776 48,171 45,527
-------------------------------------------
Interest on deposits 20,972 19,240 19,382
Interest on borrowings 8,338 8,847 8,094
-------------------------------------------
Total interest expense 29,310 28,087 27,476
-------------------------------------------
Net interest income 21,466 20,084 18,051
Provision for loan losses 600 377 697
-------------------------------------------
Net interest income after provision for loan losses 20,866 19,707 17,354
-------------------------------------------
Other income:
Deposit fees 2,040 1,425 1,024
Gains (losses) on sales of:
Securities, net 84 77 (563)
Loans, net 548 629 544
Loan servicing fees and late charges 322 353 441
Other 2,719 1,410 1,498
-------------------------------------------
Total other income 5,713 3,894 2,944
-------------------------------------------
Other expenses:
Salaries and employee benefits 8,313 7,762 7,469
Equipment, data processing, and supplies 2,703 2,529 2,512
Federal deposit insurance premiums, including
one-time SAIF special assessment of $2,340
in 1996 277 3,187 893
Merger expenses - - 757
Expenses related to proxy contest and other
matters 405 - -
Other 5,614 4,694 4,543
-------------------------------------------
Total other expenses 17,312 18,172 16,174
-------------------------------------------
Income before income taxes 9,267 5,429 4,124
Provision for income taxes 3,264 1,821 1,652
-------------------------------------------
Net income $ 6,003 $ 3,608 $ 2,472
===========================================
Earnings per share:
Basic $ 3.71 $ 2.23 $ 1.55
===========================================
Diluted $ 3.61 $ 2.17 $ 1.50
===========================================
Dividends per common share $ 1.00 $ .75 $ .40
===========================================
Pro forma earnings per share to reflect 3 for 1
stock split approved by Board of Directors on
March 24, 1998 (unaudited)
Basic $ 1.24 $ .74 $ .52
===========================================
Diluted $ 1.20 $ .72 $ .50
===========================================
<FN>
The notes to consolidated financial statements are an integral part of this
statement.
</FN>
64
Consolidated Statement of Cash Flows
(Dollars in thousands)
Year Ended December 31,
1997 1996 1995
------------------------------------------------
Cash flows from operating activities:
Net income $ 6,003 $ 3,608 $ 2,472
Add (deduct) items not affecting cash during the year:
Provision for loan losses 600 377 697
Provision for losses on real estate owned 81 136 199
Amortization of loan yield adjustments 158 (98) (227)
Depreciation, amortization and accretion, net 2,593 2,481 1,617
Net (gains) losses on sales/disposals of:
Securities (84) (77) 563
Loans (548) (629) (544)
Real estate, property and equipment 16 160 (244)
Proceeds from sales of loans held for sale 45,338 46,685 37,848
Originations of loans held for sale (46,097) (45,003) (33,424)
Change in assets/liabilities, net
Increase in interest receivable and other assets (1,121) (3,689) (772)
Decrease in other liabilities (46) (532) (410)
------------------------------------------------
Net cash provided by operating activities 6,893 3,419 7,775
------------------------------------------------
Cash flows from investing activities:
Purchases of securities available for sale (16,087) (67,906) (103,420)
Purchases of securities held to maturity - - (53,321)
Proceeds from sales of securities available for sale 35,447 14,792 68,689
Principal repayments on securities available for sale 49,243 66,519 8,499
Principal repayments on securities held to maturity - - 24,020
Proceeds from maturities and calls of securities available
for sale 17,000 29,160 10,000
Net increase in loans held for investment (64,572) (105,602) (10,517)
Net proceeds on sales of real estate owned 1,224 1,837 828
Additions to real estate owned (129) (398) (727)
Purchases of Federal Home Loan Bank stock
and Federal Reserve Bank stock (1,850) (7,942) (5,191)
Redemption of Federal Home Loan Bank stock 1,000 7,110 3,900
Purchases of property and equipment (2,727) (2,662) (2,620)
Proceeds from sales of property and equipment 10 - 389
------------------------------------------------
Net cash provided by (used for) investing activities 18,559 (65,092) (59,471)
------------------------------------------------
Cash flows from financing activities:
Proceeds from exercise of stock options and warrants 357 583 196
Net increase in deposits 8,705 48,435 30,108
Proceeds from Federal Home Loan Bank advances 1,255,000 1,918,000 1,247,000
Repayment of Federal Home Loan Bank advances (1,258,000) (1,903,000) (1,221,000)
Proceeds from other borrowings 4,000 - -
Repayment of other borrowings (1,425) (300) (300)
Net increase in securities sold under agreement
to repurchase 2,526 2,267 3,436
Cash dividends paid (1,627) (1,215) (531)
Purchase of Common Stock by ESOP (4,232) - -
Other, net (123) (24) (168)
------------------------------------------------
Net cash provided by financing activities 5,181 64,746 58,741
------------------------------------------------
Increase in cash and cash equivalents 30,633 3,073 7,045
Cash and cash equivalents, beginning of year 23,478 20,405 13,360
------------------------------------------------
Cash and cash equivalents, end of year $ 54,111 $ 23,478 $ 20,405
================================================
Supplemental disclosures of cash flow information:
Cash paid during the year for interest $ 11,624 $ 11,883 $ 15,082
Cash paid during the year for income taxes 2,820 1,595 1,691
Schedule of noncash investing and financing activities:
Real estate acquired in settlement of loans 1,603 3,920 3,055
Loans to facilitate sale of real estate owned 2,058 1,622 3,486
<FN>
The notes to consolidated financial statements are an integral part of this
statement.
</FN>
65
Consolidated Statement of Changes in Stockholders' Equity
(Dollars in thousands)
Common Net Unrealized
Stock Gain (Loss) On
Common Common Additional Acquired Securities
Stock Stock Paid-In Retained by ESOP Available
Shares Amount Capital Earnings and MRP For Sale Total
-------------------------------------------------------------------------------------------
Balance, December 31, 1994 1,583,595 $ 16 $ 16,588 $ 26,720 $ (718) $ (389) $ 42,217
Net income - - - 2,472 - - 2,472
Cash dividends paid, net of
tax benefits relating to
dividends paid on unallo-
cated shares held by ESOP - - - (523) - - (523)
Principal payments on ESOP
loan - - - - 300 - 300
Exercise of stock options, stock
warrants, and related tax
benefits 13,783 - 276 - - - 276
Net unrealized gain on
securities transferred on
November 30, 1995 to
available for sale, net of
income taxes - - - - - 103 103
Net change in unrealized gain
(loss) on securities available
for sale, net of income taxes - - - - - 1,897 1,897
Other (703) - 39 (28) (24) - (13)
-------------------------------------------------------------------------------------------
Balance, December 31, 1995 1,596,675 16 16,903 28,641 (442) 1,611 46,729
Net income - - - 3,608 - - 3,608
Cash dividends paid, net of
tax benefits relating to
dividends paid on unallo-
cated shares held by ESOP - - - (1,209) - - (1,209)
Principal payments on ESOP
loan - - - - 300 - 300
Exercise of stock options, stock
warrants, and related tax
benefits 38,369 - 767 - - - 767
Net change in unrealized gain
(loss) on securities avail-
able for sale, net of income
taxes - - - - - (548) (548)
Other - - - - (39) - (39)
-------------------------------------------------------------------------------------------
Balance, December 31, 1996 1,635,044 16 17,670 31,040 (181) 1,063 49,608
Net income - - - 6,003 - - 6,003
Cash dividends paid - - - (1,627) - - (1,627)
Purchase of Common Stock
by ESOP - - - - (4,232) - (4,232)
Exercise of stock options
and related tax benefits 22,037 1 482 - - - 483
Net change in unrealized gain
(loss) on securities avail-
able for sale, net of income
taxes - - - - - (208) (208)
Other - - - - (90) - (90)
-------------------------------------------------------------------------------------------
Balance, December 31, 1997 1,657,081 $ 17 $ 18,152 $ 35,416 $ (4,503) $ 855 $ 49,937
===========================================================================================
<FN>
The notes to consolidated financial statements are an integral part of this
statement.
</FN>
66
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, FSB ("CENIT Bank"), a federally chartered
stock savings bank, and Princess Anne Bank ("Princess Anne"), a Virginia
commercial bank. Effective February 6, 1998, Princess Anne Bank changed its name
to CENIT Bank. See Note 2 for a discussion of the business combination between
the Company and Princess Anne.
The preparation of the financial statements in conformity with generally
accepted accounting principles 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 two wholly-owned subsidiaries, CENIT Bank, FSB, and Princess Anne Bank (the
"Banks"), CENIT Bank's wholly-owned subsidiaries, and Princess Anne's wholly-
owned subsidiary. All significant intercompany balances and transactions have
been eliminated.
Investment Securities
Investment securities are accounted for in accordance with Statement of
Financial Accounting Standards No. 115 (FAS 115), "Accounting for Certain
Investments in Debt and Equity Securities." FAS 115 requires that certain
securities be classified into one of three categories: held to maturity,
available for sale, or trading. Securities classified as held to maturity are
carried at amortized cost; securities classified as available for sale are
carried at their fair value with the amount of unrealized gains and losses, net
of income taxes, reported as a separate component of stockholders' equity; and
securities classified as trading are carried at fair value with the unrealized
gains and losses included in earnings.
In November 1995, The Financial Accounting Standards Board issued "A Guide
to Implementation of FAS 115 - Questions and Answers." This guide allowed
entities such as the Company a one-time opportunity to reassess the
appropriateness of the classifications of securities held in their investment
portfolios. On November 30, 1995, the Company transferred its U. S. Government
agency securities and mortgage-backed certificates from held to maturity to
available for sale.
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 the allowance for
loan losses are treated as adjustments of loans in the consolidated statement of
financial condition.
Effective January 1, 1995, the Company adopted Statement of Financial
Accounting Standards No. 114 (FAS 114), "Accounting by Creditors for Impairment
of a Loan," and Statement of Financial Accounting Standards No. 118 (FAS 118),
"Accounting by Creditors for Impairment of a Loan - Income Recognition and
Disclosures." These statements require creditors to account for impaired loans,
except for those loans that are accounted for at fair value or at the lower of
cost or fair value, at the present value of the expected future cash flows
discounted at the loan's effective interest rate, or the fair value of the
collateral if the loan is collateral dependent. A loan is impaired when, based
on current information and events, it is probable that a creditor will be unable
to collect all principal and interest amounts due according to the contractual
terms of the loan agreement.
67
At December 31, 1997 and 1996, approximately seventy-one percent and
seventy-four percent, respectively, of the principal balance of the Banks' 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 are deferred and amortized as an
adjustment of yield over the contractual life of the related loan. The
unamortized portion of net deferred fees is recognized in income if loans prepay
or if commitments expire unfunded. The amortization of net fees or costs is
included in interest and fees on loans in the consolidated statement of
operations.
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.
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 loss experience, expectations of future economic
conditions, concentrations of credit and other judgmental factors. The allowance
for loan losses is increased by charges to income and decreased by charge-offs,
net of recoveries. Actual future losses may differ from estimates as a result of
unforeseen events.
Real Estate Owned
Real estate acquired in settlement of loans is recorded at the lower of the
unpaid loan balance or estimated fair value less estimated costs of sale at the
date of foreclosure. Subsequent valuations are periodically performed and
valuation allowances are established if the carrying value of the real estate
exceeds estimated fair value less estimated costs of sale. Costs related to
development and improvement of real estate are capitalized. Net costs related to
holding assets are expensed.
Property and Equipment
Property and equipment are stated at cost less accumulated depreciation and
amortization. Major renewals or betterments are capitalized and depreciated over
their estimated useful lives. Repairs and maintenance are charged to expense in
the year incurred. Depreciation and amortization are computed principally on the
straight-line basis over the estimated useful lives of the related assets.
68
Goodwill and other intangibles
Goodwill represents the excess of cost over the fair value of net assets
acquired and is amortized on a straight-line basis over 15 years. The core
deposit intangible represents the estimated fair value of certain customer
relationships acquired and is amortized on an accelerated basis over 10 years.
Long-Lived Assets
Long-lived assets to be held and those to be disposed of and certain other
intangibles are evaluated for impairment using the guidance of Statement of
Financial Accounting Standards No. 121 (FAS 121), "Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," which was
adopted by the Company on January 1, 1996. FAS 121 establishes when an
impairment loss should be recognized and how an impairment loss should be
measured. The adoption of FAS 121 did not have a significant impact on the
financial statements of the Company.
Deposits
Interest on deposits is accrued and compounded according to the contractual
term of the deposit account and either paid to the depositor or added to the
deposit account. On term accounts, the forfeiture of interest (because of
withdrawal prior to maturity) is offset as of the date of withdrawal against
interest expense.
Securities Sold Under Agreements to Repurchase
The Banks enter into sales of securities under agreements to repurchase
(reverse repurchase agreements). Fixed-coupon reverse repurchase agreements are
treated as financing transactions, and the obligations to repurchase securities
sold are reflected as liabilities in the statement of financial condition. The
securities underlying the agreements continue to be recorded as assets.
Income Taxes
The provision for income taxes is based upon income taxes estimated to be
currently payable and certain changes in deferred income tax assets and
liabilities. The deferred tax assets and liabilities relate principally to the
use of dif ferent reporting methods for bad debts, depreciation, and Federal
Home Loan Bank stock dividends.
Statement of Cash Flows
For purposes of the statement of cash flows, the Company considers cash and
federal funds sold to be cash and cash equivalents.
Earnings Per Share
Effective December 31, 1997, the Company adopted Statement of Financial
Accounting Standards No. 128, "Earnings per Share" (FAS 128). FAS 128 replaced
the primary and fully diluted earnings per share ("EPS") calculations with two
new calculations, basic EPS and diluted EPS. Basic EPS excludes dilution and is
computed by dividing income by the weighted average number of shares outstanding
for the period. Diluted EPS reflects the potential dilution of stock options
computed using the treasury stock method. In accordance with FAS 128, all prior
periods have been restated. Basic earnings per share for the years ended
December 31, 1997, 1996, and 1995 were determined by dividing net income for the
respective year by 1,617,828 shares, 1,616,717 shares, and 1,590,535 shares,
respectively. Diluted earnings per share for the years ended December 31, 1997,
1996, and 1995 were determined by dividing net income for the respective year by
1,662,022 shares, 1,666,165 shares, and 1,646,735 shares, respectively. The
difference in the number of shares used for basic earnings per share and diluted
earnings per share calculations for each year above results solely from the
dilutive effect of stock options and warrants.
69
Dividends Per Share
Dividends per share were determined by dividing historical dividends
declared by the Company by historical common shares outstanding of the Company,
without adjustment for the shares issued in connection with the Princess Anne
merger. Princess Anne declared no dividends in 1995.
Comparative Financial Statements
The financial statements for 1995 and 1996 have been reclassified to
conform to the 1997 presentation. Such reclassifications had no impact on
previously reported net income.
Note 2
Business Combination
On August 1, 1995, the Company and Princess Anne Bank became affiliated
pursuant to a definitive agreement entered into in November 1994. The
transactions contemplated by the Agreement and Plan of Reorganization were
approved by the shareholders of both the Company and Princess Anne at special
meetings held on July 26, 1995. Under the terms of the agreement, Princess
Anne's shareholders received 0.3364 shares of CENIT Bancorp common stock for
each share of Princess Anne common stock. This resulted in the issuance of
353,779 shares of CENIT Bancorp common stock. This combination was accounted for
as a pooling of interests. In connection with this transaction, merger expenses
totaling $757,000 were recognized in 1995.
As part of this transaction, effective August 1, 1995, Princess Anne began
operating as a wholly-owned subsidiary of the Company. At August 1, 1995,
Princess Anne reported total assets of $94.1 million and stockholders' equity of
$6.9 million. Effective November 1, 1995, CENIT Bank's three Virginia Beach
branch offices, with total deposits of $80.6 million on that date, were
transferred to Princess Anne. As a result, subsequent to the transfer, Princess
Anne had six branch offices in Virginia Beach.
The following summarizes the separate historical results of operations for
CENIT Bancorp and Princess Anne for periods prior to the merger, during which
time there were no intercompany transactions (in thousands):
CENIT Princess
Bancorp Anne Combined
Six months ended June 30, 1995:
(Unaudited)
Net interest income $7,092 $1,938 $9,030
Net income 1,283 492 1,775
CENIT Bancorp's total stockholders' equity increased from $36.2 million at
December 31, 1994 to approximately $38.0 million at June 30, 1995. This increase
resulted primarily from $1,283,000 of net income during the period and a
$517,000 change in the net unrealized gain (loss) on securities available for
sale, net of income taxes. Princess Anne's total stockholders' equity increased
from approximately $6.0 million at December 31, 1994 to approximately $6.8
million at June 30, 1995. This increase resulted primarily from $492,000 of net
income during the period, a $259,000 change in the net unrealized gain (loss) on
securities available for sale, net of income taxes, and $82,000 of proceeds on
the exercise of stock options and warrants.
70
Note 3
Acquisition of Deposits
On September 26, 1996 and November 7, 1996, CENIT Bank assumed the deposits
of five Essex Savings Bank, FSB ("Essex") branches pursuant to a Branch Purchase
and Deposit Assumption Agreement dated July 2, 1996. As part of these
transactions, CENIT Bank assumed approximately $68.1 million of deposits,
acquired certain other assets and liabilities, received approximately $65.5
million of cash and recorded total intangible assets of approximately $2.8
million. CENIT Bank used the majority of the cash proceeds received in
connection with the deposit assumptions to reduce its Federal Home Loan Bank
(FHLB) advances.
CENIT Bank still operates the former Essex offices located in Downtown
Hampton, Virginia and in the Denbigh area of Newport News, Virginia. The
deposits associated with Essex's Norfolk and Portsmouth, Virginia offices were
consolidated into existing CENIT Bank retail offices in those neighborhoods, and
the deposits associated with Essex's Grafton, Virginia office were consolidated
into CENIT Bank's existing Kiln Creek office located in York County, Virginia.
Note 4
Intangible Assets
Goodwill and core deposit intangibles, and the related amortization, are as
following (in thousands):
Core Deposit
Goodwill Intangible Total
Balance, December 31, 1995 $ 1,777 $ - $ 1,777
Additions 2,340 458 2,798
Amortization (173) (21) (194)
----------------------------------------
Balance, December 31, 1996 3,944 437 4,381
Amortization (290) (81) (371)
Balance, December 31, 1997 ----------------------------------------
$ 3,654 $ 356 $ 4,010
========================================
Goodwill in 1996 resulted from the acquisition of deposits from Essex. In
connection with the acquisition of deposits from Essex, CENIT Bank also recorded
a core deposit intangible. At December 31, 1997, the Company had recorded
$799,000 of accumulated amortization.
71
Note 5
Securities Available for Sale
Securities available for sale are as follows (in thousands):
December 31,
1997 1996
---------------------------------------------- --------------------------------------------------
Gross Gross Gross Gross
Amortized Unrealized Unrealized Fair Amortized Unrealized Unrealized Fair
Cost Gains Losses Value Cost Gains Losses Value
---------------------------------------------- ----------------------------------------------
U.S. Treasury securities $ 39,139 $ 215 $ (11) $ 39,343 $ 40,178 $ 181 $ (63) $ 40,296
---------------------------------------------- ---------------------------------------------
Other U. S. Government
agency securities 5,999 6 (1) 6,004 6,000 14 (5) 6,009
---------------------------------------------- ---------------------------------------------
Mortgage-backed certificates:
Federal Home Loan
Mortgage Corporation
participation certificates 81,382 880 (2) 82,260 162,890 1,302 (139) 164,053
Federal National Mortgage
Association pass-through
certificates 6,646 150 (2) 6,794 9,867 250 (4) 10,113
Government National
Mortgage Association
pass-through certificates 2,695 92 - 2,787 3,432 108 - 3,540
---------------------------------------------- ---------------------------------------------
Total mortgage-backed
certificates 90,723 1,122 (4) 91,841 176,189 1,660 (143) 177,706
---------------------------------------------- ---------------------------------------------
$ 135,861 $ 1,343 $ (16) $ 137,188 $222,367 $ 1,855 $ (211) $ 224,011
============================================== =============================================
During 1997 and 1996, the Company recognized gross gains of $111,000 and
$140,000, respectively, and gross losses of $27,000 and $63,000, respectively,
on the sale of available for sale securities. During 1995, the Company
recognized gross losses of $563,000 on the sale of available for sale
securities.
The amortized cost and fair value of securities available for sale at
December 31, 1997 are shown below by contractual maturity (in thousands):
Amortized Fair
Cost Value
---------------------------
Due in one year or less $ 16,022 $ 16,044
Due after 1 year through 5 years 29,116 29,303
Mortgage-backed certificates 90,723 91,841
---------------------------
$ 135,861 $ 137,188
---------------------------
At December 31, 1997, the Company's amortized cost of its investment in
mortgage-backed certificates available for sale includes $7,134,000 at fixed
rates, including $2,060,000 and $6,000 with five- and seven-year balloon
provisions, respectively, and $83,589,000 at variable rates.
72
Note 6
Loans
Loans held for investment consist of the following (in thousands):
December 31,
1997 1996
----------------------------
First mortgage loans:
Single family $ 308,525 $ 263,498
Multi-family 6,374 7,100
Construction:
Residential 56,992 52,662
Nonresidential 1,420 3,365
Commercial real estate 57,913 58,314
Consumer lots 4,573 5,396
Acquisition and development 13,327 16,010
Equity and second mortgage 45,194 29,578
Purchased mobile home 95 137
Boat 5,685 7,814
Other consumer 7,250 6,606
Commercial business 24,222 17,922
----------------------------
531,570 468,402
Undisbursed portion of construction
and acquisition and development loans (42,067) (42,309)
Allowance for loan losses (3,783) (3,806)
Unearned discounts, premiums, and loan
fees, net 767 (68)
----------------------------
$ 486,487 $ 422,219
============================
At December 31, 1997, the Company's gross loan portfolio contains
$241,060,000 of adjustable-rate mortgage loans and $63,712,000 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 $76,187,000 at December 31, 1997.
73
Nonaccrual loans are as follows (in thousands):
December 31,
1997 1996 1995
-----------------------------
Single family $ 528 $ 1,172 $ 527
Commercial real estate - 457 -
Land acquisition 200 200 200
Purchased mobile home 48 83 134
Other consumer 24 17 3
Commercial business 240 483 70
-----------------------------
$ 1,040 $ 2,412 $ 934
=============================
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,
1997 1996 1995
----------------------------
Interest income based on contractual terms $ 92 $ 252 $ 80
Interest income recognized 30 114 33
----------------------------
Interest income foregone $ 62 $ 138 $ 47
============================
Changes in the allowance for loan losses are as follows (in thousands):
Year Ended December 31,
1997 1996 1995
----------------------------
Balance at beginning of year $3,806 $3,696 $3,789
Provision for loan losses 600 377 697
Losses charged to allowance (836) (738) (995)
Recovery of prior losses 213 471 205
----------------------------
Balance at end of year $3,783 $3,806 $3,696
============================
Impaired loans at December 31, 1997 and 1996 were not significant.
Loans serviced for others approximate $16,013,000 at December 31, 1997,
$17,740,000 at December 31, 1996, and $20,284,000 at December 31, 1995.
74
Note 7
Interest Receivable
The components of interest receivable are as follows (in thousands):
December 31,
1997 1996
---------------------------
Interest on loans $ 3,054 $ 2,808
Interest on mortgage-backed certificates 1,090 1,962
Interest on investments and interest-bearing
deposits 909 907
---------------------------
5,053 5,677
Less: Allowance for uncollected interest (165) (221)
---------------------------
$ 4,888 $ 5,456
===========================
Note 8
Real Estate Owned
Real estate owned is as follows (in thousands):
December 31,
1997 1996
---------------------------
Residential - Single family $ 1,204 $ 2,165
Land - 97
Commercial real estate - 707
---------------------------
1,204 2,969
Less: Valuation allowance (106) (200)
---------------------------
$ 1,098 $ 2,769
===========================
Changes in the valuation allowance for real estate owned are as follows(in
thousands):
Year Ended December 31,
1997 1996 1995
---------------------------
Balance at beginning of year $ 200 $ 161 $ 192
Provision for losses 81 136 199
Losses charged to allowance (175) (97) (230)
---------------------------
Balance at end of year $ 106 $ 200 $ 161
==========================
The provision for losses on real estate owned is included in other expense
in the accompanying consolidated statement of operations.
75
Note 9
Federal Home Loan Bank and Federal Reserve Bank Stock
Investment in the stock of the Federal Home Loan Bank (FHLB) is required by
law for federally insured savings associations such as CENIT Bank. Princess Anne
has also invested in FHLB stock as a requisite for membership in the FHLB. No
ready market exists for the stock and it has no quoted market value. The FHLB is
required under the Fi nancial 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.
Investment in the stock of the Federal Reserve Bank is required by law for
insured institutions such as Princess Anne. No ready market exists for the stock
and it has no quoted market value.
Note 10
Property and Equipment
Property and equipment consist of the following (in thousands):
December 31,
1997 1996
-------------------------
Buildings and improvements $ 11,829 $ 10,686
Furniture and equipment 8,904 8,457
-------------------------
20,733 19,143
Less: Accumulated depreciation and
amortization (9,318) (9,294)
-------------------------
11,415 9,849
Land 2,815 2,815
-------------------------
$ 14,230 $ 12,664
========================
Depreciation and amortization expense is $1,154,000, $1,037,000, and
$1,061,000 for the years ended December 31, 1997, 1996 and 1995, respectively.
76
Note 11
Deposits
Deposit balances by type and range of interest rates at December 31, 1997 and
1996 are as follows (in thousands):
December 31,
1997 1996
-----------------------
Noninterest-bearing:
Commercial checking $ 47,499 $ 40,130
Personal checking 7,375 6,024
-----------------------
Total noninterest-bearing deposits 54,874 46,154
-----------------------
Interest-bearing:
Passbook and Statement Savings
(interest rates of 3.34% at 1997 and
3.38% at 1996) 44,118 48,042
Checking accounts (interest rates of 2.05% at
1997 and 2.24% at 1996) 32,754 30,266
Money market deposits (interest rates of
3.25% at 1997 and 1996) 47,726 44,815
Certificates:
3.99% or less 519 451
4.00% to 4.99% 70,286 100,302
5.00% to 5.99% 218,016 179,399
6.00% to 6.99% 27,210 37,244
7.00% to 7.99% 10,369 10,280
8.00% to 8.99% 668 775
9.00% to 9.99% 1,130 1,237
-----------------------
Total certificates 328,198 329,688
-----------------------
Total interest-bearing deposits 452,796 452,811
-----------------------
Total deposits $ 507,670 $ 498,965
======================
Certificates in denominations greater than $100,000 aggregated $28,831,000
and $23,967,000 at December 31, 1997 and 1996, respectively. The weighted
average cost of deposits approximates 4.66% and 4.70% for the years ended
December 31, 1997 and 1996, respectively.
77
The following is a summary of interest expense on deposits (in thousands):
Year Ended December 31,
1997 1996 1995
----------------------------------------
Passbook and statement savings $ 1,522 $ 1,558 $ 1,561
Checking accounts 602 677 767
Money market deposits 1,566 1,398 1,506
Certificates 17,351 15,678 15,593
Less: Early withdrawal penalties (69) (71) (45)
-----------------------------------------
$ 20,972 $ 19,240 $ 19,382
=========================================
At December 31, 1997, remaining maturities on certificates are as follows (in
thousands):
1998 $ 258,896
1999 31,290
2000 23,859
2001 8,757
2002 5,396
-----------
$ 328,198
===========
At December 31, 1997, the Banks have pledged mortgage-backed certificates,
U. S. Treasury securities, and other U. S. Government agency securities with a
total carrying value of $12,793,000 to the State Treasury Board as collateral
for certain public deposits.
Note 12
Advances from the Federal Home Loan Bank
At December 31, 1997, advances from the Federal Home Loan Bank (FHLB)
consist of $85,000,000 of short-term variable rate advances and a $60,000,000
convertible fixed-rate advance with an interest rate of 5.18%. The $60,000,000
fixed-rate advance is convertible to an adjustable-rate advance at the option of
the FHLB beginning in September, 1998, and quarterly thereafter until the
advance's maturity in September, 2007. These advances are collateralized by
mortgage-backed cer tificates with a net book value of approximately $61,748,000
and by first mortgage loans with a net book value of approximately $178,016,000.
The weighted average cost of advances from the FHLB is 5.58% and 5.44% for
the years ended December 31, 1997 and 1996, respectively.
Note 13
Other Borrowings
In 1997, the Company borrowed $4,000,000 from an unrelated third party
lender for general corporate purposes. The loan balance is $2,575,000 at
December 31, 1997, and bears interest at a variable rate of one month LIBOR plus
1.75%, payable in monthly principal and interest installments of $61,116 based
on a seven-year amortization period. At December 31, 1997, the interest rate on
the loan was 7.72%. The remaining principal balance, if any, is due and payable
in August, 2004. The loan is unsecured and may be prepaid without penalty. The
loan agreement requires that the Company and the Banks maintain capital in
accordance with applicable regulatory guidelines sufficient to be considered
"well capitalized." The loan agreement also requires the Company to maintain
certain ratios regarding nonperforming loans to total loans and regarding the
allowance for loan losses to nonperforming loans. The covenants relating to
nonperforming loans and the allowance for loan losses expire when the
outstanding principal balance reaches $2,000,000.
78
Note 14
Securities Sold under Agreements to Repurchase
At December 31, 1997, mortgage-backed certificates sold under agreements to
repurchase had a carrying value of $10,465,000 and a market value of $9,680,000.
The mortgage-backed certificates underlying these repurchase agreements were
delivered to a branch of the Federal Reserve Bank which is acting as custodian
in the transaction. The Company enters into reverse repurchase agreements with
dealers and certain commercial deposit customers. The reverse repurchase
agreements executed with commercial deposit customers do not constitute savings
accounts or deposits and are not insured by the Federal Deposit Insurance
Corporation. At December 31, 1997, all of the Company's reverse repurchase
agreements were with commercial customers.
The following is a summary of certain information regarding the Company's
reverse repurchase agreements (dollars in thousands):
December 31,
1997 1996
--------------------------
Balance at end of year $ 9,664 $ 7,138
Average amount outstanding during the year 8,893 8,616
Maximum amount outstanding at any month end 12,199 30,382
Weighted average interest rate during the year 4.60% 4.67%
Weighted average interest rate at end of year 4.57% 4.40%
Weighted average maturity at end of year daily daily
Note 15
Other Income and Other Expense
The components of other income and other expense are as follows (in thousands):
Year Ended December 31,
1997 1996 1995
-----------------------------------------
Other income:
Brokerage fees $ 850 $ 413 $ 716
Merchant processing fees 1,391 738 502
Other miscellaneous 478 259 280
-----------------------------------------
$ 2,719 $ 1,410 $ 1,498
=========================================
Other expense:
Net occupancy expense of premises $ 1,848 $ 1,715 $ 1,404
Professional fees 345 474 676
Expenses, gains/losses on sales,
and provision for losses on real
estate owned, net 215 38 372
Merchant processing 1,130 586 377
Other miscellaneous 2,076 1,881 1,714
-----------------------------------------
$ 5,614 $ 4,694 $ 4,543
=========================================
79
Note 16
Income Taxes
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial and income
tax reporting purposes.
Significant components of the Company's deferred tax assets and liabilities are
as follows (in thousands):
December 31,
1997 1996 1995
-------------------------------------------
Deferred tax assets:
Bad debt reserves $ 1,251 $ 1,297 $ 1,199
Other 219 34 107
-------------------------------------------
1,470 1,331 1,306
===========================================
Deferred tax liabilities:
Federal Home Loan Bank
stock dividends (696) (696) (696)
Unrealized gains on securities
available for sale (472) (580) (821)
Depreciation (296) (327) (291)
Other (299) (106) (106)
-------------------------------------------
(1,763) (1,709) (1,914)
-------------------------------------------
Net deferred tax liability $ (293) $ (378) $ (608)
===========================================
80
The provision for income taxes consists of the following (in thousands):
Year Ended December 31,
1997 1996 1995
-----------------------------------------
Current:
Federal $ 3,109 $ 1,810 $ 1,615
State 131 - 56
-----------------------------------------
3,240 1,810 1,671
-----------------------------------------
Deferred:
Federal 20 8 (19)
State 4 3 -
-----------------------------------------
24 11 (19)
-----------------------------------------
$ 3,264 $ 1,821 $ 1,652
=========================================
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,
1997 1996 1995
-------------------------------------
Computed "expected" tax provision $ 3,151 $ 1,846 $ 1,402
Increase (decrease) in taxes
resulting from:
State income taxes, net of federal
tax benefit 86 2 37
Nondeductible merger expenses - - 172
Other 27 (27) 41
-------------------------------------
Provision for income taxes $ 3,264 $ 1,821 $ 1,652
=====================================
For tax purposes, CENIT 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, 1997 includes $6,134,000 representing that
portion of CENIT 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
CENIT Bank were to use the reserve for purposes other than to absorb losses.
81
Note 17
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
The Company recognized compensation expense on an accrual basis based upon
the annual number of shares to be released valued at historical cost, plus
estimated annual administrative expenses of the ESOP, less estimated annual
dividends to be used for debt service and administrative expenses. ESOP related
compensation expense recognized by the Company totaled $238,000 in 1996 and
$281,000 in 1995. The Company recognized interest expense on the ESOP loan and
made quarterly contributions to the ESOP sufficient to fund such interest
payments. Total contributions to the ESOP, which were used to fund principal and
interest payments on the ESOP loan and administrative expenses of the ESOP,
totaled $254,000 in 1996 and $322,000 in 1995. There were no contributions to
the ESOP nor any ESOP related compensation expense recognized in 1997.
In 1997, dividends received by the ESOP, all of which related to allocated
shares, were first used for administrative expenses, and dividends remaining
were distributed to plan participants. Dividends received on allocated shares in
1997 totaled $81,000, of which $63,000 was distributed to participants. In 1995
and 1996, dividends received on both unallocated and allocated shares were used
for debt service. Dividends received in 1995 and 1996 totaled $34,000 and
$63,000, respectively. The tax benefit relating to dividends paid on unallocated
shares held by the ESOP is reflected as an addition to retained earnings. Shares
were released and allocated to eligible participants on an annual basis. The
number of additional shares released and allocated annually was based upon the
pro rata amount of the total ESOP loan principal paid in that year as compared
to the ESOP loan principal balance at the beginning of that year. At
December 31, 1997, the ESOP has 77,177 allocated shares. A total of 5,350 shares
were distributed in 1997 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 will recognize compensation expense on an accrual basis based
upon the estimated annual number of shares to be released valued at the shares'
fair value. No ESOP related compensation expense was recognized by the Company
in 1997 relating to the 1997 share purchase as none of these shares were
released or committed-to-be released in 1997. The Company intends to make
contributions to the ESOP sufficient to fund principal and interest payments on
the ESOP loan. The Company made no contributions to the ESOP in 1997.
The loan between the ESOP and the holding company has a fifteen-year term
with monthly principal and interest payments commencing in 1998. Shares will be
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. As no
payments were made under the ESOP loan in 1997, no shares were released in 1997.
Dividends received on both allocated and unallocated shares will be used for
debt service.
All of the 82,719 shares purchased in 1997 were unallocated at December 31,
1997 and were excluded from earnings per share calculations. At December 31,
1997, the fair value of unearned shares approximated $6,576,000.
401(k) Plans
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, 1997, 1996 and 1995, the maximum percentage that could be
contributed by employees was 10%, 7%, and 6%, respectively. The Company matched
50% of employee contributions. Effective January 1, 1996, the 401(k) plan was
amended to allow participation by Princess Anne. In 1995, Princess Anne had a
separate 401(k) plan covering substantially all employees. Princess Anne
employees could have contributed a specified percentage of their gross earnings
to a maximum of 15% each year. Princess Anne matched 50% of the first 7% of
employees' contributions in 1995. The Company contributed a total of $207,000,
$154,000 and $131,000 to these plans during the years ended December 31, 1997,
1996 and 1995, respectively.
82
Postretirement Benefit Plan
The Company sponsors a postretirement health care and life insurance
benefit plan. This plan is unfunded and the Company retains the right to modify
or eliminate these benefits. Participating retirees and eligible dependents
under the age of 65 are covered under the Company's regular medical and dental
plans. Participating retirees and eligible dependents age 65 or older are
eligible for a Medicare supplement plan. The medical portion of the plan is
contributory for retirees, with retiree contributions adjusted annually, and
contains other cost-sharing features such as deductibles and copays. The life
insurance portion of the plan is noncontributory.
As permitted by FAS 106, the Company elected to amortize its unrecognized
transition obligation over 20 years. At December 31, 1997 and December 31, 1996,
the Company's unfunded accumulated postretirement benefit obligation totaled
$537,000 and $537,000, respectively, and the accrued postretirement benefit cost
recognized in the statement of financial condition totaled $136,000 and
$110,000, respectively. Postretirement benefit cost was $69,000, $71,000, and
$71,000 in 1997, 1996 and 1995, respectively.
Note 18
Stock Options and Awards
At December 31, 1997, the Company has two stock-based compensation plans,
the CENIT Stock Option Plan and the Management Recognition Plan, which are
described below. Princess Anne also had three stock option plans prior to the
merger with the Company. 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. If the Company had accounted for stock options
granted in 1995, 1996, and 1997 under the provisions of FAS No. 123, the pro
forma effect on 1995, 1996, and 1997 net income and earnings per share would not
be material.
CENIT Stock Option Plan
In conjunction with CENIT Bank's conversion, the Company adopted a stock
option plan for the benefit of directors and specified key officers. The total
number of shares of common stock reserved for issuance under the stock option
plan is 123,625. Under the 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. Options issued in connection
with the conversion are 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 four years. In addition, limited stock
appreciation rights have been granted with the options issued. These 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.
Princess Anne Stock Option Plans
Princess Anne had three stock option plans prior to the merger with the
Company. On August 1, 1995, all options outstanding under these plans converted
into options for common stock of the Company in accordance with the terms of the
stock option plan under which each was issued. Both the number of shares subject
to option and the per share exercise price under each option were adjusted by
the exchange ratio of .3364. On the date of the merger, all options became fully
vested and exercisable.
83
A summary of the Company's stock option plan is as follows. This
information includes stock options relating to Princess Anne's stock option
plans; both the number of shares and the per share exercise price were adjusted
by the exchange ratio of .3364.
Year Ended December 31,
1997 1996 1995
---------------------------- -------------------------------------- -------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
------------ --------------- ----------------- --------------- -------------- ------------
Outstanding at beginning
of year 114,383 $16.21 133,227 $14.85 139,000 $13.90
Granted 4,235 45.00 6,234 34.63 5,234 37.00
Exercised (27,972) 13.89 (24,641) 13.47 (10,839) 13.25
Forfeited - - (437) 17.83 (168) 23.19
------- ------- -------
Outstanding at end of year 90,646 18.27 114,383 16.21 133,227 14.85
======= ======= =======
Options exercisable at
year end 77,808 96,661 119,123
The weighted average fair value of options granted during 1997, 1996 and
1995 was $14.68, $11.20 and $13.92, respectively.
84
The following table summarizes information about the options outstanding at
December 31, 1997:
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
- ----------------------- -------------------- ------------------- ------------------ ------------------- --------------
$11.50 51,666 4.6 years $ 11.50 51,666 $ 11.50
$17.83 12,539 4.7 years 17.83 12,539 17.83
$21.25 to $23.18 10,738 5.9 years 22.18 9,429 22.06
$34.63 to $37.00 11,468 8.6 years 35.71 4,174 36.12
$45.00 4,235 9.2 years 45.00 - 45.00
------- -------
90,646 5.5 years 18.27 77,808 15.12
======= =======
85
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. CENIT Bank contributed $247,250 to the MRP to enable
the MRP trustees to acquire a total of 21,500 shares of the common stock in the
conversion at $11.50 per share. As a result of an oversubscription in the
subscription offering, the MRP was able to acquire only 15,000 shares in the
conversion. In 1997, 1996 and 1995, the MRP purchased 4,706, 3,535 and 1,484
additional shares, respectively, at an average price of approximately $45.38,
$33.78 and $39.30 per share, respectively.
A total of 12,362 shares were granted in 1992 and vested 20% each year over
five years beginning in 1993. The shares granted in 1995, 1996 and 1997 vest at
the end of three to five years. Compensation expense, which is recognized as
shares vest, totaled $122,000, $82,000, and $50,000 for 1997, 1996 and 1995,
respectively. The unamortized cost of the shares purchased, which represents
deferred compensation, is reflected as a reduction of stockholders' equity in
the Company's consolidated statement of financial condition.
A summary of MRP grants is as follows:
Year Ended December 31,
1997 1996 1995
-------------------------------
Outstanding at beginning of year 10,131 9,068 9,479
Granted 4,706 3,535 2,061
Exercised (3,443) (2,472) (2,472)
-------------------------------
Outstanding at end of year 11,394 10,131 9,068
===============================
There were no grants forfeited during these periods and no grants were
exercisable at the end of each period. At December 31, 1997, the weighted
average period until the awards become vested is approximately two and one-half
years. The weighted average fair value of shares granted in 1997, 1996 and 1995
was $45.00, $34.63, and $38.50, respectively.
Note 19
Commitments and Financial Instruments With Off-Balance Sheet Credit Risk
The Company is a party to financial instruments with off-balance sheet
credit risk in the normal course of business to meet the financing needs of its
customers and, to a lesser extent, to reduce its own exposure to fluctuations in
interest rates. These financial instruments include commitments to extend credit
in the form of loans or through letters of credit, interest rate caps and
interest rate swaps. At December 31, 1997, financial instruments with
off-balance sheet risk are limited to outstanding loan commitments and letters
of credit. There are no open interest rate cap or interest rate swap positions
at December 31, 1997.
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.
86
The Company had loan commitments, excluding the undisbursed portion of
construction and acquisition and development loans, as follows (in thousands):
December 31,
1997 1996
Commitments outstanding:
Mortgage loans:
Fixed rate (rates between 7.00% and 9.50% at 1997
and between 7.25% and 9.00% at 1996) $ 2,766 $ 1,201
Variable rate 1,745 1,594
Commercial business loans 2,857 638
Consumer loans - -
-------------------------
$ 7,368 $ 3,433
=========================
At December 31, 1997, the Company has granted unused consumer and
commercial lines of credit of $22,128,000 and $11,558,000, respectively, and has
commitments to purchase loans totaling $28.1 million.
Standby letters of credit are written unconditional commitments issued to
guarantee the performance of a customer to a third party and total approximately
$3,431,000 at December 31, 1997. The credit risk involved in issuing standby
letters of credit is essentially the same as that involved in extending a loan
and the collateral obtained, if any, varies but generally includes real estate
or personal property. Because most of these letters of credit expire without
being drawn upon, they do not necessarily represent future cash requirements.
Commitments to purchase securities are contracts for delayed delivery of
securities in which the seller agrees to make delivery on a specified future
date of a specified instrument, with a specified coupon, for a specified price.
At December 31, 1997, the Company had commitments to purchase approximately
$9,346,000 of adjustable-rate mortgage- backed certificates.
Rent expense under long-term operating leases for property approximates
$709,000, $620,000, and $460,000 for the years ended December 31, 1997, 1996 and
1995, 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):
1998 $ 696
1999 652
2000 538
2001 442
2002 371
Thereafter 1,728
---------
$ 4,427
=========
87
Note 20
Regulatory matters
Capital Adequacy
CENIT Bank and Princess Anne Bank are subject to various regulatory capital
requirements administered by the Office of Thrift Supervision and Federal
Reserve Board, respectively. 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
Banks' financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Banks must meet specific
capital guidelines that involve quantitative measures of the Banks' assets,
liabilities and certain off-balance-sheet items as calculated under regulatory
accounting practices. The Banks' 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 CENIT Bank to maintain minimum
amounts and ratios of tangible capital to adjusted total assets, of core capital
to adjusted total assets and total capital to risk-weighted assets. Princess
Anne is required to maintain minimum amounts and ratios of leverage capital to
adjusted average total assets, and Tier 1 and total capital to risk-weighted
assets. As of December 31, 1997, the Banks exceeded all capital adequacy
requirements to which they are subject.
As of December 31, 1997, the most recent notification from the Office of
Thrift Supervision and Federal Reserve Board categorized CENIT Bank and Princess
Anne Bank, respectively, as Well Capitalized under the framework for prompt
corrective action. To be considered Well Capitalized under prompt corrective
action provisions, the Banks 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 Banks' categorizations.
As a bank holding company, the Company is also subject to the capital
adequacy guidelines established by the Federal Reserve Board.
88
The Banks' and Company'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, 1997:
CENIT Bank
Core capital $ 32,302 6.6% $ 14,744 3.0% $ 24,575 5.0%
Tangible capital 32,302 6.6 7,372 1.5 - -
Tier 1 risk-based 32,302 11.1 11,610 4.0 17,416 6.0
Total risk-based 34,799 12.0 23,221 8.0 29,026 10.0
Princess Anne Bank
Tier 1 leverage $ 14,006 7.1% $ 7,931 4.0% $ 9,914 5.0%
Tier 1 risk-based 14,006 11.4 4,905 4.0 7,358 6.0
Total risk-based 15,184 12.4 9,810 8.0 12,263 10.0
CENIT Bancorp
Tier 1 leverage $ 45,071 6.6% $ 27,383 4.0% $ - -%
Tier 1 risk-based 45,071 10.8 16,632 4.0 - -
Total risk-based 48,854 11.7 33,264 8.0 - -
As of December 31, 1996:
CENIT Bank
Core capital $ 28,991 6.0% $ 14,594 3.0% $ 24,323 5.0%
Tangible capital 28,991 6.0 7,297 1.5 - -
Tier 1 risk-based 28,991 11.0 10,547 4.0 15,820 6.0
Total risk-based 31,510 11.9 21,094 8.0 26,367 10.0
Princess Anne Bank
Tier 1 leverage $ 13,789 7.1% $ 7,738 4.0% $ 9,672 5.0%
Tier 1 risk-based 13,789 12.7 4,350 4.0 6,525 6.0
Total risk-based 14,986 13.8 8,700 8.0 10,875 10.0
CENIT Bancorp
Tier 1 leverage $ 44,163 6.5% $ 27,171 4.0% $ - -%
Tier 1 risk-based 44,163 11.8 14,959 4.0 - -
Total risk-based 47,969 12.8 29,919 8.0 - -
Dividend Restrictions
CENIT Bank's capital exceeds all of the capital requirements imposed by
FIRREA. OTS regulations provide that an association that 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 of up to the higher of (i) 100% of its
net income to date during the calendar year plus the amount that would reduce by
one-half its "surplus capital ratio" (the excess capital over its fully
phased-in capital requirements) at the beginning of the calendar year, or (ii)
75% of its net income during the most recent four-quarter period. Any additional
capital distributions require prior regulatory approval.
As a state chartered bank which is a member of the Federal Reserve,
Princess Anne Bank is subject to legal limitations on capital distributions
including the payment of dividends, if, after making such distribution, the
institution would become "undercapitalized" (as such term is used in the
statute). For all state member banks of the Federal Reserve seeking to pay
dividends, the prior approval of the applicable Federal Reserve Bank is required
if the total of all dividends declared in any calendar year will exceed the sum
of the bank's net profits for that year and its retained net profits for the
preceding two calendar years. Federal law also generally prohibits a depository
institution from making any capital distribution (including payment of a
dividend or payment of a management fee to its holding company) if the
depository institution would thereafter fail to maintain capital above
regulatory minimums. Federal Reserve Banks are also authorized to limit the
payment of dividends by any state member bank if such payment may be deemed to
constitute an unsafe or unsound practice. In addition, under Virginia law no
dividend may be declared or paid that would impair a Virginia chartered bank's
paid-in capital. The Virginia State Corporation Commission has general authority
to prohibit payment of dividends by a Virginia chartered bank if it determines
that the limitation is in the public interest and is necessary to ensure the
bank's financial soundness.
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.
90
Note 21
Stockholders' Equity
As part of CENIT Bank's conversion from a federally chartered mutual
savings bank to a federally chartered stock savings bank, CENIT 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 CENIT 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 CENIT Bank's
capital stock. CENIT 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 CENIT Bank to be reduced below the amount required for
the liquidation account. Except for such restrictions, the existence of the
liquidation ac count does not restrict the use or application of CENIT Bank's
retained earnings. At December 31, 1997, the liquidation account balance was
$3,819,000.
Note 22
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, 1997 $ 3,055
Originations - 1997 454
Repayments - 1997 (617)
----------
Balance at December 31, 1997 $ 2,892
==========
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's previous
policy permitted the Company's directors and executive officers to borrow from
the Company at an interest rate one percentage point in excess of the Company's
then existing cost of funds. There is one loan made under the Company's previous
policy still outstanding at December 31, 1997, which has a balance of $154,000
and a fixed interest rate of 7.875%. The Company believes loans to related
parties do not involve more than the normal risk of collectibility. Commitments
to extend credit and letters of credit to related parties totaled $1,390,000 at
December 31, 1997.
Note 23
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,
1997, 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. As required by FAS 115, securities available for
sale are recorded at fair value.
91
Loans
The fair value of loans is estimated by discounting the future cash flows
using the current rates at which similar loans would be made to borrowers with
similar credit ratings for the same remaining maturities, or based on quoted
market prices for mortgage-backed certificates securitized by similar loans,
adjusted for differences in loan characteristics. The risk of default is
measured as an adjustment to the discount rate, and no future interest income is
assumed for nonaccrual loans.
The fair value of loans does not include the value of the customer
relationship or the right to fees generated by the account.
Federal Home Loan Bank and Federal Reserve Bank Stock
The carrying value of Federal Home Loan Bank and Federal Reserve Bank stock
is a reasonable estimate of the fair value.
Deposit Liabilities
The fair value of deposits with no stated maturities (which includes demand
deposits, savings accounts, and money market 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.
FAS 107 requires deposit liabilities with no stated maturity to be reported
at the amount payable on demand without regard for the inherent funding value of
these instruments. The Company believes that significant value exists in this
funding source.
Short-term Borrowings
For short-term borrowings (which include short-term advances from the
Federal Home Loan Bank and securities sold under agreements to repurchase), the
carrying amount is a reasonable estimate of fair value.
Long-term Borrowings
Rates currently available to the Company for borrowings with similar terms
and remaining maturities are used to estimate fair value of existing borrowings.
Loan Commitments and Standby Letters of Credit
The Company has reviewed its loan commitments and standby letters of credit
and determined that differences between the fair value and notional principal
amounts are not significant.
92
The estimated fair values of the Company's financial instruments that differ
from their carrying amount are as follows (in thousands):
December 31,
1997 1996
-------------------------- ---------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
-------------------------- ---------------------------
Financial assets:
Loans held for investment, net $ 486,487 $ 494,207 $ 422,219 $ 427,615
Financial liabilities:
Deposits with stated maturities 328,198 330,314 329,688 332,098
Long-term borrowings 62,575 63,152 - -
As mentioned in the assumptions above, the estimated fair value of loans
and deposits does not include any value for the customer relationship or the
right to future fee income which may be generated by these relationships.
Note 24
Condensed Parent Company Only Financial Statements
The following condensed financial statements for CENIT Bancorp, Inc. should
be read in conjunction with the consolidated financial statements and the notes
thereto.
Condensed Statement of Financial Condition
(In thousands)
December 31,
1997 1996
---------------------------
Assets:
Cash $ 1 $ 4
Equity in net assets of the Banks 51,173 48,223
Other assets 1,908 1,762
---------------------------
$ 53,082 $ 49,989
===========================
Liabilities:
Other borrowings 2,575 -
Other liabilities 570 381
---------------------------
3,145 381
---------------------------
Stockholders' equity 49,937 49,608
---------------------------
$ 53,082 $ 49,989
===========================
93
Condensed Statement of Operations
(In thousands)
Year Ended December 31,
1997 1996 1995
-------- -------- --------
Equity in earnings of the Banks $ 6,767 $ 3,943 $ 3,084
Interest expense (110) (16) (41)
Salaries and employee benefits (349) (276) (65)
Expenses related to proxy contest
and other matters (405) - -
Professional fees (247) (108) (155)
Merger expenses - - (397)
Other expenses (87) (122) (86)
------------------------------------
Income before income taxes 5,569 3,421 2,340
Benefit from income taxes 434 187 132
------------------------------------
Net income $ 6,003 $ 3,608 $ 2,472
====================================
Condensed Statement of Cash Flows
(In thousands)
Year Ended December 31,
1997 1996 1995
---------- ---------- ----------
Cash flows from operating activities:
Net income $ 6,003 $ 3,608 $ 2,472
Add (deduct) items not affecting cash:
Undistributed earnings of the Banks (3,157) (1,941) (2,368)
Amortization 3 26 16
(Increase) decrease in other assets (114) (1,192) 163
Increase in liabilities 189 121 57
-------------------------------------------
Net cash provided by operations 2,924 622 340
-------------------------------------------
Cash flows from financing activities:
Cash dividends paid (1,627) (1,215) (531)
Net proceeds from issuance of common stock 357 583 196
Increase in other borrowings 4,000 - -
Principal payments on other borrowings (1,425) - -
Purchase of common stock by ESOP (4,232) - -
-------------------------------------------
Net cash used for financing activities (2,927) (632) (335)
-------------------------------------------
Net increase (decrease) in cash and cash
equivalents (3) (10) 5
Cash and cash equivalents at beginning of period 4 14 9
-------------------------------------------
Cash and cash equivalents at end of period $ 1 $ 4 $ 14
===========================================
94
Note 25
Quarterly Results of Operations (Unaudited)
(Dollars in thousands, except per share data)
Year Ended December 31, 1997
First Second Third Fourth
Quarter Quarter Quarter Quarter
------------------------------------------------------------
Total interest income $ 12,551 $ 12,766 $ 12,858 $ 12,601
Total interest expense 7,221 7,385 7,461 7,243
----------------------------------------------------------
Net interest income 5,330 5,381 5,397 5,358
Provision for loan losses 150 150 150 150
----------------------------------------------------------
Net interest income after provision
for loan losses 5,180 5,231 5,247 5,208
Other income 971 1,359 1,376 2,007
Other expenses 4,527 4,194 3,979 4,612
----------------------------------------------------------
Income before income taxes 1,624 2,396 2,644 2,603
Provision for income taxes 570 848 935 911
----------------------------------------------------------
Net income $ 1,054 $ 1,548 $ 1,709 $ 1,692
==========================================================
Earnings per share:(1)
Basic $ .64 $ .94 $ 1.05 $ 1.08
==========================================================
Diluted $ .62 $ .92 $ 1.03 $ 1.04
==========================================================
Dividends per common share $ .25 $ .25 $ .25 $ .25
==========================================================
Pro forma earnings per share to reflect 3 for 1
stock split approved by Board of Directors on
March 24, 1998
Basic $ .22 $ .31 $ .35 $ .36
==========================================================
Diluted $ .21 $ .30 $ .34 $ .35
==========================================================
95
Year Ended December 31, 1996
First Second Third Fourth
Quarter Quarter Quarter Quarter
------------------------------------------------------------
Total interest income $ 11,852 $ 11,692 $ 12,256 $ 12,371
Total interest expense 7,003 6,870 7,135 7,079
-----------------------------------------------------------
Net interest income 4,849 4,822 5,121 5,292
Provision for loan losses 102 53 101 121
-----------------------------------------------------------
Net interest income after provision
for loan losses 4,747 4,769 5,020 5,171
Other income 896 981 1,053 964
Other expenses 3,794 3,870 6,350 4,158
-----------------------------------------------------------
Income (loss) before income taxes 1,849 1,880 (277) 1,977
Provision for (benefit from) income taxes 646 659 (162) 678
-----------------------------------------------------------
Net income (loss) $ 1,203 $ 1,221 $ (115) $ 1,299
===========================================================
Earnings (loss) per share:(1)
Basic $ .75 $ .75 $ (.07) $ .80
===========================================================
Diluted $ .73 $ .74 $ (.07) $ .77
===========================================================
Dividends per common share $ .10 $ .20 $ .20 $ .25
===========================================================
Pro forma earnings per share to reflect 3 for 1
stock split approved by Board of Directors on
March 24, 1998
Basic $ .25 $ .25 $ (.02) $ .26
===========================================================
Diluted $ .24 $ .24 $ (.02) $ .26
===========================================================
<FN>
(1) Amounts previously reported on Form 10-Q have been adjusted to reflect
the adoption of FAS 128, "Earnings Per Share."
</FN>
96
Note 26
Subsequent Event (Unaudited)
On March 24, 1998, the Company's Board of Directors approved a 3 for 1
stock split and maintained the par value per common share at $.01. The pro forma
impact on annual earnings per share is reflected on the face of the income
statement and the pro forma impact on quarterly earnings per share is included
in Note 25, "Quarterly Results of Operations, (Unaudited)." The pro forma impact
on the number of common shares outstanding, the amount of common stock and
additional paid in capital is as follows (dollars in thousands):
Historical Pro Forma
---------- ---------
December 31, 1997
Number of common shares outstanding 1,657,081 4,971,243
Common Stock amount $ 17 $ 50
Additional paid-in capital $ 18,152 $ 18,119
December 31, 1996
Number of common shares outstanding 1,635,044 4,905,132
Common Stock amount $ 16 $ 49
Additional paid-in capital $ 17,670 $ 17,637
97
Item 9 - Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
PART III
Item 10 - Directors and Executive Officers of the Registrant
The information contained under the caption "Election of Directors" to
appear in the Company's definitive proxy statement relating to the Company's
1998 Annual Meeting of Stockholders, which definitive proxy statement will be
filed with the Securities and Exchange Commission not later than 120 days after
the end of the Company's fiscal year covered by this report on Form 10-K
(hereinafter referred to as the "Annual Meeting Proxy Statement"), is
incorporated herein by reference. Information concerning the executive officers
of the Company is included in Part I of this Report on Form 10-K.
Item 11 - Executive Compensation
The information contained under the caption "Directors' Fees" and
"Executive Compensation" to appear in the Annual Meeting Proxy Statement is
incorporated herein by reference.
Item 12 - Security Ownership of Certain Beneficial Owners and Management
The information contained under the caption "Security Ownership of Certain
Beneficial Owners" and "Information with Respect to Nominees and Continuing
Directors" to appear in the Annual Meeting Proxy Statement is incorporated
herein by reference.
Item 13 - Certain Relationships and Related Transactions
The information contained under the captions "Transactions with Certain
Related Persons" and "Compensation Committee Interlocks and Insider
Participation" to appear in the Annual Meeting Proxy Statement is incorporated
herein by reference.
PART IV
Item 14 - Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) (1) Financial Statements
(a) (2) Financial Statement Schedules
See Item 8 - Financial Statements and Supplementary Data
(a) (3) Exhibits
The following exhibits are either filed as part of this report or are
incorporated herein by reference:
Exhibit No. 3 Certificate of Incorporation, incorporated herein by
reference to this report from the Exhibits to Form S-1, Registration Statement
filed on July 31, 1991, Registration No. 33-41848 and Amendment No. 2 to Form
S-1 Registration Statement, filed on June 11, 1992, and Exhibits to Form 10-Q
filed on November 3, 1997.
3.1 Certificate of Incorporation of CENIT Bancorp, Inc.
3.3 Certificate of Amendment to Certificate of Incorporation of CENIT
Bancorp, Inc.
3.4 Bylaws of CENIT Bancorp, Inc.
98
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, and Exhibits to Form 10-K
filed on March 25, 1997.
10.1 Employment Agreement with Michael S. Ives
10.2 CENIT Stock Option Plan
10.3 CENIT Employees Stock Ownership Plan and Trust Agreement
10.4 ESOP Loan Commitment Letter
10.5 CENIT Management Recognition Plan
10.6 ESOP Loan Agreement
10.7 Agreement and Plan of Reorganization between Princess Anne Company and
CENIT Bancorp, Inc.
10.8 Employment Agreement with J. Morgan Davis
10.9 Branch Purchase and Deposit Assumption Agreement between CENIT
Bancorp, Inc. and Essex Savings Bank, F.S.B.
10.10 Amendment to Employment Agreement with Michael S. Ives
10.11 Amendment to Employment Agreement with J. Morgan Davis
Exhibit No. 11. Statement Re: Computation of Per Share Earnings
The 1997 statement Re: Computation of per share earnings is attached as
Exhibit 11.
Exhibit No. 21. Subsidiaries of the Registrant.
CENIT Bank and Princess Anne are the only subsidiaries of the
Registrant. Information regarding the subsidiaries of CENIT Bank and
Princess Anne is included in Part I, Item 1 under the captions "Activities
of Subsidiary Companies of CENIT Bank" and "Activities of Subsidiary
Company of Princess Anne," which is incorporated by reference.
Exhibit No. 23.1. Consent of Independent Accountants.
The consent of Price Waterhouse LLP, independent accountants for the
Company, is attached as Exhibit 23.1.
(b) Reports on Form 8-K filed in the fourth quarter of 1997
None.
(c) Exhibits
Exhibits to this Form 10-K are either filed as part of this Report or are
incorporated herein by reference.
(d) Financial Statements Excluded from Annual Report to Shareholders pursuant to
Rule 14a3(b)
Not applicable.
Supplemental Information
As of the date of filing of this report on Form 10-K, no annual report or
proxy material has been sent to security holders. Such material will be
furnished to security holders and the Securities and Exchange Commission
subsequent to the filing of this report on Form 10-K.
99
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
CENIT Bancorp, Inc.
By: /s/ Michael S. Ives
Michael S. Ives, President
and Chief Executive Officer
March 31, 1998
(Date)
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
By: /s/ John O. Guthrie March 31, 1998
John O. Guthrie (Date)
Senior Vice President and
Chief Financial Officer
By: /s/ David A. Foster March 31, 1998
David A. Foster (Date)
First Vice President and
Principal Accounting Officer
By: /s/ C. L. Kaufman, Jr. March 31, 1998
C. L. Kaufman, Jr. (Date)
Chairman of the Board/Director
By: /s/ Michael S. Ives March 31, 1998
Michael S. Ives (Date)
Director
By: /s/ David L. Bernd March 31, 1998
David L. Bernd (Date)
Director
By: /s/ Patrick E. Corbin March 31, 1998
Patrick E. Corbin (Date)
Director
By: /s/ J. Morgan Davis March 31, 1998
J. Morgan Davis (Date)
Director
By: /s/ Roger C. Reinhold March 31, 1998
Roger C. Reinhold (Date)
Director
By: /s/ Anne B. Shumadine March 31, 1998
Anne B. Shumadine (Date)
Director
100
By: /s/ John A. Tilhou March 31, 1998
John A. Tilhou (Date)
Director
By: /s/ David R. Tynch March 31, 1998
David R. Tynch (Date)
Director
101