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, 1996
[ ] 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)
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 $45.00 of the registrant's common stock on
February 28, 1997, 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 $65,065,455. Solely for purposes of this calculation, all
executive officers and directors of the registrant are considered to be
affiliates. Also included are certain shares held by various employee benefit
plans.
The number of shares of the registrant's common stock outstanding as of
February 28, 1997 was 1,639,989.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Annual Report to Stockholders for the fiscal year ended
December 31, 1996 are incorporated by reference into Parts I and II hereof.
Portions of the Proxy Statement for the Annual Meeting to be held on April 23,
1997 are incorporated by reference into Part III hereof.
<PAGE>
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 Financial Statements in
the 1996 Annual Report to stockholders, which is attached hereto as Exhibit 13.
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. See Note 2 of the Notes to Consolidated Financial
Statements in the 1996 Annual Report to stockholders, which is attached hereto
as Exhibit 13.
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--Activities Restrictions." 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 April 1, 1994, CENIT Bank and Homestead Savings Bank, FSB ("Homestead")
merged pursuant to a definitive agreement entered into on October 21, 1993. The
merger was accounted for by the purchase method of accounting. At March 31,
1994, Homestead had total assets of approximately $53.9 million and deposits of
approximately $47.1 million. See Note 2 of the Notes to Consolidated Financial
Statements in the 1996 Annual Report to Stockholders, which is attached hereto
as Exhibit 13.
The Company currently conducts its business from its corporate headquarters
in Norfolk, Virginia, and through nineteen retail offices and two mortgage
origination offices located in southeastern Virginia. At December 31, 1996, the
Company had total deposits of $499.0 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 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").
2
<PAGE>
At December 31, 1996, the Company had total assets of $707.1 million and
total stockholders' equity of $49.6 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 nineteen retail offices 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, 1996, 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
<PAGE>
<TABLE>
<CAPTION>
Year ended December 31,
1994 1995 1996
Average Yield/ Average Yield/ Average Yield/
Balance Interest Cost Balance Interest Cost Balance Interest Cost
------- -------- ---- ------- -------- ---- ------- -------- ----
<S> (Dollars in Thousands)
Interest-earning assets: <C> <C> <C> <C> <C> <C> <C> <C> <C>
Loans (1) $295,014 $24,747 8.39% $324,316 $28,907 8.91% $352,153 $30,243 8.59%
Mortgage-backed certificates 162,330 9,169 5.65 181,154 11,406 6.30 197,562 13,224 6.69
U.S. Treasury and other U.S.
Government agency securities 53,179 3,072 5.78 64,640 4,046 6.26 56,826 3,657 6.44
Federal funds sold 12,100 485 4.01 11,384 653 5.74 7,618 405 5.32
Federal Home Loan Bank and
Federal Reserve Bank stock 5,672 353 6.22 7,091 515 7.26 8,913 642 7.20
----- --- ----- --- ----- ---
Total interest-earning assets 528,295 37,826 7.16 588,585 45,527 7.73 623,072 48,171 7.73
------- ------ ------- ------ ------- ------
Noninterest-earning assets:
REO 4,034 2,879 2,015
Other 19,217 24,062 38,178
------ ------ ------
Total noninterest-earning assets 23,251 26,941 40,193
------ ------ ------
Total assets $551,546 $615,526 $663,265
======== ======== ========
Interest-bearing liabilities:
Passbook and statement savings $ 51,378 1,607 3.13 $ 44,758 1,561 3.49 $45,816 1,558 3.40
Checking accounts 32,230 749 2.32 28,151 767 2.72 26,951 677 2.51
Money market deposit accounts 47,139 1,399 2.97 43,847 1,506 3.43 43,057 1,398 3.25
Certificates of deposit 259,580 11,640 4.48 287,042 15,548 5.42 293,336 15,607 5.32
------- ------ ---- ------- ------ ---- ------- ------ ----
Total interest-bearing deposits 390,327 15,395 3.94 403,798 19,382 4.80 409,160 19,240 4.70
------- ------ ------- ------ ------- ------
Advances from the Federal Home
Loan Bank 87,892 4,021 4.57 128,499 7,910 6.16 154,854 8,423 5.44
Other borrowings 646 43 6.66 817 62 7.59 295 22 7.46
Securities sold under agreements
to repurchase 1,141 37 3.24 2,543 122 4.80 8.616 402 4.67
----- -- ----- --- ----- ---
Total interest-bearing liabilities 480,006 19,496 4.06 535,657 27,476 5.13 572,925 28,087 4.90
------- ------ ------- ------ ------- ------
Noninterest-bearing liabilities:
Deposits 26,890 31,308 38,133
Other liabilities 3,858 4,182 4,477
----- ----- -----
Total noninterest-bearing liabilities 30,748 35,490 42,610
------ ------ ------
Total liabilities 510,754 571,147 615,535
Stockholders' equity 40,792 44,379 47,730
------ ------ ------
Total liabilities and stockholders'equity $551,546 $615,526 $663,265
======== ======== ========
Net interest income/interest rate spread $18,330 3.10% $18,051 2.60% $20,084 2.83%
======= ==== ======= ==== ======= ====
Net interest position/net interest margin $ 48,289 3.47% $ 52,928 3.07% $ 50,147 3.22%
======== ==== ======== ==== ======== ====
Ratio of average interest-earning assets to
average interest-bearing liabilities 110.06% 109.88% 108.75%
====== ====== ======
<FN>
(1) Includes nonaccrual loans and loans held for sale.
</FN>
</TABLE>
4
<PAGE>
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.
<TABLE>
<CAPTION>
Year ended December 31,
-------------------------------------------------------------
1994 vs. 1995 1995 vs. 1996
----------------------------- ----------------------------
Increase (decrease) Increase (decrease)
due to due to
Volume Rate Net Volume Rate Net
------ ---- --- ------ ---- ---
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest Income:
Loans (1) $ 2,552 $ 1,608 $ 4,160 $ 2,417 $(1,081) $ 1,336
Mortgage-backed certificates 1,125 1,112 2,237 1,072 746 1,818
U.S. Treasury and other U.S.
Government agency securities 702 272 974 (500) 111 (389)
Federal funds sold (30) 198 168 (203) (45) (248)
Federal Home Loan Bank and
Federal Reserve Bank stock 97 65 162 131 (4) 127
-- -- --- --- -- ---
Total interest income 4,446 3,255 7,701 2,917 (273) 2,644
----- ----- ----- ----- ---- -----
Interest Expense:
Passbook and statement savings (219) 173 (46) 36 (39) (3)
Checking accounts (102) 120 18 (32) (58) (90)
Money market deposit accounts (102) 209 107 (28) (80) (108)
Certificates of deposit 1,318 2,590 3,908 338 (279) 59
Advances from the Federal Home Loan Bank 2,225 1,664 3,889 1,502 (989) 513
Other borrowings 12 7 19 (39) (1) (40)
Securities sold under agreements to
repurchase 61 24 85 283 (3) 280
-- -- -- --- -- ---
Total interest expense 3,193 4,787 7,980 2,060 (1,449) 611
----- ----- ----- ----- ------ ---
Net interest income $ 1,253 $(1,532) $ (279) $ 857 $ 1,176 $ 2,033
======= ======= ======= ======= ======= =======
<FN>
___________________________
(1) Includes nonaccrual loans and loans held for sale.
</FN>
</TABLE>
5
<PAGE>
Interest Rate Risk Management
The following table sets forth the amounts of interest-earning assets and
interest-bearing liabilities outstanding at December 31, 1996 that are subject
to repricing or that mature in each of the future time periods shown. The table
reflects estimated contractual amortization as well as certain assumptions
regarding prepayment of loans and mortgage-backed certificates and the
withdrawal of certain deposits that are outside of actual contractual terms,
including a prepayment rate per period of approximately 10% to 18% for
adjustable-rate one- to four-family residential mortgages, 6% to 14 % for
fixed-rate one- to four-family residential mortgages, 2% to 32% for most other
loans, and 11% to 23% for mortgage-backed certificates. These prepayment
assumptions are based on the recent prepayment experience of the Company.
Further, the table assumes various rates of retention for money market deposit,
savings and checking accounts. The annual retention rates used are approximately
69% for money market deposit accounts, 83% for checking accounts, and 86% for
savings accounts. These estimated retention rates are those last published by
the OTS in November, 1994. For additional discussion, See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Interest Rate Risk Management" included in the 1996 Annual Report to
Stockholders, which is attached hereto as Exhibit 13 and incorporated herein by
reference.
Interest Sensitivity Analysis
<TABLE>
<CAPTION>
Total Over one Over three
0-3 4-6 7-12 within year to years or
Months Months Months one year three years nonsensitive Total
------ ------ ------ -------- ----------- ------------ -----
(Dollars in Thousands)
Assets
Interest-earning assets:
<S> <C> <C> <C> <C> <C> <C> <C>
Loans (1) $107,364 $ 40,446 $ 91,704 $239,514 $103,400 $ 82,599 $425,513
Securities available for sale:
U.S. Treasury securities 3,000 4,517 6,555 14,072 26,224 -- 40,296
Other U.S. Government
agency securities 2,003 1,005 995 4,003 2,006 -- 6,009
Mortgage-backed certificates 46,464 39,252 73,652 159,368 10,619 7,719 177,706
Federal funds sold and interest-
earning deposits 6,003 -- -- 6,003 -- -- 6,003
Federal Home Loan Bank and
Federal Reserve Bank stock -- -- -- -- -- 7,861 7,861
Total interest-earning assets $164,834 $ 85,220 $172,906 $422,960 $142,249 $ 98,179 $663,388
Liabilities
Interest-bearing liabilities:
Interest-bearing deposits:
Passbook, statement savings
and checking accounts (2) $ 2,996 $ 2,996 $ 5,996 $11,988 $18,700 $ 47,620 $ 78,308
Money market deposit accounts 3,513 3,513 7,027 14,053 16,268 14,494 44,815
Certificates of deposits 81,159 55,681 92,689 229,529 68,501 31,658 329,688
Total interest-bearing deposits 87,668 62,190 105,712 255,570 103,469 93,772 452,811
Advances from the Federal
Home Loan Bank 148,000 -- -- 148,000 -- -- 148,000
Securities sold under
agreements to repurchase 7,138 -- -- 7,138 -- -- 7,138
Total interest-bearing
liabilities (2) $242,806 $ 62,190 $105,712 $410,708 $103,469 $ 93,772 $607,949
Interest sensitivity gap $(77,972) $ 23,030 $ 67,194 $12,252 $38,780 $ 4,407 $ 55,439
Cumulative interest sensitivity gap $(77,972) $(54,942) $ 12,252 $12,252 $51,032
Cumulative interest sensitivity gap
as a percentage of total assets (11.0)% (7.8)% 1.7% 1.7% 7.2%
<FN>
__________________
(1) Excludes nonaccrual loans of $2.4 million.
(2) Excludes $46.2 million of noninterest-bearing deposits.
</FN>
</TABLE>
6
<PAGE>
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, 1996, the Company's total gross loans held for
investment in all categories equaled $468.4 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.
7
<PAGE>
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.
<TABLE>
<CAPTION>
At December 31,
-----------------------------------------------------------------------------------
1992 1993 1994 1995 1996
-------------- -------------- -------------- -------------- ---------------
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
-------------- ------ ------- ------ ------- ------ ------- ------ -------
(Dollars in Thousands)
Real estate loans:
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Residential permanent 1- to 4-family:
Adjustable rate $ 50,051 16.75% $56,658 19.79% $ 91,657 26.28% $98,093 27.44% $157,542 33.63%
Fixed rate
Conventional 51,481 17.22 37,291 13.03 48,241 13.83 47,633 13.32 98,952 21.12
Guaranteed by VA or insured by FHA 12,521 4.19 9,932 3.47 8,594 2.46 7,691 2.15 7,004 1.50
Total permanent 1- to 4-family 114,053 38.16 103,881 36.29 148,492 42.57 153,417 42.91 263,498 56.25
Residential permanent 5 or more family 11,580 3.87 10,678 3.73 11,043 3.16 9,343 2.61 7,100 1.52
Total permanent residential loans 125,633 42.03 114,559 40.02 159,535 45.73 162,760 45.52 270,598 57.77
Commercial real estate loans:
Hotels 6,090 2.04 9,059 3.17 6,303 1.81 9,652 2.70 9,651 2.06
Office and warehouse facilities 27,334 9.15 25,224 8.81 27,153 7.78 30,483 8.52 27,178 5.80
Retail facilities 14,032 4.69 15,278 5.34 16,987 4.87 17,450 4.88 18,181 3.88
Other 1,901 0.64 581 0.20 1,983 0.57 5,459 1.53 3,304 .71
Total commercial real estate loans 49,357 16.52 50,142 17.52 52,426 15.03 63,044 17.63 58,314 12.45
Construction loans:
Residential 1- to 4-family 25,353 8.48 35,327 12.34 53,900 15.45 51,637 14.44 43,807 9.35
Residential 5 or more family 600 0.20 1,475 0.52 2,234 0.64 4,224 1.18 8,855 1.89
Nonresidential:
Office and warehouse facilities 950 0.32 - - - - - - - -
Other 2,036 0.68 1,125 0.39 50 0.02 50 0.02 3,365 .72
Total construction loans 28,939 9.68 37,927 13.25 56,184 16.11 55,911 15.64 56,027 11.96
Land acquisition and development loans:
Consumer lots 11,752 3.93 8,707 3.04 5,906 1.69 5,646 1.58 5,396 1.15
Acquisition and development 7,352 2.46 5,641 1.97 14,950 4.29 14,961 4.18 16,010 3.42
Total land acquisition and
development loans 19,104 6.39 14,348 5.01 20,856 5.98 20,607 5.76 21,406 4.57
Total real estate loans 223,033 74.62 216,976 75.80 289,001 82.85 302,322 84.55 406,345 86.75
Consumer loans:
Boats 19,843 6.64 15,266 5.33 12,004 3.44 9,766 2.73 7,814 1.67
Home equity and second mortgage 21,240 7.10 19,742 6.90 23,252 6.67 20,811 5.82 29,578 6.31
Mobile homes 9,614 3.22 8,011 2.80 392 0.11 206 0.06 137 .03
Other 8,733 2.92 7,449 2.60 7,052 2.02 5,211 1.46 6,606 1.41
Total consumer loans 59,430 19.88 50,468 17.63 42,700 12.24 35,994 10.07 44,135 9.42
Commercial business loans 16,449 5.50 18,812 6.57 17,129 4.91 19,259 5.38 17,922 3.83
Total loans 298,912 100.00% 286,256 100.00% 348,830 100.00% 357,575 100.00% 468,402 100.00%
Less:
Allowance for loan losses 3,884 4,039 3,789 3,696 3,806
Loans in process 15,348 23,397 39,397 34,728 42,309
Unearned discounts, premiums, and
loan fees, net 411 216 66 (43) 68
19,643 27,652 43,252 38,381 46,183
Total loans, net $279,269 $258,604 $305,578 $319,194 $422,219
</TABLE>
8
<PAGE>
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, 1996. 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.
<TABLE>
<CAPTION>
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)
<S> <C> <C> <C> <C> <C> <C>
Permanent 1- to 4-family $ 10,774 $ 43,583 $ 37,944 $ 85,938 $ 85,259 $ 263,498
Permanent 5 or more family 285 1,392 1,663 3,524 236 7,100
Commercial real estate 6,223 13,129 14,139 22,213 2,610 58,314
Construction 56,027 - - - - 56,027
Land acquisition and development 15,754 929 931 2,462 1,330 21,406
Consumer 23,965 11,725 6,224 1,770 451 44,135
Commercial business 12,023 5,233 327 339 - 17,922
------ ----- --- --- ------
Total $125,051 $ 75,991 $ 61,228 $116,246 $ 89,886 $ 468,402
======== ======== ======== ======== ======== =========
</TABLE>
<TABLE>
<CAPTION>
Maturity after December 31, 1997:
-------------------------------------------------------------------------
Floating
or
Fixed Adjustable Balloons/
Rates Rates Calls Total
----- ----- ----- -----
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Permanent 1- to 4-family $70,928 $154,346 $27,450 $252,724
Permanent 5- or more family 513 4,675 1,627 6,815
Commercial real estate 8,916 24,380 18,795 52,091
Construction - - - -
Land acquisition and development 110 284 5,258 5,652
Consumer 12,765 651 6,754 20,170
Commercial business 4,035 1,864 - 5,899
Total $97,267 $186,200 $59,884 $343,351
</TABLE>
CENIT Bancorp Credit Policy. Effective January 1, 1997, a new credit policy
has been approved by the Company's Board of Directors. The new policy
established minimum requirements for subsidiary banks for their individual
credit policies and provides for appropriate limitations on overall
concentration of credit within the Company. The Company's Credit 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 new 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.
9
<PAGE>
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 1996, the Company purchased a total of approximately $105.9 million in
residential mortgage loans which included $84.6 million of loans which were
purchased on a bulk basis from three other financial institutions. The loans
acquired in these three transactions included $51.3 million of adjustable-rate
loans and $33.3 million of fixed-rate loans, $21.1 million of which balloon at
various dates over the next seven years. The majority of these loans are secured
by real estate located in the South and Southeast regions of the U.S., with the
largest concentrations in Virginia, Alabama and Georgia.
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.
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The following table sets forth information about originations, purchases,
sales, and principal reductions for the Company's loans for the years indicated:
<TABLE>
<CAPTION>
Year ended December 31,
-----------------------------
1994 1995 1996
---- ---- ----
(Dollars in Thousands)
<S> <C> <C> <C>
Loans originated:
Real estate:
Permanent:
Residential 1- to 4-family $ 54,991 $ 51,500 $ 73,949
Residential 5 or more family 802 1,588 --
Total 55,793 53,088 73,949
Commercial real estate 12,608 14,938 5,622
Construction:
Residential 1- to 4-family 43,940 19,984 17,938
Residential 5 or more family 2,730 2,000 4,094
Nonresidential 50 -- 3,487
Total 46,720 21,984 25,519
Land acquisition:
Consumer lots 1,143 2,276 1,176
Acquisition and development 11,986 4,786 3,756
Total 13,129 7,062 4,932
Total real estate loans originated 128,250 97,072 110,022
Consumer:
Home equity and second mortgage 8,351 8,066 19,909
Other 5,050 3,640 5,357
Total 13,401 11,706 25,266
Commercial business 20,128 21,401 34,978
Total loans originated 161,779 130,179 170,266
Loans purchased 13,040 6,474 105,889
Loans acquired in business combination 39,436 -- --
Total loans originated, purchased, and acquired 214,255 136,653 276.155
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 116,148 89,583 120,322
Real estate loans sold 31,845 38,174 46,085
Consumer loans sold -- 7,709 --
Total principal reductions 147,993 135,466 166,407
Net increase in total loans $ 66,262 $ 4,617 $ 109,748
Net increase (decrease) in loans held for sale $ 2,178 $ (4,128) $ (1,079)
Net increase in gross loans held for investment 64,084 8,745 110,827
$ 66,262 $ 4,617 $ 109,748
</TABLE>
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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, 1996, $263.5 million were
invested in one- to four-family residential mortgage loans. Of these residential
mortgage loans, $157.5 million or 59.8% were invested in ARM loans and $106.0
million or 40.2% 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.
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<PAGE>
The Banks' 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
$214,600) to high income and/or net worth borrowers.
Construction Lending. At December 31, 1996, $56.0 million of the Company's
total loans held for investment were construction loans, of which $38.1 million
were undisbursed loan proceeds. Of these construction loans, all except $12.2
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
13
<PAGE>
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, 1996, the Company had $58.3
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 useful life and
replacement costs for the property, the operating history of the project, the
revenues, receipts, and operating expenses
14
<PAGE>
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. CENIT
Bank's maximum loan-to-value ratio for a commercial real estate loan is 80%, and
85% at Princess Anne. 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,
1996, the Company had $5.4 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 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, residential housing
subdivisions, multi-family dwellings, and a variety of commercial uses. At
December 31, 1996, the Company had $16.0
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<PAGE>
million of land acquisition and development loans, of which $4.2 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 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, 1996, the balance
of all consumer loans was $44.1 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, 1996, the Company had a portfolio of boat loans
totaling $7.8 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 charged by the Company, 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 percent of the
outstanding principal. Underwriting procedures similar to those used for first
mortgage loans are followed for
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<PAGE>
all home equity loans and second mortgage loans. At December 31, 1996, the
Company's outstanding home equity and second mortgage loans totaled $29.6
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, 1996, the Company had a total of $17.9 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 that 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.
17
<PAGE>
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, 1994, such amounts
totaled $332,000 for loans 30-59 days delinquent, $152,000 for loans 60-89 days
delinquent, and $150,000 for loans delinquent 90 days or more. At December 31,
1996, such amounts totaled $185,000 for loans 30-59 days delinquent. There were
no such loans at December 31, 1995. Additionally, the information below at
December 31, 1994 excludes delinquencies relating to mobile home loans
classified as held for sale at December 31, 1994. Such amounts totaled $470,000
for loans delinquent 30-59 days and $146,000 for loans delinquent 60-89 days.
At December 31,
-----------------------------------------------------------
1994 1995 1996
----------------- ------------------ ------------------
(Dollars in Thousands)
Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ -------
30-59 days $1,079 0.31% $1,765 0.49% $1,004 0.21%
60-89 days 204 0.06 67 0.02 727 0.16
90 days and over 2,154 0.62 1,028 0.29 2,822 0.60%
Total $3,437 0.99% $2,860 0.80% $4,553 0.97%
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.
18
<PAGE>
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.
<TABLE>
<CAPTION>
At December 31,
------------------------------------------------------------------
1992 1993 1994 1995 1996
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
(Dollars in Thousands)
Nonperforming loans:
Real estate loans:
Permanent residential 1- to 4-family:
Nonaccrual $ 813 $ 395 $ 437 $ 420 $ 1,172
Accruing loans 90 days or more past due 409 370 490 77 246
Total 1,222 765 927 497 1,418
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 533 - - - -
Total 533 - 139 - 457
Construction:
Nonaccrual 184 - 53 - -
Accruing loans 90 days or more past due 257 - - - 170
Total 441 - 53 - 170
Land acquisition and development:
Nonaccrual 59 199 527 200 200
Accruing loans 90 days or more past due 403 - - - -
Total 462 199 527 200 200
Consumer loans:
Boats 166 - - - -
Home equity and second mortgage 51 80 18 107 -
Mobile homes 453 274 310 134 83
Credit cards (accruing loans 90 days or
more past due) 18 31 23 13 9
Other - - - 3 17
Total 688 385 351 257 109
Commercial business loans:
Nonaccrual 175 144 65 70 483
Accruing loans 90 days or more past due - - 16 4 -
Total 175 144 81 74 483
Total nonperforming loans:
Nonaccrual 1,901 1,092 1,639 934 2,412
Accruing loans 90 days or more past due 1,620 401 575 94 425
Total 3,521 1,493 2,214 1,028 2,837
Real estate owned, net 6,642 3,575 5,718 1,828 2,769
Other repossessed assets, net 124 85 233 1 55
--- -- --- - --
Total nonperforming assets, net 10,287 5,153 8,165 2,857 5,661
Total troubled debt restructurings - - - - -
Total nonperforming assets, net, and
troubled debt restructurings $ 10,287 $ 5,153 $ 8,165 $ 2,857 $ 5,661
======== ======== ======== ======== ========
Total nonperforming assets, net, and troubled
debt restructurings, to total assets 2.17% 1.01% 1.42% .45% .80%
</TABLE>
19
<PAGE>
Nonperforming Loans. At December 31, 1996, the Company's nonaccrual loans
totaled $2,412,000. This was comprised of $1,172,000 of single family loans
(eight loans), a $457,000 commercial real estate loan secured by an office
building located in Virginia Beach, Virginia, on which the Company believes
foreclosure is highly probable, a $200,000 land acquisition loan, $83,000 of
purchased mobile home loans (ten loans), $483,000 of commercial business loans
(seven loans), and $17,000 of other consumer loans (three loans). Interest
income on nonaccrual loans at December 31, 1996 would have approximated $252,000
for the year ended December 31, 1996, 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, 1996 approximated
$114,000.
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 increased from $1.8 million at December 31, 1995 to $2.8 million
at December 31, 1996. REO at December 31, 1996 is comprised primarily of sixteen
residential one- to four-family properties with a total net carrying value of
$2.0 million, a commercial real estate property with a total net carrying value
of $688,000 which was sold in February 1997, and two parcels of land with a
total net carrying value of $69,000.
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, 1996, the Company had $8.2 million of assets classified
as substandard, including $2.1 million of nonperforming loans and $2.8 million
of REO and other repossessed assets, $98,000 of assets classified as doubtful,
and $124,000 of assets classified as loss. All assets classified as loss have
been fully reserved. These amounts compare with $6.4 million, $308,000 and
$282,000 of assets classified as substandard, doubtful, and loss, respectively,
at December 31, 1995.
Assets classified as substandard at December 31, 1996 included three
relationships with total loans over $500,000. First, the Company had two loans
to one borrower totaling $832,000 at December 31, 1996 that were 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 first loan for $602,000 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 second
loan to this borrower is for $230,000 and is secured by a second deed of trust
on a residence located in Virginia Beach, Virginia with a $750,000 appraised
value as of July of 1993. The first deed of trust on this residence is
approximately $390,000. This second loan is also collateralized by a third deed
of trust on the special use property discussed above. The first and second deeds
of trust on the special use property are approximately $806,000. The Company
will continue to monitor the financial condition of the tenant and the value and
condition of the properties that collateralize these loans. Both of these loans
were current at December 31, 1996.
The Company also had three loans to one borrower totaling $966,000 at
December 31, 1996 that were classified as substandard due to the financial
difficulty of the borrower. The three loans are collateralized by 16 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. At December 31, 1996, two of the loans totaling $384,000 were sixty
days past due and the third loan with a balance of $582,000 was over 90 days
past due and on nonaccrual status. 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
order was submitted to the Bankruptcy Court and was approved by the Court on
February 12, 1997. The Company has received two full payments of principal and
interest on the two accruing loans since agreement on the terms of the court
order was reached.
20
<PAGE>
Finally, the Company had a total of eight loans to one borrower or related
entities and/or individuals with $923,000 outstanding at December 31, 1996,
including two commercial business loans totaling $377,000, that were classified
substandard and are nonaccrual at December 31, 1996. The other six loans are
comprised of a $277,000 commercial real estate loan, a $200,000 acquisition and
development loan, a $39,000 permanent one- to four-family residential real
estate loan, two auto loans totaling $15,000 and a $15,000 commercial loan. The
$39,000 residential real estate loan and the two auto loans are also on
nonaccrual at December 31, 1996. All of the loans except the $200,000
acquisition and development loan and the $15,000 commercial loan are
cross-collateralized and cross defaulted.
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. Currently, one of
the related entities is engaged in substantive negotiations for the sale of a
large parcel of land to an unrelated third party. A portion of this land secures
the $200,000 acquisition and development loan. The Company believes the five
nonperforming loans, with the exception of the $277,000 commercial real estate
loan, will return to performing status only in the event the land is sold.
Otherwise, the Company believes liquidation of collateral will be necessary.
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 $637,000 of commercial real estate loans (four
loans), $1.2 million of permanent one- to four-family real estate loans (sixteen
loans), $138,000 of consumer loans (9 loans), and a $44,000 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 1, 1996, the Company had total valuation allowances of $3.8
million, including $181,000 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 $377,000 in 1996 compared to
$697,000 in 1995. Net chargeoffs decreased from $790,000 in 1995 to $267,000 in
1996. 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 in 1995.
21
<PAGE>
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%. At December 31, 1995, the Company's total allowance
for loan losses was $3.7 million and nonperforming loans totaled $1.0 million,
resulting in a coverage ratio of 359.5%. Also, 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 $1.1 million not allocated to a
particular loan type at December 31, 1995.
The following table sets forth an analysis of the Company's allowance of
loan losses for periods indicated.
<TABLE>
<CAPTION>
Year ended December 31,
1992 1993 1994 1995 1996
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Balance at beginning of year $ 4,140 $ 3,884 $ 4,039 $ 3,789 $ 3,696
Charge-offs:
Real estate:
Residential 492 371 201 474 312
Commercial 1,121 (1) 23 - - 75
Mobile home 409 329 198 91 50
Other consumer 639 556 573 371 199
Commercial 411 482 52 59 102
Total charge-offs 3,072 1,761 1,024 995 738
Recoveries 335 249 127 205 471
Total charge-offs, net 2,737 1,512 897 790 267
Allowance for loans acquired in business
combination - - 157 - -
Provision for loan losses 2,481 1,667 490 697 377
----- ----- --- --- ---
Balance at end of year $ 3,884 $ 4,039 $ 3,789 $ 3,696 $ 3,806
======= ======= ======== ========= ========
Ratio of net charge-offs during the year to
average loans receivable during the year 0.89% 0.55% 0.30% 0.24% 0.08%
Ratio of allowance for loan losses to total
outstanding loans (gross) at end of year 1.30% 1.41% 1.09% 1.03% 0.81%
Allowance for loan losses as a percentage
of nonperforming loans 110.31% 270.53% 171.14% 359.53% 134.16%
<FN>
_______________
(1) Includes $1.0 million relating to a hotel property which was considered an in-substance foreclosure at December 31, 1992, was
acquired by one of the Company's subsidiaries through foreclosure in January 1993, and was sold in May, 1993.
</FN>
</TABLE>
22
<PAGE>
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.
<TABLE>
<CAPTION>
At December 31,
---------------
1992 1993 1994 1995 1996
---- ---- ---- ---- ----
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
catetory 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)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Real estate loans:
Permanent:
Residential 1- to 4-family $ 487 38.16% $ 519 36.29% $ 514 42.57% $ 451 42.91% $ 512 56.25%
Residential 5 or more family 74 3.87 71 3.73 79 3.16 36 2.61 21 1.52
Commercial real estate 957 16.52 808 17.52 764 15.03 869 17.63 799 12.45
Construction loans:
Residential 1- to 4-family 295 8.48 236 12.34 329 15.45 337 14.44 251 9.35
Residential 5 or more family 6 .20 69 .52 22 0.64 42 1.18 89 1.89
Nonresidential 30 1.00 11 .39 1 0.02 1 0.02 34 .72
Land acquisition:
Individual lots 27 3.93 19 3.04 15 1.69 18 1.58 23 1.15
Acquisition and development 234 2.46 387 1.97 178 4.29 137 4.18 127 3.42
Unallocated 411 - 958 - 1,002 - 1,144 - 1,308 -
Consumer loans:
Mobile homes 333 3.22 197 2.80 293 0.11 116 0.06 43 .03
Other consumer 697 16.66 435 14.83 265 12.13 195 10.01 283 9.39
Commercial business loans 333 5.50 329 6.57 327 4.91 350 5.38 316 3.83
--- ---- --- ---- --- ---- --- ---- --- ----
$3,884 100.00% $4,039 100.00% $3,789 100.00% $3,696 100.00% $3,806 100.00%
====== ====== ====== ====== ====== ====== ====== ====== ====== ======
</TABLE>
23
<PAGE>
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, 1996, mortgage-backed certificates available for sale
totaled $177.7 million. The weighted average yield on the total mortgage-backed
certificate portfolio at December 31, 1996 was 6.85%.
The following table sets forth the composition of the Company's portfolio
of mortgage-backed certificates at the dates indicated.
<TABLE>
<CAPTION>
At December 31,
1992 1993 1994 1995 1996
---- ---- ---- ---- ----
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ ------- ------ ------- ------ -------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Mortgage-backed certificates
available for sale:
FHLMC:
Fixed rate $ - -% $ 540 0.40% $ 342 0.19% $24,963(4)12.29% $ 20,033 (5)11.27%
Adjustable rate - - - - - - 154,891 76.23 144,020 81.04
FNMA:
Fixed rate - - - - - - 965 0.48 830 0.47
Adjustable rate - - - - - - 17,909 8.81 9,283 5.22
GNMA:
Fixed rate - - - - - - 4,448 2.19 3,540 2.00
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
Mortgage-backed certificates
held to maturity:
FHLMC:
Fixed rate 35,298 (1)40.64 86,565(2)63.74 94,448 (3) 53.74 - - - -
Adjustable rate 25,908 29.83 22,034 16.22 57,305 32.60 - - - -
FNMA:
Fixed rate 2,163 2.49 1,504 1.11 1,048 0.60 - - - -
Adjustable rate 3,296 3.80 6,859 5.05 17,686 10.06 - - - -
GNMA:
Fixed rate 7,801 8.98 6,406 4.72 4,934 2.81 - - - -
Adjustable rate 12,387 14.26 - - - - - - - -
Total held to maturity 86,853 100.00 123,368 90.84 175,421 99.81 - - - -
------ ------ ------- ----- ------- -----
Total mortgage-backed
certificates $ 86,853 100.00% $135,812 100.00% $175,763 100.00% $203,176 100.00% $177,706 100.00%
======== ====== ======== ====== ======== ====== ======== ====== ======== ======
<FN>
_______________
(1) Includes $24.5 million of fixed rate mortgage-backed certificates with five-year balloon provisions.
(2) Includes $63.2 million and $18.7 million with five- and seven-year balloon provisions, respectively.
(3) Includes $77.6 million and $13.9 million with five- and seven-year balloon provisions, respectively.
(4) Includes $10.5 million and $11.9 million with five- and seven-year balloon provisions, respectively.
(5) Includes $7.7 million and $10.3 million with five- and seven-year balloon provisions, respectively.
</FN>
</TABLE>
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."
24
<PAGE>
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.
<TABLE>
<CAPTION>
Year ended December 31,
-----------------------
1994 1995 1996
---- ---- ----
<S> <C> <C> <C>
(Dollars in Thousands)
Mortgage-backed certificates purchased $ 85,054 $ 114,506 $ 48,772
Mortgage-backed certificates acquired in business
combination, net 8,913 - -
Mortgage-backed certificates sold (20,354) (56,786) (6,739)
Principal repayments and (amortization)/
accretion of (premiums)/discounts (33,467) (31,918) (67,416)
Change in unrealized gains (losses) on available
for sale securities (195) 1,611 (87)
---- ----- ---
Net increase (decrease) in mortgage-backed certificates $ 39,951 $ 27,413 $ (25,470)
========= ========== ==========
</TABLE>
The following table sets forth certain yield, maturity and market value
information concerning the Company's mortgage-backed certificates at December
31, 1996:
<TABLE>
<CAPTION>
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 1996 Maturity
------- ---------- ----- --------- ------ ---- --------
(Dollars in Thousands) (years)
<S> <C> <C> <C> <C> <C> <C> <C>
Held to maturity: $ - $ - $ - $ - $ - $ -
Available for sale:
FHLMC:
Fixed rate 7,746 11,734 553 - 20,033 20,033 1.6
Adjustable rate 34,712 76,323 32,328 657 144,020 144,020 2.6
FNMA:
Fixed rate 171 501 158 - 830 830 2.6
Adjustable rate 2,235 4,912 2,102 34 9,283 9,283 2.8
GNMA:
Fixed rate 605 1,999 936 - 3,540 3,540 2.8
Adjustable rate - - - - - - -
Total available for sale 45,469 95,469 36,077 691 177,706 177,706 2.5
------ ------ ------ --- ------- ------- ---
Total $ 45,469 $ 95,469 $ 36,077 $ 691 $ 177,706 $ 177,706 2.5
========= ========= ========= ========= ========== ========== ===
Weighted average yield 6.80% 6.85% 6.93% 6.85% 6.85%
<FN>
______________
(1) Reflects estimated average life to maturity based on recent prepayment experience of the Company (approximately 11% to
23%). It has been the Company's experience that most mortgage-backed certificates prepay substantially in advance of their
scheduled amortizations.
</FN>
</TABLE>
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.
25
<PAGE>
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, 1996, the Company's investment portfolio
totaled $60.2 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," included
in the 1996 Annual Report to Stockholders, which is attached hereto as Exhibit
13 and incorporated herein by reference.
The following table sets forth certain information concerning the Company's
investment portfolio at the dates and for the years indicated.
<TABLE>
<CAPTION>
At or for the year ended December 31,
----------------------------------------------------------------------
1994 1995 1996
------------------- --------------------- --------------------
(Dollars in Thousands)
Carrying Average Carrying Average Carrying Average
Value Yield (1) Value Yield (1) Value Yield (1)
-------- --------- -------- --------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
Investment securities available for sale:
U.S. Treasury securities $ 29,592 6.18% $ 50,100 6.72% $ 40,296 6.45%
Other U.S. Government agency securities 1,992 4.65 15,018 5.12 6,009 6.36
Investment securities held to maturity:
Other U.S. Government agency securities 13,066 4.62 - - - -
Federal funds sold and interest-earning deposits 5,379 4.01 7,439 5.74 6,003 5.32
Federal Home Loan Bank and Federal
Reserve Bank stock 5,738 6.22 7,029 7.26 7,861 7.20
----- ----- -----
Total investments $ 55,767 5.51 $ 79,586 6.27 $ 60,169 6.42
======== ======== ========
<FN>
__________
(1) Yields are calculated during the years indicated.
</FN>
</TABLE>
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, 1996. 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.
<TABLE>
<CAPTION>
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)
<S> <C> <C> <C> <C> <C> <C>
Investment securities available for sale:
U.S. Treasury securities $ 14,072 $ 26,224 $ - $ - $ 40,296 $ 40,296
========= ========= ======= ======= ======== ========
Weighted average yield 6.52% 6.11% -% -% 6.25%
Other U.S. Government agency
securities $ 4,003 $ 2,006 $ - $ - $ 6,009 $ 6,009
========= ========= ======= ======= ======== ========
Weighted average yield 6.56% 6.10% -% -% 6.41%
</TABLE>
26
<PAGE>
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 passbook accounts, personal and commercial checking accounts, money
market deposit accounts, and certificates of deposit with terms ranging from 91
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.
<TABLE>
<CAPTION>
At December 31,
1994 1995 1996
---- ---- ----
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)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial checking $ 23,067 5.48% -% $ 33,372 7.41% -% $ 40,130 8.04% -%
Passbook 25,525 6.07 3.05 21,258 4.72 3.01 21,175 4.24 3.01
Personal checking 37,368 8.89 2.19 35,075 7.78 2.39 36,290 7.29 2.24
90-day passbook and
statement savings 21,401 5.09 3.39 24,175 5.37 3.89 26,867 5.38 3.68
Money market deposits 47,244 11.24 3.06 42,233 9.37 3.44 44,815 8.98 3.25
Subtotal 154,605 36.77 2.44 156,113 34.65 2.48 169,277 33.93 2.30
Certificate accounts 265,817 63.23 4.81 294,417 65.35 5.59 329,688 66.07 5.37
------- ----- ------- ----- ------- -----
Total deposits $420,422 100.00% 3.94 $450,530 100.00% 4.51 $498,965 100.00% 4.33
======== ====== ======== ====== ======== ======
</TABLE>
27
<PAGE>
The following table sets forth the activity in the Company's deposits
during the periods indicated.
<TABLE>
<CAPTION>
Year Ended December 31,
1994 1995 1996
---- ---- ----
(Dollars in Thousands)
<S> <C> <C> <C>
Beginning balance $407,309 $420,422 $450,530
Deposits acquired in business combination 47,069 - 68,101
Net increase (decrease) before interest credited (44,632) 17,573 (35,692)
Interest credited (1) 10,676 12,535 16,026
Net increase in savings deposits 13,113 30,108 48,435
------ ------ ------
Ending balance $420,422 $450,530 $498,965
======== ======== ========
<FN>
_________________
(1) Does not include interest on deposit accounts paid directly to
depositors and not credited to their deposit accounts.
</FN>
</TABLE>
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, 1996.
<TABLE>
<CAPTION>
At December 31, At December 31, 1996, Maturing in
-------------------------- --------------------------------------------------
Greater
One year than three
1994 1995 1996 or less Two years Three years years
---- ---- ---- ------- --------- ----------- -----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Certificate accounts:
3.99% or less $ 42,012 $ 644 $ 451 $ 449 $ - $ 2 $ -
4.00% to 4.99% 128,762 51,320 100,302 92,777 4,545 2,844 136
5.00% to 5.99% 54,389 133,573 179,399 123,583 36,245 8,750 10,821
6.00% to 6.99% 24,720 94,235 37,244 12,310 6,939 4,625 13.370
7.00% to 7.99% 9,296 14,010 10,280 133 643 2,380 7,124
8.00% to 8.99% 6,474 480 775 142 371 55 207
9.00% to 9.99% 164 155 1,237 135 - 1,102 -
---- ---- --- --- ----- --- -----
Total certificates $265,817 $294,417 $329,688 $229,529 $48,743 $19,758 $31,658
======== ======== ======== ======== ======= ======= =======
</TABLE>
28
At December 31, 1996, the Company had outstanding $24.0 million in
certificate accounts in amounts greater than $100,000 maturing as follows (which
amount includes $4.2 million of jumbo certificates of deposit with negotiable
rates of interest):
Amount
------
(Dollars in Thousands)
Three months or less $ 6,497
Over three months to six months 3,274
Over six months to twelve months 7,930
Over twelve months 6,266
-----
Total $ 23,967
=========
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. At December
31, 1996, CENIT Bank and Princess Anne had $117.0 million and $31.0 million,
respectively, of outstanding advances from the FHLB-Atlanta.
The following table sets forth certain information regarding FHLB advances
at the dates indicated:
<TABLE>
<CAPTION>
At or for the year ended December 31,
1994 1995 1996
<S> <C> <C> <C>
(Dollars in Thousands)
Adjustable-rate advances:
One year or less $ 107,000 $ 56,000 $ 123,000
Fixed-rate advances:
One year or less - 77,000 25,000
---------- ----------- ---------
Total advances $ 107,000 $ 133,000 $ 148,000
========== =========== =========
Maximum balance outstanding at any month-end $ 115,700 $ 152,000 $ 192,000
Average amount outstanding during the year $ 87,892 $ 128,499 $ 154,854
Weighted average cost of advances for the year 4.57% 6.16% 5.44%
</TABLE>
In connection with CENIT Bank's conversion from a mutual savings bank to a
stock savings bank, the Company established an Employees Stock Ownership Plan
("ESOP"). The ESOP was funded by the proceeds from a $1,000,000 loan from an
unrelated third party lender. At December 31, 1995, the balance of the ESOP loan
was $300,000. The loan was repaid in full in 1996
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.
29
<PAGE>
The following table presents certain information regarding reverse
repurchase agreements during the years indicated:
<TABLE>
<CAPTION>
At or for the year ended December 31,
1994 1995 1996
---- ---- ----
(Dollars in Thousands)
<S> <C> <C> <C>
Maximum amount outstanding at any month-end $ 1,713 $ 4,871 $ 30,382
Balance at end of year 1,435 4,871 7,138
Average amount outstanding during the year 1,141 2,543 8,616
Weighted average interest rate:
Amount outstanding at end of year 4.39% 4.35% 4.40%
Average amount outstanding during the year 3.24% 4.80% 4.67%
</TABLE>
Activities of Subsidiary Companies of CENIT Bank
Princess Anne has no subsidiaries. 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, 1996, CENIT Bank's initial investment
in and loans outstanding to its service corporations totaled $4.5 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
Bankers Financial Partners, Inc., 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 1996 activities consisted of transactions with
Bankers Financial Partners and an initial investment of $17,000 in Bankers Title
of Hampton Roads, L.L.C. representing 15% ownership of an entity formed in 1996
for the purpose of providing real estate settlement services. At
December 31, 1996, CENIT Bank's initial investment in and loans outstanding to
Olney-Duke totaled $144,000.
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, 1996, CENIT Equity held REO with a
total net book value of $2.8 million, and the Company's initial investment in
and loans outstanding to CENIT Equity amounted to $4.3 million.
Independent Developers is a Virginia corporation incorporated in 1977.
Independent Developers and a local builder and developer were involved in a
partnership in the development of unimproved land into residential building
sites and in the construction of townhouses and other single-family dwellings.
In 1986, 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.
30
<PAGE>
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,
1996, 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, 1996, CENIT Bank's initial investment in CENIT Commercial
Mortgage was $50,000.
Personnel. At December 31, 1996, the Company and its subsidiaries had 217
full-time and 52 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 savings and loan holding company
pursuant to the Home Owners' Loan Act, as amended (the "HOLA"). As such, the
Company is subject to OTS regulation, examination, supervision and reporting
requirements. The Company is also required to file certain reports with and
otherwise comply with the rules and regulations of the SEC under the federal
securities laws. As a subsidiary of a savings and loan holding company, CENIT
Bank is subject to certain restrictions in its dealings with the Company and
affiliates thereof.
The Company is also a registered bank holding company subject to the Bank
Holding Company Act of 1956 (the "BHCA"), 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 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.
Activities Restrictions. There are generally no restrictions on the
activities of a savings and loan holding company, such as the Company, that
holds only one subsidiary savings association. However, if the Director of the
OTS determines that there is reasonable cause to believe that the continuation
by a savings and loan holding company of an activity constitutes a serious risk
to the financial safety, soundness or stability of its subsidiary savings
association, the Director may impose such restrictions as deemed necessary to
address such risk, including limiting (i) payment of dividends by the savings
association; (ii) transactions between the savings association and its
affiliates; and (iii) any activities of the savings association that could
create a serious risk that the liabilities of the holding company and its
affiliates may be imposed on the savings association. Notwithstanding the above
rules as to permissible business activities of unitary savings and loan holding
companies, if the savings association subsidiary of such a holding company fails
to meet a qualified thrift lender ("QTL") test, then such unitary holding
company also shall become subject to the activities restrictions applicable to
multiple savings and loan holding companies and, unless the savings association
requalifies as a QTL within one year thereafter, shall register as, and become
subject to the restrictions applicable to, a bank holding company. See
"--Regulation of the Banks--Qualified Thrift Lender Test."
If the Company were to acquire control of another savings association,
other than through merger or other business combination with CENIT Bank, the
Company would thereupon become a multiple savings and loan holding company.
Except where such acquisition is pursuant to the authority to approve emergency
thrift acquisitions and where each subsidiary savings association meets the QTL
test, the activities of the Company and any of its subsidiaries (other than
CENIT Bank or other subsidiary savings associations) would thereafter be subject
to further restrictions. Among other things, no multiple savings and loan
holding company or subsidiary thereof that is not a savings association shall
commence, or continue for a limited period of time after becoming a multiple
savings and loan holding company or subsidiary thereof, any business activity,
unless prior notice is given to the OTS and the OTS does not object, other than:
(i) furnishing or performing management services for a subsidiary savings
association; (ii)
31
<PAGE>
conducting an insurance agency or escrow business; (iii) holding, managing,
or liquidating assets owned by or acquired from a subsidiary savings
association; (iv) holding or managing properties used or occupied by a
subsidiary savings association; (v) acting as trustee under deeds of trust; (vi)
those activities authorized by regulation as of March 5, 1987 to be engaged in
by multiple savings and loan holding companies; or (vii) those activities
authorized by the Federal Reserve Board as permissible for bank holding
companies, unless the Director of the OTS by regulation prohibits or limits such
activities for savings and loan holding companies. The activities described in
(vii) above also must be approved by the Director of the OTS prior to being
engaged in by a multiple savings and loan holding company.
Under recently enacted federal legislation, 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 also will be
able to branch across state lines by acquisition, merger or de novo, effective
June 1, 1997 (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
$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.
Other Bank Holding Company Restrictions. 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
32
<PAGE>
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.
Restrictions on Acquisitions. Savings and loan holding companies are
prohibited from acquiring, without prior approval of the Director of the OTS,
(i) control of any other savings association or savings and loan holding company
or substantially all 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.
Under certain circumstances, a registered savings and loan holding company
is permitted to acquire, with the approval of the Director of the OTS, up to 15%
of the voting shares of an under-capitalized savings association pursuant to a
"qualified stock issuance" without that savings association being deemed
controlled by the holding company. In order for the shares acquired to
constitute a "qualified stock issuance," the shares must consist of previously
unissued stock or treasury shares, the shares must be acquired for cash, the
savings and loan holding company's other subsidiaries must have tangible capital
of at least 6-1/2% of total assets, there must not be more than one common
director or officer between the savings and loan holding company and the issuing
savings association and transactions between the savings association and the
savings and loan holding company and any of its affiliates must conform to
Sections 23A and 23B of the FRA. Except with the prior approval of the Director
of the OTS, no director or officer of a savings and loan holding company or
person owning or controlling by proxy or otherwise more than 25% of such
company's stock, may acquire control of any savings association, other than a
subsidiary savings association, or of any other savings and loan holding
company.
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 acquiror 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 the state-chartered associations or savings and loan holding
companies located in the state where the acquiring entity is located (or by a
holding company that controls such state-chartered savings associations).
FIRREA amended provisions of the BHCA to specifically authorize the Federal
Reserve to approve an application by a bank holding company to acquire control
of a savings association. FIRREA also authorized a bank holding company that
controls a savings association to merge or consolidate the assets and
liabilities of the savings association with, or transfer assets and liabilities
to, any subsidiary Company that is a member of the BIF with the approval of the
appropriate federal banking agency and the Federal Reserve. As a result of these
provisions, there have been a number of acquisitions of savings associations by
bank holding companies in recent years.
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 and SCC completed their most
recent regular supervisory examinations in February 1996. The Federal Reserve
completed its most recent examination in January 1997. 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
33
<PAGE>
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 their
holding companies, including the Company and 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.
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.
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
34
<PAGE>
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 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. The Banks do not believe that these Guidelines
will materially affect their operations or financial condition.
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, 1996, 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.
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<PAGE>
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
"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.
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, 1996,
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, 1996, 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, 1996, the Banks had no borrowers to which they had outstanding
loans in excess of their respective loans-to-one-borrower limit.
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<PAGE>
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, 1996, CENIT Bank had an
intangible asset totaling $4.4 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, 1996, 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, 1996, 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.
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.
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<PAGE>
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, 1996 OTS calculations, no
deduction of risk-based capital would have been required if such regulation had
been effective as of such date.
The following table summarizes CENIT Bank's capital ratios and balances at
December 31, 1996 (dollars in thousands).
<TABLE>
<CAPTION>
Capital Requirement Actual Capital Excess Capital
Percentage Amount Percentage Amount Percentage Amount
---------- ------ ---------- ------ ---------- ------
<S> <C> <C> <C> <C> <C> <C>
Core 3.0% $ 14,594 6.0% $ 28,991 3.0% $ 14,397
Tangible 1.5 7,297 6.0 28,991 4.5 21,694
Tier 1 risk-based 4.0 10,547 11.0 28,991 7.0 18,444
Total risk-based 8.0 21,094 11.9 31,510 3.9 10,416
</TABLE>
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 13.8% at December 31, 1996 and a ratio of risk- weighted assets to
Tier 1 capital of 12.7%. 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, 1996 was 7.1%,
which exceeds the regulatory minimum.
The following table summarizes Princess Anne's capital ratios and balances
at December 31, 1996 (dollars in thousands)
<TABLE>
<CAPTION>
Capital Requirement Actual Capital Excess Capital
Percentage Amount Percentage Amount Percentage Amount
---------- ------ ---------- ------ ---------- ------
<S> <C> <C> <C> <C> <C> <C>
Leverage 4.0% $ 7,738 7.1% $ 13,789 3.1% $ 6,051
Risk-based - Tier 1 4.0 4,350 12.7 13,789 8.7 9,439
Risk-based - total 8.0 8,700 13.8 14,986 5.8 6,286
</TABLE>
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.
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<PAGE>
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, 1996 (dollars in thousands).
<TABLE>
<CAPTION>
Capital Requirement Actual Capital Excess Capital
Percentage Amount Percentage Amount Percentage Amount
---------- ------ ---------- ------ ---------- ------
<S> <C> <C> <C> <C> <C> <C>
Leverage 4.0% $ 27,171 6.5% $ 44,163 2.5% $ 16,992
Risk-based - Tier 1 4.0 14,959 11.8 44,163 7.8 29,204
Risk-based - total 8.0 29,919 12.8 47,969 4.8 18,050
</TABLE>
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 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. As of February 28, 1997, the OTS had not
adopted final regulations modifying the core capital requirement.
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 20 of the Notes to Consolidated Financial
Statements in the 1996 Annual Report to Stockholders, which is attached hereto
as Exhibit 13.
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<PAGE>
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 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, 1996, approximately 86.4% 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 5%.
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
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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.
Short-term liquid assets currently must constitute at least 1% of the
institution's average daily balance of net withdrawable deposit accounts and
current borrowings. Penalties may be imposed upon a savings institution for
violations of liquidity requirements. At December 31, 1996, CENIT Bank was in
compliance with these requirements, with an overall liquidity ratio of 9.5% and
a short-term liquidity ratio of 4.6%.
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, 1996, 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- 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). Prior to
September 30, 1996, the SAIF assessment rate ranged from .23% to .31% of insured
deposits, and CENIT Bank's net semi-annual assessment rate in effect before that
date was .23% of insured deposits for the period January 1, 1996 to July 1,
1996. Prior to September 30, 1996, the BIF assessment rate had been reduced to
0%, subject to an annual minimum payment of $2,000 on BIF insured deposits, due
to the adequacy of the BIF's capitalization, and Princess Anne's net semi-
annual BIF assessment rate for the period January 1, 1996 to July 1, 1996 was 0%
of its BIF insured deposits. Like CENIT Bank, Princess Anne paid an assessment
rate of .23% on its SAIF insured deposits. At September 30, 1996, the Banks'
SAIF assessed deposits were $406.5 million and BIF assessed deposits were $76.3
million.
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 1997 were set at
.013% annually for BIF-assessable deposits and .065% 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.
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.
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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 is effective January 1, 1997. Under the existing 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 such greater fraction
as established by the FHLB) of its outstanding FHLB advances. At December 31,
1996, CENIT Bank and Princess Anne held $5.9 million and $1.7 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, 1996, dividends paid by FHLB-Atlanta to
the Company totaled $625,000.
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, 1996, 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, 1996, 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.
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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 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 1993 through 1996 and 1993 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.
Historically, the Company has reported its income and expenses on the
accrual method of accounting and filed its consolidated federal income tax
returns on a December 31 fiscal year basis. Beginning in 1992, the Company and
its subsidiaries began filing consolidated federal and state income tax returns
on a December 31 calendar year basis. Consolidated tax returns have the effect
of
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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.
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,
1996 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). In addition, an environmental tax of
0.12% of the excess, if any, of AMTI (with certain modifications) over $2
million is imposed on corporations, whether or not an AMT is paid. The
consolidated group was not subject to the AMT in 1996.
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
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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 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, 1996. 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 44 President/Chief Executive
Officer/Director
David A. Foster 36 First Vice President/Treasurer and
Principal Accounting Officer
Barry L. French 53 Senior Vice President/
Retail Banking Group Manager
John O. Guthrie 47 Senior Vice President/
Chief Financial Officer and
Finance Group Manager
Patrick L. Hillard 36 Senior Vice President/
CENIT Mortgage Company
Roger J. Lambert 47 Senior Vice President/
Information Services Group Manager
Barbara N. Lane 47 Senior Vice President/
Administrative Services
Group Manager
Alvin D. Woods 52 Senior Vice President/
Chief Lending Officer and
Lending Group Manager
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Princess Anne
-------------
J. Morgan Davis 45 President/Chief Executive Officer/
Director
Winfred O. Stant, Jr. 43 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.
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.
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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. In his present
position, he is responsible for overseeing Princess Anne's asset/liability and
investment management, for budgeting and for administering Princess Anne's
external and internal reporting. 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.
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
nineteen 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, 1996. The total net book value of the Banks' property
and equipment at December 31, 1996 was approximately $12.7 million.
47
<PAGE>
<TABLE>
<CAPTION>
Owned Expiration Net Book
or Date of Value
Location Year Office Opened Leased Lease (Dollars in thousands)
-------- ------------------ ------ ----- ----------------------
<S> <C> <C> <C> <C>
Corporate Headquarters
225 W. Olney Road
Norfolk, Virginia 1979 Owned - $ 1,160
Retail Branch Offices - CENIT Bank
745 Duke Street
Norfolk, Virginia 1889 (Relocated in 1979) Owned - 807
2203 E. Little Creek Road
Norfolk, Virginia 1959 (Relocated in 1980) Owned - 217
300 E. Main Street
Norfolk, Virginia 1993 (Relocated in 1995) Leased June, 2005 119
3315 High Street
Portsmouth, Virginia 1955
(Relocated in 1989 and 1994) Leased August, 2000 32
675 N. Battlefield Blvd.
Chesapeake, Virginia 1989 Owned - 819
2600 Taylor Road
Chesapeake, Virginia 1988 Owned - 370
3220 Churchland Blvd.
Chesapeake, Virginia 1986 Leased December, 2000 35
2205 Executive Drive
Hampton, Virginia 1973 (Relocated in 1989) Owned - 780
110 Ottis Road
York County, Virginia 1994 Owned - 1,834
(Retail/Mortgage Office)
5007 Victory Boulevard
York County, Virginia 1995 Leased November, 2010 227
13307 Warwick Blvd.
Newport News, Virginia 1996 Owned 387
6101 Military Highway
Norfolk, Virginia 1996 Leased October, 2001 216
550 Settlers Landing Road
Hampton, Virginia 1996 Owned 582
Mortgage Branch Office - CENIT Bank
2612 Taylor Road
Chesapeake, Virginia 1993 Owned - 541
Retail Branch Offices - Princess Anne
1616 Laskin Road Land-
Virginia Beach, Virginia 1975 Leased June, 2005 -
Building and improvements owned 124
699 Independence Boulevard
Virginia Beach, Virginia 1975 Owned - 352
905 Kempsville Road
Virginia Beach, Virginia 1978 Owned - 337
641 Lynnhaven Parkway
Virginia Beach, Virginia 1985 Leased March, 2000 313
4801 Columbus Street
Virginia Beach, Virginia 1987 Leased March, 2003 35
3001 Shore Drive
Virginia Beach, Virginia 1989 (Relocated in 1996) Leased January, 2002 49
3901 Holland Road
Virginia Beach, Virginia (Opening in 1997) Leased January, 2002 -
Other Real Property 902
---------
Total Real Property 10,238
---------
Other Fixed Assets
Furniture, fixtures, equipment and auto 2,426
---------
Total $ 12,664
=========
</TABLE>
48
<PAGE>
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, 1996, 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 information contained on page 52 of the 1996 Annual Report to
Stockholders under the caption "Stock Price Information" is incorporated herein
by reference.
The Company paid a quarterly cash dividend on its Common Stock of $.10 per
share in 1995, and $.10, $.20, $.20 and $.25 per share for the first, second,
third and fourth quarters, respectively, of 1996. The Company also declared a
cash dividend of $.25 per share in the first quarter of 1997. After the first
quarter of 1997, if the Company experiences first quarter results in line with
first quarter projections, the Company intends to continue the quarterly
dividend at $.25 per share. However, no assurance can be given that such
dividends will be paid at all or, if paid, that such dividends will not be
reduced or eliminated in future periods. The declaration of dividends by the
Board of Directors of the Company will depend upon a variety of factors,
including, but not limited to, the Company's 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 20 of the Notes to
Consolidated Financial Statements in the 1996 Annual Report to Stockholders,
which is attached hereto as Exhibit 13.
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 15 of the notes to Consolidated Financial
Statements in the 1996 Annual Report to Stockholders, which is attached hereto
as Exhibit 13.
As of February 28, 1997, there were approximately 1,722 holders of record
of the Company's Common Stock.
Item 6 - Selected Financial Data
The selected financial data for the five years ended December 31, 1996,
which appears on page 10 of the Company's 1996 Annual Report to Stockholders,
which is attached hereto as Exhibit 13, is incorporated herein by reference.
49
<PAGE>
Item 7 - Management's Discussion and Analysis of Financial Condition and Results
of Operations
The information contained on pages 11 to 18 of the 1996 Annual Report to
Stockholders, which is attached hereto as Exhibit 13, under the caption
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" is incorporated herein by reference.
Item 8 - Financial Statements and Supplementary Data
The consolidated statements of financial condition of the Company and its
subsidiaries as of December 31, 1996 and 1995 and the related consolidated
statements of operations, stockholders' equity and cash flows for each of the
years in the three-year period ended December 31, 1996, along with the related
notes to consolidated financial statements and the report of Price Waterhouse
LLP, independent accountants, are incorporated herein by reference from pages 19
through 51 of the Company's 1996 Annual Report to Stockholders, which is
attached hereto as Exhibit 13.
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
Information regarding the directors of the Company is included in the
Company's Proxy Statement for the Annual Meeting to be held on April 23, 1997
under the heading "Election of Directors" on pages 3 through 5 and the
information included therein is incorporated herein by reference. Information
regarding the executive officers of the Company and the Banks is included in
Item 1 under the heading "Executive Officers of the Registrant" on pages 45
through 47 of this report pursuant to Paragraph (b) of Item 401 of Regulation
S-K.
Information regarding compliance with Section 16(a) of the Securities
Exchange Act is included in the Company's Proxy Statement for the Annual Meeting
to be held on April 23, 1997 under the heading "Compliance with Section 16(a) of
the Securities Exchange Act of 1934" on page 16, and the information included
therein is incorporated herein by reference.
Item 11 - Executive Compensation
Information regarding compensation of executive officers and directors is
incorporated herein by reference to the Company's Proxy Statement for the Annual
Meeting to be held on April 23, 1997 under the headings "Directors' Fees" and
"Executive Compensation" on pages 6 through 15.
Item 12 - Security Ownership of Certain Beneficial Owners and Management
Information regarding security ownership of certain beneficial owners and
management is included in the Company's Proxy Statement for the Annual Meeting
to be held on April 23, 1997 under the headings "Security Ownership of Certain
Beneficial Owners" on pages 2 and 3, and "Information with Respect to Nominees
and Continuing Directors" on pages 4 and 5 and the information included therein
is incorporated herein by reference.
Item 13 - Certain Relationships and Related Transactions
Information regarding certain relationships and related transactions is
included in the Company's Proxy Statement for the Annual Meeting to be held on
April 23, 1997 under the heading "Transactions with Certain Related Persons" on
pages 15 and 16 and under the heading "Compensation Committee Interlocks and
Insider Participation" on pages 10 and 11, and the information included therein
is incorporated herein by reference.
50
<PAGE>
PART IV
Item 14 - Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) (1) Financial Statements
The following consolidated financial statements of the Company and its
subsidiaries, together with the report thereon of Price Waterhouse LLP,
independent accountants, dated January 30, 1997, appearing in the 1996 Annual
Report to Stockholders, which is attached hereto as Exhibit 13, are incorporated
herein by reference:
Page in
Annual Report
Report of Independent Accountants 51
Consolidated Statement of Financial Condition at
December 31, 1996 and 1995. 19
Consolidated Statement of Operations for each of the
years in the three-year period ended December 31, 1996. 20
Consolidated Statement of Stockholders' Equity for each of
the years in the three-year period ended December 31, 1996. 21
Consolidated Statement of Cash Flows for each of the years in
the three-year period ended December 31, 1996. 22
Notes to Consolidated Financial Statements. 23-50
With the exception of the aforementioned information and the information
incorporated in Items 5, 6, 7, and 8, the 1996 Annual Report to Stockholders is
not deemed to be filed as part of this report.
The following consolidated financial statements of Princess Anne are
incorporated herein by reference to this document from the Exhibits to Form S-4,
Registration Statement, filed on April 4, 1995, Registration No. 033-90922. The
reissued report thereon dated February 7, 1995 of Goodman & Company, LLP,
independent accountants for Princess Anne, is incorporated herein by reference
to Form 10-K filed on March 28, 1996.
Balance Sheets as of December 31, 1994 and 1993
Statements of Income for the Years Ended December 31, 1994 and 1993
Statements of Stockholders' Equity for the Years Ended December 31, 1994
and 1993
Statements of Cash Flows for the Years Ended December 31, 1994 and 1993
Notes to Financial Statements
(a) (2) Financial Statement Schedules
All schedules are omitted because they are not required or are not
applicable or the required information is shown in the consolidated financial
statements or notes thereto.
(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.
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. filed with this 10-K.
51
<PAGE>
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, and Exhibits to Form 8-K filed on
July 9, 1996.
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.
Exhibit No. 10.10. Amendment to Employment Agreement with Michael S. Ives
Amendment to Employment Agreement with Michael S. Ives is
attached as Exhibit 10.10.
Exhibit No. 10.11. Amendment to Employment Agreement with J. Morgan Davis
The Amendment to Employment Agreement with J. Morgan Davis is attached
as Exhibit 10.11.
Exhibit No. 11. Statement Re: Computation of Per Share Earnings
The 1996 statement Re: Computation of per share earnings is attached
as Exhibit 11.
Exhibit No. 13. 1996 Annual Report to Stockholders
The 1996 Annual Report to Stockholders is attached as Exhibit 13.
Portions of the 1996 Annual Report to Stockholders have been
incorporated by reference into this Form 10-K.
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 is
included in Part I, Item 1 under the caption "Activities of Subsidiary
Companies of CENIT Bank," which is incorporated by reference.
Exhibit No. 23.1. Consent of Independent Accountants.
The consent of Price Waterhouse LLP, independent accountants for the
Company, is attached as Exhibit 23.1.
Exhibit No. 23.2. Consent of Independent Accountants.
The consent of Goodman & Company, LLP, independent accountants for
Princess Anne, is attached as Exhibit 23.2.
(b) Reports on Form 8-K filed in the fourth quarter of 1996
A report on Form 8-K was filed on October 10, 1996, dated September 26,
1996, which included Item 2, the assumption of approximately $63 million of
deposits of four Essex Savings Bank, FSB branches and a copy of the news release
and Item 7, Exhibit of the Branch Purchase and Deposit Assumption Agreement
between CENIT Bancorp, Inc. and Essex Savings Bank, FSB.
(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.
52
<PAGE>
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 25, 1997
(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 25, 1997
John O. Guthrie (Date)
Senior Vice President and
Chief Financial Officer
By: /s/ David A. Foster March 25, 1997
David A. Foster (Date)
First Vice President and
Principal Accounting Officer
By: /s/ C. L. Kaufman, Jr. March 25, 1997
C. L. Kaufman, Jr. (Date)
Chairman of the Board/Director
By: /s/ Michael S. Ives March 25, 1997
Michael S. Ives (Date)
Director
By: /s/ David L. Bernd March 25, 1997
David L. Bernd (Date)
Director
By: /s/ Patrick E. Corbin March 25, 1997
Patrick E. Corbin (Date)
Director
By: /s/ J. Morgan Davis March 25, 1997
J. Morgan Davis (Date)
Director
By: /s/ Roger C. Reinhold March 25, 1997
Roger C. Reinhold (Date)
Director
By: /s/ Anne B. Shumadine March 25, 1997
Anne B. Shumadine (Date)
Director
53
<PAGE>
By: /s/ John A. Tilhou March 25, 1997
John A. Tilhou (Date)
Director
By: /s/ David R. Tynch March 25, 1997
David R. Tynch (Date)
Director
By: /s/ William H. Hodges March 25, 1997
William H. Hodges (Date)
Director
54
CENIT BANCORP, INC.
BYLAWS
(as amended as of February 18, 1997)
ARTICLE I - STOCKHOLDERS
Section 1. Annual Meeting.
An annual meeting of the stockholders of the Corporation, for the election
of directors to succeed those whose terms expire and for the transaction of such
other business as may properly come before the meeting, shall be held at such
place, on such date, and at such time as the Board of Directors shall each year
fix, which date shall be within thirteen (13) months subsequent to the later of
the date of incorporation of the Corporation or the last annual meeting of
stockholders.
Section 2. Special Meetings.
Special meetings of stockholders of the Corporation may be called only by
the Board of Directors pursuant to a resolution adopted by a majority of the
total number of authorized directors (whether or not there exist any vacancies
in previously authorized directorships at the time any such resolution is
presented to the Board for adoption) (hereinafter the "Whole Board").
Section 3. Notice of Meetings.
Written notice of the place, date, and time of all meetings of the
stockholders shall be given, not less than ten (10) nor more than sixty (60)
days before the date on which the meeting is to be held, to each stockholder
entitled to vote at such meeting, except as otherwise provided herein or
required by law (meaning, here and hereinafter, as required from time to time by
the Delaware General Corporation Law or by the Certificate of Incorporation of
the Corporation).
When a meeting is adjourned to another place, date or time, written notice
need not be given of the adjourned meeting if the place, date and time thereof
are announced at the meeting at which the adjournment is taken; except that if
the date of any adjourned meeting is more than thirty (30) days after the date
for which the meeting was originally noticed, or if a new record date is fixed
for the adjourned meeting, written notice of the place, date, and time of the
adjourned meeting shall be given in conformity herewith. At any adjourned
meeting, any business may be transacted which might have been transacted at the
original meeting.
1
<PAGE>
Section 4. Quorum.
At any meeting of the stockholders, the holders of a majority of all of the
shares of the stock entitled to vote at the meeting (after giving effect to the
provisions of Article IV(C) of the Certificate of Incorporation of the
Corporation), present in person or by proxy, shall constitute a quorum for all
purposes, unless or except to the extent that the presence of a larger number
may be required by law. Where a separate vote by a class or classes of shares is
required, a majority of the shares of such class or classes present in person or
represented by proxy shall constitute a quorum entitled to take action with
respect to that matter.
If a quorum shall fail to attend any meeting, the chairman of the meeting
or the holders of a majority of the shares of stock entitled to vote (after
giving effect to the provisions of Article IV(C) of the Certificate of
Incorporation of the Corporation) who are present, in person or by proxy, may
adjourn the meeting to another place, date, or time.
If a notice of any adjourned special meeting of stockholders is sent to all
stockholders entitled to vote thereat, stating that it will be held with those
present constituting a quorum, then except as otherwise required by law, those
present at such adjourned meeting shall constitute a quorum, and all matters
shall be determined by a majority of the votes cast at such meeting.
Section 5. Organization.
Such person as the Board of Directors may have designated or, in the
absence of such a person, the President of the Corporation or, in his or her
absence, such person as may be chosen by the holders of a majority of the shares
entitled to vote (after giving effect to the provisions of Article IV(C) of the
Certificate of Incorporation of the Corporation) who are present, in person or
by proxy, shall call to order any meeting of the stockholders and act as
chairman of the meeting. In the absence of the Secretary of the Corporation, the
secretary of the meeting shall be such person as the chairman appoints. The
chairman of the meeting shall also have the power to appoint such other officers
of the meeting as he or she shall deem appropriate.
Section 6. Conduct of Business.
(a) The Board of Directors may, to the extent not prohibited by law, adopt
by resolution such rules and regulations for the conduct of any meeting of the
stockholders as it shall deem appropriate. Except to the extent inconsistent
with such rules and regulations as adopted by the Board of Directors, the
chairman of any meeting of stockholders shall have the right and authority to
prescribe such rules, regulations and procedures and to do all such acts as, in
the judgment of such chairman, are appropriate for the proper conduct of the
meeting. Such rules, regulations or procedures, whether adopted by the Board of
Directors or prescribed by the chairman of the meeting, may to the extent not
prohibited by law include, without limitation, the following: (i) the
establishment of an agenda or order of business for
2
<PAGE>
the meeting; (ii) rules and procedures for maintaining order at the meeting and
the safety of those present; (iii) limitations on attendance at or participation
in the meeting to stockholders of record of the Corporation, their duly
authorized and constituted proxies or such other persons as the chairman of the
meeting shall determine; (iv) restrictions on entry to the meeting after the
time fixed for the commencement thereof; and (v) limitations on the time
allotted, if any, to questions or comments by participants in the meeting.
Unless, and to the extent, determined by the Board of Directors or the chairman
of the meeting, meetings of stockholders shall not be required to be held in
accordance with the rules of parliamentary procedure. Any person in attendance
at a meeting of stockholders shall, at the time of gaining recognition from the
chairman, state the name of the speaker, the number of shares owned by the
speaker, and if appearing in a representative capacity, produce satisfactory
written evidence of the right of representation signed by a stockholder of
record. Upon a failure to comply with this requirement, the chairman of the
meeting may ignore the speaker, and, if deemed necessary, request the
sergeant-at-arms to remove the proposed speaker from the meeting.
(b) At any annual meeting of the stockholders, only such business shall be
conducted as shall have been brought before the meeting (i) by or at the
direction of the Board of Directors or (ii) by any stockholder of the
Corporation who is entitled to vote with respect thereto and who complies with
the notice procedures set forth in this Section 6(b). For business to be
properly brought before an annual meeting by a stockholder, the stockholder must
have given timely notice thereof in writing to the Secretary of the Corporation.
To be timely, a stockholder's notice must be delivered or mailed to and received
at the principal executive offices of the Corporation not less than one hundred
twenty (120) days in advance of the date of the Corporation's proxy statement
released to stockholders in connection with the previous year's annual meeting
of the stockholders. A stockholder's notice to the Secretary shall set forth as
to each matter such stockholder proposes to bring before the annual meeting (i)
a brief description of the business desired to be brought before the annual
meeting and the reasons for conducting such business at the annual meeting, (ii)
the name and address, as they appear on the Corporation's books, of the
stockholder who proposes such business, (iii) the class and number of shares of
the Corporation's capital stock that are beneficially owned by such stockholder
and (iv) any material interest of such stockholder in such business.
Notwithstanding anything in these Bylaws to the contrary, no business shall be
brought before or conducted at an annual meeting except in accordance with the
provisions of this Section 6(b). The officer of the Corporation or other person
presiding over the annual meeting shall, if the facts so warrant, determine and
declare to the meeting that business was not properly brought before the meeting
in accordance with the provisions of this Section 6(b) and, if he should so
determine, shall so declare to the meeting, and any such business so determined
to be not properly brought before the meeting shall not be transacted.
Notwithstanding the foregoing provisions, a stockholder shall also comply with
all applicable requirements of the Securities and Exchange Act of 1934 and the
rules and regulations thereunder with respect to the matters set forth in this
Section 6(b).
3
<PAGE>
At any special meeting of the stockholders, only such business shall be
conducted as shall have been brought before the meeting by or at the direction
of the Board of Directors.
(c) Only persons who are nominated in accordance with the procedures set
forth in these Bylaws shall be eligible for election as directors. Nominations
of persons for election to the Board of Directors of the Corporation may be made
at a meeting of stockholders at which directors are to be elected only (i) by or
at the direction of the Board of Directors or (ii) by any stockholder of the
Corporation entitled to vote for the election of directors at the meeting who
complies with the notice procedures set forth in this Section 6(c). Such
nominations, other than those made by or at the direction of the Board of
Directors, shall be made by timely notice in writing to the Secretary of the
Corporation. To be timely, a stockholder's notice shall be delivered or mailed
to and received at the principal executive offices of the Corporation not less
than one hundred twenty (120) days in advance of the date of the Corporation's
proxy statement released to stockholders in connection with the previous year's
annual meeting of the stockholders. Such stockholder's notice shall set forth
(i) as to each person whom such stockholder proposes to nominate for election or
re-election as a director, all information relating to such person that is
required to be disclosed in solicitations of proxies for election of directors,
or is otherwise required, in each case pursuant to Rule 14A under the Securities
Exchange Act of 1934, as amended (including such person's written consent to
being named in the proxy statement as a nominee and to serving as a director if
elected); (ii) as to each person whom such stockholder proposes to nominated for
election or re-election as a director, all information, certifications, reports
and submissions required by the Office of Thrift Supervision, Federal Reserve
Board, Virginia Bureau of Financial Institutions or any other regulatory agency
with supervisory authority over the Corporation or any of its subsidiaries, or
any successor to such a regulatory agency, with respect to the designation of a
new director of a holding company or financial institution regulated by such a
regulatory agency; and (iii) as to the stockholder giving the notice (x) the
name and address, as they appear on the Corporation's books, of such stockholder
and (y) the class and number of shares of the Corporation's capital stock that
are beneficially owned by such stockholder. At the request of the Board of
Directors, any person nominated by the Board of Directors for election as a
director shall furnish to the Secretary of the Corporation that information
required to be set forth in a stockholder's notice of nomination which pertains
to the nominee. No person shall be eligible for election as a director of the
Corporation unless nominated in accordance with the provisions of this Section
6(c). The officer of the Corporation or other person presiding over the meeting
shall, if the facts so warrant, determine that a nomination was not made in
accordance with such provisions and, if he should so determine, shall so declare
to the meeting, and the defective nomination shall be disregarded.
Notwithstanding the foregoing provisions, a stockholder shall also comply with
all applicable requirements of the Securities and Exchange Act of 1934 and the
rules and regulations thereunder with respect to the matters set forth in this
Section 6(c).
4
<PAGE>
Section 7. Proxies and Voting.
At any meeting of the stockholders, every stockholder entitled to vote may
vote in person or by proxy authorized by an instrument in writing filed in
accordance with the procedure established for the meeting.
Each stockholder shall have one (1) vote for every share of stock entitled
to vote which is registered in his or her name on the record date for the
meeting, except as otherwise provided herein or in the Certificate of
Incorporation or required by law.
All voting, including on the election of directors but excepting where
otherwise required by law, may be by a voice vote; except that upon demand
therefore by a stockholder entitled to vote or his or her proxy, a stock vote
shall be taken. Every stock vote shall be taken by ballots, each of which shall
state the name of the stockholder or proxy voting and such other information as
may be required under the procedure established for the meeting. Every vote
taken by ballots shall be counted by an inspector or inspectors appointed by the
chairman of the meeting.
All elections shall be determined by a plurality of the votes cast, and
except as otherwise required by law, all other matters shall be determined by a
majority of the votes cast.
Section 8. Stock List.
A complete list of stockholders entitled to vote at any meeting of
stockholders, arranged in alphabetical order for each class of stock and showing
the address of each such stockholder and the number of shares registered in his
or her name, shall be open to the examination of any such stockholder, for any
purpose germane to the meeting, during ordinary business hours for a period of
at least ten (10) days prior to the meeting, either at a place within the city
where the meeting is to be held, which place shall be specified in the notice of
the meeting, or if not so specified, at the place where the meeting is to be
held.
The stock list shall also be kept at the place of the meeting during the
whole time thereof and shall be open to the examination of any such stockholder
who is present. This list shall presumptively determine the identity of the
stockholders entitled to vote at the meeting and the number of shares held by
each of them.
Section 9. No Consent of Stockholders in Lieu of Meeting.
Subject to the rights of the holders of any class or series of preferred
stock of the Corporation, any action required or permitted to be taken by the
stockholders of the Corporation must be effected at an annual or special meeting
of stockholders of the Corporation and may not be effected by any consent in
writing by such stockholders.
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ARTICLE II - BOARD OF DIRECTORS
Section 1. General Powers, Number and Term of Office.
The business and affairs of the Corporation shall be under the direction of
its Board of Directors. The number of directors who shall constitute the Whole
Board shall be such number as the Board of Directors shall from time to time
have designated, except that in the absence of any such designation, such number
shall be eleven (11). The Board of Directors shall annually elect a Chairman
from among its members.
The directors, other than those who may be elected by the holders of any
class or series of preferred stock, shall be divided, with respect to the time
for which they severally hold office, into three classes, with the term of
office of the first class to expire at the first annual meeting of stockholders,
the term of office of the second class to expire at the second annual meeting of
stockholders and the term of office of the third class to expire at the third
annual meeting of stockholders, with each director to hold office until his or
her successor shall have been duly elected and qualified. At each annual meeting
of stockholders (or special meeting in lieu thereof), commencing with the first
annual meeting, directors elected to succeed those directors whose terms then
expire shall be elected for a term of office to expire at the third succeeding
annual meeting of stockholders after their election, with each director to hold
office until his or her successor shall have been duly elected and qualified.
Section 2. Vacancies and Newly Created Directorships.
Subject to the rights of the holders of any class or series of preferred
stock, and unless the Board of Directors otherwise determines, newly created
directorships resulting from any increase in the authorized number of directors
or any vacancies in the Board of Directors resulting from death, resignation,
retirement, disqualification, removal from office or other cause may be filled
only by a majority vote of the directors then in office, though less than a
quorum, and directors so chosen shall hold office for a term expiring at the
annual meeting of stockholders at which the term of office of the class to which
they have been elected expires and until such director's successor shall have
been duly elected and qualified. No decrease in the number of authorized
directors constituting the Board shall shorten the term of any incumbent
director.
Section 3. Regular Meetings.
Regular meetings of the Board of Directors shall be held at such place or
places, on such date or dates, and at such time or times as shall have been
established by the Board of Directors and publicized among all directors. A
notice of each regular meeting shall not be required.
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Section 4. Special Meeting.
Special meetings of the Board of Directors may be called by one-half (1/2)
of the directors then in office (rounded up to the nearest whole number), by the
Chairman of the Board or by the President of the Corporation, and shall be held
at such place, on such date, and at such time as they or he or she shall fix.
Notice of the place, date, and time of each such special meeting shall be given
to each director by whom it is not waived by mailing written notice not less
than five (5) days before the meeting or by telegraphing or telexing or by
facsimile transmission of the same not less than twenty-four (24) hours before
the meeting. Unless otherwise indicated in the notice thereof, any and all
business may be transacted at a special meeting.
Section 5. Quorum.
At any meeting of the Board of Directors, a majority of the authorized
number of directors then constituting the Board shall constitute a quorum for
all purposes. If a quorum shall fail to attend any meeting, a majority of those
present may adjourn the meeting to another place, date, or time, without further
notice or waiver thereof.
Section 6. Participation in Meetings by Conference Telephone.
Members of the Board of Directors, or of any committee thereof, may
participate in a meeting of such Board or committee by means of conference
telephone or similar communications equipment by means of which all person
participating in the meeting can hear each other, and such participation shall
constitute presence in person at such meeting.
Section 7. Conduct of Business.
At any meeting of the Board of Directors, business shall be transacted in
such order and manner as the Board may from time to time determine, and all
matters shall be determined by the vote of a majority of the directors present,
except as otherwise provided herein or required by law. Action may be taken by
the Board of Directors without a meeting if all members thereof consent thereto
in writing, and the writing or writings are filed with the minutes of
proceedings of the Board of Directors.
Section 8. Powers.
The Board of Directors may, except as otherwise required by law, exercise
all such powers and do all such acts and things as may be exercised or done by
the Corporation, including, without limiting the generality of the foregoing,
the unqualified power:
(1) To declare dividends from time to time in accordance with law;
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(2) To purchase or otherwise acquire any property, rights or privileges on
such terms as it shall determine;
(3) To authorize the creation, making and issuance, in such form as it may
determine, of written obligations of every kind, negotiable or non- negotiable,
secured or unsecured, and to do all things necessary in connection therewith;
(4) To remove any officer of the Corporation with or without cause, and
from time to time to devolve the powers and duties of any officer upon any other
person for the time being;
(5) To confer upon any officer of the Corporation the power to appoint,
remove and suspend subordinate officers, employees and agents;
(6) To adopt from time to time such stock, option, stock purchase, bonus or
other compensation plans for directors, officers, employees and agents of the
Corporation and its subsidiaries as it may determine;
(7) To adopt from time to time such insurance, retirement, and other
benefit plans for directors, officers, employees and agents of the Corporation
and its subsidiaries as it may determine; and,
(8) To adopt from time to time regulations, not inconsistent with these
Bylaws, for the management of the Corporation's business and affairs.
Section 9. Compensation of Directors.
Directors, as such, may receive, pursuant to resolution of the Board of
Directors, fixed fees and other compensation for their services as directors,
including, without limitation, their services as members of committees of the
Board of Directors.
ARTICLE III - COMMITTEES
Section 1. Committees of the Board of Directors.
The Board of Directors, by a vote of a majority of the Board of Directors,
may from time to time designate committees of the Board, with such lawfully
delegable powers and duties as it thereby confers, to serve at the pleasure of
the Board and shall, for those committees and any others provided for herein,
elect a director or directors to serve as the member or members, designating, if
it desires, other directors as alternate members who may replace any absent or
disqualified member at any meeting of the committee. Any committee so designated
may exercise the power and authority of the Board of Directors to declare a
dividend, to authorize the issuance of stock or to adopt a certificate of
ownership and merger pursuant to Section 253 of the Delaware General Corporation
Law if the resolution which designates the committee or a supplemental
resolution of the Board of Directors shall so provide. In the absence or
disqualification of any member of any committee
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and any alternate member in his or her place, the member or members of the
committee present at the meeting and not disqualified from voting, whether or
not he or she or they constitute a quorum, may by unanimous vote appoint another
member of the Board of Directors to act at the meeting in the place of the
absent or disqualified member.
Section 2. Conduct of Business
Each committee may determine the procedural rules for meeting and
conducting its business and shall act in accordance therewith, except as
otherwise provided herein or required by law. Adequate provision shall be made
for notice to members of all meetings; one-third (1/3) of the members shall
constitute a quorum unless the committee shall consist of one (1) or two (2)
members, in which event one (1) member shall constitute a quorum; and all
matters shall be determined by a majority vote of the members present. Action
may be taken by any committee without a meeting if all members thereof consent
thereto in writing, and the writing or writings are filed with the minutes of
the proceedings of such committee.
Section 3. Nominating Committee.
The Board of Directors shall appoint a Nominating Committee of the Board,
consisting of three (3) members, one of which shall be the President of the
Corporation if, and only so long as, the President remains in office as a member
of the Board of Directors. The Nominating Committee shall have authority (a) to
review any nominations for election to the Board of Directors made by a
stockholder of the Corporation pursuant to Section 6(c)(ii) of Article I of
these Bylaws in order to determine compliance with such Bylaw, and (b) to
recommend to the Whole Board nominees for election to the Board of Directors to
replace those directors whose terms expire at the next ensuing annual meeting of
stockholders.
ARTICLE IV - OFFICERS
Section 1. Generally.
(a) The Board of Directors as soon as may be practicable after the annual
meeting of stockholders shall choose a President and Chief Executive Officer
(the "President"), one or more Vice Presidents, a Secretary, and a Treasurer,
and from time to time may choose such other officers as it may deem proper. An
officer may be chosen from among the directors. Any number of offices may be
held by the same person.
(b) The term of office of all officers shall be until the next annual
election of officers and until their respective successors are chosen, but any
officer may be removed from office at any time by the affirmative vote of a
majority of the authorized number of directors then constituting the Board of
Directors.
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(c) Each officer chosen by the Board of Directors shall have such powers
and duties as generally pertain to their respective offices, subject to the
specific provisions of this Article IV. Such officers shall also have such
powers and duties as from time to time may be conferred upon them by the Board
of Directors or by any committee thereof.
Section 2. President.
The President shall be the chief executive officer of the Corporation and,
subject to the control of the Board of Directors, shall have general power over
the management and oversight of the administration and operation of the
Corporation's business and general supervisory power and authority over its
policies and affairs. He shall see that all orders and resolutions of the Board
of Directors and of any committee thereof are carried into effect.
Section 3. Vice President.
The Vice President or Vice Presidents shall perform the duties of the
President in his absence or during his disability to act. In addition, the Vice
Presidents shall perform the duties and exercise the powers usually incident to
their respective offices and/or such other duties and powers as may be properly
assigned to them from time to time by the Board of Directors or the President.
Section 4. Secretary.
The Secretary or an Assistant Secretary shall issue notices of meetings,
shall keep minutes of such meetings, shall have charge of the corporate seal and
the corporate books, and shall perform such other duties and exercise such other
powers as are usually incident to such offices and/or such other duties and
powers as are properly assigned thereto by the Board of Directors or the
President.
Section 5. Treasurer.
The Treasurer shall have charge of all monies and securities of the
Corporation, other than monies and securities of any division of the Corporation
which has a treasurer or financial officer appointed by the Board of Directors,
and shall keep regular books of account. The funds of the Corporation shall be
deposited in the name of the Corporation by the Treasurer with such banks or
trust companies as the Board of Directors from time to time shall designate. He
shall sign or countersign such instruments as require his signature, shall
perform all such duties and have all such powers as are usually incident to such
office and/or such other duties and powers as are properly assigned to him by
the Board of Directors or the President, and may be required to give bond for
the faithful performance of his duties in such sum and with such surety as may
be required by the Board of Directors.
Section 6. Assistant Secretaries and Other Officers.
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The Board of Directors may appoint one or more assistant Secretaries and
one or more assistant Treasurers, which officers shall have such powers and
shall perform such duties as are provided in these Bylaws or as may be properly
assigned to them by the Board of Directors or the President.
Section 7. Action with Respect to Securities of Other Corporations.
Unless otherwise directed by the Board of Directors, the President or any
officer of the Corporation authorized by the President shall have the power to
vote and otherwise act on behalf of the Corporation, in person or by proxy, at
any meeting of stockholders of or with respect to any action of stockholders of
any other corporation in which this Corporation may hold securities and
otherwise to exercise any and all rights and powers which this Corporation may
possess by reason of its ownership of securities in such other corporation.
ARTICLE V - STOCK
Section 1. Certificates of Stock.
Each stockholder shall be entitled to a certificate signed by, or in the
name of the Corporation by, the President or a Vice President, and by the
Secretary or an Assistant Secretary, or the Treasurer or an Assistant Treasurer,
certifying the number of shares owned by him or her. Any or all of the
signatures on the certificate may be by facsimile.
Section 2. Transfers of Stock.
Transfer of stock shall be made only upon the transfer books of the
Corporation kept at an office of the Corporation or by transfer agents
designated to transfer shares of the stock of the Corporation. Except where a
certificate is issued in accordance with Section 4 of Article V of these Bylaws,
an outstanding certificate for the number of shares involved shall be
surrendered for cancellation before a new certificate is issued therefor.
Section 3. Record Date.
In order that the Corporation may determine the stockholders entitled to
notice of or to vote at any meeting of stockholders, or to receive payment of
any dividend or other distribution or allotment of any rights or to exercise any
rights in respect of any change, conversion or exchange of stock or for the
purpose of any other lawful action, the Board of Directors may fix a record
date, which record date shall not precede the date on which the resolution
fixing the record date is adopted and which record date shall not be more than
sixty (60) nor less than ten (10) days before the date for any meeting of
stockholders, nor more than sixty (60) days prior to the time for such other
action as hereinbefore described; except that if no record date is fixed by the
Board of Directors, the record date for determining stockholders entitled to
notice of or to vote at a meeting of stockholders shall be at the close of
business on the date next preceding the day on which notice is given
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or, if notice is waived, at the close of business on the day next preceding the
day on which the meeting is held, and, for determining stockholders entitled to
receive payment of any dividend or other distribution or allotment of rights or
to exercise any rights of change, conversion or exchange of stock or for any
other purpose, the record date shall be at the close of business on the day on
which the Board of Directors adopts a resolution relating thereto.
A determination of stockholders of record entitled to notice of or to vote
at a meeting of stockholders shall apply to any adjournment of the meeting;
except that the Board of Directors may fix a new record date for the adjourned
meeting.
Section 4. Lost, Stolen or Destroyed Certificates.
In the event of the loss, theft or destruction of any certificate of stock,
another may be issued in its place pursuant to such regulations as the Board of
Directors may establish concerning proof of such loss, theft or destruction and
concerning the giving of a satisfactory bond or bonds of indemnity.
Section 5. Regulations.
The issue, transfer, conversion and registration of certificates of stock
shall be governed by such other regulations as the Board of Directors may
establish.
ARTICLE VI - NOTICES
Section 1. Notices.
Except as otherwise specifically provided herein or required by law, all
notices required to be given to any stockholder, director, officer, employee or
agent shall be in writing and may in every instance be effectively given by hand
delivery to the recipient thereof, by depositing such notice in the mails,
postage paid, or by sending such notice by prepaid telegram or mailgram or other
courier. Any such notice shall be addressed to such stockholder, director,
officer, employee or agent at his or her last known address as the same appears
on the books of the Corporation. The time when such notice is received, if hand
delivered, or dispatched, if delivered through the mails or by telegram or
mailgram or other courier, shall be the time of the giving of the notice.
Section 2. Waivers.
A written waiver of any notice, signed by a stockholder, director, officer,
employee or agent, whether before or after the time of the event for which
notice is to be given, shall be deemed equivalent to the notice required to be
given to such stockholder, director, officer, employee or agent. Neither the
business nor the purpose of any meeting need be specified in such a waiver.
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ARTICLE VII - MISCELLANEOUS
Section 1. Facsimile Signatures.
In addition to the provisions for use of facsimile signatures elsewhere
specifically authorized in these Bylaws, facsimile signatures of any officer or
officers of the Corporation may be used whenever and as authorized by the Board
of Directors or a committee thereof.
Section 2. Corporate Seal.
The Board of Directors may provide a suitable seal, containing the name of
the Corporation, which seal shall be in the charge of the Secretary. If and when
so directed by the Board of Directors or a committee thereof, duplicates of the
seal may be kept and used by the Treasurer or by an Assistant Secretary or
Assistant Treasurer.
Section 3. Reliance upon Books, Reports and Records.
Each director, each member of any committee designated by the Board of
Directors, and each officer of the Corporation shall, in the performance of his
or her duties, be fully protected in relying in good faith upon the books of
account or other records of the Corporation and upon such information, opinions,
reports or statements presented to the Corporation by any of its officers or
employees, or committees of the Board of Directors so designated, or by any
other person who has been selected with reasonable care by or on behalf of the
Corporation as to matters which such director or committee member reasonably
believes are within such other person's professional or expert competence.
Section 4. Fiscal Year.
The fiscal year of the Corporation shall be as fixed by the Board of
Directors.
Section 5. Time Periods.
In applying any provision of these Bylaws which requires that an act be
done or not be done a specified number of days prior to an event or that an act
be done during a period of a specified number of days prior to an event,
calendar days shall be used, the day of the doing of the act shall be excluded,
and the day of the event shall be included.
ARTICLE VIII - AMENDMENTS
These Bylaws may be altered, amended, added to, rescinded or repealed at
any meeting of the Board of Directors or of the stockholders, provided notice of
the proposed change was given in the notice of the meeting or, in the case of a
meeting of the Board of Directors, in a notice given not less than two days
prior to the meeting; except that notwithstanding any other provisions of
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these Bylaws or any provision of law which might otherwise permit a lesser vote
or no vote, but in addition to any affirmative vote of the holders of any
particular class or series of the Voting Stock (as defined in the Certificate of
Incorporation) required by law, the Certificate of Incorporation, any Preferred
Stock Designation (as defined in the Certificate of Incorporation) or these
Bylaws, the affirmative votes of the holders of at least 80% of the voting power
of the then outstanding shares of Voting Stock, voting together as a single
class, shall be required in order for these Bylaws to be altered, amended, added
to, rescinded or repealed by the stockholders of the Corporation.
14
AMENDMENT
TO
EMPLOYMENT AGREEMENT
WHEREAS, the undersigned CENIT Bancorp, Inc. ("Bancorp"), CENIT Bank, FSB
("Bank") and Michael S. Ives ("Executive") entered into an Employment Agreement
as of July 1, 1995 ("Agreement"); and
WHEREAS, the undersigned desire to amend the Agreement in certain respects.
NOW, THEREFORE, the parties agree to amend the Agreement as follows,
effective November 26, 1996.
1. In Section 6 of the Agreement, the first sentence of subsection (e)(1)
shall be amended to read as follows:
(1) Notwithstanding the foregoing provisions of this Section, neither
Bancorp nor the Bank shall terminate Executive's employment without cause (nor
shall any decision previously made to terminate Executive's employment without
cause be effective) nor shall Bancorp or the Bank, without cause, fail to renew
this Agreement pursuant to Section 3 during any period of time when Bancorp or
the Bank has knowledge that any person(s), entity or concern has taken steps
reasonably calculated to effect a change of control of Bancorp or the Bank as
defined in Section 7 of this Agreement until, in the opinion of the Boards of
Directors of Bancorp and the Bank, the person(s), concern or entity has
abandoned or terminated its efforts to effect a change of control.
2. Section 7 of the Agreement shall be deleted and replaced with the
following:
7. CHANGE OF CONTROL: Notwithstanding the provisions of Section 6 of this
Agreement, if during the Term of this Agreement Executive's employment is
terminated without cause or Executive resigns for good reason within 12 months
after a change of control of Bancorp or the Bank, Bancorp and the Bank shall pay
to Executive, in lieu of the compensation specified in subsections 6(e) and (f),
severance pay (subject to any applicable payroll or other taxes required to be
withheld) equal to 2.99 times Executive's average annual compensation includable
in Executive's gross income for federal income tax purposes for Executive's most
recent five taxable years ending before the date on which the change in control
occurs. Notwithstanding the preceding sentence, however, if a change in control
for purposes of this Agreement occurs in a taxable year of the
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Executive but does not constitute and is followed by a change in control
for purposes of Section 280G of the Internal Revenue Code that occurs in a
subsequent taxable year of the Executive, severance pay shall be based upon
Executive's most recent five taxable years ending before the date on which the
change of control occurs for purposes of Section 280G of the Internal Revenue
Code. Severance pay shall be paid in cash (except to the extent that Executive
and the Bank and Bancorp agree that it shall be paid in other property) and
shall be paid in one lump sum on or before Executive's last day of employment;
except that, at the option of Executive, any cash amount required to be paid
hereby shall be paid by Bancorp and the Bank in consecutive equal monthly
installments over the six (6) months following the month in which termination
occurs, payable on the first day of each such month. As provided in Section 9 of
this Agreement, the severance pay described in this Section is subject to the
limitations set forth in Section 280G of the Internal Revenue Code and the
regulations thereunder, and such severance pay is intended to be the maximum
amount payable that will not give rise to an "excess parachute payment" under
that statute. Accordingly, the provisions of this Section are to be interpreted
in the broadest possible way in order to pay to Executive the maximum amount
that, at the time concerned, will not constitute an excess parachute payment
under Section 280G.
(a) For purposes of this Agreement, a change of control shall be deemed to
have occurred upon the occurrence of any of the following:
(i) The acquisition by any "person" or "group" (as defined in Sections
13(d) and 14(d) of the Exchange Act), (other than Bancorp, any subsidiary of
Bancorp or any Bancorp or subsidiarys employee benefit plan) directly or
indirectly, as "beneficial owner" (as defined in Rule 13d-3 under the Exchange
Act) of securities of Bancorp representing twenty percent (20%) or more of
either the then outstanding shares or the combined voting power of the then
outstanding securities of Bancorp;
(ii) Either a majority of the directors of Bancorp elected at Bancorp's
annual stockholders meeting shall have been nominated for election other than by
or at the direction of the "incumbent directors" of Bancorp, or the "incumbent
directors" shall cease to constitute a majority of the directors of Bancorp. The
term "incumbent director" shall mean any director who was a director of Bancorp
on November 1, 1996 and any individual who becomes a director of Bancorp
subsequent to November 1, 1996 and who is elected or nominated by or at the
direction of at least two-thirds of the then incumbent directors;
(iii) The shareholders of Bancorp approve (x) a merger, consolidation or
other business combination of Bancorp with any other "person" or "group" (as
defined in Sections 13(d) and 14(d) of the 1934 Act) or affiliate thereof, other
than a merger or
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consolidation that would result in the outstanding common stock of Bancorp
immediately prior thereto continuing to represent (either by remaining
outstanding or by being converted into common stock of the surviving entity or a
parent or affiliate thereof) at least fifty percent (50%) of the outstanding
common stock of Bancorp or such surviving entity or a parent or affiliate
thereof outstanding immediately after such merger, consolidation or other
business combination, or (y) a plan of complete liquidation of Bancorp or an
agreement for the sale or disposition by Bancorp of all or substantially all of
Bancorp's assets; or
(iv) Any other event or circumstance which is not covered by the foregoing
subsections but which the Board of Directors of Bancorp determines to affect
control of Bancorp and with respect to which the Board of Directors adopts a
resolution that the event or circumstance constitutes a Change in Control for
purposes of the Agreement.
(b) The control change date is the date on which an event described in (i),
(ii), (iii) or (iv) occurs.
(c) If Executive collects any part or all of the severance pay provided
under this Section by or through a lawyer or lawyers, following a change of
control and a dispute with Bancorp or the Bank regarding the terms of this
Section and any related provision of the Agreement, Bancorp and Bank will pay
all costs of any such collection or enforcement, including reasonable legal fees
and other out of pocket expenses incurred by the Executive, up to that point
when Bancorp and Bank offer to settle the dispute for an amount equal to the
amount that Executive is entitled to recover.
(d) The payments described in this Section 7 will be due Executive
regardless of any subsequent employment obtained by Executive.
3. In Section 8 of the Agreement, the first sentence of subsection (c)
shall be amended to read as follows:
(c) The provisions contained in subsections (a) and (b) above shall not
apply and shall have no force and effect at any time following a change of
control.
4. Section 9 of the Agreement shall be deleted and replaced with the
following:
9. LIMITATION OF BENEFITS: It is the intention of the parties that no
payment be made or benefit provided to Executive that would constitute an
"excess parachute payment" within the meaning of Section 280G of the Code and
any regulations thereunder, thereby resulting in a loss of an income tax
deduction by Bancorp or the Bank or the
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imposition of an excise tax on Executive under Section 4999 of the Code. If the
independent accountants serving as auditors for Bancorp or the Bank immediately
prior to the date of a change of control determine that some or all of the
payments or benefits scheduled under this Agreement, when combined with any
other payments or benefits provided to Executive by Bancorp or the Bank on a
change of control, would constitute nondeductible excess parachute payments by
Bancorp or the Bank under Section 280G of the Code, then the payments or
benefits scheduled under this Agreement will be reduced to one dollar less than
the maximum amount which may be paid or provided without causing any such
payments or benefits scheduled under this Agreement or otherwise provided on a
change of control to be nondeductible. The determination made as to the
reduction of benefits or payments required hereunder by the independent
accountants shall be binding on the parties. Executive shall have the right to
designate within a reasonable period which payments or benefits scheduled under
this Agreement will be reduced; except that if no direction is received from
Executive, Bancorp or the Bank shall implement the reductions under this
Agreement in its discretion.
IN WITNESS WHEREOF, the parties have executed this Amendment to Employment
Agreement effective November 26, 1996.
Executive:
Michael S. Ives
CENIT Bancorp, Inc.
By:
Its:
CENIT Bank, FSB
By:
Its:
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AMENDMENT
TO
EMPLOYMENT AGREEMENT
WHEREAS, the undersigned Princess Anne Bank ("Bank") and J. Morgan Davis
("Executive") entered into an Employment Agreement as of January 30, 1995
("Agreement"); and
WHEREAS, the undersigned desire to amend the Agreement in certain respects.
NOW, THEREFORE, the parties agree to amend the Agreement as follows,
effective November 13, 1996.
1. The following subparagraphs shall be added to paragraph 11.
If the Executive collects any part or all of the severance pay provided
under this paragraph by or through a lawyer or lawyers, following a Change of
Control and a dispute with the Bank regarding the terms of this paragraph and
any related provision of the Agreement, the Bank will pay all costs of any such
collection or enforcement, including reasonable legal fees and other out of
pocket expenses incurred by the Executive, up to that point when the Bank offers
to settle the dispute for an amount equal to the amount that Executive is
entitled to recover.
The payments described in this paragraph will be due Executive regardless
of any subsequent employment obtained by Executive.
2. The phrase "within three (3) years" shall be deleted from subparagraphs
12 (i) and 12 (iii).
3. Paragraph 13 of the Agreement shall be deleted and replaced with the
following:
13. LIMITATION OF BENEFITS: It is the intention of the parties that no
payment be made or benefit provided to the Executive that would constitute an
"excess parachute payment" within the meaning of Section 280G of the Internal
Revenue Code of 1986, as amended (the Code) and any regulations thereunder,
thereby resulting in a loss of an income tax deduction by the Bank or the
imposition of an excise tax on Executive under Section 4999 of the Code. If the
independent accountants serving as auditors for the Bank immediately prior to
the date of a Change of Control determine that some or all of the payments or
benefits scheduled under this Agreement, when combined with any other payments
or benefits provided to the Executive on a Change of Control by CENIT, the Bank
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and any affiliate of CENIT or the Bank required to be aggregated with CENIT or
the Bank under Section 280G of the Code, would constitute nondeductible excess
parachute payments by the Bank under Section 280G of the Code, then the payments
or benefits scheduled under this Agreement will be reduced to one dollar less
than the maximum amount which may be paid or provided without causing any such
payments or benefits scheduled under this Agreement or otherwise provided on a
Change of Control to be nondeductible. The determination made as to the
reduction of benefits or payments required hereunder by the independent
accountants shall be binding on the parties. The Executive shall have the right
to designate within a reasonable period which payments or benefits scheduled
under this Agreement will be reduced; provided, however, that if no direction is
received from the Executive, the Bank shall implement the reductions under this
Agreement in its discretion.
4. Subparagraph 15 of the Agreement shall be deleted and replaced with the
following:
15. CHANGE OF CONTROL:
(a) For purposes of this Agreement, a Change of Control of CENIT occurs in
any of the following events: (i) The acquisition by any "person" or "group" (as
defined in Sections 13(d) and 14(d) of the Exchange Act), (other than CENIT, any
subsidiary of CENIT or any CENIT or subsidiary's employee benefit plan) directly
or indirectly, as "beneficial owner" (as defined in Rule 13d-3 under the
Exchange Act) of securities of CENIT representing twenty percent (20%) or more
of either the then outstanding shares or the combined voting power of the then
outstanding securities of CENIT; (ii) Either a majority of the directors of
CENIT elected at CENIT's annual stockholders meeting shall have been nominated
for election other than by or at the direction of the "incumbent directors" of
CENIT, or the "incumbent directors" shall cease to constitute a majority of the
directors of CENIT. The term "incumbent director" shall mean any director who
was a director of CENIT on November 1, 1996 and any individual who becomes a
director of Bancorp subsequent to November 1, 1996 and who is elected or
nominated by or at the direction of at least two-thirds of the then incumbent
directors; (iii) The shareholders of CENIT approve (x) a merger, consolidation
or other business combination of CENIT with any other "person" or "group" (as
defined in Sections 13(d) and 14(d) of the 1934 Act) or affiliate thereof, other
than a merger or consolidation that would result in the outstanding common stock
of CENIT immediately prior thereto continuing to represent (either by remaining
outstanding or by being converted into common stock of the surviving entity or a
parent or affiliate thereof) at least fifty percent (50%) of the outstanding
common stock of CENIT or such surviving entity or a parent or affiliate thereof
outstanding immediately after such merger, consolidation or other business
combination, or (y) a plan of complete liquidation of
- 2 -
CENIT or an agreement for the sale or disposition by CENIT of all or
substantially all of CENIT's assets; or (iv) Any other event or circumstance
which is not covered by the foregoing subsections but which the Board of
Directors of CENIT determines to affect control of CENIT and with respect to
which the Board of Directors adopts a resolution that the event or circumstance
constitutes a Change of Control for purposes of the Agreement.
The Control Change Date is the date on which an event described in (i),
(ii), (iii) or (iv) occurs.
Following a Change of Control of CENIT, the Bank may terminate the
Executive's employment without cause at any time in any otherwise lawful manner,
subject to the Bank providing to the Executive the payments and benefits
specified in paragraph 11.
IN WITNESS WHEREOF, the parties have executed this Amendment to Employment
Agreement effective November 13, 1996.
Executive:
J. Morgan Davis
Princess Anne Bank
By:
Its: Vice Chairman
- 3 -
Statement Re: Computation of Per Share Earnings
<TABLE>
<CAPTION>
Year ended December 31,
1996 1995 1994
---- ---- ----
(Amounts in thousands,
except per share amounts)
<S> <C> <C> <C>
Net income $ 3,608 $ 2,472 $ 3,977
=========== =========== ==========
PRIMARY
Average shares outstanding 1,616,570 1,590,535 1,571,379
Net effect of the assumed exercise of
stock options and warrants - based on the treasury
stock method using average market price 71,986 85,522 58,922
------ ------ ------
Total 1,688,556 1,676,057 1,630,301
========= ========= =========
Earnings per share $ 2.14 $ 1.48 $ 2.44
=========== =========== ==========
FULLY DILUTED
Average shares outstanding 1,616,570 1,596,033 1,571,379
Net effect of the assumed exercise of
stock options and warrants - based on the treasury stock
method using average market price or year-
end market price, whichever is higher. 72,578 88,135 60,915
------ ------ ------
Total 1,689,148 1,684,168 1,632,294
========= ========= =========
Earnings per share $ 2.14 $ 1.47 $ 2.44
=========== =========== ==========
</TABLE>
FRONT COVER
CENIT Bancorp, Inc.
1996 Annual Report
<PAGE>
Table of Contents
1 Corporate Profile
2 Report To Our Stockholders
8 Boards of Directors
CENIT Bancorp Management Committee
9 Community Advisory Boards
10 Five Year Financial Summary
11 Management's Discussion and Analysis
19 Consolidated Financial Statements
23 Notes To Consolidated Financial Statements
51 Report of Independent Accountants
52 Investor Information
53 Corporate Information
Inside Back Cover Map of Retail Banking Offices
<PAGE>
Corporate Profile
CENIT Bancorp, Inc., with headquarters in Norfolk, Virginia, is the holding
company for CENIT Bank, FSB, a federal stock savings bank based in Norfolk,
Virginia, and Princess Anne Bank, a Virginia commercial bank headquartered in
Virginia Beach, Virginia.
CENIT Bank has been in business since 1889, and Princess Anne Bank since
1985. Together, the two Banks form the second largest bank or thrift institution
headquartered in the Norfolk-Virginia Beach-Newport News Statistical Area, the
27th largest Metropolitan Statistical Area (MSA) in the United States and the
fourth largest MSA in the southeast.
At December 31, 1996, CENIT Bancorp had consolidated assets of $707.1
million, deposits of $499.0 million and stockholders' equity of $49.6 million
with 1,635,044 shares of common stock outstanding.
The two Banks operate nineteen retail banking offices in the cities of
Norfolk, Portsmouth, Virginia Beach, Chesapeake, Hampton and Newport News and in
York County, Virginia. The Banks attract retail deposits from the general public
in their market area by providing a variety of deposit services. As community
banks, the focus is personal banking for local individuals and businesses.
Deposits are insured by the Federal Deposit Insurance Corporation up to
applicable limits.
The Banks invest their funds in permanent and construction residential
loans, consumer loans, and commercial real estate and business loans. The Banks
also invest in mortgage-backed certificates and U.S. Treasury and federal agency
securities.
The Banks are members of the Federal Home Loan Bank System and Princess
Anne Bank is a member bank of the Federal Reserve System.
The Company's common stock trades on the Nasdaq Stock Market under the
symbol CNIT.
1
<PAGE>
Report to Our Stockholders
Our Board of Directors and I are pleased to present to you the 1996 Annual
Report for CENIT Bancorp, Inc. (the "Company") and its subsidiaries CENIT Bank,
FSB, and Princess Anne Bank.
During 1996, we continued to make great progress in the development of our
Company. We expanded our retail branch network to provide greater market
coverage and convenience for our customers. Our community banking initiatives
led to strong growth in our noninterest-bearing demand deposit account balances
and in our consumer home equity lending balances, and the Company increased its
residential mortgage loan portfolio systematically over the course of the year.
With these and other actions on our part, the Company's net income grew to over
$5.0 million before the impact of the one-time special Federal Deposit Insurance
Corporation assessment (the "Special Assessment") to recapitalize the Savings
Association Insurance Fund (the "SAIF").
Expanding Our Community Banking Franchise
Our rapid growth and development continued unabated throughout 1996. Over
the past few years, we have demonstrated the capabilities to identify
opportunities for growth as they arise in our market and to act decisively to
seize these opportunities. 1996 was no exception.
Once again, the Company was able to capitalize on a business opportunity.
During 1996, CENIT Bank acquired approximately $68.1 million of deposits in our
local market from five offices of Essex Savings Bank, FSB. CENIT Bank continued
to operate the former Essex retail offices in Downtown Hampton and in the
Denbigh area of Newport News to expand our retail branch network. The deposits
associated with the other three former Essex retail offices were consolidated
into existing CENIT Bank retail offices.
To integrate these two new offices into our retail network, CENIT Bank
completely refurbished the offices and thoroughly equipped them to provide our
customers at these offices with as many of our full range of services as
possible. Both offices are now capable of attracting and serving retail and
commercial banking customers with a wide variety of community banking services
such as ATMs, night depositories, and complete commercial lending and deposit
products.
As a further expansion of our retail banking options for our customers,
CENIT Bank opened its second "supercenter" banking office at the Super Kmart in
Norfolk. Our Super Kmart retail offices afford our customers the opportunity to
bank with us during evening hours and on weekends and many holidays. This makes
us a much more convenient banking option for our customers than the typical
community bank.
2
<PAGE>
In March 1996, Princess Anne Bank relocated its Great Neck office in
Virginia Beach from a small facility on a side street to a full-service retail
office on Shore Drive, a major traffic artery. The high visibility of this new
office has resulted in a substantial increase in deposits and customer activity
in the Great Neck office. The Great Neck and Shore Drive areas of Virginia Beach
are growing rapidly, and this new facility makes Princess Anne Bank a strong
competitor for retail and commercial banking customers in this market.
With these new and expanded retail offices, the Company now has a stronger
retail network that is convenient to a large percentage of potential customers
in our local market. This is clearly shown on the map identifying the locations
of our retail offices included on the inside back cover of this Annual Report.
This retail network makes us the only local community banking institution with
retail offices in all six of our market's most populated cities.
Using Our Strength to Grow Our Community Banks
These and other enhancements to our retail banking network caused the total
assets of the Company to increase from $639.8 million at December 31, 1995 to
$707.1 million at December 31, 1996. During this time, loans held for investment
increased from $319.2 million at December 31, 1995, to $422.2 million at
December 31, 1996. Also, total deposits increased from $450.5 million at
December 31, 1995, to $499.0 million at December 31, 1996. Of special note,
noninterest-bearing deposits increased by 19.4% from $38.7 million at
December 31, 1995 to $46.2 million at December 31, 1996. These deposits have
increased by $17.6 million, or 61.8%, since December 31, 1994, and represent a
particularly valuable source of funding to the Company.
Behind these broad statistics relating to the Company's growth in 1996 are
the results of certain of the Company's major programs. This information
provides additional insight into the Company's capacity for future growth.
During 1996, the Company developed a comprehensive program to increase our
home equity and second mortgage loan portfolio. The program was designed to
become an ongoing feature of our retail banking strategy and has proven very
successful. As a result of this program, we increased the outstanding balance of
our home equity and second mortgage loan portfolio by 43.9% in nine months from
$20.6 million at March 31, 1996 to $29.6 million at December 31, 1996.
Our continuing efforts to increase our merchant credit card processing
business also had impressive results in 1996. Our gross processing fees from
merchant sales grew by 47.0% from $502,000 in 1995 to $738,000 in
3
<PAGE>
1996, and the total number of our merchant customers increased by 35.9%
from 312 at December 31, 1995 to 424 at December 31, 1996. This phenomenal
growth in our merchant credit card processing business supports our efforts to
increase our noninterest-bearing demand deposits as we encourage our merchant
customers to maintain their commercial accounts with us.
We note with some disappointment that our nonperforming assets increased to
$5.7 million at the end of 1996. However, we are confident that the reasons
behind this increase represent an unusual confluence of unrelated events and not
a general deterioration of our asset quality. As of February 28, 1997, we have
had a net reduction in our nonperforming assets of $954,000 from the level
existing at December 31, 1996. We are making vigorous efforts to continue to
reduce our nonperforming assets very quickly. Our past experience in fashioning
creative solutions to nonperforming assets will serve us well in our attempts to
bring our nonperforming assets to lower levels in 1997.
Record Earnings and Dividends
In our 1995 Annual Report, we spoke of our great potential to increase our
earnings from operations during 1996. We also pointed out the possibility of the
one-time Special Assessment occurring during 1996, which would subject our
earnings to a substantial but nonrecurring charge. We proved to be right on both
counts.
Before the impact of the Special Assessment, the Company earned $5,059,000,
or $3.00 per share, in 1996. Including the $1.45 million after-tax charge from
the Special Assessment, the Company had annual net income of $3.6 million, or
$2.14 per share.
In comparison, annual net income for 1995 was $2.5 million, or $1.48 per
share. Net income for 1995 included the negative impact of a $348,000 after-tax
charge, or $.21 per share, relating to the sale of various securities in our
balance sheet restructuring and a $691,000 after-tax charge, or $.41 per share,
relating to merger expenses. Excluding the impact of these two special events,
the Company earned $3,511,000, or $2.09 per share, in 1995.
Excluding the effects of the Special Assessment in 1996 and the merger and
balance sheet restructuring changes in 1995, the Company's net income in 1996
increased by $1,548,000, or 44.1%, over our income from 1995.
These comparisons provide dramatic evidence of the Company's earnings
potential. Behind these comparisons are a number of factors that provide us with
additional earnings momentum in 1997:
4
<PAGE>
- Our net loans held for investment at December 31, 1996 were $422.2
million. This balance is 21.7%, or $75.3 million, higher than our average
net loans held for investment of $346.9 million in 1996.
- Our net interest margin for the fourth quarter of 1996 rose to 3.30%,
some eight basis points higher than our net interest margin of 3.22% for
all of 1996. We enter 1997 with a higher net interest margin than that
which existed on average in 1996.
- The Special Assessment reduced our deposit insurance premiums from a
prior annual rate of $2.30 per $1,000 of deposits insured by SAIF to a
substantially lower annual rate of $.648 per $1,000 of deposits insured
by SAIF. If our deposit balances were to remain unchanged from the levels
at December 31, 1996, our FDIC insurance cost would decrease by
approximately $678,000 below the annual cost of this insurance for 1996
under the previously existing deposit premium schedule.
- In 1996, our deposit fees increased by 39.2% to $1.4 million from $1.0
million in 1995. This occurred primarily because of overall increases in
checking account balances, increases in our deposit fee schedule in
mid-1996, and seven additional ATMs including three installed in the last
quarter of 1996. With the new ATMs and the fee schedule in place for all
of 1997, we expect that deposit fees will continue to grow in 1997.
With these factors in place for 1997, our Board of Directors has provided
you with clear evidence of the increasing profitability of the Company. In late
1996, we increased your quarterly dividend by 25%, to an annual rate of $1.00
per share, to demonstrate to you our high expectations for the future. We look
forward to 1997 with a great sense of excitement.
1997 and Beyond
As impressive as our record of corporate growth in 1996 may be, we are not
relying on our past efforts to ensure a continuation of our progress in 1997. We
have taken a number of actions in recent months that are designed to build upon
our 1996 results.
We have implemented a new promotional program for our Super Kmart retail
offices to accelerate our deposit growth in these offices. Bold "message center"
electronic signs have been installed at ten of our retail offices located
on some of our market's busiest highways to provide us with continuous
advertising for our banking services. Furthermore, we recently began a
systematic and comprehensive calling effort to contact many of our existing
customers to ask these customers to do additional business with the Company.
5
<PAGE>
Technological advancements in banking are enabling us to become more
competitive with larger banks in many areas. Unlike most financial institutions
similar to us in size, we have the benefit of our own "in-house" data processing
system. We can implement data processing advancements as we deem appropriate, we
can customize many of our banking services to fit the needs of major depositors,
and we can develop our own solutions to data processing problems. This
flexibility allows us to compete effectively for large depositors with financial
institutions many times our size.
To make our retail offices more efficient and to reduce the time necessary
to train our retail personnel, we have developed and begun the installation of a
proprietary retail banking software package that we call the Branch Delivery
System or BDS. This BDS software package simplifies and expedites customer
banking transactions and gives our customer service representatives the time to
engage our customers in meaningful dialogue concerning their banking needs
during the processing of routine banking transactions.
Other recent developments in technology for the Company include the
installation of a frame relay telephone network to facilitate the rapid
transmission of data among our offices and to provide for the easy expansion of
our branch network as the Company grows. We have also installed data processing
software to develop a marketing customer information file or MCIF to assist us
in identifying existing customers to whom we can offer additional banking
services. Soon to be installed is an interactive voice response customer
information program that will allow our customers to access information about
their accounts over the telephone at any time, night or day.
New technology is our ally and not our foe as we expand our Company.
Combining our community banking approach with our technological capabilities
makes us a formidable banking competitor in our market for the future.
Over th past few months, we have taken a very significant step in the
growth and development of the Company. Princess Anne Bank had three advisory
boards in place at the time of our merger in 1995. Before we expanded our
advisory boards further, we wanted to have the retail network and banking
infrastructure in place to exploit fully the business opportunities that arise
from a comprehensive network of advisory boards. We are now in a position to
move forward with the full development of this vital part of a community banking
structure.
We have begun the process of asking prominent and diverse members of our
local communities to join advisory boards for CENIT Bank and Princess Anne Bank.
Already, we have organized four new advisory boards
6
<PAGE>
for our Company, and we plan to establish at least three others very
quickly. We are very pleased with the enthusiasm for our Company that we have
encountered when we approach prospective members for our advisory boards.
Our advisory boards provide us with a means to evaluate our competitive
position in the communities that we serve. They tell us the new banking services
that we need to offer and help us to refine our existing services to better
serve our customers. They assist us in evaluating the effectiveness of our
customer service personnel. In addition, our advisory boards recommend our
banking services regularly to their business associates, friends and family and
are a significant source of business development for the Company.
The essence of a community bank is continuous interaction with its
customers and detailed knowledge of the markets served by the bank. Our advisory
boards will ensure that we never lose touch with our customers and that we are
always knowledgeable about changes and opportunities in our markets.
New marketing initiatives, new technology and new advisory boards will spur
the evolution and growth of the Company. Our resources and capabilities are
increasing rapidly. We expect 1997 to be a year that will present great banking
opportunities for the Company in our markets, and we will take full advantage of
these opportunities to expand our business and profitability.
Our Board of Directors recognizes its responsibility to continue to grow
the Company's earnings and franchise in order to create value for all of us. We
appreciate the trust and support that our stockholders have given to the Company
and its Board of Directors over the years. We will endeavor to be worthy of your
confidence.
Michael S. Ives
President & Chief Executive Officer
7
<PAGE>
Boards of Directors and Management Committee
Directors of Directors of Management Committee
CENIT Bancorp, Inc. and Princess Anne Bank of CENIT Bancorp, Inc.
CENIT Bank CENIT Bank
C. L. Kaufman, Jr. John A. Tilhou, Esq., Chairman Michael S. Ives
Chairman, Partner, Mays & Valentine, L.L.P. President & Chief
CENIT Bancorp, Inc. Executive Officer
Investor
David L. Bernd Homer W. Cunningham Barry L. French
President & CEO, Chairman Emeritus Senior Vice President
Sentara Health System Retail Banking
Group Manager
Patrick E. Corbin, William J. Davenport, III
CPA Principal, Vice Chairman John O. Guthrie
Carter Corbin & Real Estate Developer/Investor Senior Vice President
Company, P.C. Chief Financial
Officer & Finance
Homer W. Cunningham* J. Morgan Davis Group Manager
Member Emeritus President & Chief Executive
Officer Patrick L. Hillard
J. Morgan Davis* Senior Vice President
President & Chief Thomas J. Decker, Jr. CENIT Mortgage Company
Executive Officer President, The Prudential-
Princess Anne Bank Decker Realty Roger J. Lambert
Senior Vice President
The Honorable John W. Failes, CPA Information Services
William H. Hodges CEO, Failes & Associates, P.C. Group Manager
Judge, Virginia Court
of Appeals (Retired) L. Renshaw Fortier Barbara N. Lane
Consultant/Counsel, Chairman, Teren Company Senior Vice President
Plasser American Administrative Ser-
Corporation John F. Harris vices Group Manager
President, Affordable Homes
Michael S. Ives Alvin D. Woods
President & Chief Michael S. Ives Senior Vice President
Executive Officer President & Chief Executive Chief Lending Officer
Officer, CENIT Bancorp, Inc. & Lending Group
Frank R.
Kollmansperger, Jr. Charles R. Malbon, Jr. Princess Anne Bank
Management Consultant Vice President
Tank Lines, Inc. J. Morgan Davis
Roger C. Reinhold President & Chief
Commercial Dan Ryan, President Executive Officer
Investments Dan Ryan's For Men
Retired President, Winfred O. Stant, Jr.
Homestead Savings Bank Senior Vice President
& Chief Financial
John A. Tilhou, Esq.* Officer
Chairman,
Princess Anne Bank
Partner, Mays &
Valentine, L.L.P.
David R. Tynch, Esq.
President and Managing
Partner,
Cooper, Spong & Davis,
P.C.
Anne B. Shumandine, Esq.
President, Signature
Financial Management, Inc.
Director, Mezzullo &
McCandlish,
A Professional Corporation
* CENIT Bancorp Board Only
8
<PAGE>
Community Advisory Boards
CENIT Bank
Tri-City
(Western Chesapeake,
Suffolk & Portsmouth)
Samuel H. Lamb, II,
Chairman Provost,
Tidewater
Community College,
Portsmouth
Robert C. Barclay, IV,
Esq.
Attorney, Cooper, Spong &
Davis
Roger L. Brown, Owner,
McDonald's Franchises
B. Anne Davis
President & CEO, Diesel
Tech
Gwendolyn S. Davis
Legislative Liaison &
Principal Management
Analyst
City of Portsmouth
Sharon D. Franklin
Owner & Graphic Designer,
Okra Stewdio
Ann M. Kirk, Esq.
Attorney, Private
Practice
Michael R. Kirsch
President, K Plus
Eric J. Sasser
President, Sasser
Construction
Jimmy R. Spruill
Chairman, JJ Fasteners,
Inc.
Andrew M. Virga
Treasurer & CFO,
Virga's Pizza Crust of
Virginia
Junius H. Williams, Jr
Division Manager,
Community & Government
Affairs
Eastern Operations
Division
Virginia Power
Great Bridge
(Southern Chesapeake)
James A. Roy, Esq. Chairman
Partner, Roy, Laine,
Larsen, Romm & Lascara, P.C.
Fella Rhodes,
Managing Broker
Long & Foster Realtors
Debbie Ritter
Professional Dog Breeder
Greg Skillman
President, Seaboard
Mechanical
Peter Szoke, MD
Family Physicians of
Great Bridge, Ltd.
Stephen J. Telfeyan, Esq.
Partner, Basnight, Wright,
Kinser, Telfeyan, &
Leftwich, P.C.
Gayle A. Terwilliger, DDS
Dentist, Private Practice
James J. Wheaton, Esq.
Partner, Willcox & Savage, P.C.
Princess Anne Bank
Pembroke
Wendell A. White, Chairman
Senior Vice President,
The Breeden Company
Joseph M. Gianascoli
President, IKON Office
Solutions
William F. Harris
President, Bank United
Mortgage
Glen A. Huff, Esq.
Partner, Huff, Poole &
Mahoney
Donald E. Lee, Jr., Esq.
Attorney, Private Practice
Robert E. Ruloff, Esq.,
Partner,
Shuttleworth, Ruloff &
Giordano
Shore Drive
Kal Kassir, Chairman
Owner, The Corner Market
Donald F. Bennis, Esq.
Attorney, Private Practice
Thomas R. Eckert
Owner, Bay Lake Pines
School
Charles W. Guthrie
President, Lynnhaven Marine
John R. Savino
Agent, The Prudential-
Decker Realty
Lynnhaven
Brian P. Winfield, Chairman
Winfield & Associates
Gunther H. Degan
President, Degan
Enterprises
Paul V. Michels
President, Coastal Video
Communications Corp.
A. William Reid
President, Cellar Door
Productions of VA, Inc.
Hilltop
John W. Richardson, Esq.
Chairman
Partner, Stallings &
Richardson
Michael Atkinson
Owner, 501 City Grill &
Atlas Diner
Judy B. Crumley
Owner & Treasurer,
Crumley Group, Inc.
Frank Drew
Sheriff, City of Virginia
Beach
Independence
W. K. Hammaker, Chairman
Branch Manager,
Pembroke Riedman
Insurance
Stephen B. Ballard
President, S.B. Ballard,
Inc.
Nancy Cheng
Administrative Vice
President,
Eastern Computers, Inc.
William A. Hearst
Account Executive,
Pembroke Riedman
Insurance
Clarence A. Holland, MD
Physician
Norma O. Magpoc, MD
Physician
Mark E. Slaughter, Esq.
Partner, Pender & Coward
9
<PAGE>
Five Year Financial Summary (1)
(Dollars in thousands, except per share)
<TABLE>
<CAPTION>
At or for the year ended December 31,
1996 1995 1994 1993 1992
----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Financial Condition Data:
Total assets $ 707,100 $ 639,812 $575,675 $ 508,421 $ 473,239
U.S. Treasury and other U.S. Government
agency securities, net 46,305 65,118 44,650 55,953 43,339
Loans held for investment, net 422,219 319,194 305,578 258,604 279,269
Mortgage-backed certificates, net 177,706 203,176 175,763 135,812 86,853
Real estate owned, net 2,769 1,828 5,718 3,575 6,642
Deposits 498,965 450,530 420,422 407,309 400,590
Borrowings 155,138 138,171 109,035 58,560 35,203
Stockholders' equity 49,608 46,729 42,217 39,810 35,105
Operating Data:
Interest income $ 48,171 $ 45,527 $ 37,826 $ 34,004 $ 37,635
Interest expense 28,087 27,476 19,496 16,910 21,702
Net interest income 20,084 18,051 18,330 17,094 15,933
Provision for loan losses 377 697 490 1,667 2,481
Net interest income after provision for loan losses 19,707 17,354 17,840 15,427 13,452
Other income 3,894 2,944 2,765 2,956 3,113
Other expenses 18,172 16,174 14,402 13,099 13,463
Income before income taxes and cumulative
effect of accounting change 5,429 4,124 6,203 5,284 3,102
Provision for income taxes 1,821 1,652 2,226 1,637 931
Income before cumulative effect of
accounting change 3,608 2,472 3,977 3,647 2,171
Cumulative effect of change in method of
accounting for income taxes -- -- -- -- 553
Net income $ 3,608 $ 2,472 $ 3,977 $ 3,647 $ 2,724
----------------------------------------------------------------------
Earnings per share:
Income before cumulative effect of
accounting change $ 2.14 $ 1.48 $ 2.44 $ 2.28 $ 1.42
Cumulative effect of accounting change -- -- -- -- .36
Net income $ 2.14 $ 1.48 $ 2.44 $ 2.28 $ 1.78
Cash dividends per share ----------------------------------------------------------------------
----------------------------------------------------------------------
$ .75 $ .40 $ .36 $ .27 $ --
Selected Financial Ratios and Other Data:
Return on average assets 0.54% (2) 0.40% (3) 0.72% 0.76% 0.58% (4)
Return on average stockholders' equity 7.56 (2) 5.57 (3) 9.75 9.83 10.31 (4)
Average stockholders' equity to average assets 7.20 7.21 7.40 7.76 5.67
Stockholders' equity to total assets at year end 7.02 7.30 7.33 7.83 7.42
Interest rate spread 2.83 2.60 3.10 3.36 3.17
Net interest margin 3.22 3.07 3.47 3.78 3.58
Other expenses to average assets 2.74 (2) 2.63 (3) 2.61 2.76 2.89
Net interest income to other expenses 110.52 (2) 111.61 (3) 127.27 130.50 118.35
Nonperforming assets to total assets .80 .45 1.42 1.01 2.17
Allowance for loan losses to total net loans .90 1.16 1.24 1.56 1.39
Dividend payout ratio (5) 35.10 27.12 14.76 11.85 --
Book value per share $ 30.34 $ 29.27 $ 26.66 $ 25.41 $ 22.41
Tangible book value per share 27.66 28.15 25.45 25.41 22.41
Number of retail branch offices 19 16 15 12 11
<FN>
________
(1) On August 1, 1995, Princess Anne Bank ("Princess Anne") became a
wholly-owned subsidiary of CENIT Bancorp, Inc. (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, FSB 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 $2,340 one-time SAIF special assessment paid in
November, 1996 and the related tax effect, where applicable, the return on
average assets and return on average stockholders' equity for the year ended
December 31, 1996 would have been .76% and 10.52%, respectively, and the ratio
of other expenses to average assets and net interest income to other expenses
would have been 2.39% and 126.86%, respectively.
(3) Exclusive of the $757 of merger expenses and the $563 loss on the sale
of securities and the related tax effect, the return on average assets and
return on average stockholders' equity for the year ended December 31, 1995
would have been .57% and 7.91%, respectively. Exclusive of the $757 of merger
expenses relating to the Princess Anne combination, the ratio of other expenses
to average assets and net interest income to other expenses would have been
2.50% and 117.09%, respectively.
(4) The return on average assets and average stockholders' equity for 1992
includes the cumulative effect of changing the Company's method of accounting
for income taxes. Without this change, the Company's return on average assets
and average stockholders' equity would have been .47% and 8.22%, respectively.
(5) Represents dividends per share divided by net income per share.
Dividends per share represent historical dividends declared by the Company.
</FN>
</TABLE>
10
<PAGE>
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Financial Condition of the Company
Total assets. At December 31, 1996, the Company had total assets of $707.1
million, an increase of $67.3 million, or 10.5%, since December 31, 1995. This
increase is accounted for primarily by the Company's purchase of residential
permanent one- to four- family real estate loans, the effect of which was
partially offset by a decrease in securities available for sale.
Securities Available For Sale. Securities available for sale totaled $224.0
million at December 31, 1996 compared to $268.3 million at December 31, 1995.
The net decrease of $44.3 million from December 31, 1995 resulted primarily from
the net effect of $66.5 million of mortgage-backed certificate repayments, $48.8
million of adjustable-rate mortgage-backed certificate purchases, $29.2 million
of proceeds from the maturities or calls of securities, $19.1 million of U.S.
Treasury and other U.S. Government agency securities purchases, and $14.8
million of proceeds from the sale of securities. The portfolio of securities
available for sale at December 31, 1996 was comprised of $6.0 million of other
U.S. Government agency securities, $40.3 million of U.S. Treasury securities and
$177.7 million of mortgage-backed certificates.
Loans. The balance of net loans held for investment increased from $319.2
million at December 31, 1995 to $422.2 million at December 31, 1996.
Adjustable-rate and conventional fixed-rate residential permanent one- to
four-family loans increased from $98.1 million and $47.6 million, respectively,
at December 31, 1995 to $157.5 million and $99.0 million, respectively, at
December 31, 1996. These increases in one- to four- family loans resulted
primarily from the purchase of loans, including three bulk transactions totaling
$84.6 million. The loans acquired in these three transactions included $51.3
million of adjustable-rate loans and $33.3 million of fixed-rate loans, $21.1
million of which balloon at various dates over the next seven years. The
majority of these loans are secured by real estate located in the South and
Southeast regions of the U.S., with the largest concentrations in Virginia,
Alabama and Georgia. Loan purchases for 1996, including individual loans
purchased from correspondents, totaled $105.9 million. The balance of one- to
four-family loans also increased in 1996 as a result of a 43.6% increase in
originations from $51.5 million in 1995 to $73.9 million in 1996.
The balance of outstanding home equity and second mortgage loans also
increased from $20.8 million at December 31, 1995 to $29.6 million at
December 31, 1996. This increase resulted primarily from a successful program
added to the Company's retail banking strategy as evidenced by a 146.8% increase
in originations from $8.1 million in 1995 to $19.9 million in 1996.
Deposits. During 1996, the Company's total deposits increased from $450.5
million at December 31, 1995 to $499.0 million at December 31, 1996. In 1996, as
part of its strategy to expand its community banking franchise in Southeastern
Virginia, CENIT Bank assumed approximately $68.1 million in deposits from five
Essex Savings Bank, FSB ("Essex") branches that were located in the Company's
existing market area. Also, the Company's noninterest-bearing deposits increased
by 19.4% from $38.7 million at December 31, 1995 to $46.2 million at
December 31, 1996. 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. The impact of the Essex deposit assumption and the
increase in noninterest-bearing deposits was partially offset by decreases in
certificates of deposit and money market deposit accounts.
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 $138.2 million at December 31, 1995 to
$155.1 million at December 31, 1996. FHLB advances increased from $133.0 million
to $148.0 million during this period. Although the Company used the majority of
the cash proceeds received in connection with the Essex deposit assumption to
11
<PAGE>
reduce its FHLB advances, the Company also utilized FHLB advances to fund the
purchase of loans. 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, 1996 and 1995.
Asset Quality. The Company's total nonperforming assets totaled $5.7
million, or .80% of assets, at December 31, 1996 compared to $2.9 million, or
.45% of assets, at December 31, 1995. Real estate owned ("REO") increased from
$1.8 million at December 31, 1995 to $2.8 million at December 31, 1996. REO at
December 31, 1996 included approximately $707,000 relating to a commercial
office building that was acquired by the Company in December, 1996 and sold in
February, 1997. Nonperforming loans increased from $1.0 million at December 31,
1995 to $2.8 million at December 31, 1996. This increase resulted primarily from
a $921,000 increase in permanent residential one- to four-family loans, a
$457,000 commercial real estate loan, and a $409,000 increase in commercial
business loans.
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 $2,033,000 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 $1,998,000 increase in other
expenses. Other expenses increased primarily as a result of the $2,340,000
pretax charge against earnings relating to the special assessment charged to the
Company in connection with the federal legislation to recapitalize the Savings
Association Insurance Fund ("SAIF") of the Federal Deposit Insurance
Corporation.
Net Interest Income. The Company's net interest income before provision for
loan losses increased by $2,033,000 for the year ended December 31, 1996, an
11.3% increase from 1995. This increase resulted from a $2,644,000 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. The weighted
average yields for the month of December, 1996 for these three classifications
were 6.26%, 6.85%, and 8.42%, respectively.
12
<PAGE>
Interest on loans increased by approximately $1.3 million from $28.9
million in the year ended 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. The weighted average yield on the
loan portfolio for the month of December, 1996 was 8.32%.
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
13
<PAGE>
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 $1,821,000, which represents an effective tax rate of
33.5%. The Company's income tax expense for 1995 was $1,652,000, 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.
Comparison of Operating Results for the Years Ended December 31, 1995 and
December 31, 1994
General. The Company's pre-tax income decreased to $4.1 million for the
year ended December 31, 1995 from $6.2 million for 1994. This decrease was
attributable primarily to a $1,772,000 increase in other expenses, including
$757,000 of merger expenses, a $279,000 decrease in net interest income, and a
$207,000 increase in the provision for loan losses, the effect of which more
than offset a $179,000 increase in other income.
Net Interest Income. The Company's net interest income before provision for
loan losses decreased by $279,000 for the year ended December 31, 1995 as
compared to that of the previous year. This decrease resulted from a $7,980,000
increase in interest expense, which exceeded a $7,701,000 increase in interest
income. The increase in interest expense was primarily attributable to an
increase in the average balance and average cost of certificates of deposit, and
to an increase in the average balance and average cost of FHLB advances.
Interest on deposits increased by approximately $4.0 million in the year
ended December 31, 1995 compared to 1994. This increase was primarily
attributable to an increase in the average cost of certificates of deposit from
4.48% in 1994 to 5.42% in 1995. The average balance of certificates of deposit
also increased by $27.5 million in 1995 compared to 1994. Overall, the Company's
cost of deposits increased from 3.94% in 1994 to 4.80% in 1995.
The Company's interest on borrowings increased to $8.1 million in the year
ended December 31, 1995 compared to $4.1 million in 1994. The average balance of
FHLB advances increased by $40.6 million in 1995 compared to 1994 as the Company
utilized FHLB advances to fund a portion of its growth. The impact of the
increase in average balances of FHLB advances, combined with an increase in the
average cost of the advances from 4.57% in 1994 to 6.16% in 1995, resulted in a
$3.9 million increase in interest expense on FHLB advances.
Interest on the Company's portfolio of mortgage-backed certificates
increased by approximately $2.2 million from $9.2 million for the year ended
December 31, 1994 to $11.4 million for the comparable 1995 period. This increase
resulted from both an $18.8 million increase in the average balance of the
portfolio and an increase in the average yield of the portfolio from 5.65% in
1994 to 6.30% in 1995. The increase in the average balance was a consequence of
the Company's purchase of mortgage-backed certificates to increase income of the
Company. The increase in the yield on mortgage-backed certificates occurred
because certificates backed by adjustable-rate mortgage loans ("ARMs") adjusted
to higher rates and because of the higher yields on the mortgage- backed
certificates purchased by the Company in 1994 and 1995.elds on the mortgage-
backed certificates purchased by the Company in 1994 and 1995.
The mortgage-backed certificate portfolio at December 31, 1995 had a total
amortized cost of $201.6 million and had a weighted average yield of
14
<PAGE>
6.84%. The portfolio was comprised of $22.4 million, or 11.1% of the total
portfolio, of mortgage-backed certificates with five- and seven-year balloon
provisions; $171.6 million, or 85.1% of the total portfolio, of adjustable-rate
mortgage-backed certificates; and $7.6 million, or 3.8% of the total portfolio,
of fixed-rate mortgage- backed certificates. The weighted average yields at
December 31, 1995 for these three classifications were 6.33%, 6.84%, and 8.41%,
respectively.
Interest on loans increased by approximately $4.2 million from $24.7
million in the year ended 1994 to $28.9 million in 1995. This increase was
attributable to a $29.3 million increase in the average balance of loans and an
increase in the yield on the portfolio from 8.39% in 1994 to 8.91% in 1995. The
yield on the Company's loan portfolio in 1995 was positively affected by the
rise in interest rates in 1994 and in the first half of 1995.
Interest on investment securities increased by $974,000 in 1995 compared to
1994. This increase resulted from an $11.5 million increase in the average
balance of the portfolio and an increase in the yield on the portfolio from
5.78% in 1994 to 6.26% in 1995.
The Company's net interest margin decreased from 3.47% for the year ended
December 31, 1994 to 3.07% for the year ended December 31, 1995. This decrease
was the result of a decrease in the Company's interest rate spread from 3.10% in
the year ended December 31, 1994 to 2.60% in the comparable 1995 period. The
decrease in the Company's interest rate spread occurred primarily because of
rising interest rates and the overall growth of the Company. 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
decreased during 1995. For the three months ended December 31, 1995, the
Company's net interest margin was 2.96% and the interest rate spread was 2.46%.
Provision for Loan Losses. The Company's provision for loan losses
increased from $490,000 in 1994 to $697,000 in 1995. The Company's 1994
provision for loan losses was positively impacted by a $275,000 reduction in
specific allowances for loan losses relating to one loan. Net chargeoffs totaled
$790,000 in 1995 compared to $897,000 in 1994. Net chargeoffs in 1995 included
$157,000 relating to CENIT Bank's credit card and mobile home loan portfolios,
which were substantially sold in 1995. At December 31, 1995, the Company's total
allowance for loan losses was $3.7 million and nonperforming loans totaled $1.0
million, resulting in a coverage ratio of 359.5%.
Other Income. Total other income increased from $2.8 million in 1994 to
$2.9 million in 1995. The Company recognized a $563,000 loss on the sale of
securities in 1995, compared to a loss of $273,000 on the sale of securities and
the sale of the mobile home portfolio in 1994. However, gains on the sale of
individual loans and servicing from mortgage operations increased by $92,000 in
1995 compared to 1994 primarily as a result of the interest rate environment and
the improved capabilities of the Company's mortgage department. Also, increases
in brokerage fees recognized by CENIT Bank's commercial mortgage loan brokerage
subsidiary, increases in merchant processing income, and increases in gains on
the sale of miscellaneous assets more than offset decreases in deposit fee
income.
Other Expenses. Total other expenses increased from $14.4 million in the
year ended December 31, 1994 to $16.2 million in 1995. Expenses relating to the
merger with Princess Anne accounted for $757,000 of the increase. Salaries and
employees benefits increased by $553,000 in 1995, which included a $270,000
increase in commissions relating to mortgage operations and commercial mortgage
loan brokerage and a $134,000 increase in overtime and temporary staffing
expenses, a portion of which related to the Princess Anne merger. Equipment,
data processing, and supplies expense increased by $265,000 in 1995 primarily as
a result of increased supplies costs. Net occupancy expense of premises
increased by $261,000 in 1995 primarily as a result of general rent increases,
additional rent expense relating to CENIT Bank's Main Street office, and
15
<PAGE>
increased costs resulting from CENIT Bank's opening of the Kiln Creek retail
banking and Peninsula mortgage lending center in the summer of 1995.
Income Taxes. The Company's income tax expense for the year ended
December 31, 1995 was $1,652,000, which represents an effective tax rate of
40.0%. The Company's income tax expense for 1994 was $2,226,000, which
represented an effective tax rate of 35.9%. The effective tax rate was higher in
the 1995 period due to the nondeductibility of certain merger expenses.
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 9.5% and 9.6% at
December 31, 1996 and December 31, 1995, respectively. As a Virginia state
chartered bank, Princess Anne is not required by regulation to maintain specific
levels of liquid investments.
The Company anticipates that it will have sufficient funds available to
meet its current loan commitments. At December 31, 1996, the Company had
outstanding mortgage and nonmortgage loan commitments, including unused lines of
credit, of $30.3 million, outstanding commitments to purchase loans of $13.0
million, and outstanding commitments to sell mortgage loans of $2.4 million, if
such loans close.
Certificates of deposit that are scheduled to mature within one year
totaled $229.5 million at December 31, 1996. 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 Federal Home Loan Bank of
Atlanta. The Company could also obtain funds through the sale of investment
securities from its available for sale portfolio.
Interest Rate Risk Management
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 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 purchase of adjustable-rate mortgage-backed certificates and
origination of other residential, construction, commercial real estate,
commercial business and consumer loans with adjustable rates, call or balloon
features or
16
<PAGE>
shorter maturities has increased the Company's sensitivity to interest rate
changes. However, in order to generate fee income and to offer a complete range
of mortgage loan products to its customers, the Company continues to originate
long-term, fixed-rate mortgage loans primarily for sale in the secondary market.
The Company will consider holding certain longer-term, fixed-rate investments if
the yield on such investments is consistent with the Company's asset/liability
strategy. The Company will also consider holding other shorter-term, fixed-rate
investments such as U. S. Treasury and U. S. Government agency securities,
mortgage-backed certificates representing interests in balloon loans, and
15-year mortgage-backed certificates.
At December 31, 1996, 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 $12.3 million,
or 1.7% 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.
Certain shortcomings are inherent in any method of analysis used to
estimate an institution's one-year interest rate gap. For example, although
certain assets and liabilities may have similar maturities or periods to
repricing, they may react in different degrees 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 ARMs, have features that may restrict changes in interest rates on a
short-term basis and over the life of the asset.
The methodology used also estimates various rates of withdrawal (or
"decay") for money market deposit, savings, and checking accounts, which may
vary significantly from actual experience. The estimated decay rates used in the
following table are those rates last published by the Office of Thrift
Supervision in November, 1994.
The following table reflects certain assumptions regarding prepayment of
loans and mortgage-backed certificates that are outside of actual contractual
terms, and are based on the recent prepayment experience of the Company.
Additionally, loans and securities with call provisions are included in the
period in which they may first be called. Changes in the interest rate
environment can cause substantial changes in the level of prepayments of loans
and mortgage-backed certificates, which may also affect the Company's interest
rate gap position.
The following table sets forth the amounts of interest-earning assets and
interest- bearing liabilities outstanding at December 31, 1996 that are subject
to repricing or that mature in each of the future time periods shown. 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.
17
<PAGE>
Interest Sensitivity Analysis
December 31, 1996
(Dollars in thousands)
<TABLE>
<CAPTION>
Over Over
One Year Three
Total to Years or
0-3 4-6 7-12 Within Three Non-
Months Months Months One Year Years Sensitive Total
-------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Assets
Interest-earning assets:
Loans (1) $107,364 $ 40,446 $ 91,704 $ 239,514 $103,400 $ 82,599 $425,513
Securities available for sale:
U.S. Treasury securities 3,000 4,517 6,555 14,072 26,224 - 40,296
Other U.S. Government agency
securities 2,003 1,005 995 4,003 2,006 - 6,009
Mortgage-backed certificates 46,464 39,252 73,652 159,368 10,619 7,719 177,706
Federal funds sold and interest-
earning deposits 6,003 - - 6,003 - - 6,003
Federal Home Loan Bank and Federal
Reserve Bank stock - - - - - 7,861 7,861
-------------------------------------------------------------------------------
Total interest-earning assets $164,834 $ 85,220 $172,906 $ 422,960 $142,249 $ 98,179 $663,388
-------------------------------------------------------------------------------
Liabilities
Interest-bearing liabilities:
Interest-bearing deposits:
Passbook, statement savings
and checking accounts (2) 2,996 2,996 5,996 11,988 18,700 47,620 78,308
Money market deposit accounts 3,513 3,513 7,027 14,053 16,268 14,494 44,815
Certificates of deposits 81,159 55,681 92,689 229,529 68,501 31,658 329,688
-------------------------------------------------------------------------------
Total interest-bearing deposits 87,668 62,190 105,712 255,570 103,469 93,772 452,811
Advances from the Federal Home
Loan Bank 148,000 - - 148,000 - - 148,000
Securities sold under
agreements to repurchase 7,138 - - 7,138 - - 7,138
-------------------------------------------------------------------------------
Total interest-bearing liabilities $242,806 $ 62,190 $105,712 $ 410,708 $103,469 $ 93,772 $607,949
-------------------------------------------------------------------------------
Interest sensitivity gap $(77,972) $ 23,030 $ 67,194 $ 12,252 $ 38,780 $ 4,407 $ 55,439
-------------------------------------------------------------------------------
Cumulative interest sensitivity gap $(77,972) $(54,942) $ 12,252 $ 12,252 $ 51,032
-------------------------------------------------------
Cumulative interest sensitivity gap as a
percentage of total assets (11.0)% (7.8)% 1.7% 1.7% 7.2%
<FN>
- ------------
(1) Excludes nonaccrual loans of $2.4 million.
(2) Excludes $46.2 million of noninterest-bearing deposits.
</FN>
</TABLE>
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 mea- surement 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
reflec- ted 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.
18
<PAGE>
Consolidated Statement of Financial Condition
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
December 31,
1996 1995
---- ----
Assets
<S> <C> <C>
Cash $ 17,475 $ 12,966
Federal funds sold and interest-earning deposits 6,003 7,439
Securities available for sale at fair value (adjusted
cost of $222,367 and $265,862, respectively) 224,011 268,294
Loans, net:
Held for investment 422,219 319,194
Held for sale 1,900 2,982
Interest receivable 5,456 5,291
Real estate owned, net 2,769 1,828
Federal Home Loan Bank and Federal
Reserve Bank stock, at cost 7,861 7,029
Property and equipment, net 12,664 11,272
Goodwill and other intangibles, net 4,381 1,777
Other assets 2,361 1,740
---------------------------
Total assets $ 707,100 $ 639,812
===========================
Liabilities and Stockholders' Equity
Liabilities:
Deposits:
Noninterest-bearing $ 46,154 $ 38,664
Interest-bearing 452,811 411,866
---------------------------
Total deposits 498,965 450,530
Advances from the Federal Home Loan Bank 148,000 133,000
Other borrowings -- 300
Securities sold under agreements to repurchase 7,138 4,871
Advance payments by borrowers for taxes and insurance 631 661
Other liabilities 2,758 3,721
---------------------------
Total liabilities 657,492 593,083
===========================
Commitments (Note 18)
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 1,635,044 and
1,596,675, respectively 16 16
Additional paid-in capital 17,670 16,903
Retained earnings - substantially restricted 31,040 28,641
Common stock acquired by Employees Stock
Ownership Plan (ESOP) -- (300)
Common stock acquired by Management
Recognition Plan (MRP) (181) (142)
Net unrealized gain on securities available for
sale, net of income taxes 1,063 1,611
---------------------------
Total stockholders' equity 49,608 46,729
---------------------------
$ 707,100 $ 639,812
===========================
The notes to consolidated financial statements are an integral part of this
statement.
</TABLE>
19
<PAGE>
Consolidated Statement of Operations
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
Year Ended December 31,
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Interest and fees on loans $ 30,243 $ 28,907 $ 24,747
Interest on mortgage-backed certificates 13,224 11,406 9,169
Interest on investment securities 3,657 4,046 3,072
Dividends and other interest income 1,047 1,168 838
-------------------------------------------
Total interest income 48,171 45,527 37,826
-------------------------------------------
Interest on deposits 19,240 19,382 15,395
Interest on borrowings 8,847 8,094 4,101
-------------------------------------------
Total interest expense 28,087 27,476 19,496
-------------------------------------------
Net interest income 20,084 18,051 18,330
Provision for loan losses 377 697 490
-------------------------------------------
Net interest income after provision for loan losses 19,707 17,354 17,840
-------------------------------------------
Other income:
Gains (losses) on sales of:
Securities, net 77 (563) (68)
Loans, net 629 544 247
Loan servicing fees and late charges 353 441 541
Other 2,835 2,522 2,045
-------------------------------------------
Total other income 3,894 2,944 2,765
-------------------------------------------
Other expenses:
Salaries and employee benefits 7,762 7,469 6,916
Equipment, data processing, and supplies 2,529 2,512 2,247
Federal deposit insurance premiums,
including
one-time SAIF special assessment of $2,340
in 1996 3,187 893 987
Merger expenses -- 757 --
Other 4,694 4,543 4,252
-------------------------------------------
Total other expenses 18,172 16,174 14,402
-------------------------------------------
Income before income taxes 5,429 4,124 6,203
Provision for income taxes 1,821 1,652 2,226
-------------------------------------------
Net income $ 3,608 $ 2,472 $ 3,977
-------------------------------------------
Net income per common and common
equivalent share $ 2.14 $ 1.48 $ 2.44
-------------------------------------------
Dividends per common share $ .75 $ .40 $ .36
-------------------------------------------
The notes to consolidated financial statements are an integral part of this
statement.
</TABLE>
20
<PAGE>
Consolidated Statement of Changes in Stockholders' Equity
(Dollars in thousands)
<TABLE>
<CAPTION>
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
------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1993 1,566,409 $ 16 $ 16,296 $ 23,180 $ (832) $1,150 $ 39,810
Net income -- -- -- 3,977 -- -- 3,977
Cash dividends paid, net of
tax benefits relating to
dividends paid on unallo-
cated shares held by ESOP -- -- -- (437) -- -- (437)
Principal payments on ESOP
loan -- -- -- -- 100 -- 100
Exercise of stock warrants 17,186 -- 256 -- -- -- 256
Net change in unrealized gain
(loss) on securities available
for sale, net of income taxes -- -- -- -- -- (1,539) (1,539)
Other -- -- 36 -- 14 -- 50
------------------------------------------------------------------------------------------
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
unallocated 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 divi-
dends paid on unallocated
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 available
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
------------------------------------------------------------------------------------------
The notes to consolidated financial statements are an integral part of this
statement.
</TABLE>
21
<PAGE>
Consolidated Statement of Cash Flows
(Dollars in thousands)
<TABLE>
<CAPTION>
Year Ended December 31,
1996 1995 1994
-------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 3,608 $ 2,472 $ 3,977
Add (deduct) items not affecting cash during the year:
Provision for loan losses 377 697 490
Provision for losses on real estate owned 136 199 274
Amortization of loan yield adjustments (98) (227) (30)
Federal Home Loan Bank stock dividends - - (58)
Depreciation, amortization and accretion, net 2,481 1,617 1,434
Net (gains) losses on sales/disposals of:
Securities (77) 563 68
Loans (629) (544) (247)
Real estate, property and equipment 160 (244) 215
Proceeds from sales of loans held for sale 46,685 37,848 31,442
Originations of loans held for sale (45,003) (33,424) (26,929)
Change in assets/liabilities net of
effects from acquisition:
Increase in interest receivable and other assets (3,689) (772) (477)
Increase (decrease) in other liabilities (532) (410) 1,113
---- ---- -----
Net cash provided by operating activities 3,419 7,775 11,272
----- ----- ------
Cash flows from investing activities:
Purchases of securities available for sale (67,906) (103,420) (32,708)
Purchases of securities held to maturity - (53,321) (88,066)
Proceeds from sales of securities available for sale 14,792 68,689 56,357
Principal repayments on securities available for sale 66,519 8,499 476
Principal repayments on securities held to maturity - 24,020 32,820
Proceeds from maturities and calls
of securities available for sale 29,160 10,000 2,500
Proceeds from maturities of securities held to maturity - - 9,000
Net increase in loans held for investment (105,602) (10,517) (14,857)
Net proceeds on sales of real estate owned 1,837 828 116
Additions to real estate owned (398) (727) (2,081)
Purchases of Federal Home Loan Bank
stock and Federal Reserve Bank stock (7,942) (5,191) (5,198)
Redemption of Federal Home Loan Bank stock 7,110 3,900 4,635
Purchases of property and equipment (2,662) (2,620) (1,567)
Proceeds from sales of property and equipment - 389 -
Payments to acquire business, net of cash received - - (4,674)
------ ------ ------
Net cash used for investing activities (65,092) (59,471) (43,247)
------- ------- -------
Cash flows from financing activities:
Proceeds from exercise of stock options and warrants 583 196 256
Net increase (decrease) in deposits 48,435 30,108 (34,092)
Proceeds from Federal Home Loan Bank advances 1,918,000 1,247,000 371,400
Repayment of Federal Home Loan Bank advances (1,903,000) (1,221,000) (324,149)
Net increase in securities sold under agreement
to repurchase and federal funds purchased 2,267 3,436 975
Cash dividends paid (1,215) (531) (445)
Other, net (324) (468) (49)
---- ---- ---
Net cash provided by financing activities 64,746 58,741 13,896
------ ------ ------
Increase (decrease) in cash and cash equivalents 3,073 7,045 (18,079)
Cash and cash equivalents, beginning of year 20,405 13,360 31,439
------ ------ ------
Cash and cash equivalents, end of year $ 23,478 $ 20,405 $ 13,360
========== ============ =========
Supplemental disclosures of cash flow information:
Cash paid during the year for interest $ 11,883 $ 15,082 $ 8,612
Cash paid during the year for income taxes 1,595 1,691 2,140
Schedule of noncash investing and financing activities:
Real estate acquired in settlement of loans 3,920 3,055 3,611
Loans to facilitate sale of real estate owned 1,622 3,486 3,281
The notes to consolidated financial statements are an integral part of this
statement.
</TABLE>
22
<PAGE>
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. 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"), and CENIT Bank's wholly-owned subsidiaries. All significant
intercompany balances and transactions have been eliminated.
Investment Securities
On December 31, 1993, the Company adopted 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. As described in Note 4 , on November 30, 1995, the Company
transferred 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 bal
ance. 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.agreement.
23
<PAGE>
In connection with the Company's adoption of these standards, loans
previously classified as insubstance foreclosures and included in Real Estate
Owned ("REO") were reclassified to loans held for investment. At January 1,
1995, such amounts totaled $3.4 million.
At December 31, 1996 and 1995, approximately seventy-four percent and
eighty-five 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.
Goodwill and other intangibles
Goodwill resulted from a 1994 merger of Homestead Savings Bank, FSB
("Homestead") into CENIT Bank and from a 1996 acquisition of deposits from Essex
Savings Bank, FSB ("Essex") by CENIT Bank. 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. In connection with the acquisition of
deposits from Essex, CENIT Bank also recorded a core deposit intangible. The
core deposit intangible represents the estimated fair value of certain customer
relationships acquired and is amortized on an accelerated basis over 10 years.
24
<PAGE>
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 different reporting methods for bad debts, depreciation, and Federal Home
Loan Bank stock dividends.
Statement of Cash Flows
For purposes of the statement of cash flows, the Company considers cash,
federal funds sold and other overnight interest-bearing deposits to be cash and
cash equivalents.
Earnings and Dividends Per Share
Earnings per share for years ended December 31, 1996, 1995 and 1994 were
determined by dividing net income for the respective year by 1,688,556 shares,
1,676,057 shares, and 1,630,301 shares, respectively, the weighted average
number of shares of common stock and common stock equivalents outstanding during
the year. Stock options and warrants are regarded as common stock equivalents
and are therefore considered in earnings per share calculations, if dilutive.
Common stock equivalents are computed using the treasury stock method. There is
no material difference between primary and fully-diluted earnings 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 and 1994.
Comparative Financial Statements
The financial statements for 1994 and 1995 have been reclassified to
conform to the 1996 presentation. Such reclassifications had no impact on
previously reported net income.
25
<PAGE>
Note 2
Business Combinations
Princess Anne Bank
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 has 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
Year ended December 31, 1994:
Net interest income 14,723 3,607 18,330
Net income 3,116 861 3,977
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.
Homestead Savings Bank
On April 1, 1994, CENIT Bank and Homestead merged pursuant to a definitive
agreement entered into on October 21, 1993. This merger was accounted for by the
purchase method of accounting. Each of the 333,794 shares of Homestead common
stock issued and outstanding was converted into the right to receive $17.08 in
cash, amounting to a total purchase price of $5.7 million. The cash required for
the purchase was obtained by CENIT Bank pursuant to an advance made to CENIT
Bank by the Federal Home Loan Bank of Atlanta.
At March 31, 1994, Homestead had total assets of approximately $53.9
million and deposits of approximately $47.1 million. Homestead had two branch
offices and a mortgage origination office in the Western Branch area of
Chesapeake, Virginia, and one branch office in Portsmouth, Virginia. When
Homestead was merged into CENIT Bank, these offices became part of CENIT Bank.
Additionally, on April 1, 1994, CENIT Bank's previous retail office in
Portsmouth, Virginia was consolidated into Homestead's retail office in that
city because of the proximity of the two locations.
As part of the Homestead merger, assets with a total fair value of $53.7
million were acquired, liabilities with a total fair value of $50.0 million were
assumed, and goodwill of $2.0 million was recorded. Amortization of goodwill
totaled $134,000 in both 1996 and 1995, resulting in a remaining balance of
$1,642,000 and $1,776,000 at December 31, 1996 and 1995, respectively.
26
<PAGE>
The following unaudited pro forma financial information for the year ended
December 31, 1994 is presented for informational purposes only. This information
assumes the Homestead merger was consummated on January 1, 1994 and is not
necessarily indicative of the combined results of operations which would
actually have occurred had the transaction been consummated on that date or
which may be obtained in the future. This financial information includes the
actual separate operating results of the Company and Homestead through March 31,
1994, the financial impact of all pro forma adjustments through March 31, 1994,
and the actual combined operating results of the Company for the period April 1,
1994 through December 31, 1994. Dollars are in thousands, except per share data.
Unaudited Pro Forma
Results of Operations
Year Ended December 31, 1994
Total interest income $ 38,788
Net interest income 18,811
Provision for loan losses 500
Other income 2,846
Other expenses 14,761
Provision for income taxes 2,308
Net income 4,088
Earnings per share 2.51
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, and received approximately $65.5
million of cash. 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.
In connection with these transactions, CENIT Bank recorded total intangible
assets of approximately $2.8 million. Goodwill totaled approximately $2,341,000
and the core deposit intangible totaled approximately $458,000. Amortization of
goodwill and the core deposit intangible in 1996 totaled $39,000 and $21,000,
respectively, resulting in remaining balances of approximately $2,302,000 and
$437,000, respectively, at December 31, 1996.
27
<PAGE>
Note 4
Securities Available for Sale
Securities available for sale are as follows (in thousands):
<TABLE>
<CAPTION>
December 31,
1996 1995
----------------------------------------------- ------------------------------------------------
Gross Gross Gross Gross
Amortized Unrealized Unrealized Fair Amortized Unrealized Unrealized Fair
Cost Gains Losses Value Cost Gains Losses Value
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Treasury securities $ 40,178 $ 181 $ (63) $ 40,296 $ 49,330 $ 782 $ (12) $ 50,100
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Other U. S. Government
agency securities 6,000 14 (5) 6,009 14,960 60 (2) 15,018
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Mortgage-backed certificates:
Federal Home Loan
Mortgage Corporation
participation certificates 162,890 1,302 (139) 164,053 178,789 1,251 (186) 179,854
Federal National Mortgage
Association pass-through
certificates 9,867 250 (4) 10,113 18,522 356 (4) 18,874
Government National
Mortgage Association
pass-through certificates 3,432 108 -- 3,540 4,261 187 -- 4,448
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Total mortgage-backed
certificates 176,189 1,660 (143) 177,706 201,572 1,794 (190) 203,176
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
$ 222,367 $ 1,855 $ (211) $ 224,011 $ 265,862 $ 2,636 $ (204) $ 268,294
=========== =========== ========== =========== =========== =========== ========== ===========
</TABLE>
As described in Note 1, on November 30, 1995, the Company transferred U. S.
Government agency securities with a total book value of $13,065,000 and
mortgage-backed certificates with a total book value of $211,001,000 from held
to maturity to available for sale. At the time of transfer, the U. S. Government
Agency securities had a total fair value of $12,962,000 and the mortgage-backed
certificates had a total fair value of $211,498,000.
During 1996, the Company recognized gross gains of $140,000 and gross
losses of $63,000 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, 1996 are shown below by contractual maturity (in thousands):
Amortized Fair
Cost Value
---- -----
Due in one year or less $ 14,010 $ 14,072
Due after 1 year through 5 years 32,168 32,233
Mortgage-backed certificates 176,189 177,706
---------- -----------
$ 222,367 $ 224,011
========== ===========
At December 31, 1996, the Company's amortized cost of its investment in
mortgage-backed certificates available for sale includes $24,266,000 at fixed
rates, including $7,662,000 and $10,319,000 with five- and seven-year balloon
provisions, respectively, and $151,923,000 at variable rates.
28
<PAGE>
Note 5
Loans
Loans held for investment consist of the following (in thousands):
December 31,
1996 1995
---- ----
First mortgage loans:
Single family $ 263,498 $ 153,417
Multi-family 7,100 9,343
Construction:
Residential 52,662 55,861
Nonresidential 3,365 50
Commercial real estate 58,314 63,044
Consumer lots 5,396 5,646
Acquisition and development 16,010 14,961
Equity and second mortgage 29,578 20,811
Purchased mobile home 137 206
Boat 7,814 9,766
Other consumer 6,606 5,211
Commercial business 17,922 19,259
------ ------
468,402 357,575
Undisbursed portion of construction
and acquisition and development loans (42,309) (34,728)
Allowance for loan losses (3,806) (3,696)
Unearned discounts, premiums, and loan
fees, net (68) 43
--------- ---------
$ 422,219 $ 319,194
========= =========
At December 31, 1996, the Company's gross loan portfolio contains
$186,449,000 of adjustable-rate mortgage loans and $68,465,000 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 $70,655,000 at December 31, 1996.
29
<PAGE>
Nonaccrual loans are as follows (in thousands):
December 31,
1996 1995 1994
---- ---- ----
Single family $1,172 $ 527 $ 452
Multi-family - - 90
Construction - - 53
Commercial real estate 457 - 139
Land acquisition 200 200 527
Purchased mobile home 83 134 310
Other consumer 17 3 -
Commercial business 483 70 68
------ ------ ------
$2,412 $ 934 $1,639
====== ====== ======
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,
1996 1995 1994
---- ---- ----
Interest income based on contractual
terms $252 $ 80 $168
Interest income recognized 114 33 65
---- ---- ----
Interest income foregone $138 $ 47 $103
==== ==== ====
Changes in the allowance for loan losses are as follows (in thousands):
Year Ended December 31,
1996 1995 1994
---- ---- ----
Balance at beginning of year $ 3,696 $ 3,789 $ 4,039
Provision for loan losses 377 697 490
Losses charged to allowance (738) (995) (1,024)
Recovery of prior losses 471 205 127
Allowance for loans acquired - - 157
------- ------- -------
Balance at end of year $ 3,806 $ 3,696 $ 3,789
======= ======= =======
Impaired loans at December 31, 1996 and 1995 were not significant.
Loans serviced for others approximate $17,740,000 at December 31, 1996,
$20,284,000 at December 31, 1995, and $23,598,000 at December 31, 1994.
30
<PAGE>
Note 6
Interest Receivable
The components of interest receivable are as follows (in thousands):
December 31,
1996 1995
---- ----
Interest on loans $ 2,808 $ 2,265
Interest on mortgage-backed certificates 1,962 1,716
Interest on investments and interest-bearing
deposits 907 1,431
------- -------
5,677 5,412
Less: Allowance for uncollected interest (221) (121)
------- -------
$ 5,456 $ 5,291
======= =======
Note 7
Real Estate Owned
Real estate owned is as follows (in thousands):
December 31,
1996 1995
---- ----
Residential:
Single family $ 2,165 $ 1,074
Multi-family - 717
Land 97 198
Commercial real estate 707 -
------ ------
2,969 1,989
Less: Valuation allowance (200) (161)
------- -------
$ 2,769 $ 1,828
======= =======
Changes in the valuation allowance for real estate owned are as follows (in
thousands):
Year Ended December 31,
1996 1995 1994
---- ---- ----
Balance at beginning of year $ 161 $ 192 $ 226
Provision for losses 136 199 274
Losses charged to allowance (97) (230) (308)
----- ----- -----
Balance at end of year $ 200 $ 161 $ 192
===== ===== =====
The provision for losses on real estate owned is included in other expense
in the accompanying consolidated statement of operations.
31
<PAGE>
Note 8
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 Financial Institutions Reform, Recovery and Enforcement Act
of 1989 ("FIRREA") to use its future earnings in various government-mandated
programs including low to moderate income housing. These programs and other uses
of the FHLB's future earnings could impair its ability to pay dividends to the
Company on this investment.
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 9
Property and Equipment
Property and equipment consist of the following (in thousands):
December 31,
1996 1995
---- ----
Buildings and improvements $ 10,686 $ 9,556
Furniture and equipment 8,457 7,567
----- -----
19,143 17,123
Less: Accumulated depreciation and
amortization (9,294) (8,560)
------ ------
9,849 8,563
Land 2,815 2,709
----- -----
$ 12,664 $ 11,272
======== ========
Depreciation and amortization expense is $1,037,000, $1,061,000, and
$988,000 for the years ended December 31, 1996, 1995 and 1994, respectively.
32
<PAGE>
Note 10
Deposits
Deposit balances by type and range of interest rates at December 31, 1996
and 1995 are as follows (in thousands):
December 31,
1996 1995
Noninterest-bearing:
Commercial checking $ 40,130 $ 33,372
Personal checking 6,024 5,292
----- -----
Total noninterest-bearing deposits 46,154 38,664
------ ------
Interest-bearing:
Passbook (interest rates of 3.01% at 1996 and
1995) 21,175 21,258
Checking accounts (interest rates of 2.24% at
1996 and 2.81% at 1995) 30,266 29,783
90-day passbook and statement savings
(interest rates of 3.68% at 1996 and 3.89%
at 1995) 26,867 24,175
Money market deposits (interest rates of
3.25% at 1996 and 3.44% at 1995) 44,815 42,233
Certificates:
3.99% or less 451 644
4.00% to 4.99% 100,302 51,320
5.00% to 5.99% 179,399 133,573
6.00% to 6.99% 37,244 94,235
7.00% to 7.99% 10,280 14,010
8.00% to 8.99% 775 480
9.00% to 9.99% 1,237 155
------- -------
Total certificates 329,688 294,417
------- -------
Total interest-bearing deposits 452,811 411,866
------- -------
Total deposits $498,965 $450,530
======== ========
Certificates in denominations greater than $100,000 aggregated $23,967,000
and $22,923,000 at December 31, 1996 and 1995, respectively. The weighted
average cost of deposits approximates 4.70% and 4.80% for the years ended
December 31, 1996 and 1995, respectively.
33
<PAGE>
The following is a summary of interest expense on deposits (in thousands):
Year Ended December 31,
1996 1995 1994
---- ---- ----
Passbook $ 601 $ 695 $ 841
Checking accounts 677 767 748
90-day passbook and statement savings 957 866 767
Money market deposits 1,398 1,506 1,399
Certificates 15,678 15,593 11,696
Less: Early withdrawal penalties (71) (45) (56)
-------- -------- --------
$ 19,240 $ 19,382 $ 15,395
======== ======== ========
At December 31, 1996, remaining maturities on certificates are as follows
(in thousands):
1997 $ 229,529
1998 48,743
1999 19,758
2000 22,420
2001 9,238
---------
$ 329,688
=========
At December 31, 1996, the Banks have pledged mortgage-backed certificates,
U. S. Treasury securities, and other U. S. Government agency securities with a
total carrying value of $15,742,000 to the State Treasury Board as collateral
for certain public deposits.
Note 11
Advances from the Federal Home Loan Bank
At December 31, 1996, advances from the Federal Home Loan Bank (FHLB)
consist of $123,000,000 of short- term variable rate advances and a $25,000,000
callable fixed rate advance with an interest rate of 4.96%. These advances are
collateralized by mortgage-backed certificates with a net book value of
approximately $142,044,000 and by first mortgage loans with a net book value of
approximately $154,289,000. The weighted average cost of advances from the FHLB
is 5.44% and 6.16% for the years ended December 31, 1996 and 1995, respectively
Note 12
Other Borrowings
In connection with CENIT Bank's conversion from a mutual savings bank to a
stock savings bank, the Company established an Employees Stock Ownership Plan
("ESOP"). The ESOP was funded by the proceeds from a $1,000,000 loan from an
unrelated third party lender. The loan, which was repaid in full in 1996, was
secured by the common stock of the Company purchased with the loan proceeds and
was guaranteed by the Company.
34
<PAGE>
Note 13
Securities Sold under Agreements to Repurchase
At December 31, 1996, mortgage-backed certificates sold under agreements to
repurchase had a carrying value of $7,661,000 and a market value of $7,273,000.
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, 1996, 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,
1996 1995
---- ----
Balance at end of year $ 7,138 $ 4,871
Average amount outstanding during the year 8,616 2,543
Maximum amount outstanding at any month end 30,382 4,871
Weighted average interest rate during the year 4.67% 4.80%
Weighted average interest rate at end of year 4.40% 4.35%
Weighted average maturity at end of year daily daily
Note 14
Other Income and Other Expense
The components of other income and other expense are as follows (in thousands):
Year Ended December 31,
1996 1995 1994
----------------------------------
Other income:
Deposit fees $1,425 $1,024 $1,142
Brokerage fees 413 716 457
Merchant processing fees 738 502 358
Other miscellaneous 259 280 88
------ ------ ------
$2,835 $2,522 $2,045
====== ====== ======
Other expense:
Net occupancy expense of premises $1,715 $1,404 $1,143
Professional fees 474 676 631
Expenses, gains/losses on sales,
and provision for losses on real
estate owned, net 38 372 595
Merchant processing 586 377 272
Other miscellaneous 1,881 1,714 1,611
------ ------ ------
$4,694 $4,543 $4,252
====== ====== ======
35
<PAGE>
Note 15
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,
1996 1995 1994
Deferred tax assets:
Bad debt reserves $ 1,297 $ 1,199 $ 1,152
Unrealized losses on securities
available for sale - - 218
Other 34 107 253
------- ------- -------
1,331 1,306 1,623
------- ------- -------
Deferred tax liabilities:
Federal Home Loan Bank
stock dividends (696) (696) (696)
Unrealized gains on securities
available for sale (580) (821) -
Depreciation (327) (291) (461)
Other (106) (106) (54)
------- ------- -------
(1,709) (1,914) (1,211)
------- ------- -------
Net deferred tax asset (liability) $ (378) $ (608) $ 412
======= ======= =======
A net deferred tax asset of $176,000 resulted from the April 1, 1994 merger
with Homestead as described in Note 2.
36
<PAGE>
The provision for income taxes consists of the following (in thousands):
Year Ended December 31,
1996 1995 1994
---- ---- ----
Current:
Federal $ 1,810 $ 1,615 $ 1,907
State - 56 174
------- ------- -------
1,810 1,671 2,081
------- ------- -------
Deferred:
Federal 8 (19) 128
State 3 - 17
------- ------- -------
11 (19) 145
------- ------- -------
$ 1,821 $ 1,652 $ 2,226
======= ======= =======
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,
1996 1995 1994
---- ---- ----
Computed "expected" tax provision $ 1,846 $ 1,402 $ 2,109
Increase (decrease) in taxes
resulting from:
State income taxes, net of
federal tax benefit 2 37 126
Nondeductible merger expenses - 172 -
Other (27) 41 (9)
------- ------- -------
Provision for income taxes $ 1,821 $ 1,652 $ 2,226
======= ======= =======
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, 1996 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.
37
<PAGE>
Note 16
Employee Benefit Plans
Employees Stock Ownership Plan
The Company recognizes 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,
$281,000 in 1995, and $90,000 in 1994. The Company recognizes interest expense
on the ESOP loan and makes 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, $322,000 in 1995, and $132,000
in 1994.
In 1994, dividends received by the ESOP on unallocated and allocated shares
were used for debt service and administrative expenses, respectively. Dividends
received in 1994 on unallocated and allocated shares totaled $22,000 and $9,000,
respectively. 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 are released and allocated to eligible participants on
an annual basis. The number of additional shares released and allocated annually
is 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, 1996, the ESOP has 26,086 of unreleased shares, all of
which are committed-to-be-released based upon 1996 ESOP loan principal payments,
and 56,441 allocated shares. The historical cost of unreleased shares held by
the ESOP at December 31, 1996 totaled $300,000. A total of 2,649 shares were
distributed in 1996 to terminated employees. All shares held by the ESOP are
considered outstanding for earnings per share calculations.
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, 1996, 1995 and 1994, the maximum percentage that could be
contributed by employees was 7%, 6%, and 10%, respectively. The Company matches
50% of employee contributions and in 1994 also contributed 2% of gross payroll
for eligible employees. Effective January 1, 1996, the 401(k) plan was amended
to allow participation by Princess Anne. In 1995 and 1994, 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 and 100% of the first 6% in 1994. The Company
contributed a total of $154,000, $131,000, and $259,000 to these plans during
the years ended December 31, 1996, 1995 and 1994, respectively.
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.
38
<PAGE>
As permitted by FAS 106, the Company elected to amortize its unrecognized
transition obligation over 20 years. At December 31, 1996 and December 31, 1995,
the Company's unfunded accumulated postretirement benefit obligation totaled
$537,000 and $541,000, respectively, and the accrued postretirement benefit cost
recognized in the statement of financial condition totaled $110,000 and $85,000,
respectively. Postretirement benefit cost was $71,000, $71,000 and $77,000 in
1996, 1995 and 1994, respectively.
Note 17
Stock Options and Awards
At December 31, 1996, 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 and 1996 under the provisions of FAS No. 123, the pro forma
effect on 1995 and 1996 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 and 1996 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.
39
<PAGE>
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.
<TABLE>
<CAPTION>
Year Ended December 31
1996 1995 1994
---------------------------- ---------------------------- ----------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
------------ ------------- ------------ -------------- ----------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning
of year 133,227 $14.85 139,000 $13.90 117,888 $12.97
Granted 6,234 34.63 5,234 37.00 21,112 19.11
Exercised (24,641) 13.47 (10,839) 13.25 - -
Forfeited (437) 17.83 (168) 23.19 - -
------- ------- -------
Outstanding at end of year 114,383 16.21 133,227 14.85 139,000 13.90
======= ======= =======
Options exercisable at year end 96,661 119,123 121,322
</TABLE>
The weighted average fair value of options granted during 1996 and 1995 was
$11.20 and $13.92, respectively.
The following table summarizes information about the options outstanding at
December 31, 1996:
<TABLE>
<CAPTION>
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
- ----------------------- ----------------- ----------- --------- ----------------- -----------
<S> <C> <C> <C> <C> <C>
$11.50 71,909 5.6 years $11.50 66,965 $11.50
$17.83 16,154 6.1 years 17.83 16,154 17.83
$21.25 to $23.78 14,852 6.3 years 22.17 12,234 22.00
$34.63 to $37.00 11,468 9.5 years 35.71 1,308 37.00
------- ------
114,383 6.1 years 16.21 96,661 14.23
======= ======
</TABLE>
40
<PAGE>
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 1996 and 1995, the MRP purchased 3,535 and 1,484 additional
shares, respectively, at an average price of approximately $33.78 and $39.30 per
share, respectively.
A total of 12,362 shares were granted in 1992 and vest 20% each year over
five years beginning in 1993. The shares granted in 1994, 1995 and 1996 vest at
the end of three to five years. Compensation expense, which is recognized as
shares vest, totaled $82,000, $50,000 and $37,000 for 1996, 1995 and 1994,
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,
1996 1995 1994
---- ---- ----
Outstanding at beginning of year 9,068 9,479 9,890
Granted 3,535 2,061 2,061
Exercised (2,472) (2,472) (2,472)
------ ----- -----
Outstanding at end of year 10,131 9,068 9,479
====== ===== =====
There were no grants forfeited during these periods and no grants were
exercisable at the end of each period. At December 31, 1996, the weighted
average period until the awards become vested is approximately two years. The
weighted average fair value of shares granted in 1996 and 1995 was $34.63 and
$38.50, respectively.
Note 18
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, 1996, 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, 1996.
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.
41
<PAGE>
The Company had loan commitments, excluding the undisbursed portion of
construction and acquisition and development loans, as follows (in thousands):
December 31,
1996 1995
---- ----
Commitments outstanding:
Mortgage loans:
Fixed rate (rates between 7.25% and 9.00% at
1996 and between 6.00% and 8.50% at 1995) $ 1,201 $ 5,868
Variable rate 1,594 6,005
Commercial business loans 638 874
Consumer loans - 40
------- -------
$ 3,433 $12,787
======= =======
At December 31, 1996, the Company has granted unused consumer and
commercial lines of credit of $15,542,000 and $11,348,000, respectively, and has
commitments to purchase loans totaling $13.0 million.
Standby letters of credit are written unconditional commitments issued to
guarantee the performance of a customer to a third party and total approximately
$3,507,000 at December 31, 1996. 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, 1996, the Company had no commitments to purchase securities.
Rent expense under long-term operating leases for property approximates
$620,000, $460,000, and $331,000 for the years ended December 31, 1996, 1995 and
1994, 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):
1997 $ 630
1998 654
1999 632
2000 583
2001 507
Thereafter 2,308
-------
$ 5,314
=======
42
<PAGE>
Note 19
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, 1996, the Banks exceeded all capital adequacy
requirements to which they are subject.
As of December 31, 1996, 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.
43
<PAGE>
The Banks' and Company's actual capital amounts and ratios are as follows
(dollars in thousands):
<TABLE>
<CAPTION>
Required for
Actual Required Well Capitalized
------------------------ --------------------- ---------------------
Amount Ratio Amount Ratio Amount Ratio
As of December 31, 1996:
<S> <C> <C> <C> <C> <C> <C>
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 - -
As of December 31, 1995:
CENIT Bank
Core capital $30,664 6.8% $13,511 3.0% $22,519 5.0%
Tangible capital 30,664 6.8 6,756 1.5 - -
Tier 1 risk-based 30,664 11.9 10,327 4.0 15,491 6.0
Total risk-based 33,198 12.9 20,654 8.0 25,818 10.0
Princess Anne Bank
Tier 1 leverage $12,778 8.1% $ 6,282 4.0% $ 7,853 5.0%
Tier 1 risk-based 12,778 15.9 3,222 4.0 4,833 6.0
Total risk-based 13,762 17.1 6,445 8.0 8,056 10.0
CENIT Bancorp
Tier 1 leverage $43,442 6.8% $25,396 4.0% $ - -%
Tier 1 risk-based 43,442 12.8 13,550 4.0 - -
Total risk-based 46,960 13.9 27,099 8.0 - -
</TABLE>
44
<PAGE>
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.
Note 20
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 account does not restrict the use or application of CENIT Bank's
retained earnings. At December 31, 1996, the liquidation account balance was
$4,554,000.
Warrants for the purchase of 51,089 shares of Princess Anne common stock
were exercised in 1994 and warrants for the purchase of 6,697 shares of Princess
Anne common stock were exercised in 1995 prior to the merger with the Company on
August 1, 1995. At the time of the merger, Princess Anne's outstanding warrants
were converted to warrants to purchase common stock of the Company. For the
period August 1, 1995 to December 31, 1995, a total of 692 shares of the
Company's common stock were issued in connection with exercise of warrants.
In 1996, a total of 14,589 shares of the Company's common stock were issued
in connection with the exercise of warrants. All warrants for the purchase of
the Company's common stock expired on September 30, 1996.
45
<PAGE>
Note 21
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, 1996 $ 3,121
Originations - 1996 1,149
Repayments - 1996 (1,215)
---------
Balance at December 31, 1996 $ 3,055
=========
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, 1996, which has a balance of $157,000
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 $508,000 at
December 31, 1996.
Note 22
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,
1996, 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.
46
<PAGE>
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 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.
47
<PAGE>
The estimated fair values of the Company's financial instruments that
differ from their carrying amount are as follows (in thousands):
December 31,
1996 1995
------------------ ---------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
------------------ ---------------------
Financial assets:
Loans held for investment, net $422,219 $427,615 $319,194 $322,306
Financial liabilities:
Deposits with stated maturities 329,688 332,098 294,417 295,676
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 23
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,
1996 1995
---- ----
Assets:
Cash $ 4 $ 14
Equity in net assets of the Banks 48,223 46,530
Other assets 1,762 445
------- -------
$49,989 $46,989
------- -------
Liabilities $ 381 $ 260
Stockholders' equity 49,608 46,729
------- -------
$49,989 $46,989
======= =======
48
<PAGE>
Condensed Statement of Operations
(In thousands)
Year Ended December 31,
1996 1995 1994
Equity in earnings of the Banks $ 3,943 $ 3,084 $ 4,101
Interest expense (16) (41) (42)
Salaries and employee benefits (276) (65) (19)
Professional fees (108) (155) (52)
Merger expenses - (397) -
Other expenses (122) (86) (73)
------- ------- -------
Income before income taxes 3,421 2,340 3,915
Benefit from income taxes 187 132 62
------- ------- -------
Net income $ 3,608 $ 2,472 $ 3,977
======= ======= =======
Condensed Statement of Cash Flows
(In thousands)
Year Ended December 31,
1996 1995 1994
---- ---- ----
Cash flows from operating activities:
Net income $ 3,608 $ 2,472 $ 3,977
Add (deduct) items not affecting cash:
Undistributed earnings of the Banks (1,941) (2,368) (3,501)
Amortization 26 16 16
(Increase) decrease in other assets (1,192) 163 (360)
Increase in liabilities 121 57 33
------- ------- -------
Net cash provided by operations 622 340 165
------- ------- -------
Cash flows from financing activities:
Cash dividends paid (1,215) (531) (445)
Net proceeds from issuance of common stock 583 196 256
------- ------- -------
Net cash used for financing activities (632) (335) (189)
------- ------- -------
Net increase (decrease) in cash and cash
equivalents (10) 5 (24)
Cash and cash equivalents at beginning of period 14 9 33
------- ------- -------
Cash and cash equivalents at end of period $ 4 $ 14 $ 9
======= ======= =======
49
<PAGE>
Note 24
Quarterly Results of Operations (Unaudited)
<TABLE>
<CAPTION>
Year Ended December 31, 1996
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
<S> <C> <C> <C> <C>
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 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 common and
common equivalent share $ .72 $ .73 $ (.07) $ .76
Dividends per common share $ .10 $ .20 $ .20 $ .25
Year Ended December 31, 1995
First Second Third Fourth
Quarter (1) Quarter (1) Quarter Quarter
Total interest income $ 10,698 $ 11,458 $ 11,673 $ 11,698
Total interest expense 6,228 6,898 7,135 7,215
----- ----- ----- -----
Net interest income 4,470 4,560 4,538 4,483
Provision for loan losses 170 189 163 175
--- --- --- ---
Net interest income after provision
for loan losses 4,300 4,371 4,375 4,308
Other income 623 825 1,142 354
Other expenses 3,550 3,839 4,644 4,141
----- ----- ----- -----
Income before income taxes 1,373 1,357 873 521
Provision for income taxes 481 474 498 199
--- --- --- ---
Net income $ 892 $ 883 $ 375 $ 322
======== ======== ======== ========
Earnings per common and common
equivalent share $ .54 $ .53 $ .22 $ .19
Dividends per common share $ .10 $ .10 $ .10 $ .10
<FN>
_______________
(1) Amounts previously reported on Form 10-Q have been adjusted above to
include the results of operations for Princess Anne.
</FN>
</TABLE>
50
<PAGE>
Report of Independent Accountants
Price Waterhouse
To the Board of Directors and Stockholders of CENIT Bancorp, Inc.
Norfolk, Virginia
In our opinion, based upon our audits and the report of other auditors, the
accompanying consolidated statement 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, 1996 and 1995, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1996, 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 did not audit the financial
statements of Princess Anne Bank, a wholly- owned subsidiary, for the year ended
December 31, 1994, which statements reflect net income of $861,000 for the year
ended December 31, 1994. Those financial statements were audited by other
auditors whose report thereon has been furnished to us, and our opinion
expressed herein, insofar as it relates to the amounts included for Princess
Anne Bank, is based solely on the report of the other auditors. 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 and the report of other auditors provide a reasonable
basis for the opinion expressed above.
PRICE WATERHOUSE LLP
Norfolk, Virginia
January 30, 1997
51
<PAGE>
Investor Information
Annual Meeting of Stockholders
The Annual Meeting of Stockholders of CENIT Bancorp, Inc. will be held at
5:00 p.m. on Wednesday, April 23, 1997 at the Chrysler Museum of Art, 245 West
Olney Road, Norfolk, Virginia. All stockholders are cordially invited to attend.
Stock Price Information
CENIT Bancorp, Inc. Common Stock trades on the Nasdaq Stock Market under
the symbol CNIT. Newspapers and other stock tables may identify the stock under
various abbreviations for CENIT Bancorp.
The table below shows the reported high and low sales prices of CENIT
Bancorp Common Stock by quarters in fiscal years 1995 and 1996.
1996 1995
Quarter High Low High Low
First $ 36 5/16 $33 $36 $20 3/4
Second 35 1/2 33 39 1/2 34 1/2
Third 41 1/4 31 3/4 40 1/4 36
Fourth 41 1/2 38 1/2 38 1/2 35
Source: Nasdaq
Stock Transfer Agent
ChaseMellon Shareholder Services
15th Floor, 450 West 33rd Street
New York, NY 10001-2697
Questions regarding your account should
be referred in writing or by telephone to:
ChaseMellon Financial Services
85 Challenger Road
Overpeck Centre
Ridgefield Park, NJ 07660-2108
Telephone 1-800-526-0801
Annual Report on Form 10-K and
Additional Information
A copy of Form 10-K as filed with the Securities and Exchange Commission is
available without charge to stockholders upon written request. Requests for this
or other financial information about CENIT Bancorp, Inc. should be directed to:
Stuart F. Pollard
Vice President and
Director of Investor Relations
CENIT Bancorp, Inc.
Post Office Box 1811
Norfolk, VA 23501-1811
Independent Accountants
Price Waterhouse LLP
700 World Trade Center
Norfolk, VA 23510-9916
52
<PAGE>
Corporate Information
Executive Offices
225 West Olney Road
Norfolk, VA 23510-1586
Telephone (757) 446-6600
CENIT Bank - Retail Banking Offices
Norfolk
745 Duke Street
300 East Main Street
2203 East Little Creek Road
Super Kmart Center, 6101 Military Highway
Portsmouth
3315 High Street
Chesapeake
675 North Battlefield Boulevard
2600 Taylor Road
3220 Churchland Boulevard
2612 Taylor Road
(Mortgage Loan Production Office)
Hampton
2205 Executive Drive
550 Settlers Landing Road
Newport News
13307 Warwick Boulevard
York County
Victory Boulevard and Commonwealth Drive
Super Kmart Center, 5007 Victory Boulevard
Princess Anne Bank - Retail Banking Offices
Virginia Beach
1616 Laskin Road
699 Independence Boulevard
905 Kempsville Road
641 Lynnhaven Parkway
3001 Shore Drive
4801 Columbus Street
Super Kmart Center, 3901 Holland Road
(Office Opens Late 1997)
Banking Services
Personal Banking
Checking and Savings Accounts
Retirement Accounts
24 Hour Banking ATMs
Members,MOST, PLUS, CIRRUS & VISA Networks
with access to DISCOVER, MASTERCARD, and
AMERICAN EXPRESS
Full Service Investment Brokerage
Safe Deposit Boxes
Construction and Permanent
Residential Mortgages
Lot Loans
Equity Loans and Lines of Credit
Car and Personal Loans
VISA and MASTERCARD Credit Cards
Private Banking Services
Commercial Banking
Business Checking Accounts
Interest Deposit Accounts
Interest on Lawyers' Trust Accounts
Corporate Cash Management Services
Wire Tranfers and EFT Services
VISA Business Cards
Merchant BankCard Processing
Loans to Businesses
Small Business Administration (SBA)
Government Guaranteed Loans
Construction and Permanent
Commercial Mortgages
Lines of Credit
Term Loans
Equipment Loans 53
INSIDE BACK COVER
CENIT Bancorp, Inc., Retail Banking Offices
MAP INSERTED HERE
CENIT Bank
Norfolk
1 - 745 Duke Street
2 - 300 East Main Street
3 - 2203 E. Little Creek Rd.
4 - Super Kmart 6101 Military Hwy.
Chesapeake
5 - 675 N. Battlefield Blvd.
6 - 2600 Taylor Road
7 - 3220 Churchland Blvd.
Portsmouth
8 - 3315 High Street
Hampton
9 - 2205 Executive Drive
10 - 550 Settlers Landing Rd.
Newport News
11 - 13307 Warwick Blvd.
York County
12 - Victory Blvd. & Commonwealth Dr.
13 - In Super Kmart, 5007 Victory Blvd.
Princess Anne Bank
Virginia Beach
14 - 1616 Laskin Road
15 - 699 Independence Blvd.
16 - 905 Kempsville Road
17 - 641 Lynnhaven Pkwy.
18 - 3001 Shore Drive
19 - 4801 Columbus Street
20 - In Super Kmart, 3901 Holland Rd.
(Office Opens Late 1997)
BACK COVER
CENIT Bancorp, Inc.
Executive Offices
225 West Olney Road
Norfolk, Virginia 23510-1586
(757) 446-6600
Consent of Independent Accountants
We hereby consent to the incorporation by reference in the Registration
Statement on Form S-8 (No. 33-93978) of CENIT Bancorp, Inc. of our report dated
January 30, 1997 appearing on page 51 of the Annual Report to Shareholders which
is incorporated in this Annual Report on Form 10-K.
Price Waterhouse LLP
Norfolk, Virginia
March 25, 1997
<PAGE>
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statement on Form S-8, (Registration No. 33-93978) filed by CENIT Bancorp, Inc.
(the "Company") on June 27, 1995, of our report, dated February 7, 1995, on the
financial statements of Princess Anne Bank as of December 31, 1994 and 1993, and
for the years then ended, which is included in the Company's 1996 Annual Report
on Form 10-K as Exhibit 23.2.
Goodman & Company, L.L.P.
One Commercial Place
Norfolk, Virginia
March 25, 1997
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 17,475
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 6,003
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 224,011
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 427,925
<ALLOWANCE> 3,806
<TOTAL-ASSETS> 707,100
<DEPOSITS> 498,965
<SHORT-TERM> 155,138
<LIABILITIES-OTHER> 3,389
<LONG-TERM> 0
0
0
<COMMON> 16
<OTHER-SE> 49,592
<TOTAL-LIABILITIES-AND-EQUITY> 707,100
<INTEREST-LOAN> 30,243
<INTEREST-INVEST> 16,881
<INTEREST-OTHER> 1,047
<INTEREST-TOTAL> 48,171
<INTEREST-DEPOSIT> 19,240
<INTEREST-EXPENSE> 28,087
<INTEREST-INCOME-NET> 20,084
<LOAN-LOSSES> 377
<SECURITIES-GAINS> 77
<EXPENSE-OTHER> 18,172
<INCOME-PRETAX> 5,429
<INCOME-PRE-EXTRAORDINARY> 3,608
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,608
<EPS-PRIMARY> 2.14
<EPS-DILUTED> 2.14
<YIELD-ACTUAL> 3.22
<LOANS-NON> 2,412
<LOANS-PAST> 425
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 3,227
<ALLOWANCE-OPEN> 3,696
<CHARGE-OFFS> 738
<RECOVERIES> 471
<ALLOWANCE-CLOSE> 3,806
<ALLOWANCE-DOMESTIC> 3,806
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
