UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 or 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended September 30, 1998 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
incorporation or organization) Number)
225 West Olney Road
Norfolk, Virginia 23510
----------------- -----
(Address of principal executive (Zip code)
office)
Registrant's telephone number, including area code: (757) 446-6600
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 the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
Common Stock $.01 Par Value 4,847,306
Title of Class Number of Shares Outstanding
as of November 6, 1998
CENIT BANCORP, INC. AND SUBSIDIARY
Contents
- --------------------------------------------------------------------------------
Page
----
PART I - FINANCIAL INFORMATION
Item 1
Financial Statements
Consolidated Statement of Financial Condition as of September 30, 1998
(Unaudited)and December 31, 1997.............................................. 1
Unaudited Consolidated Statement of Operations for the Three Months and Nine
Months ended September 30, 1998 and September 30, 1997........................ 2
Unaudited Consolidated Statement of Comprehensive Income for The Nine Months
Ended September 30, 1998.......................................................3
Unaudited Consolidated Statement of Changes in Stockholders' Equity for the
Nine Months ended September 30, 1998.......................................... 4
Unaudited Consolidated Statement of Cash Flows for the Nine Months ended
September 30, 1998 and September 30, 1997................. ................... 5
Notes to Unaudited Consolidated Financial Statements.......................... 6
Item 2
Management's Discussion and Analysis of Financial Condition and Results of
Operations................................................................. 7
Item 3
Quantitative and Qualitative Disclosures about Market Risk.................19
PART II - OTHER INFORMATION
Item 1
Legal Proceedings..........................................................19
Item 2
Changes in Securities......................................................19
Item 3
Defaults Upon Senior Securities............................................19
Item 4
Submission of Matters to a Vote of Security Holders........................19
Item 5
Other Information..........................................................19
Item 6
Exhibits and Reports on Form 8-K...........................................19
Signatures....................................................................20
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
CENIT BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF FINANCIAL CONDITION
(Dollars in thousands, except per share data)
ASSETS
(Unaudited)
September 30, 1998 December 31, 1997
------------------ -----------------
Cash $ 12,502 $ 16,993
Federal funds sold 13,628 37,118
Securities available for sale at fair value (adjusted
cost of $62,373 and $135,861, respectively) 63,631 137,188
Loans, net:
Held for investment 496,857 486,487
Held for sale 4,356 3,167
Interest receivable 3,984 4,888
Real estate owned, net 660 1,098
Federal Home Loan Bank and Federal Reserve Bank stock, at cost 5,066 8,711
Property and equipment, net 14,348 14,230
Goodwill and other intangibles 3,736 4,010
Other assets 4,779 4,193
----- -----
$ 623,547 $ 718,083
========== =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits:
Noninterest-bearing $ 67,679 $ 54,874
Interest-bearing 421,148 452,796
------- -------
Total deposits 488,827 507,670
Advances from the Federal Home Loan Bank 68,000 145,000
Other borrowings - 2,575
Securities sold under agreements to repurchase 12,203 9,664
Advance payments by borrowers for taxes and insurance 1,040 720
Other liabilities 3,235 2,517
----- -----
Total liabilities 573,305 668,146
------- -------
Stockholders' equity:
Preferred stock, $.01 par value; authorized 3,000,000
shares; none outstanding - -
Common stock, $.01 par value; authorized 7,000,000 shares;
issued and outstanding 4,897,775 and 4,971,243 shares,
respectively 49 50
Additional paid-in capital 15,820 18,119
Retained earnings - substantially restricted 38,066 35,416
Common stock acquired by Employees Stock Ownership Plan (ESOP) (4,098) (4,232)
Common stock acquired by Management Recognition
Plan (MRP) (220) (271)
Accumulated other comprehensive income,
net of income taxes 625 855
--- ---
Total stockholders' equity 50,242 $ 49,937
------ ----------
$ 623,547 $ 718,083
========== =========
<FN>
The notes to unaudited consolidated financial statements are an integral part of this statement.
</FN>
1
CENIT BANCORP, INC. AND SUBSIDIARY
UNAUDITED CONSOLIDATED STATEMENT OF OPERATIONS
(Dollars in thousands, except per share data)
Three Months Nine Months
Ended Ended
September 30, September 30,
1998 1997 1998 1997
---- ---- ---- ----
Interest and fees on loans $ 10,115 $ 9,882 $ 30,439 $ 28,260
Interest on mortgage-backed certificates 378 2,005 2,884 7,013
Interest on investment securities 638 683 1,995 2,108
Dividends and other interest income 236 288 930 793
--- --- --- ---
Total interest income 11,367 12,858 36,248 38,174
------ ------ ------ ------
Interest on deposits 4,891 5,415 14,988 15,612
Interest on borrowings 1,115 2,046 5,209 6,455
----- ----- ----- -----
Total interest expense 6,006 7,461 20,197 22,067
----- ----- ------ ------
Net interest income 5,361 5,397 16,051 16,107
Provision for loan losses 100 150 440 450
--- --- --- ---
Net interest income after provision
for loan losses 5,261 5,247 15,611 15,657
----- ----- ------ ------
Other income:
Deposit fees 602 521 1,822 1,498
Merchant processing fees 618 462 1,548 1,016
Commercial mortgage brokerage fees 30 - 393 125
Gains on sales of loans and securities 318 174 780 488
Other 235 219 694 579
--- --- --- ---
Total other income 1,803 1,376 5,237 3,706
----- ----- ----- -----
Other expenses:
Salaries and employee benefits 2,052 1,846 6,246 5,873
Equipment, data processing and supplies 690 653 2,168 2,009
Net occupancy expense of premises 477 467 1,404 1,385
Expenses, gains/losses on sales and provision
for losses on real estate owned, net 11 32 91 172
Professional fees 105 25 472 263
Merchant processing 515 381 1,347 844
Expenses related to proxy contest and
other matters - - - 405
Other 656 575 1,977 1,749
--- --- ----- -----
Total other expenses 4,506 3,979 13,705 12,700
----- ----- ------ ------
Income before income taxes 2,558 2,644 7,143 6,663
Provision for income taxes 934 935 2,557 2,353
--- --- ----- -----
Net income $ 1,624 $ 1,709 $ 4,586 $ 4,310
========= ======== ========= =========
Earnings per share
Basic $ .34 $ .35 $ .97 $ .88
========= ======== ========= =========
Diluted $ .33 $ .34 $ .94 $ .86
========= ======== ========= =========
Dividends per common share $ .11 $ .08 $ .31 $ .25
========= ======== ========= =========
<FN>
The notes to unaudited consolidated financial statements are an integral part of this statement.
</FN>
2
CENIT BANCORP, INC. AND SUBSIDIARY
UNAUDITED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
(Dollars in thousands)
Nine Months
Ended
September 30,
1998 1997
---- ----
Net income $ 4,586 $ 4,310
-------- -------
Other comprehensive income (loss), before income taxes:
Unrealized gains (losses) on securities available for sale
Unrealized holding gains (losses) arising during the period (246) 639
Less: reclassification adjustment for gains included in net income (72) (90)
--- ---
Other comprehensive income (loss), before income taxes (318) 549
Income tax benefit (expense) related to items of other comprehensive income (loss) 88 (202)
-- ----
Other comprehensive income (loss), net of income taxes (230) 347
---- ---
Comprehensive income $ 4,356 $ 4,657
======== =======
<FN>
The notes to unaudited consolidated financial statements are an integral part of this statement.
</FN>
3
CENIT BANCORP, INC. AND SUBSIDIARY
UNAUDITED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
Nine Months Ended September 30, 1998
(Dollars in thousands)
Common Accumulated
Stock Other
Common Additional Acquired
Common Stock Paid-In Retained by ESOP Income, Net of
Stock Shares Amount Capital Earnings and MRP Income Taxes Total
------------ ------ ------- -------- ------- ------------ -----
Balance, December 31, 1997,
as originally reported 1,657,081 $ 17 $18,152 $35,416 $(4,503) $ 855 $49,937
Common stock issued in
1998 three-for-one stock split 3,314,162 33 (33) - - - -
--------- -- --- --- --- --- ---
Balance, December 31, 1997,
as restated 4,971,243 $ 50 $18,119 $35,416 $(4,503) $ 855 $49,937
Comprehensive income - - - 4,586 - (230) 4,356
Cash dividends declared - - - (1,936) - - (1,936)
Exercise of stock options
and related tax benefits 63,532 - 548 - - - 548
Stock repurchase (137,000) (1) (2,963) - - - (2,964)
Other - - 116 - 185 - 301
--- --- --- --- --- --- ---
Balance, September 30, 1998 4,897,775 $ 49 $15,820 $38,066 $(4,318) $ 625 $50,242
========= ===== ======= ======= ======= ====== =======
<FN>
The notes to unaudited consolidated financial statements are an integral part of this statement.
</FN>
4
CENIT BANCORP, INC. AND SUBSIDIARY
UNAUDITED CONSOLIDATED STATEMENT OF CASH FLOWS
(Dollars in thousands)
Nine months ended September 30,
-------------------------------
1998 1997
---- ----
Cash flows from operating activities:
Net income $ 4,586 $ 4,310
Add (deduct) items not affecting cash in the period:
Provision for loan losses 440 450
Provision for losses on real estate owned 14 67
Amortization of loan yield adjustments 399 115
Depreciation, amortization and accretion, net 1,536 1,724
Net (gains) losses on sales/disposals of:
Securities (72) (90)
Loans (708) (398)
Real estate, property and equipment 36 14
Proceeds from sales of loans held for sale 57,140 30,910
Originations of loans held for sale (57,651) (31,997)
Change in assets/liabilities:
Decrease (increase) in interest receivable and other assets 538 (981)
Increase in other liabilities 809 71
--- --
Net cash provided by operating activities 7,067 4,195
----- -----
Cash flows from investing activities:
Purchases of securities available for sale (40,234) (12,094)
Principal repayments on securities available for sale 32,566 38,328
Proceeds from maturities and calls of securities available for sale 14,000 14,500
Proceeds from sales of securities available for sale 66,660 26,677
Net increase in loans held for investment (11,051) (61,012)
Net proceeds on sales of real estate owned 302 1,082
Additions to real estate owned (83) (87)
Purchases of Federal Home Loan Bank stock (1,650) (1,600)
Redemption of Federal Home Loan Bank stock & Federal Reserve Stock 5,295 250
Proceeds from sale of property and equipment 70 5
Purchases of property and equipment (1,126) (1,836)
------ ------
Net cash provided by investing activities 64,749 4,213
------ -----
Cash flows from financing activities:
Proceeds from exercise of stock options and warrants 150 306
Net (decrease) increase in deposits (18,843) 10,523
Proceeds from Federal Home Loan Bank advances 556,000 987,000
Repayment of Federal Home Loan Bank advances (633,000) (1,009,000)
Net increase in other borrowings - 3,965
Repayments of other borrowings (2,575) -
Net increase in securities sold under agreement
to repurchase 2,539 2,341
Cash dividends paid (1,424) (1,626)
Purchase of common stock by ESOP - (4,232)
Common stock repurchase (2,964) -
Other, net 320 515
--- ---
Net cash used for financing activities (99,797) (10,208)
------- -------
Decrease in cash and cash equivalents (27,981) (1,800)
Cash and cash equivalents, beginning of period 54,111 23,478
------ ------
Cash and cash equivalents, end of period $ 26,130 $ 21,678
========= ========
Supplemental disclosures of cash flow information:
Cash paid during the period for interest $ 7,359 $ 8,928
Cash paid during the period for income taxes 2,085 2,095
Schedule of noncash investing and financing activities:
Real estate acquired in settlement of loans $ 312 $ 1,225
Loans to facilitate sale of real estate owned 470 1,406
<FN>
The notes to unaudited consolidated financial statements are an integral part of this statement.
</FN>
5
CENIT BANCORP, INC. AND SUBSIDIARY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 1 - Basis of Presentation
The accompanying unaudited consolidated financial statements have been
prepared in accordance with the instructions to Form 10-Q and, therefore, do not
include all of the disclosures and notes required by generally accepted
accounting principles. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. The results of operations for the three and nine month periods
ended September 30, 1998 and 1997 are not necessarily indicative of results that
may be expected for the entire year or any interim periods. Certain previously
reported amounts have been reclassified to agree with the current presentation.
The interim financial statements should be read in conjunction with the
December 31, 1997 consolidated financial statements of CENIT Bancorp, Inc. (the
"Company").
Note 2 - Per Share Data
On March 24, 1998, the Company declared a three-for-one stock split. All
financial data included in this Form 10-Q reflects the effect of the stock
split.
The Company adopted FAS 128, Earnings per Share, on December 31, 1997. The
Company changed the method used to compute earnings per share and restated all
prior periods.
Basic earnings per share is calculated using weighted average shares
outstanding. For the nine and three months ended September 30, 1998, weighted
average shares used to compute basic earnings per share were 4,749,457 and
4,769,039, respectively. For the nine and three months ended September 30, 1997,
weighted average shares used to compute basic earnings per share were 4,897,509
and 4,843,380, respectively.
Diluted earnings per share is calculated by adding common stock equivalents
to the weighted average shares outstanding. For the nine month period and three
month period ended September 30, 1998, weighted average shares used to compute
diluted earnings per share were 4,873,332 and 4,872,882, respectively. For the
nine months and three months ended September 30, 1997, weighted average shares
used to compute diluted earnings per share were 5,028,324 and 4,969,263,
respectively.
The unallocated common shares held by the Company's Employee Stock
Ownership Plan are excluded from the weighted average shares used to calculate
basic and diluted earnings per share.
Note 3 - Comprehensive Income
On January 1, 1998, the Company adopted FAS 130, Reporting Comprehensive
Income. FAS 130 established standards for reporting and displaying comprehensive
income and its components. The adoption of FAS 130 did not have a material
impact on the Company. All of the Company's other comprehensive income relates
to net unrealized gains (losses) on available for sale securities.
6
Item 2 - Management's Discussion and Analysis of Financial Condition and Results
of Operations
General
The Company's business consists of the business of its sole subsidiary,
CENIT Bank ("the Bank"). The principal business of the Bank consists of
attracting retail deposits from the general public in its market areas through a
variety of deposit products and investing these fund in commercial, real estate
and consumer loans. The Bank also invests in mortgage-backed certificates,
securities issued by the U.S. Treasury and U.S. Government agencies and other
investments permitted by applicable laws and regulations.
Financial Condition of the Company
Total Assets
- ------------
At September 30, 1998, the Company had total assets of $623.5 million,
compared to $718.1 million at December 31, 1997, a decrease of $94.6 million or
13.2%. As a result of changes in the interest rate environment, management used
the proceeds from the sale, maturity and principal repayment of certain
securities, primarily mortgage-backed certificates, to reduce advances from the
Federal Home Loan Bank ("FHLB") rather than seek alternative investment
opportunities.
Securities Available for Sale
- -----------------------------
Securities available for sale totaled $63.6 million at September 30, 1998
and are comprised of U. S. Treasury securities, other U. S. Government agency
securities, and mortgage-backed certificates. The net decrease of $73.6 million
from the December 31, 1997 balance of $137.2 million resulted primarily from
$32.6 million of repayments, $40.2 million of purchases, $14.0 million of
proceeds from the maturities of securities, and $66.7 million from the sale of
securities.
Loans
- -----
The balance of net loans held for investment increased from $486.5 million
at December 31, 1997 to $496.9 million at September 30, 1998, an increase of
$10.4 million or 2.1%. Consumer loans increased during the first nine months of
1998 by $7.8 million or 13.4% while commercial business loans increased $6.2
million or 25.5%. Real estate loans decreased by $5.0 million or 1.1% during
this period, which includes a decrease of $28.1 million or 9.1% in residential
permanent 1-to 4-family loans due to amortization or repayments which were
approximately 41% on an annualized basis during the first nine months of 1998.
Amortization or reparyments of 1-to-4 family loans increased during September
and October 1998 to approximately 51% on an annualized basis.
7
The following table sets forth the composition of the Company's loans in dollar
amounts and as a percentage of the Company's total gross loans held for
investment at the dates indicated.
September 30, 1998 December 31, 1997
------------------ -----------------
(Dollars in Thousands)
Amount Percent Amount Percent
------ ------- ------ -------
Real estate loans:
Residential permanent 1- to 4-family:
Adjustable rate $ 203,006 37.56% $ 213,682 40.20%
Fixed rate
Conventional 73,118 13.53 89,356 16.81
Guaranteed by VA or insured by FHA 4,338 .80 5,487 1.03
----- --- ----- ----
Total permanent 1- to 4-family 280,462 51.89 308,525 58.04
Residential permanent 5 or more family 6,587 1.22 6,374 1.20
----- ---- ----- ----
Total permanent residential loans 287,049 53.11 314,899 59.24
------- ----- ------- -----
Commercial real estate loans:
Hotels 9,275 1.72 10,240 1.93
Office and warehouse facilities 32,568 6.02 26,710 5.02
Retail facilities 19,503 3.61 18,249 3.43
Other 5,542 1.02 2,714 0.51
----- ---- ----- ----
Total commercial real estate loans 66,888 12.37 57,913 10.89
------ ----- ------ -----
Construction loans:
Residential 1- to 4-family 44,178 8.17 44,208 8.32
Residential 5 or more family 22,807 4.22 12,784 2.40
Nonresidential 5,940 1.10 1,420 .27
----- ---- ----- ---
Total construction loans 72,925 13.49 58,412 10.99
------ ----- ------ -----
Land acquisition and development loans:
Consumer lots 3,762 .70 4,573 0.86
Acquisition and development 13,503 2.50 13,327 2.51
------ ---- ------ ----
Total land acquisition and development
loans 17,265 3.20 17,900 3.37
------ ---- ------ ----
Total real estate loans 444,127 82.17 449,124 84.49
------- ----- ------- -----
Consumer loans:
Boats 4,645 .86 5,685 1.07
Home equity and second mortgage 52,127 9.64 45,194 8.50
Mobile homes 57 .01 95 0.02
Other 9,191 1.70 7,250 1.36
----- ---- ----- ----
Total consumer loans 66,020 12.21 58,224 10.95
------ ----- ------ -----
Commercial business loans 30,393 5.62 24,222 4.56
------ ---- ------ ----
Total loans 540,540 100.00% 531,570 100.00%
------- ------ ------- ------
Less:
Allowance for loan losses 3,977 3,783
Loans in process 41,070 42,067
Unearned discounts, premiums, and loan fees, net (1,364) (767)
------ ----
43,683 45,083
------ ------
Total loans, net $ 496,857 $ 486,487
========= ==========
8
The following table sets forth information about originations, purchases, sales,
and principal reductions for the Company's loans for the period indicated.
Nine Months Ended
September 30, 1998
------------------
(Dollars in Thousands)
Loans originated:
Real estate:
Permanent:
Residential 1- to 4-family $69,368
Residential 5 or more family 610
- ---
Total 69,978
------
Commercial real estate 15,182
------
Construction:
Residential 1- to 4-family 17,040
Residential 5 or more family 11,350
Nonresidential 5,478
-----
Total 33,868
------
Land acquisition:
Consumer lots 772
Acquisition and development 3,530
-----
Total 4,302
-----
Total real estate loans originated 123,330
-------
Consumer:
Home equity and second mortgage 26,964
Other 6,617
-----
Total 33,581
------
Commercial business 33,745
------
Total loans originated 190,656
Loans purchased 52,431
------
Total loans originated and purchased 243,087
-------
Principal reductions:
Repayments and other principal reductions 176,618
Real estate loans sold 56,327
------
Total principal reductions 232,945
-------
Net increase in total loans $ 10,142
========
Net increase in loans held for sale 1,172
Net increase in gross loans held for investment 8,970
-----
$ 10,142
========
9
Deposits
- --------
The balance of deposits decreased from $507.7 million at December 31, 1997
to $488.8 million at September 30, 1998. During this period, certificates of
deposit decreased from $328.2 million at December 31, 1997, to $277.8 million at
September 30 1998, as the Company did not seek to match the highest certificate
rates within its market. All other interest bearing deposits increased by $18.8
million from $124.6 million at December 31, 1997 to $143.4 million at September
30, 1998. Noninterest-bearing deposits increased 23.3% from $54.9 million at
December 31, 1997 to $67.7 million at September 30, 1998 due, in part, to the
Company's emphasis on attracting small business accounts.
Capital
- --------
The Company's and the Bank's capital ratios exceeded applicable regulatory
requirements at September 30, 1998.
In June 1998, the Board of Directors of the Company gave the Company's
management the discretion to initiate a repurchase of up to five percent of the
Company's shares. During the third quarter of 1998 the Company repurchased
137,000 shares of the Company's stock. Since the end of the third quarter of
1998 and through the date of this report, the Company has repurchased 51,000
shares of the Company's stock. The Company is not obligated to conduct further
repurchases at all, and the Company's decision to do so, as well as the timing
of any purchases, will depend on a variety of factors.
Asset Quality
- -------------
Nonperforming Assets. Nonperforming assets consist of nonperforming loans,
real estate acquired in settlement of loans ("REO"), and other repossessed
assets. Generally the Company does not accrue interest on loans that are 90 days
or more past due, 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 Banks are
negotiating extensions or refinancings with the borrowers.
10
The following table sets forth information about the Company's nonperforming
loans, REO, and other repossessed assets at the dates indicated.
September 30, December 31,
1998 1997
---- ----
(Dollars in Thousands)
Nonperforming loans:
Real estate loans:
Permanent residential 1- to 4-family
Nonaccrual $ 191 $ 528
Accruing loans 90 days or more past due 474 53
--- --
Total 665 581
--- ---
Land acquisition and development
Nonaccrual 36 200
Accruing loans 90 days or more past due 15 -
-- ---
Total 51 200
-- ---
Consumer loans:
Mobile homes (nonaccrual) 17 48
Credit cards (accruing loans 90 days or
more past due) - 5
Other (nonaccrual) 16 24
-- --
Total 33 77
-- --
Commercial business loans:
Nonaccrual 32 240
Accruing loans 90 days or more past due 94 5
-- -
Total 126 245
--- ---
Total nonperforming loans $ 875 $ 483
====== =======
Total nonperforming loans:
Nonaccrual $ 292 $ 1,040
Accruing loans 90 or more days past due 583 63
--- --
Total 875 1,103
Real estate owned, net 660 1,098
Other repossessed assets, net 11 228
-- ---
Total nonperforming assets, net $1,546 $ 2,429
====== =======
Total nonperforming assets, net, to total assets .25% .34%
==== ====
11
Allowance for Loan Losses. The following table sets forth activity of the
allowance for loan losses for the periods indicated.
Nine months ended September 30,
-------------------------------
1998 1997
---- ----
(Dollars in Thousands)
Balance at beginning of period $ 3,783 $ 3,806
Provision for loan losses 440 450
Losses charged to allowance (340) (571)
Recovery of prior losses 94 107
-- ---
Balance at end of period $ 3,977 $ 3,792
======= =======
The Company's provision for loan losses was $440,000 for the nine months
ended September 30, 1998 compared to $450,000 in the same period in 1997. At
September 30, 1998, the Company's coverage ratio was 455% based on a total
allowance for loan losses of $3,977,000 and total nonperforming loans of
$875,000. This compares to a coverage ratio of 200% at September 30, 1997.
Average Balance Sheets
The following tables set forth, for the periods 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 tables have been calculated using daily
average balances.
12
For the Three Months For the Three Months
Ended Ended
September 30, 1998 September 30, 1997
------------------ ------------------
Average Yield/ Average Yield/
Balance Interest Cost Balance Interest Cost
------- -------- ---- ------- -------- ----
(Dollars in thousands)
Interest-earning assets:
Loans (1) $ 509,055 $10,116 7.95% $ 487,000 $ 9,882 8.12%
Mortgage-backed certificates 19,546 378 7.74 112,393 2,005 7.13
U.S. Treasury and other U.S.
Government agency securities 42,967 638 5.94 43,936 683 6.22
Federal funds sold 9,517 134 5.63 8,560 119 5.56
Federal Home Loan Bank and
Federal Reserve Bank stock 5,083 101 7.95 9,253 169 7.31
----- --- ----- ---
Total interest-earning assets $ 586,168 11,367 7.76 $ 661,142 12,858 7.78
---------- ------ ---------- ------
Noninterest-earning assets:
REO 595 1,586
Other 39,565 38,219
------ ------
Total noninterest-earning assets 40,160 39,805
------ ------
Total assets $ 626,328 $ 700,947
========== ==========
Interest-bearing liabilities:
Passbook and statement savings $ 38,059 314 3.30% $ 44,116 377 3.42%
Checking accounts 35,363 158 1.79 28,939 149 2.06
Money market deposit accounts 66,312 649 3.91 47,981 402 3.35
Certificates of deposit 285,327 3,770 5.28 336,156 4,487 5.34
------- ----- ------- -----
Total interest-bearing deposits 425,061 4,891 4.60 457,192 5,415 4.74
------- ----- ------- -----
Advances from the Federal Home
Loan Bank 71,402 959 5.37 131,978 1,894 5.74
Securities sold under agreements
to repurchase 12,895 150 4.65 9,734 116 4.77
Other borrowings 332 6 7.23 1,893 36 7.61
--- - ----- --
Total borrowings 84,629 1,115 5.27 143,605 2,046 5.70
------ ----- ------- -----
Total interest-bearing liabilities 509,690 6,006 4.71 600,797 7,461 4.97
------- ----- ------- -----
Noninterest-bearing liabilities:
Deposits 58,131 45,883
Other liabilities 6,782 4,185
----- -----
Total noninterest-bearing liabilities 64,913 50,068
------ ------
Total liabilities 574,603 650,865
Stockholders' equity 51,725 50,082
------ ------
Total liabilities and stockholders' equity $ 626,328 $ 700,947
========== ==========
Net interest income/interest rate spread $ 5,361 3.05% $ 5,397 2.81%
======= =========
Net interest position/net interest margin $ 76,478 3.66% $ 60,345 3.27%
========== ==========
Ratio of average interest-earning assets to
average interest-bearing liabilities 115.00% 110.04%
====== ======
<FN>
(1) Includes nonaccrual loans and loans held for sale.
</FN>
13
For the Nine Months For the Nine Months
Ended Ended
September 30, 1998 September 30, 1997
------------------ ------------------
Average Yield/ Average Yield/
Balance Interest Cost Balance Interest Cost
------- -------- ---- ------- -------- ----
(Dollars in thousands)
Interest-earning assets:
Loans (1) $ 511,506 $ 30,439 7.93% $ 464,181 $ 28,260 8.12%
Mortgage-backed certificates 57,035 2,884 6.74 134,392 7,013 6.96
U.S. Treasury and other U.S.
Government agency securities 44,463 1,995 5.98 44,791 2,108 6.28
Federal funds sold 11,714 486 5.53 7,386 305 5.51
Federal Home Loan Bank and
Federal Reserve Bank stock 7,756 444 7.63 9,029 488 7.21
----- --- ----- ---
Total interest-earning assets 632,474 36,248 7.64 659,779 38,174 7.71
------- ------ ------- ------
Noninterest-earning assets:
REO 738 1,927
Other 42,112 38,781
------ ------
Total noninterest-earning assets 42,850 40,708
------ ------
Total assets $ 675,324 $ 700,487
========== ==========
Interest-bearing liabilities:
Passbook and statement savings $ 40,697 1,008 3.30% $ 45,560 1,154 3.38%
Checking accounts 34,268 468 1.82 29,014 451 2.07
Money market deposit accounts 61,294 1,735 3.77 46,341 1,147 3.30
Certificates of deposit 299,194 11,777 5.25 328,889 12,860 5.21
------- ------ ------- ------
Total interest-bearing deposits 435,453 14,988 4.59 449,804 15,612 4.63
------- ------ ------- ------
Advances from the Federal Home
Loan Bank 115,938 4,739 5.45 145,882 6,117 5.59
Securities sold under agreements
to repurchase 11,355 393 4.61 8,761 301 4.58
Other borrowings 1,348 77 7.62 638 37 7.73
Total borrowings 128,641 5,209 5.40 155,281 6,455 5.54
------- ----- ------- -----
Total interest-bearing liabilities 564,094 20,197 4.77 605,085 22,067 4.86
------- ------ ------- ------
Noninterest-bearing liabilities:
Deposits 53,786 41,515
Other liabilities 6,386 3,789
Total noninterest-bearing liabilities 60,172 45,304
------ ------
Total liabilities 624,266 650,389
Stockholders' equity 51,058 50,098
------ ------
Total liabilities and stockholders' equity $ 675,324 $ 700,487
========== ==========
Net interest income/interest rate spread $ 16,051 2.87% $ 16,107 2.85%
======== =========
Net interest position/net interest margin $ 68,380 3.38% $ 54,694 3.26%
========== ==========
Ratio of average interest-earning assets to
average interest-bearing liabilities 112.12% 109.04%
====== ======
<FN>
(1) Includes nonaccrual loans and loans held for sale.
</FN>
14
Comparison of Operating Results for the Three Months Ended September 30, 1998
and September 30, 1997.
General
- -------
The Company's pre-tax income for the three months ended September 30, 1998
was $2.56 million compared to $2.64 million during the same period in the prior
year. This decrease is primarily attributable to a $527,000 increase in other
expenses, the effect of which was partially offset by a $427,000 increase in
other income and a $14,000 increase in net interest income after provision for
loan losses.
Net Interest Income
- -------------------
The Company's net interest income before provision for loan losses
decreased by $36,000, or less than 1.0%, for the quarter ended September 30,
1998 as compared to that of the previous year. This decrease resulted primarily
from a $1.49 million decrease in interest income which exceeded a $1.46 million
decrease in interest expense. The decrease in interest income was primarily
attributable to an decrease in the average balance of mortgage-backed
certificates. The decrease in interest expense was primarily due to a decrease
in the average balance of certificates of deposits.
Interest on the Company's portfolio of mortgage-backed certificated
decreased by approximately $1.6 million from $2.0 million for the quarter ended
September 30, 1997, to $378,000 for the comparable 1998 period. This decrease
resulted from a $92.8 million decrease in the average balance of the portfolio
during the third quarter of 1998 compared to 1997. The decrease in the average
balance of mortgage-backed certificates was due to sales and prepayments which
have increased due to declines in interest rates.
Interest on loans increased by $233,000 in the quarter ended September 30,
1998, compared to the comparable 1997 period. This increase was primarily
attributable to a $22.1 million increase in the average balance of loans. The
yield on the Company's loan portfolio decreased from 8.12% in the quarter ended
September 30, 1997 to 7.95% in the comparable 1998 period primarily as a result
of purchased loans with lower yields being added to the loan portfolio during
1998 and lower rates on originations.
Interest on investment securities for the quarter ended September 30, 1998,
decreased by $45,000 compared to the same period in 1997. The yield on this
portfolio decreased from 6.22% in the quarter ended September 30, 1997 to 5.94%
for the quarter ended September 30, 1998.
Interest on deposits decreased by $524,000 in the quarter ended September
30, 1998, compared to the comparable 1997 period. This decrease was primarily
attributable to a $50.8 million decrease in the average balance of certificates
of deposit in the quarter ended September 30, 1998, compared to the comparable
1997 period.
Interest on borrowings decreased by $931,000 in the third quarter of 1998
compared to the same period in 1997. The decrease was the result of both a
decrease in the average balance outstanding during the quarters of $59.0 million
and a decrease in the cost of these borrowings from 5.70% during the quarter
ended September 30, 1997 to 5.27% in the comparable 1998 quarter.
Total interest-earning assets decreased from an average of $661.1 million
during the third quarter of 1997 to $586.2 million during the third quarter of
1998. Net interest income during the two quarters remained approximately the
same, however, as decreases in lower yielding investments offset decreases in
interest-bearing deposits and borrowings. This resulted in an increase in the
Company's net interest margin to 3.66% during the third quarter of 1998 compared
to a net interest margin of 3.27% during the third quarter of 1997.
Provision for Loan Losses
- -------------------------
The Company's provision for loan losses decreased by $50,000 to $100,000
for the three months ended September 30, 1998, compared to the same period in
1997 as asset quality continues to improve. Net loans charged off during the
quarter ended September 30, 1998, were $30,000 compared to $68,000 in the
comparable 1997 period.
Other Income
- ------------
Total other income increased from $1.4 million in the quarter ended
September 30, 1997 to $1.8 million in the comparable 1998 period, an increase of
$427,000 or 31.0%.
15
Deposit fees increased by $81,000, primarily as the result of increases in
usage fees from the Company's automated teller network and increases in checking
account fees. Merchant processing fees increased by $156,000, gains on sales of
loans and securities increased by $144,000, and commercial mortgage brokerage
fees increased by $30,000, all of which were primarily the result of increases
in the volume of transactions.
Other Expenses
- --------------
Total other expenses increased by $527,000 for the quarter ended September
30, 1998 compared to the comparable 1997 period.
Salaries and employee benefits increased by $206,000. Merchant processing
expenses increased by $134,000 due to increases in volume. Professional fees
increased by $80,000 primarily as a result of a nonrecurring recovery of legal
costs in the third quarter of 1997. Marketing expenses increased by $41,000 due,
in part, to expenses during the third quarter, 1998 related to a new marketing
campaign designed to promote the identity, products and services of the Bank,
the area's largest remaining community bank. Primarily as a result of this
marketing campaign, which is scheduled to end during the fourth quarter, 1998,
marketing expenses are expected to increase approximately $80,000 over those of
the third quarter, 1998.
Comparison of Operating Results for the Nine Months Ended
September 30, 1998 and September 30, 1997.
General
- -------
The Company's pre-tax income for the nine months ended September 30, 1998
was $7.1 million compared to $6.7 million during the same period in the prior
year. This increase is attributable to a $1.5 million increase in other income,
the effects of which more than offset a $1.0 million increase in other expenses.
Net Interest Income
- -------------------
The Company's net interest income before provision for loan losses
decreased by $56,000 during the nine months ended September 30, 1998, compared
to the same period in 1997. Interest income decreased by $1.9 million while
interest expense decreased by approximately the same amount during the nine
month period of 1998 compared to 1997.
Interest on the Company's portfolio of mortgage-backed certificates
decreased by approximately $4.1 million from $7.0 million for the nine months
ended September 30, 1997, to $2.9 million for the comparable 1998 period. This
decrease resulted from a $77.4 million decrease in the average balance of the
portfolio and decrease in the average yield on the portfolio from 6.96% in the
nine months ended September 30, 1997, to 6.74% in the comparable 1998 period.
The decrease in the average balance of mortgage-backed certificates was due to
sales and repayments.
Interest on loans increased by $2.2 million in the nine months ended
September 30, 1998 compared to the comparable 1997 period. This increase was
attributable to a $47.3 million increase in the average balance of loans. The
yield on the Company's loan portfolio decreased from 8.12% in the nine months
ended September 30, 1997, to 7.93% in the comparable 1998 period primarily as a
result of purchased loans with lower yields being added to the loan portfolio.
Interest on investment securities for the nine months ended September 30,
1998 decreased by $113,000 compared to the same period in 1997 primarily due to
a decrease in the portfolio's yield from 6.28% in 1997 to 5.98% in 1998.
Interest on deposits decreased by $624,000 in the nine months ended
September 30, 1998, compared to the comparable 1997 period. This decrease was
primarily attributable to a $29.7 million decrease in the average balance of
certificates of deposit in the nine months ended September 30, 1998.
The Company's net interest margin increased from 3.26% for the nine months
ended September 30, 1997, to 3.38% for the nine months ended September 30, 1998.
The Company's interest rate spread increased from 2.85% in the nine months ended
September 30, 1997, to 2.87% in the comparable 1998 period. The Company's
calculations of interest rate spread and net interest rate margin included
nonaccrual loans as interest-earning assets.
16
Provision for Loan Losses
- -------------------------
The Company's provision for loan losses decreased by $10,000 to $440,000
for the nine months ended September 30, 1998, compared to the same period in
1997. Net loans charged off during the nine months ended September 30, 1998,
were $247,000 compared to $464,000 in the comparable 1997 period.
Other Income
- ------------
Total other income increased from $3.7 million in the nine months ended
September 30, 1997 to $5.2 million in the comparable 1998 period, an increase of
$1.5 million or 41.3%.
Deposit fees increased by $324,000, primarily as the result of increases in
usage fees from the Company's automated teller network and increases in checking
account fees. Merchant processing fees increased by $532,000, and commercial
mortgage brokerage fees increased by $268,000, the result of increases in the
volume of transactions. Gains on sales of loans and securities increased by
$292,000.
Other Expenses
- --------------
Total other expenses increased by $1.0 million for the nine months ended
September 30, 1998 compared to the comparable 1997 period.
Salaries and employee benefits increased by $373,000, or 6.4%, which
includes a $209,000 increase in commercial mortgage brokerage compensation.
Equipment, data processing and supply expense increased by $159,000. Merchant
processing expenses increased by $503,000 due to increases in volume.
Professional fees increased by $209,000 due, in part, to $37,000 of legal
expenses during the first nine months of 1998 related to the merger of the
Company's two subsidiary banks, and a recovery of legal costs in the third
quarter of 1997. REO expense decreased by $81,000, as a result of the decrease
in REO outstanding during 1998 compared to 1997. In 1997, the Company incurred
$405,000 of expenses related to the 1997 proxy contest and other matters. Other
expense increased by $228,000 which includes $63,000 related to the merger of
the Company's banks.
Liquidity
- ---------
The principal sources of funds for the Company for the nine months ended
September 30, 1998 included $556.0 million in proceeds from FHLB advances, $32.6
million in principal repayments of securities available for sale, $66.7 million
in proceeds from sales of securities available for sale, and $57.1 million in
proceeds from the sale of loans. Funds were used primarily to repay FHLB
advances totaling $633.0 million, to fund $11.1 million net increase in loans
held for investment, to fund purchases of investment securities available for
sale totaling $40.2 million, and to originate loans held for sale of $57.7
million.
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.
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 requirements may vary from time to
time (between 4% and 10%) depending upon economic conditions and savings flows
of all savings institutions. At the present time, the required liquid asset
ratio in 4%. CENIT Bank's liquid asset ratio was 6.8% and 8.8% at September 30,
1998 and December 31, 1997, respectively.
17
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 may not recognize the correct date after December 31, 1999.
Also, systems and equipment that are not typically thought of as "computer
related" (referred to as "non-IT") contain imbedded hardware or software that
may have a time element.
In 1997, the Company implemented a process of software inventory, analysis,
modification and testing to address the Year 2000 Issue. The scope of the
project includes: ensuring the compliance of all applications, operating systems
and hardware on the mainframe, PC and LAN systems; addressing issues related to
non-IT embedded software and equipment; and addressing the compliance of the
Company's significant borrowers and third party providers.
Management believes that significant progress has been made towards
accomplishing these objectives. Significant software and hardware systems have
been identified, including third party and customer related issues; remediation
is well underway and committees have been formed to address testing and
contingency planning. A summary of significant milestones is presented below:
. The Company has completed modifications of its mainframe applications for
Year 2000 compliance and is currently establishing a plan to test these
applications. This testing will begin in the fourth quarter of 1998 and is
expected to be completed by the end of the second quarter of 1999. For PC
and LAN systems, the Company has completed its review and expects to
complete all modifications and testing by the end of the second quarter of
1999.
. The majority of the Company's non-IT related systems and equipment are
currently Year 2000 compliant, based primarily on communications with
vendors. Compilation of written documentation regarding compliance is
underway and is scheduled to be completed by the end of the second quarter
of 1999, as is any testing of critical systems that the Company determines
needs to be conducted.
. The potential impact of Year 2000 will depend not only on the corrective
measures the Company undertakes but also on other entities who provide data
to or receive data from the Company and on those whose operational
capability or financial conditions are important to the Company. The
Company is currently communicating with significant third parties to ensure
their awareness of the Year 2000 Issue. In addition, management has
reviewed significant lending relationships and consulted with these
customers as to their plans to address Year 2000 issues. The plans of such
parties are currently being monitored, and any fundamental impact on the
Company will be evaluated.
. The Company has not had an independent review of its Year 2000 risks or
estimates. However, the Company expects to engage experts during the first
quarter of 1999 to assist with a review of compliance testing by the
Company.
. The Company estimates, based on current projections of allocations of
existing resources and known direct costs, that total costs related to the
Year 2000 project will be approximately $1,000,000. The Company estimates
that approximately 88% of these costs will be related to the redeployment
of existing personnel to address Year 2000 Issues, while approximately 12%
of these costs will represent incremental expenses to the Company since
inception of the Year 2000 project. Since inception, the Company has
incurred approximately $400,000 of costs related to its Year 2000 project,
of which $20,000 represents incremental expenses. Management believes there
has not been an adverse impact on the Company's financial condition or day
to day operations as a result of computer projects being deferred due to
reallocation of resources to the Year 2000 project.
Although the Company expects its critical systems to be compliant before
December 31, 1999, there is no guarantee that these results will be achieved as
a result of risks inherent in this process, including loss of technical
resources to perform the work, failure to identify critical systems and
noncompliance by third parties whose systems and operations impact the Company .
The Company is working to establish a contingency plan to address the possible
failure of critical systems. The Company expects to complete its contingency
plan by the end of the second quarter of 1999. For non-IT systems and equipment
and third party providers, the Company is assessing their compliance and will
consider alternative providers, where necessary.
18
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.
Item 3 - Quantitative and Qualitative Disclosure About Market Risk
- ------------------------------------------------------------------
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. There were no material changes in the
Company's market risk management strategy, as stated in the Company's 1997
annual report, during the first nine months of 1998.
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings - Inapplicable
- --------------------------
Item 2 - Changes in Securities - Inapplicable
- ------------------------------
Item 3 - Defaults Upon Senior Securities - Inapplicable
- ----------------------------------------
Item 4 - Submission of Matters to a Vote of Security Holders - Inapplicable
- ------------------------------------------------------------
Item 5 - Other Information - None
- --------------------------
Item 6 - Exhibits and Reports on Form 8-K - None
- -----------------------------------------
19
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
CENIT BANCORP, INC.
DATE: November 12, 1998 /S/ Michael S. Ives
-------------------
Michael S. Ives
President and Chief Executive Officer
DATE: November 12, 1998 /S/ John O. Guthrie
-------------------
John O. Guthrie
Senior Vice President and
Chief Financial Officer
20