SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of
the Securities Exchange Act of 1934 (Amendment No. )
Filed by Registrant /X/
Filed by a Party other than the Registrant / /
Check the appropriate box:
/ / Preliminary Proxy Statement
/ / Confidential, for Use of the Commission Only (as permitted by Rule
14a-6(e)(2))
/X/ Definitive Proxy Statement
/ / Definitive Additional Materials
/ / Soliciting Material Pursuant to Section 240.14a-11(c) or
Section 240.14a-12
CENIT Bancorp, Inc.
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(Name of Registrant as Specified In Its Charter)
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(Name of Person(s) Filing Proxy Statement if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
/X/ No fee required.
/ / Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
1) Title of each class of securities to which transaction applies.
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2) Aggregate number of securities to which transaction applies.
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3) Per unit price or other underlying value of transaction computed to
Exchange Act Rule 0-11 (Set forth the amount on which the filing fee is
calculated and state how it was determined):
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4) Proposed maximum aggregate value of transaction:
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5) Total fee paid:
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/ / Fee paid previously with preliminary materials.
/ / Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
1) Amount Previously Paid:
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2) Form, Schedule or Registration Statement No.:
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3) Filing Party:
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4) Date Filed:
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<PAGE>
CENIT Bancorp, Inc. Michael S. Ives
Corporate Offices President and
225 West Olney Road Chief Executive Officer
Norfolk, Virginia 23510-1586
(757) 446-6600
April 29, 1998
Dear Stockholder:
You are cordially invited to attend the Annual Meeting of Stockholders (the
"Meeting") of CENIT Bancorp, Inc. (the "Company"), which will be held at The
Chrysler Museum of Art Theater, 245 West Olney Road, Norfolk, Virginia, on May
20, 1998 at 5:00 p.m.
The attached Notice of the Meeting and the Proxy Statement describe the formal
business to be transacted at the Meeting.
The Board of Directors of the Company recommends a vote "FOR" each of the four
persons who have been nominated to serve as a director of the Company.
YOUR VOTE IS IMPORTANT. You are urged to sign, date and mail the enclosed Proxy
Card promptly in the postage-paid envelope provided. If you attend the Meeting,
you may vote in person even if you have already mailed in your Proxy Card.
On behalf of the Board of Directors and all of the employees of the Company and
its subsidiaries, I wish to thank you for your continued support. We appreciate
your interest.
Sincerely yours,
Michael S. Ives
<PAGE>
CENIT Bancorp, Inc.
225 West Olney Road
Norfolk, Virginia 23510
(757) 446-6600
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
To Be Held on May 20, 1998
NOTICE IS HEREBY GIVEN that the Annual Meeting of Stockholders (the
"Meeting") of CENIT Bancorp, Inc. (the "Company") will be held at The Chrysler
Museum of Art, 245 West Olney Road, Norfolk, Virginia 23510, on May 20, 1998, at
5:00 p.m.
A proxy statement and a proxy card for the Meeting are enclosed. The
Meeting is for the purpose of considering and voting upon the following matters:
1. The election of four directors for terms of three years each; and
2. Such other matters as may properly come before the Meeting or any
adjournment thereof.
The Board of Directors has established March 27, 1998 as the record date
for the determination of stockholders entitled to notice of and to vote at the
Meeting and at any adjournments thereof. Only record holders of the common stock
of the Company as of the close of business on that date will be entitled to vote
at the Meeting or any adjournments thereof. A list of stockholders entitled to
vote at the Meeting will be available at CENIT Bancorp, Inc., 225 West Olney
Road, Norfolk, Virginia 23510, for a period of ten days prior to the Meeting and
also will be available for inspection at the Meeting itself.
EACH STOCKHOLDER, WHETHER HE OR SHE PLANS TO ATTEND THE MEETING, IS
REQUESTED TO SIGN, DATE AND RETURN THE ENCLOSED PROXY CARD WITHOUT DELAY IN THE
ENCLOSED POSTAGE-PAID ENVELOPE. ANY PROXY GIVEN BY A STOCKHOLDER MAY BE REVOKED
AT ANY TIME BEFORE IT IS EXERCISED. A PROXY MAY BE REVOKED BY FILING WITH THE
SECRETARY OF THE COMPANY A WRITTEN REVOCATION OR A DULY EXECUTED PROXY BEARING A
LATER DATE. ANY STOCKHOLDER PRESENT AT THE MEETING MAY REVOKE HIS OR HER PROXY
AND VOTE PERSONALLY ON EACH MATTER BROUGHT BEFORE THE MEETING. HOWEVER, IF YOU
ARE A STOCKHOLDER WHOSE SHARES ARE NOT REGISTERED IN YOUR NAME, YOU WILL NEED
ADDITIONAL DOCUMENTATION FROM THE RECORD HOLDER OF YOUR SHARES TO VOTE
PERSONALLY AT THE MEETING.
By Order of the Board of Directors
John O. Guthrie
Corporate Secretary
CENIT Bancorp, Inc.
Norfolk, Virginia
April 29, 1998
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IMPORTANT: THE PROMPT RETURN OF PROXIES WILL SAVE THE COMPANY THE EXPENSE OF
FURTHER REQUESTS FOR PROXIES IN ORDER TO ENSURE A QUORUM AT THE MEETING. A
SELF-ADDRESSED ENVELOPE IS ENCLOSED FOR YOUR CONVENIENCE. NO POSTAGE IS REQUIRED
IF MAILED IN THE UNITED STATES.
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<PAGE>
CENIT Bancorp, Inc.
225 West Olney Road
Norfolk, Virginia 23510
(757) 446-6600
PROXY STATEMENT
ANNUAL MEETING OF STOCKHOLDERS
May 20, 1998
Solicitation and Voting of Proxy.
This proxy statement is being furnished to stockholders of CENIT Bancorp,
Inc. (the "Company"), in connection with the solicitation by its Board of
Directors of proxies to be used at the Annual Meeting of Stockholders (the
"Meeting") to be held at The Chrysler Museum of Art, 245 West Olney Road,
Norfolk, Virginia 23510, on May 20, 1998, at 5:00 p.m., and at any adjournments
thereof. The 1997 Annual Report to Stockholders, including the consolidated
financial statements for the year ended December 31, 1997, accompanies this
proxy statement, which is first being mailed to stockholders on or about April
29, 1998.
Regardless of the number of shares of common stock owned, it is important
that stockholders be represented by proxy or present in person at the Meeting.
Stockholders are requested to vote by completing the enclosed proxy card and
returning it signed and dated in the enclosed postage-paid envelope.
Stockholders are urged to indicate their vote in the spaces provided on the
proxy card. Proxies solicited by the Board of Directors of the Company will be
voted in accordance with the directions given therein. Where no instructions are
indicated, proxies will be voted FOR the election of each of the nominees for
director named in this proxy statement.
A proxy may be revoked at any time prior to its exercise by filing written
notice of revocation with the Secretary of the Company, by delivering to the
Company a duly executed proxy bearing a later date, or by attending the Meeting,
filing a notice of revocation with the Secretary and voting in person. However,
if you are a stockholder whose shares are not registered in your name, you will
need additional documentation from the record holder of your shares to vote
personally at the Meeting.
The cost of solicitation of proxies in the form enclosed will be borne by
the Company. The Company has engaged Georgeson & Company to assist it in proxy
solicitations regarding the meeting. Georgeson & Company will perform these
services at an anticipated cost of approximately $10,000 plus expenses. Proxies
may also be solicited personally or by telephone, fax, or telegraph by
directors, officers and regular employees of the Company, CENIT Bank, FSB (the
"Bank"), or CENIT Bank ("CENIT Bank") without additional compensation. (On
February 6, 1998, Princess Anne Bank changed its name to CENIT Bank.) The
Company and/or Georgeson & Company will also request persons, firms and
corporations holding shares in their names, or in the name of their nominees,
which are beneficially owned by others, to send proxy material to and obtain
proxies from such beneficial owners, and will reimburse such holders for their
reasonable expenses in doing so. The Company and/or Georgeson & Company may
request banks and brokers or other similar agents or fiduciaries to transmit the
proxy materials to the beneficial owners for their voting instructions and will
reimburse them for their expenses in so doing.
Voting Securities and Principal Stockholders.
The securities that may be voted at the meeting consist of shares of Common
Stock of the Company (the "Common Stock"), with each share entitling its owner
to one vote on all matters to be voted on at the Meeting, except as described
below.
<PAGE>
The close of business on March 27, 1998, has been established by the Board
of Directors as the record date (the "Record Date") for the determination of
stockholders entitled to notice of and to vote at the Meeting and any
adjournments thereof. The total number of shares of Common Stock outstanding on
the Record Date was 1,659,107. All references to shares in this proxy statement
reflect the number of shares owned prior to the Company's three-for-one stock
split payable April 24, 1998.
The presence, in person or by proxy, of at least a majority of the total
number of shares of Common Stock entitled to vote is necessary to constitute a
quorum at the Meeting. In the event there are not sufficient votes for a quorum
at the time of the Meeting, the Meeting may be adjourned in order to permit the
further solicitation of proxies. With respect to any action to be taken at the
Meeting other than the election of directors (which election will be determined
by a plurality of votes cast), the affirmative vote of a majority of those
shares present and voting on the action will be required.
Securities Ownership of Certain Beneficial Owners.
The following table sets forth certain information about those persons
known by management to be beneficial owners of more than 5% of the shares of
Common Stock outstanding on March 27, 1998. Persons and groups owning in excess
of 5% of the Company's Common Stock are required to file certain reports
regarding such ownership with the Company and with the Securities and Exchange
Commission (the "SEC") in accordance with Sections 13(d) and 13(g) of the
Securities Exchange Act of 1934 (the "Exchange Act").
<TABLE>
<CAPTION>
Amount and Nature
of Reported
Beneficial Percent of
Title of Class Name and Address of Beneficial Owner Ownership Class(1)
-------------- ---------------------------------------- ----------------- -----------
<S> <C> <C> <C>
Common Stock Mid-Atlantic Investors ("Mid-Atlantic") 159,625(2) 9.6%
and related parties
P. O. Box 7574
Columbia, South Carolina 29202
Common Stock CENIT Employees Stock 159,896(3) 9.6%
Ownership Plan and Trust
("ESOP")
225 West Olney Road
Norfolk, Virginia 23510
- ----------------------------------
<FN>
(1) The total number of shares of Common Stock outstanding at March 27, 1998 was
1,659,107 shares.
(2) This information on beneficial ownership is based solely on information
supplied by Mid-Atlantic Investors, H. Jerry Shearer and Jerry Zucker (the
"Mid-Atlantic Group") which the Company has not independently verified.
Mr. Zucker disclosed that he has sole dispositive and voting power over
108,584 shares. Mr. Shearer disclosed that he has sole dispositive and
voting power over 1,041 shares. All parties report shared dispositive and
voting power over 50,000 shares.
(3) Michael S. Ives, John O. Guthrie and David A. Foster administer the ESOP in
their capacity as trustees of the CENIT Employees Stock Ownership Trust (the
"ESOP Trust"). As of the Record Date, 77,177 shares of Common Stock in the
ESOP had been allocated to participating employees, and the trustees must
vote all allocated shares held in the ESOP in accordance with the
instructions of the participating employees. Under the ESOP, the ESOP
trustees have discretionary voting rights as to allocated shares for which
no voting instructions have been received.
</FN>
</TABLE>
2
<PAGE>
The following table sets forth certain information, as of April 15, 1998,
about beneficial ownership of the Common Stock of the Company for each director,
director nominee, certain executive officers and for all directors, director
nominees and executive officers of the Company as a group.
<TABLE>
<CAPTION>
Number of Shares of Ownership as a Percentage
Common Stock of all Shares of
Name Beneficially Owned(1) Common Stock Outstanding(4)
- -------------------- --------------------- ----------------------------
<S> <C> <C>
C. L. Kaufman, Jr. 19,945 1.20%
David L. Bernd 3,000 0.18%
Patrick E. Corbin 8,860 0.53%
William J. Davenport, III 1,787 0.11%
John F. Harris 313 0.02%
William H. Hodges 5,705 0.34%
Michael S. Ives 27,582 (2) 1.66%
Charles R. Malbon, Jr. 2,341 0.14%
Roger C. Reinhold 2,085 0.13%
Anne B. Shumadine 9,385 0.57%
John A. Tilhou 1,948 0.12%
David R. Tynch 2,756 0.17%
John O. Guthrie 12,250 (2) 0.74%
Alvin D. Woods 6,877 (2) 0.41%
All directors, director nominees and 125,822 (3) 7.58%
executive officers as a group (4)
- --------------------------
<FN>
(1) All shares shown as beneficially owned are owned directly or held by
spouses or children of the named persons, unless otherwise indicated.
(2) Includes 3,546, 1,472, and 1,472 shares held in the Management Recognition
Plan ("MRP") Trust as described elsewhere in this proxy statement on behalf
of Messrs. Ives, Guthrie and Woods, respectively; and 4,488, 2,597, and
2,132 shares held in the ESOP Trust and allocated to Messrs. Ives, Guthrie
and Woods, respectively.
(3) Includes 8,935 shares held in the ESOP Trust and 3,143 shares held in the
MRP Trust and allocated to executive officers other than Messrs. Ives,
Guthrie and Woods.
(4) The total number of shares of Common Stock outstanding at April 15, 1998
was 1,659,938 shares.
</FN>
</TABLE>
ELECTION OF DIRECTORS AT THE MEETING
Pursuant to the Company's bylaws, the Board of Directors has established
the number of directors of the Company at twelve. Each of the members of the
Board of Directors of the Company also serves presently as a director of one or
more of the bank subsidiaries. Directors are elected for staggered terms of
three years each, with a term of office of only one of the three classes of
directors expiring each year. Directors serve until their successors are elected
and qualified. No person being nominated as a director is being proposed for
election pursuant to any agreement or understanding between any person and the
Company.
3
<PAGE>
The four nominees proposed for election at the Meeting are Messrs. John F.
Harris, William H. Hodges and Roger C. Reinhold, and Ms. Anne B. Shumadine. The
Board of Directors believes that the nominees will stand for election and will
serve if elected. However, in the event that any such nominee is unable to serve
or declines to serve for any reason, it is intended that proxies will be voted
for the election of the balance of those nominees named and for such other
persons as may be designated by the present Board of Directors. Unless authority
to vote for the directors is withheld, it is intended that the shares
represented by the enclosed Proxy will be voted FOR the election of the four
nominees.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE ELECTION OF ALL NOMINEES
NAMED IN THIS PROXY STATEMENT.
Information with Respect to Nominees and Continuing Directors.
The following table sets forth, as of April 15, 1998, the names of the
nominees and continuing directors, their ages, and the year in which their terms
as directors of the Company expire. Each of the listed directors became a
director of the Company at the time of its incorporation in 1991, except for
Messrs. Reinhold and Tynch, who became directors of the Company on April 1,
1994, Mr. Tilhou, who became a director on August 16, 1995, and Messrs.
Davenport and Malbon, who became directors on April 1, 1998. Mr. Harris, who is
currently not a director of the Company, is being nominated for a term to expire
in 2001.
Positions Held Expiration of Term
Name with the Company Age as Company Director
- ------------------------- ---------------- --- ---------------------
Nominees
John F. Harris Nominee 60 N/A
William H. Hodges Director 68 1998
Roger C. Reinhold Director 56 1998
Anne B. Shumadine Director 55 1998
Continuing Directors
William J. Davenport, III Director 50 1999
Michael S. Ives President/Chief 45 1999
Executive Officer/
Director
C. L. Kaufman, Jr. Chairman of the 70 1999
Board/Director
Charles R. Malbon, Jr. Director 48 1999
David L. Bernd Director 49 2000
Patrick E. Corbin Director 44 2000
John A. Tilhou Director 44 2000
David R. Tynch Director 50 2000
4
<PAGE>
Set forth below is certain information with respect to the directors and
the director nominee of the Company. Unless otherwise indicated, the principal
occupation listed for each person below has been his or her principal occupation
for the past five years.
C. L. Kaufman, Jr., serves as Chairman of the Board of Directors of the
Company and has been a director of the Bank since 1981. He is self-employed in
the management of investments in both a personal and fiduciary capacity.
David L. Bernd has been a director of the Bank since 1984. Mr. Bernd is
presently President and Chief Executive Officer of Sentara Health System, a
regional health services corporation where he has been employed since 1973.
Patrick E. Corbin is a certified public accountant and a principal of
Carter Corbin & Co., an accounting firm, and has been employed by that firm
since 1980. He has been a director of the Bank since 1988.
William J. Davenport, III, has been a director of CENIT Bank since 1985 and
a director of the Company since April 1, 1998. He is and has been a private
investor and realtor for several years.
John F. Harris has been a director of CENIT Bank since 1987, and is a
nominee to serve as a director of the Company. He is President of Affordable
Homes, Inc., a developer of residential housing in the Tidewater, Virginia,
area.
William H. Hodges has served as a director of the Bank since 1989, when he
retired as a judge of the Virginia Court of Appeals. Judge Hodges had served on
the Court of Appeals since his appointment to that position in 1985, and had
previously served as a state circuit court judge. He now acts as a consultant
and in-house counsel to Plasser American Corporation in Chesapeake, Virginia.
Michael S. Ives has been a director of the Bank and has been the President
and Chief Executive Officer of the Bank since January, 1987.
Charles R. Malbon, Jr., has been a director of CENIT Bank since 1993 and a
director of the Company since April 1, 1998. He is Vice President of Tank Lines,
Inc.
Roger C. Reinhold became a director of the Company and the Bank on April 1,
1994. Prior to April 1, 1994, Mr. Reinhold had been President and Chief
Executive Officer of Homestead Savings Bank, F.S.B. ("Homestead") since 1982. He
joined Homestead in 1972.
Anne B. Shumadine was elected as a director of the Bank in 1991. Mrs.
Shumadine is President of Signature Financial Management, Inc., a financial
planning firm. She is also an attorney and member of Mezzullo & McCandlish, A
Professional Corporation. Prior to that she was an attorney and principal of
Shumadine & Rose, P.C. in Norfolk, Virginia.
John A. Tilhou was elected a director of the Company on August 16, 1995. He
is the Chairman of the Board of CENIT Bank where he has been a board member
since 1992. Mr. Tilhou is an attorney and member of the law firm of Mays &
Valentine, which he joined in 1996. Prior to that, he was an attorney and
partner at Pender and Coward, P.C., a firm he joined in 1983.
David R. Tynch became a director of the Company and the Bank on April 1,
1994. Mr. Tynch is President and Managing Partner of the law firm of Cooper,
Spong & Davis, P.C. in Portsmouth, Virginia. He joined that firm in 1986. Prior
to April 1, 1994, Mr. Tynch had been a director of Homestead since 1985.
Meetings of the Board and Committees of the Board.
During 1997, the Board of Directors of the Company held twelve regular
meetings. No director of the Company who served as a director during 1997
attended fewer than 75% in the aggregate of the total number of the Company's
board meetings and the total number of meetings of board committees on which
such director served.
5
<PAGE>
The Boards of Directors of the Company and the bank subsidiaries have
established various committees, including Audit, Compensation, and Nominating
Committees.
The Board of Directors has established an Audit Committee that is composed
of directors Corbin, Bernd, Reinhold and Tilhou and is chaired by Mr. Corbin.
This Committee meets quarterly with the Company's and the bank subsidiaries'
internal auditor, and periodically with the Company's and the bank subsidiaries'
external auditors, and reports to the Board of Directors and to senior
management on the Company's and the bank subsidiaries' financial condition and
internal auditing practices and procedures. During the year ended December 31,
1997, the CENIT Bancorp Audit Committee met three times and CENIT Bank's Audit
Committee met once.
The Compensation Committee of the Board of Directors consists of directors
Hodges, Corbin, Reinhold, Shumadine and Tilhou and is chaired by Judge Hodges.
This Committee meets periodically to evaluate the compensation and fringe
benefits of the Company's and the bank subsidiaries' directors, officers and
employees. During the year ended December 31, 1997, the Compensation Committee
met twice.
The Board of Directors of the Company appoints a Nominating Committee each
year prior to the annual meeting of its stockholders. The Nominating Committee
for the 1997 annual meeting consisted of directors Ives, Shumadine, and Tilhou
and met once in 1997. The Committee considers and recommends the nominees for
director to stand for election at the Company's annual meeting of stockholders.
Directors' Fees.
Each of the Company's directors, other than the President of the Company,
receives a director's fee of $900 per month plus a $300 attendance fee for each
of the 12 regular monthly meetings. The Chairman of the Board of the Company
receives an additional fee of $900 per month. Each of the Bank's directors,
other than President of the Bank, receives a director's fee of $600 per month.
Mr. Tilhou, as Chairman of the Board of CENIT Bank, receives a director's fee of
$500 per month plus a $150 attendance fee for each of CENIT Bank's 24 regular
semi- monthly meetings. Mr. Davenport, as Vice-Chairman of CENIT Bank, receives
a director's fee of $400 per month plus a $150 attendance fee for each of CENIT
Bank's 24 regular semi-monthly meetings. Mr. Ives, as an employee, does not
receive director's fees from any entity.
Directors do not receive separate fees for attendance at committee meetings.
6
<PAGE>
Executive Compensation.
The following table provides certain summary information concerning the
compensation of the Company's chief executive officer and certain other
executive officers for the periods indicated. Because during 1997 the executive
officers listed below were the only executive officers of the Company, or
banking subsidiaries, whose total salary and bonus compensation exceeded
$100,000, no disclosure is made in this table or elsewhere in this proxy
statement regarding the compensation of other executive officers.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Long-Term Compensation
Annual Compensation Awards
-------------------------------------- --------------------------
Securities
Underlying
Options/ All Other
Name and Principal Restricted SARs Compensation
Position Year Salary Bonus Stock Award (#) (5)
- ------------------ ---- ------ ----- ----------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
Michael S. Ives 1997 $173,000 $50,000 $72,360 (1)(4) 1,651 $15,523
President and CEO, 1996 167,820 30,000 33,556 (2)(4) 2,434 53,492
CENIT Bancorp, Inc. 1995 166,410 35,640 37,307 (3)(4) 2,434 84,298
and CENIT Bank, FSB
J. Morgan Davis 1997 117,500 18,000 35,415 (1)(4) 680 12,639
President and 1996 114,000 10,000 16,415 (2)(4) 1,000 33,085
CEO, CENIT Bank (6) 1995 114,000 14,500 -- -- 136,897
John O. Guthrie 1997 90,000 19,500 23,580 (1)(4) 544 12,741
Senior Vice President/ 1996 88,000 12,000 10,943 (2)(4) 800 35,909
CFO/Corporate Secretary 1995 88,000 9,674 12,166 (3)(4) 800 37,480
CENIT Bancorp, Inc.,
and CENIT Bank, FSB
Alvin D. Woods 1997 82,500 20,500 23,580 (1)(4) 544 12,874
Senior Vice President/ 1996 80,000 22,000 10,943 (2)(4) 800 34,938
Credit Policy & Admin. 1995 78,000 14,356 12,166 (3)(4) 800 33,065
CENIT Bancorp, Inc.,
Senior Vice President,
Chief Lending Officer
CENIT Bank, FSB
-----------------
<FN>
(1) Represents 1,608, 787, 524 and 524 shares awarded to Messrs. Ives, Davis,
Guthrie and Woods, respectively, under the MRP, valued at $45.00 per share
as of March 1, 1997, the date on which the grants were effective.
Under these grants, Messrs. Ives' and Davis' shares become fully vested at
the end of three years from the date of the grant, and Messrs. Guthrie's
and Woods' shares become fully vested at the end of five years.
(2) Represents 969, 474, 316 and 316 shares awarded to Messrs. Ives, Davis,
Guthrie and Woods, respectively under the MRP, valued at $34.63 per share
as of May 1, 1996, the date on which the grants were effective.
Under these grants, Messrs. Ives' and Davis' shares become fully vested at
the end of three years from the date
of the grant, and Messrs. Guthrie's and Woods' shares become fully vested
at the end of five years.
(3) Represents 969, 316 and 316 shares awarded to Messrs. Ives, Guthrie and
Woods, respectively, under the MRP, valued at $38.50 per share as of
August 15, 1995, the date on which the grants were effective. Under these
grants, Mr. Ives' shares become fully vested at the end of three years from
the date of the grant, and Messrs. Guthrie's and Woods' shares become fully
vested at the end of five years.
(4) The shares held in the MRP Trust will vest in full on the occurrence of
certain other events, including a change in control of the Company or the
executive's death or disability. Regardless of vesting, the executives
are entitled to receive all dividends payable on the restricted shares, and
to direct the MRP trustees as to the manner in which the shares are to be
voted, until the shares are distributed to the executives or are forfeited.
At December 31, 1997, based on the closing stock price of $79.50 on that
date, the value of the remaining
7
<PAGE>
restricted stock held on Mr. Ives', Davis', Guthrie's and Woods' behalf in
the MRP Trust was $281,907, $100,250, $117,024, and $117,024, respectively.
(5) Includes $4,750, $4,750, and $4,620 contributed to the Bank's 401(k) Plan
by the Bank in 1997, 1996, and 1995, respectively, on behalf of Mr. Ives;
77, 1,092, and 1,251 shares held in the ESOP Trust allocated to Mr. Ives in
1997, 1996, and 1995, respectively; $3,000, $3,000, and $4,404 representing
taxable compensation received by Mr. Ives related to an automobile
allowance in 1997, 1996, and 1995, respectively; and $28,874 in 1995
representing a one-time payment to Mr. Ives for past accrued vacation paid.
Includes $4,750 and $4,351 contributed to the Bank's 401(k) Plan by the
Bank in 1997 and 1996, respectively, and $4,620 contributed to CENIT Bank's
401(k) Plan by CENIT Bank in 1995 on behalf of Mr. Davis; 65 and 636 shares
held in the ESOP Trust allocated to Mr. Davis in 1997 and 1996,
respectively; $130,460 accrued in 1995 under a deferred compensation
agreement between Mr. Davis and CENIT Bank; and $1,821, $1,829, and $1,686
representing the taxable amount for use of a CENIT Bank vehicle in 1997,
1996, and 1995, respectively. In 1995, Mr. Davis was paid a total of
$235,052 for the termination of the deferred compensation agreement which
included amounts accrued in prior years.
Includes $4,750, $3,520, and $2,976 contributed to the Bank's 401(k) Plan
by the Bank in 1997, 1996, and 1995, respectively, on behalf of Mr.
Guthrie; 53, 694, and 800 shares held in the ESOP Trust allocated to
Mr. Guthrie in 1997, 1996, and 1995, respectively; $3,000, $3,000, and
$3,000 representing taxable compensation received by Mr. Guthrie related to
an automobile allowance in 1997, 1996, and 1995, respectively; and $1,523
in 1995 representing a one-time payment to Mr. Guthrie for past accrued
vacation paid.
Includes $4,750, $3,590, and $2,771 contributed to the Bank's 401(k) Plan
by the Bank in 1997, 1996, and 1995, respectively, on behalf of Mr. Woods;
50, 663, and 720 shares held in the ESOP Trust allocated to Mr. Woods in
1997, 1996, and 1995, respectively; and $3,000, $3,000, and $3,000
representing taxable compensation received by Mr. Woods related to an
automobile allowance in 1997, 1996, and 1995, respectively.
(6) Effective April 14, 1998, Mr. Davis resigned as President, Chief Executive
Officer, and a Director of CENIT Bank, and as a Director of the Company.
Mr. Davis' employment with CENIT Bank will end on May 1, 1998, and Mr.
Davis will become a consultant to CENIT Bank effective May 2, 1998. On May
1, 1998, Mr. Davis' right to exercise stock options with respect to 250
shares will become fully vested. As of May 2, 1998, because of the
termination of his employment, Mr. Davis will surrender the right to
receive 1,261 shares under the MRP and the right to exercise stock options
with respect to 1,010 shares in accordance with the terms of the grants
under which these shares and stock options were awarded.
</FN>
</TABLE>
8
<PAGE>
The following table provides information on stock option/stock appreciation
rights ("SAR") grants to the Company's Chief Executive Officer and certain other
executive officers during 1997.
OPTION/SAR GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
Potential realizable value
at assumed annual rates
of stock price
appreciation for option
Individual Grants term(2)
-------------------------------------------------------------- -------------------------
Number of
securities
underlying Percent of
options/ total options/
SARs SARs granted Exercise or
granted (#) to employees base price Expiration
Name (1) in fiscal year ($/Sh) date 5% ($) 10% ($)
- -------------- ----------- -------------- ----------- ---------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
Michael S. Ives 1,651 39.0% $45.00 03/01/07 $46,724 $118,407
J. Morgan Davis 680 16.1% 45.00 03/01/07 19,244 48,769
John O. Guthrie 544 12.8% 45.00 03/01/07 15,395 39,015
Alvin D. Woods 544 12.8% 45.00 03/01/07 15,395 39,015
- -----------
<FN>
(1) The options granted to Messrs. Ives, Davis, Guthrie and Woods vest over a
four-year period, with one-fourth of the options granted becoming
exercisable on each March 1 commencing March 1, 1998. The unvested portion
of the options granted to Mr. Davis will lapse as described above. The
options may become exercisable earlier than such dates upon a "change of
control" as defined in the Company's Stock Option Plan, or upon the
grantee's retirement, disability or death. Each optionee was granted
limited stock appreciation rights with respect to all of the shares covered
by the options. Upon exercise of a limited stock appreciation right, the
optionee could elect to receive, in lieu of purchasing stock, either stock
or cash equal to the difference between the fair market value of the
underlying shares of the Common Stock subject to the option on the date of
exercise, and the exercise price of $45.00 per share. A limited stock
appreciation right may be exercised only in the event of a change in
control, as defined in the Stock Option Plan.
(2) Represents gain that will be realized assuming the options were held for
the entire ten-year period and the price of Common Stock increased at
compounded rates of 5% and 10% from the exercise price of $45.00 per share.
Potential realizable values per option or per share under these rates of
stock price appreciation would be $28.30 and $71.72, respectively. However,
these amounts represent assumed rates of appreciation only. Actual gains,
if any, on stock option exercises and common stockholdings will be
dependent on overall market conditions and on the future performance of the
Company and the Common Stock. There can be no assurance that the amounts
reflected in this table will be achieved.
</FN>
</TABLE>
9
<PAGE>
The following table provides information on the number of shares acquired
on exercise and on the value of unexercised stock options/SARs held by the
Company's Chief Executive Officer and certain other executive officers at
December 31, 1997.
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION/SAR VALUES
<TABLE>
<CAPTION>
Number of Value of
Securities Unexercised
Underlying In-the-Money
Unexercised Stock Stock Options/
Shares Acquired Value Options/SARS at SARs At
Name on Exercise (#) Realized ($) End of Fiscal Year End of FiscalYear
- --------------- --------------- ------------ ------------------- -----------------
<S> <C> <C> <C> <C>
Michael S. Ives -- -- 46,040 $ 2,929,055 (1)
J. Morgan Davis 1,581 $ 68,934 1,680 68,330 (2)
John O. Guthrie 6,153 231,091 4,444 221,239 (3)
Alvin D. Woods 3,500 95,043 4,916 263,085 (4)
- -------------
<FN>
(1) The market value of Common Stock at December 31, 1997 was $79.50 per share,
and the exercise price is $11.50 per share on 37,087 shares, $23.00 on
2,434 shares, $34.63 on 2,434 shares, $37.00 on 2,434 shares and $45.00 on
1,651 shares.
(2) The market value of Common Stock at December 31, 1997 was $79.50 per share,
and the exercise price is $34.63 on 1,000 shares and $45.00 on 680 shares.
(3) The market value of Common Stock at December 31, 1997 was $79.50, and the
exercise price is $21.25 on 1,500 shares, $23.00 on 800 shares, $34.63 on
800 shares,$37.00 on 800 shares and $45.00 on 544 shares.
(4) The market value of Common Stock at December 31, 1997 was $79.50, and the
exercise price is $11.50 on 1,472 shares, $21.25 on 500 shares, $23.00 on
800 shares, $34.63 on 800 shares, $37.00 on 800 shares and $45.00 on 544
shares.
</FN>
</TABLE>
Compensation Committee Interlocks and Insider Participation.
There are no known interlocks involving Compensation Committee members and
executive officers of the Company.
During 1997, members of the Compensation Committee engaged in the following
transactions with the Company and its subsidiaries:
Mays & Valentine. John A. Tilhou, a director of the Company and CENIT Bank,
is a member of the law firm of Mays & Valentine, LLP. The aggregate amount of
all fees paid by the Company to Mays & Valentine during 1997 was $71,877, which
did not exceed five percent of the firm's gross revenues during its last full
fiscal year. The Company and its bank subsidiaries believes that their
transactions with Mays & Valentine have been made on a basis no less favorable
than that which would have been made with unrelated parties.
Churchland Branch Lease. The Bank leases its office in the Churchland area
of Chesapeake, Virginia from T. R. & T., a general partnership of which Roger C.
Reinhold and David R. Tynch are two of the partners. This branch was formerly
operated by Homestead. The lease agreement grants the Bank a lease for a term of
15 years, which commenced February 1, 1986, with options to renew the lease for
four additional terms of five years each. The monthly rent is $3,948 with
adjustments made at the end of each five-year period. The total rent paid for
the year ended December 31, 1997 was $47,379. Based on a review of the lease in
September 1985, the predecessor of the Office of Thrift Supervision approved the
lease in accordance with federal regulations.
10
<PAGE>
Compensation Committee Report on Executive Compensation.
The Compensation Committee (the "Committee"), which is composed of the
nonemployee Directors of the Company listed below, recommends to the Boards of
Directors of the bank subsidiaries the annual salary levels and any bonuses to
be paid to the bank subsidiaries' executive officers. All salaries and bonuses
paid to the Company's executive officers are received by them from their
respective bank subsidiaries in their capacities as officers. The members of the
Committee also serve as the committees with authority to make awards under the
MRP and Stock Option Plan, and this report covers the Committee members'
policies and actions in those capacities.
The Committee recommended the 1997 salaries for executive officers based on
a subjective determination of a reasonable salary level for each officer
relative to the individual's responsibilities and performance. Mr. Ives' salary
for 1997 was increased approximately 3% to $173,000 from $167,820 in 1996.
In 1997, the Bank paid certain bonuses to executive officers pursuant to
the Bank's Key Executive Incentive Plan ("Incentive Plan") based upon 1996
performance. The Incentive Plan provides for the Board of Directors of the Bank,
with the recommendation of the Committee and the Chief Executive Officer, to
establish a target bonus award for each officer early in each year. The award is
expressed as a percentage of the officer's base salary. The Board also
establishes two sets of performance measures under the Incentive Plan. The first
set, Company Performance Measures, consists of specific quantitative goals with
respect to earnings per share growth rate, return on assets, return on equity,
tangible capital ratio, operating efficiency, net interest margin, charge-offs,
non-performing assets and classified assets. The Chief Executive Officer's
performance is determined solely pursuant to these Company Performance Measures.
The second set, Individual Performance Measures, consists of specific
quantitative, qualitative or project-related goals for the year. With respect to
each measure, the Board sets a target goal and minimum attainment and maximum
value levels with points corresponding to each. The Board also weights the
points for each measure among the officers individually based upon the
relationship of each officer's responsibilities to various corporate results.
The sum of the points for all target goals equates to 100% of the officer's
target bonus award. Achievement above the target goals can result in an award
exceeding the target bonus; however, the maximum award is 40% of base salary,
unless increased by the Board. After the close of the year, the Committee
assesses the extent to which the corporate and individual performance goals have
been attained, and after any adjustments to the total awards or individual
awards, recommends to the Board for final action the bonus awards to be paid to
the officers under the Incentive Plan.
Mr. Ives' 1997 bonus of $50,000 represented 30% of his 1996 base salary.
Approximately 69% of Mr. Ives' bonus ($34,564) was paid pursuant to the
Incentive Plan. This portion of the bonus was based on 1996 corporate
performance which achieved 58.8% of Mr. Ives' aggregate target points assigned
to the Company Performance Measures, as described above. Mr. Ives' 1996 target
points and actual points (indicated parenthetically) were weighted as follows:
earnings per share growth rate--15% (15%); return on assets--5% (2.5%); return
on equity-- 15% (13.8%); tangible capital ratio--5% (0%); operating efficiency
ratio--10% (0%); net interest margin--15% (15%); charge-offs--10% (12.5%);
non-performing assets--15% (0%); and classified assets--10% (0%). The remainder
of Mr. Ives' 1997 bonus was based upon the Committee's subjective determination
of Mr. Ives' tangible contributions for 1996, particularly in the development of
the senior management team and handling of the deposit and branch acquisition
from Essex Savings Bank.
In 1997, the Committee awarded all remaining shares under the MRP and Stock
Option Plan to executive officers consistent with the Committee's general
policy, subject to annual discretion and change, of making grants on a
substantially consistent basis resulting in approximately the same total awards
each year. As a result of awarding all remaining shares, 1,999 fewer shares were
awarded from the Stock Option Plan than in 1996, and 1,171 more MRP shares were
awarded than in 1996. The Committee determined the individual officers'
respective awards based on a subjective determination of a reasonable level for
each officer relative to the individual's responsibilities, performance and
prior grants. The amounts of Mr. Ives' awards were determined on this basis.
COMPENSATION COMMITTEE
William H. Hodges
Patrick E. Corbin
Roger C. Reinhold
Anne B. Shumadine
John A. Tilhou
11
<PAGE>
Neither the Compensation Committee report above nor the stock performance
graph that follows is incorporated by reference in any prior or future SEC
filings, directly or by reference to the incorporation of proxy statements of
the Company, unless such filing specifically incorporates the report or the
stock performance graph. SEC rules provide that the compensation committee
report and the stock performance graph are not deemed to constitute "soliciting
material" or to be filed with the SEC, and are not subject to SEC Regulations
14A or 14C, except as provided in SEC regulations, or to the liabilities under
Section 18 of the Exchange Act.
Stock Performance Graph.
The following graph provides a comparison with the stated indices of the
percentage change in the Company's cumulative total stockholder return on its
Common Stock for the period beginning December 31, 1992. The Company's stock
performance is compared to the Center for Research in Securities Prices ("CRSP")
Total Return Index for the Nasdaq Stock Market (U.S. Companies) which is a broad
market equity index calculated by CRSP at the University of Chicago. This index
comprises all domestic common shares traded on the Nasdaq National Market and
the Nasdaq Small Cap Market.
In addition, the Company's stock performance is compared to the Nasdaq
Total Return Industry Index of Savings Institutions (SIC Code 603). This
industry index has also been calculated by the CRSP.
It should be noted that in light of the short period of time reflected by
this graph, there is no reason to assume that the performance of the Company's
Common Stock for the period shown on the graph will be reflective of long- term
performance. In any event, the following graph is designed to be only a general
depiction of one method of measure of corporate performance to be used by
stockholders in evaluating the performance of the Company.
12
<PAGE>
Comparison of Cumulative Total Return Among CENIT Bancorp, Inc., CRSP
Total Return Index for the Nasdaq Stock Market (US Companies) and
CRSP Total Return Index for Nasdaq Savings Institutions (SIC Code 603)
(GRAPH)
<TABLE>
<CAPTION>
12/31/92 12/31/93 12/30/94 12/29/95 12/31/96 12/31/97
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
CENIT Bancorp, Inc. $100.00 $148.73 $145.57 $263.37 $303.91 $594.22
CRSP Index for Nasdaq $100.00 $114.80 $112.21 $158.70 $195.20 $239.53
Stock Market
CRSP Index for Savings $100.00 $140.34 $143.14 $214.55 $275.17 $477.68
Institutions
<FN>
Notes:
A. The lines represent monthly index levels derived from compounded daily
returns that include all dividends
B. If the monthly interval, based on the fiscal year-end, is not a trading day,
the preceding trading day is used
C. The index level for all series was set to $100.00 on 12/31/92
</FN>
</TABLE>
13
<PAGE>
Employment Agreements.
President and Chief Executive Officer of the Company and the Bank. Pursuant
to an Employment Agreement (the "Agreement") entered into between the Company
and Michael S. Ives on November 1, 1997, Mr. Ives is employed as the President
and Chief Executive Officer of the Company and the Bank. The current term of the
Agreement expires December 31, 2000, and the Agreement is renewable by the Board
of Directors of the Company for successive one year terms.
The Agreement provides a base salary of not less than $173,000 subject to
increases approved at the discretion of the Company, and for participation in
all Company benefit and compensation plans available to senior executives. For
the year ended December 31, 1997, Mr. Ives received base salary in the amount of
$173,000. Mr. Ives received a $50,000 bonus in 1997 for services rendered in
1996.
The Agreement provides for termination of Mr. Ives' employment for "cause"
(as defined in the Agreement) at any time or in certain events specified by
banking regulations. In the event that Mr. Ives' employment is terminated for
reasons other than cause or upon a voluntary resignation by Mr. Ives for good
reason, including his assignment to render services other than in a senior
management or executive capacity or a material reduction in base salary,
Mr. Ives would be entitled to continue to receive his base salary for one year
from the date of termination. The Company is also required to continue Mr. Ives'
benefits plans for a period of one year following a termination without cause.
In addition, if a "change in control" of the Company occurs, Mr. Ives will be
entitled to additional compensation if within 12 months thereafter his
employment is terminated without cause or he voluntarily terminates his
employment for good reason. In these circumstances, Mr. Ives will be entitled to
receive, in lieu of the one-year salary continuation generally provided for in
the event of a termination without cause, a lump sum payment equal to 2.99 times
Mr. Ives' average annual compensation received during the five years next ending
prior to the date of the change of control. A "change of control" is defined in
the Agreement to occur upon any of the following events: (a) the acquisition by
any person or group of 20% or more of the outstanding shares or the voting power
of the outstanding securities of the Company; (b) either a majority of the
directors of Company at the annual stockholders meeting have been nominated
other than by or at the direction of the incumbent directors of the Company's
Board of Directors, or the incumbent directors cease to constitute a majority of
the Company's Board of Directors; (c) the Company's shareholders approve a
merger or other business combination pursuant to which the outstanding common
stock of the Company no longer represents at least 50% of the combined entity
after the transaction; (d) the Company's shareholders approve a plan of complete
liquidation or an agreement for the sale or disposition of all or substantially
all of the Company's assets; or (e) any other event or circumstance determined
by the Company's Board of Directors to affect control of the Company and
designated by resolution of the Board of Directors as a change of control.
Mr. Ives would be entitled to a severance payment of $783,343 in addition
to certain stock option and related stock appreciation rights and restricted
stock acceleration rights, were a change of control of the Company to occur
during 1998. Under Section 280G of the Internal Revenue Code, if Mr. Ives'
severance payments and the value of his stock option, stock appreciation rights
and restricted stock acceleration equal or exceed three times his average W-2
compensation for the five tax years immediately preceding a change in control
and if they are contingent upon the change of control, the amount by which those
severance payments and benefits exceed his average W-2 compensation for the
five-year period will be deemed to be "excess parachute payments." In that
event, a 20% excise tax would be imposed on Mr. Ives' excess parachute payments
and the Company would not be entitled to deduct the excess parachute payments.
The Agreement provides that if the severance payments to Mr. Ives would
otherwise constitute excess parachute payments in the opinion of the Company's
independent accountants, then the Company will reduce the severance payments to
an amount that would not give rise to excess parachute payments.
The Agreement also restricts the ability of Mr. Ives to compete with the
Company or the Bank for a period of 12 months after the termination of his
employment under the Agreement, but this non-competition provision is not
operative following any change of control.
14
<PAGE>
Davis Agreement. J. Morgan Davis and CENIT Bank entered into an Employment
Agreement (the "Davis Agreement") dated as of January 30, 1995, and amended on
November 13, 1996. Under the Davis Agreement, Mr. Davis was employed as the
President and Chief Executive Officer of CENIT Bank for a term of three years
ending on December 31, 1997. Mr. Davis and CENIT Bank elected not to renew the
Davis Agreement and, effective April 14, 1998, Mr. Davis resigned as an officer
and director of CENIT Bank and as a director of the Company. Effective May 2,
1998, Mr. Davis will become a consultant to CENIT Bank and will render
consulting services to CENIT Bank pursuant to the terms of a consulting
agreement with a term of two years. Pursuant to a non-competition agreement,
Mr. Davis has also agreed not to compete with the Company for a period of two
years. Pursuant to the terms of the consulting agreement and the non-competition
agreement, Mr. Davis will be paid a total of $14,000 per month for as long as
these agreements remain in effect and will receive the title to the automobile
which he presently uses. These payments are in lieu of all compensation and
benefits that would have been payable to Mr. Davis under the Davis Agreement.
Transactions with Certain Related Persons.
A number of the Company's directors, director nominees, and officers and
their associates are customers of the Company's bank subsidiaries. Except as
indicated below, extensions of credit made to them are in the ordinary course of
business, are substantially on the same terms, including interest rates and
collateral, as those prevailing at the same time for comparable transactions
with others, and do not involve more than normal risk of collectibility or
present other unfavorable features. However, one residential mortgage loan to a
director with a balance of $153,500, was originated under a previous bank policy
that permitted directors and executive officers to borrow at an interest rate
one percentage point in excess of the then existing cost of funds. None of such
credits are classified as nonaccrual, past due, restructured or potential
problem. All outstanding loans to such officers, directors, director nominees,
and their associates are current as to principal and interest. As of December
31, 1997, loans to directors, director nominees, executive officers and their
interests who had loans at any time during the year in excess of $60,000 totaled
approximately $2.4 million.
Other Potential Conflicts. Management of the Company does not believe that
any director or officer or affiliate of the Company, or any record or beneficial
owner of more than 5% of the Common Stock of the Company, or any associate of
any such director, officer, affiliate or stockholder, is a party adverse to the
Company or any of its subsidiaries or has a material interest adverse to the
Company or any of its subsidiaries in any material proceeding.
Compliance with Section 16(a) of the Securities Exchange Act of 1934.
Section 16(a) of the Exchange Act requires the Company's officers and
directors, and persons who own more than ten percent of a registered class of
the Company's equity securities, to file reports of ownership and changes in
ownership with the Securities and Exchange Commission ("SEC") and the National
Association of Securities Dealers. Officers and directors and greater than ten
percent stockholders are required by SEC regulation to furnish the Company with
copies of all Section 16(a) forms they file.
Based solely on its review of the copies of such forms received by it, the
Company believes that during 1997 its officers and directors and greater than
ten percent stockholders complied with all applicable Section 16(a) filing
requirements.
15
<PAGE>
Independent Accountants.
The Board of Directors has selected the accounting firm of Price Waterhouse
LLP, independent accountants, to be the Company's independent accountants for
the year ended December 31, 1997. A representative of Price Waterhouse LLP is
expected to be present at the Meeting, will have the opportunity to make a
statement at the meeting if he or she desires to do so, and will be available to
respond to appropriate questions. The Board of Directors has not yet made a
determination regarding the selection of independent accountants for the year
ending December 31, 1998. Under the Company's Certificate of Incorporation and
Bylaws, stockholders are not required to ratify or confirm the selection of
independent accountants made by the Board of Directors.
Stockholder Participation.
In the event that a stockholder wishes to submit a proposal for
consideration by the stockholders of the Company at the 1999 Annual Meeting of
Stockholders (the "1999 Meeting"), then in order for the proposal to be
includible in the proxy statement for the 1999 Annual Meeting, such proposal
must be received by the Secretary of the Company no later than December 29,1998.
The Bylaws of the Company provide a procedure for certain business to be
brought before annual meetings of the Company's stockholders, and such proposals
may be properly brought before the meeting even if they are not includible in
the proxy statement for the meeting, so long as the proposing stockholder
complies with the advance notice provisions of the Bylaws. If written notice of
business proposed to be brought before the 1999 Meeting is given to the
Secretary of the Company, delivered or mailed to and received at the principal
executive offices of the Company not later than December 29, 1998, such business
may be brought before the 1999 Meeting. Information regarding the contents of
the required notice to the Company is to be found in the Company's Bylaws, which
are available from the Company upon request.
Stockholders are also permitted to submit nominations of candidates for the
Board of Directors. If a stockholder wishes to nominate a candidate to stand for
election as a director at the 1999 Meeting, the nomination shall be made by
written notice to the Secretary of the Company, which must be delivered or
mailed to and received at the principal executive offices of the Company not
later than December 29, 1998. The requirements regarding the form and content of
stockholder nominations for directors are also set forth in the Bylaws.
Other Matters Which May Properly Come Before the Meeting.
Neither the Board of Directors nor management of the Company intends to
bring before the Meeting any business other than the matters referred to in the
Notice of Meeting and this proxy statement. If any other business should be
properly presented, the persons named in the proxy will vote on such matters
according to their best judgment.
Whether or not you intend to be present at the Meeting, you are urged to
return your proxy promptly. If you are present at the Meeting and wish to vote
your shares in person, your proxy may be revoked by voting at the Meeting.
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., the Bank, or CENIT
Bank should be directed to Stuart F. Pollard, Vice President Corporate
Communications, CENIT Bank, FSB, Post Office Box 1811, Norfolk, Virginia
23501-1811, Telephone (757) 446-6692.
16
<PAGE>
By Order of the Board of Directors
John O. Guthrie
Corporate Secretary
CENIT Bancorp, Inc.
Norfolk, Virginia
April 29, 1998
YOU ARE CORDIALLY INVITED TO ATTEND THE MEETING IN PERSON. WHETHER OR NOT
YOU PLAN TO ATTEND THE MEETING, YOU ARE REQUESTED TO SIGN AND PROMPTLY
RETURN THE ACCOMPANYING PROXY IN THE ENCLOSED POSTAGE-PAID ENVELOPE.
17
<PAGE>
CENIT Bancorp, Inc. Revocable Proxy
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS OF CENIT BANCORP,
INC., FOR USE ONLY AT THE ANNUAL MEETING OF STOCKHOLDERS TO BE HELD ON MAY 20,
1998 AND ANY ADJOURNMENT THEREOF.
The undersigned hereby acknowledges prior receipt of the Notice of the
Annual Meeting of Stockholders (the "Meeting") and the Proxy Statement
describing the matters set forth below, and indicating the date, time and place
of the meeting, and hereby appoints the Board of Directors of CENIT Bancorp,
Inc. (the "Company"), or any of them, as proxy, each with full power of
substitution to represent the undersigned at the Meeting, and at any adjournment
or adjournments thereof, and thereat to act with respect to all votes that the
undersigned would be entitled to cast, if then personally present on the matters
referred to on the reverse side in the manner specified.
This Proxy, if executed, will be voted as directed, but, if no instructions
are specified, this Proxy will be voted FOR the election of the Director
nominees listed. Please sign and date this Proxy on the reverse side and return
it in the enclosed envelope. This Proxy must be received by the Company no later
than May 20, 1998.
This Proxy is revocable and the undersigned may revoke it at any time prior
to the Meeting by giving written notice of such revocation to the Secretary of
the Company. Should the undersigned be present and wish to vote in person at the
Meeting, or any adjournment thereof, the undersigned may revoke this Proxy by
giving written notice of such revocation to the Secretary of the Company on a
form provided at the Meeting.
(Continued and to be signed on reverse side)
<PAGE>
- FOLD AND DETACH HERE -
- -------------------------------------------------------------------------------
Admittance Pass
- -------------------------------------------------------------------------------
Sixth Annual Meeting Of Stockholders
CENIT Bancorp, Inc.
Wednesday, May 20, 1998
5:00 p.m.
The Chrysler Museum of Art Theater
245 West Olney Road
Norfolk, Virginia
Please Present This Admittance Pass When Entering The Meeting
- -------------------------------------------------------------------------------
- ---
X
- ---
Please mark your votes as
indicated in this example
- -------------------------------------------------------------------------------
The Board of Directors recommends a vote FOR
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
1.Election of Directors of all FOR WITHHOLD
nominees listed: (Except As Marked AUTHORITY
John F. Harris, To The Contrary)
William H. Hodges,
Roger C. Reinhold, ----- -----
Anne B. Shumadine
Instruction: To withhold your vote for any individual nominee, write that
nominee's name on the line provided below.
- -------------------------------------------------------------------------------
2. To vote, in its discretion, upon any other matters
that may properly come before the meeting or any
adjournment thereof. See "Other Matters Which May
Properly Come Before the Meeting" in the Proxy Statement.
Dated ____________________________________, 1998
_______________________________________________
Signature
_______________________________________________
Signature
PLEASE SIGN your name exactly as it appears hereon.
Joint accounts need only one signature, but all
accountholders should sign if possible. When signing as
an administrator, agent, corporation officer, executor,
trustee, guardian or similar position or under a power
of attorney, please add your full title to your
signature.
PLEASE RETURN THIS PROXY CARD PROMPTLY USING THE ENCLOSED POSTAGE-PAID ENVELOPE.
<PAGE>
CENIT BANCORP, INC.
1997 Annual Report
(Graph)
Enhancing Shareholder Value Since 1992
<PAGE>
Highlights of the Year
- Record earnings of $6,003,000
- Record earnings per share of $3.61
- Record year end stock price of $79.50, an increase of 91.6%
- An increase of 15.5% in total net loans
- An increase of 18.9% in noninterest-bearing deposits
- An increase of 43.2% in deposit fee income
- A decrease of 57.1% in nonperforming assets
- Enhancement of community banking franchise
About the cover:
The graph summarizes the Company's stock price for the initial
public offering in August, 1992 ($11.50) and for each year end
thereafter through December 31, 1997 ($79.50).
<PAGE>
- - Table of Contents
1 Corporate Profile
2 Report to Our Stockholders
7 Board of Directors & Management Committee
8 Community Advisory Boards
10 Five Year Financial Summary
11 Management's Discussion and Analysis
21 Consolidated Financial Statements
25 Notes To Consolidated Financial Statements
54 Report of Independent Accountants
55 Investor Information
56 Corporate Information
57 Map of Retail Banking Offices
<PAGE>
Corporate Profile
- -----------------------------------------------------------------
CENIT Bancorp, Inc., with headquarters in Norfolk, Virginia, is the holding
company for CENIT Bank, a federal stock savings bank based in Norfolk, Virginia,
and CENIT Bank, Virginia Beach (formerly Princess Anne Bank), a Virginia
commercial bank headquartered in Virginia Beach, Virginia.
CENIT Bank has been in business since 1889, and CENIT Bank, Virginia Beach
since 1985. Together, the two Banks form the 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, 1997, CENIT Bancorp had consolidated assets of $718.1
million, deposits of $507.7 million and stockholders' equity of $49.9 million
with 1,657,081 shares of common stock outstanding.
The two Banks operate twenty 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 CENIT Bank,
Virginia Beach 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 1997 Annual
Report for CENIT Bancorp, Inc. (the "Company") and its community bank
subsidiaries. Our progress in 1997 and our continuing investment in our
community banking franchise can be summarized in two words: steady growth. The
investments that we have made in past years in our loan and deposit products,
the quality of our assets, our branch offices, facilities, and equipment, and
our advisory boards, officers, and employees have all contributed to record
earnings for the Company in 1997 and have increased the franchise value of our
Company for our stockholders.
- - Earnings and Dividends
PHOTO
MICHAEL S. IVES
1.68" X 2.52"
Michael S. Ives
President &
Chief Executive Officer
By any measure, 1997 was an excellent year for the Company. In 1997, the
Company posted record earnings of $6,003,000, or $3.61 per share, as compared
with $3,608,000, or $2.17 per share in 1996 (including the effect of the special
federal deposit insurance assessment paid by the Company in 1996). 1997 earnings
thus represented a dramatic 66.4% increase over 1996 earnings before adjustment
for the deposit insurance assessment and an 18.7% increase over 1996 earnings
after adjustment for the deposit insurance assessment. We achieved these results
notwithstanding the expense and business disruption incurred in connection with
a proxy contest. We believe that this growth in our earnings clearly reflects
the strength of our core business operations and the results of our ongoing
implementation and refinement of our business plan for the Company.
While many factors contributed to our outstanding earnings in 1997, I would
like to mention several of the more important ones. The Company enjoyed strong
loan growth in the past year. Total net loans increased from $424,119,000 at the
end of 1996 to $489,654,000 at the end of 1997, an increase of 15.5% during
1997.
Fueling this growth were substantial increases in the Company's one- to
four-family permanent mortgage loans, home equity and second mortgage loans, and
commercial business loans. These results reflect the hard work of our
residential and commercial loan officers in a highly competitive lending
environment. And, perhaps most encouraging for the future, our loan pipeline for
residential and commercial loans is now as strong, if not stronger, than at any
time in the last 10 years.
Another component of our business plan for the Company has been to increase
the amount of commercial and other non-interest bearing deposits and the fee
income generated from checking and other deposit
2
<PAGE>
products. In 1997, commercial and other noninterest-bearing deposits increased
from $46,154,000 at the end of 1996 to $54,874,000 at the end of 1997, an
increase of 18.9%. This increase reflects the continuing success of the
Company's retail and commercial account officers in attracting and retaining
commercial accounts to increase this important source of lower cost funds for
the Company. It also reflects indirectly the considerable success that the
Company has experienced in expanding its merchant credit card processing program
and its facilities. The success of this program has led to increases both in the
number and balances of related commercial accounts for the Company as well as
generating additional fee income.
Growth in deposit fee income has also contributed to the Company's
earnings. Deposit fee income in 1997 increased from $1,425,000 in 1996 to
$2,040,000 in 1997, an increase of 43.2%. The Company's retail and commercial
deposit products are competitively priced and offer good value as well as good
service to the Company's customers. This contributes to growth in our deposit
fee income as our overall transaction account balances continue to grow.
In recognition of our strong prospects for continuing our steady growth in
earnings, the Board of Directors of the Company increased the quarterly cash
dividend payable on shares of common stock of the Company by 20% in January of
1998.
- - Asset Quality
One of the cornerstones of the Company's business plan has been to improve
asset quality on a continuous basis. Management of the Company remains committed
to maintaining the quality of the Company's assets and taking prompt action,
tailored to fit each set of circumstances, to address problem assets when the
need arises. 1997 demonstrated the success of the Company's continuing attention
to this important area of its operations.
By the end of 1997, the Company had reduced its total nonperforming assets
to $2,429,000. Significantly, $1,679,000, or 69.1%, of the Company's total
nonperforming assets consisted of loans secured by one- to four-family
residences or single family real estate owned, which characteristically pose
less risk to the Company than other types of loans. Finally, at December 31,
1997, the delinquency rate for our overall loan portfolio stood at 0.51%, which
ranks among the lowest delinquency rates for the Company's loan portfolio in the
last 10 years. We believe that the improvements in our asset quality during 1997
are indicative of our careful, prudent loan underwriting and our overall loan
portfolio
3
<PAGE>
management, which will continue to benefit our stockholders in years to come.
- - The Company's Community Banking Franchise
In 1997, we continued to enhance our community banking franchise through a
variety of initiatives.
First, we completed the organization of five new advisory boards of
directors for our Company. The appointment and organization of each advisory
board strengthens our contacts and connections with another segment of our
market area and opens new doors and business opportunities for our Company. We
have already begun to attract new customers, open new accounts, and make new
loans based on referrals that we have received from our new advisory directors.
We have also put into place an incentive program for our advisory directors
which should lead to even more referrals in the future. We plan to organize at
least two additional advisory boards of directors during 1998 as we reach out to
segments of our market that present substantial business opportunities for our
Company.
Second, we have continued to improve our retail facilities and branch
operations. In the fourth quarter of 1997, we opened our third supermarket
retail office in the new Super Kmart located on Holland Road in Virginia Beach.
We have also taken steps to relocate and improve our banking facility located in
the Churchland area of Chesapeake and Portsmouth in order to provide a more
convenient facility with a greater range of services for our customers who live
and work in this rapidly growing segment of our market. We also completed
renovations of our retail offices in 1997 in order to better serve our customers
in modern, full-service commercial banking facilities.
Third, we have continued to improve the technology that supports our retail
and commercial operations. In 1997, we installed (1) a new frame relay system
throughout the Company to enhance data transmission speed and capacity for our
data processing systems, (2) an interactive voice communications system to
provide our customers with telephone access to information about their accounts,
(3) an image processing system to improve checking account customer service and
the efficiency of our checking, proof and transit departments, and (4) a new
marketing customer information software program to strengthen our business
development programs. We have also identified the steps that our Company needs
to take to address Year 2000 computer issues and are working under a precise
schedule for the installation of hardware and software updates and enhancements
in order to make our Company and
4
<PAGE>
its products and services Year 2000 compliant.
Lastly, we have assembled a team of competent and dedicated community
bankers who are committed to providing a full range of banking services to our
customers in a prompt and cost-effective manner. This level of commitment has
enabled us to leverage our investments in our facilities, equipment, and
technology in order to open new doors for our Company and to expand our
community banking franchise. We believe that recent consolidations of financial
institutions in our market area will present our community bankers with even
greater opportunities to expand our business in 1998, and that we are poised to
take advantage of each of these opportunities as they arise.
- - The Year Ahead
As we enter 1998, we see the need to make several changes in the structure
of our Company for the benefit of our stockholders. We are pleased to announce
these changes as part of our Annual Report.
First, on March 24, 1998, we announced a 3-for-1 split of our Company's
stock. With the meteoric rise in the price of our stock over the past year, we
needed to act to make shares of our stock more affordable for new investors and
more liquid for all of our investors. We are optimistic about our future and
wish to share that optimism with our existing and potential investors in a
tangible way.
Second, since 1995, the Company has conducted its banking operations in our
local market through two separate subsidiary banks. The purpose for this was to
preserve the local community bank identity and autonomy of Princess Anne Bank to
the maximum extent possible consistent with achieving some efficiencies from the
consolidation of the operations functions of the two bank subsidiaries.
In early 1998, members of Princess Anne Bank's Board of Directors who did
not also serve on the Company's Board of Directors asked the Company to change
the name of Princess Anne Bank to CENIT Bank immediately and to consider a
merger of the two subsidiary banks. These outside members of Princess Anne
Bank's Board of Directors believed that the time for two separate bank
subsidiaries with two separate identities was past and that the merger of the
two banks would increase operating efficiency, provide for greater expense
control, and would make the Company's marketing programs more effective. This
selfless act by this group of bank directors is indicative of the loyalty and
dedication to the Company and the leadership that these directors have shown
over the years.
5
<PAGE>
The Company has accepted the recommendations of these directors and is
proceeding to merge its subsidiary banks in an orderly fashion and in a manner
that is least disruptive to our customers. But, we plan to preserve for the
Company and its stockholders the wise counsel and leadership of the outside
directors from Princess Anne Bank by creating a consolidated board of directors
for our subsidiary bank and by adding three of them to the Company's Board of
Directors. All of these steps will further strengthen the Company in the months
and years ahead.
As successful as 1997 has been, we realize that we must continually create
value for our stockholders and enhance the value of our community banking
franchise. We are prepared for the challenge and believe that we have built a
strong foundation from which to move our Company forward in 1998. We believe
that 1998 will be a year of many opportunities for our Company and that we are
better prepared now than at any time in our history to seize and take advantage
of these opportunities as and when they present themselves. We are excited about
our prospects for 1998 and look forward to a successful year for our Company. We
appreciate the trust that you have placed in the directors, officers, and
employees of the Company, and we will continue to do everything within our power
to maintain and reward that trust.
Michael S. Ives
President and Chief Executive Officer
6
<PAGE>
Board of Directors & Management Committee
- -------------------------------------------------------------------------------
- - Board of Directors
C. L. Kaufman, Jr. Chairman,
Investor
David L. Bernd
President & CEO,
Sentara Health System
Patrick E. Corbin, CPA
Principal,
Carter Corbin & Company, P.C.
William J. Davenport, III*
Real Estate Developer/Investor
J. Morgan Davis
President & Chief Executive Officer
CENIT Bank, Virginia Beach
Thomas J. Decker, Jr.*
President,
The Prudential-Decker Realty
L. Renshaw Fortier*
Chairman, Teren Company
John F. Harris*
President, Affordable Homes, Inc.
The Honorable
William H. Hodges
Judge, Virginia Court of Appeals
(Retired)
Consultant/Counsel,
Plasser American Corporation
Michael S. Ives
President & Chief Executive Officer
Charles R. Malbon, Jr.*
Vice President, Tank Lines, Inc.
Roger C. Reinhold
Commercial Investments
Retired President,
Homestead Savings Bank
William L. Rueger*
Management Consultant
Dan Ryan*
President, Dan Ryan's For Men
John A. Tilhou, Esq.
Chairman, CENIT Bank,
Virginia Beach
Partner, Mays & Valentine, L.L.P.
David R. Tynch, Esq.
President and Managing Partner,
Cooper, Spong & Davis, P.C.
Anne B. Shumadine, Esq.
President,
Signature Financial
Management, Inc.
Director, Mezzullo & McCandlish,
A Professional Corporation
* CENIT Bank, Virginia Beach
Board Only
- - Management Committee
Michael S. Ives
President & Chief Executive Officer,
CENIT Bank
J. Morgan Davis
President & Chief Executive Officer,
CENIT Bank, Virginia Beach
Barry L. French
Senior Vice President
Retail Banking Group Manager
John O. Guthrie
Senior Vice President
Chief Financial Officer &
Finance Group Manager
Patrick L. Hillard
Senior Vice President
CENIT Mortgage Company
Roger J. Lambert
Senior Vice President
Information Services
Group Manager
Barbara N. Lane
Senior Vice President
Administrative Services
Group Manager
Winfred O. Stant, Jr.
Senior Vice President &
Chief Financial Officer,
CENIT Bank, Virginia Beach
Alvin D. Woods
Senior Vice President
Chief Lending Officer &
Lending Group Manager
7
<PAGE>
Community Advisory Boards
- -------------------------------------------------------------------------------
- - Norfolk
James E. Andrews, Chairman
President, Anzell Automotive, Inc.
James G. Close, Jr.
Owner, Monticello Antiques
Norma Dorey-Cobb
President, Changes Hairstyling, Inc.
Joan D. Gifford
Chairman, Coldwell Banker
Gifford Realty, Inc.
Claus Ihlemann
Owner, Decorum
Joseph F. Query
President, Joseph Query
Insurance Agency, Inc.
Peter W. Karangelan
President, Azalea Inn #1, Inc.
- - Tri-City
(West 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
Dan E. Griffin
Architect, AIA, PC
Ann M. Kirk, Esq.
Attorney, Private Practice
Michael R. Kirsch
President, K Plus
Bill Moody
Vice President, Sales
Doughtie's Foodservice
Jimmy R. Spruill
Chairman, JJ Fasteners, Inc.
Andrew M. Virga
Treasurer & CFO,
Virga's Pizza Crust of Virginia
Chris Whicker
Managing Broker, Consultant
ERA Realty Crossroads, Inc.
- - Chesapeake
(South Chesapeake)
James A. Roy, Esq., Chairman
Partner, Roy, Larsen,
Romm & Lascara, P.C.
W. Michael Bryant
President, OBBCO
Safety & Supply, Inc.
Warren D. Harris
Assistant Economic
Development Director,
City of Chesapeake
Debbie Ritter
Chesapeake Civic Leader
Fella Rhodes
Managing Broker,
Long & Foster Realtors
Greg Skillman
President, Seaboard Mechanical
Peter Szoke, MD
Family Physicians of
Great Bridge, Ltd.
Gayle A. Terwilliger, DDS
Dentist, Private Practice
Olivia T. Walton, CPA
Walton Associates
James J. Wheaton, Esq.
Partner, Willcox & Savage, P.C.
- - Pembroke
(Southwest Virginia Beach)
Wendell A. White, Chairman
President, Bayside Building Corp.
Joseph M. Gianascoli
President, Gee's Group
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
Jerry Womack
President,
Suburban Grading and Utilities, Inc
- - Shore Drive
(North Virginia Beach)
Kal Kassir, Chairman
Owner, The Corner Market
Donald F. Bennis, Esq.
Attorney, Private Practice
Thomas R. Eckert
Owner, Bay Lake Pines School
Charles G. Faison, Jr.
President,
Bayside Exxon Service Center
Charles W. Guthrie
President, Lynnhaven Marine
John R. Savino
Agent, The Prudential-Decker Realty
8
<PAGE>
- - Lynnhaven
(Southeast Virginia Beach)
Brian P. Winfield, Chairman
Winfield & Associates
Gunther H. Degan
President, Degan Enterprises
Robert G. Jones, Esq.
Partner,
Jones, Russotto & Walker, P.C.
Paul V. Michels
President, Coastal Video
Communications Corp.
A. William Reid
President, Rising Tide Productions
- - Hilltop
(East Virginia Beach)
John W. Richardson, Esq.
Chairman
Partner, Stallings & Richardson
Brian S. Burgess
Vice President, Sales
Hoffman Beverage Company
Judy B. Crumley
Owner & Treasurer,
Crumley Group, Inc.
Frank Drew
Sheriff, City of Virginia Beach
Robert M. Howard
Executive Vice President,
Accounting & Finance,
Professional Hospitality
Resources, Inc.
John P. Martin
President, Great Atlantic
Travel & Tour
- - Independence
(Northeast Virginia Beach)
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
- - Kempsville
(Southwest Virginia Beach)
Blair G. Ege, Chairman
Branch Manager,
MML Investors Services, Inc.
Richard A. Beskin
President, Beskin & Associates, Inc.
Charles W. Best. III, Esq.
Partner, Best & Best, PLC
Frances Denney Richardson,CPA
Partner, Failes & Associates, P.C.
J. Randolph Sutton
President, Waterfront Marine
Construction, Inc.
- - Peninsula
(Hampton, Newport News,
York County)
Herbert V. Kelly, Jr., Esq.,
Chairman
Partner, Jones Blechman,
Woltz & Kelly, PC
James F. Allen, MD
Neurosurgeon
Thomas R. Brooks, CPA
Witt, Mares & Co., PLC
Randolph P. Bryant
President, Wolftrap Operations
Charles R. Conte, Jr.
Owner, Conte's Bike Shop, Inc.
Betty Anne Davis
Co-owner, Davis-Penland
Building and Remodeling
Chairman,
Newport News School Board
Wendy C. Drucker
President,
Drucker & Falk, LLC
Allen R. Jones
President,
Dominion Physical Therapy
Anna Van Buren McNider
Co-owner, Digital Images
Jere Mills
Co-owner,
Ferguson Mills Construction
Chairman, York County
Board of Supervisors
C. Dwight West, III
President,
C.D. West & Company, Insurance
Charles M. Wornom
CFO, Abbitt & West & West
Real Estate Developers
Joseph N. Ziglar, Jr.
President,
Chesapeake Masonry Corporation
9
<PAGE>
Five Year Financial Summary (1)
- -------------------------------------------------------------------------------
(Dollars in thousands, except per share)
<TABLE>
<CAPTION>
At or for the year ended December 31,
1997 1996 1995 1994 1993
-----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Financial Condition Data:
Total assets $ 718,083 $ 707,100 $639,812 $ 575,675 $ 508,421
U.S. Treasury and other U.S. Government
agency securities, net 45,347 46,305 65,118 44,650 55,953
Loans held for investment, net 486,487 422,219 319,194 305,578 258,604
Mortgage-backed certificates, net 91,841 177,706 203,176 175,763 135,812
Real estate owned, net 1,098 2,769 1,828 5,718 3,575
Deposits 507,670 498,965 450,530 420,422 407,309
Borrowings 157,239 155,138 138,171 109,035 58,560
Stockholders' equity 49,937 49,608 46,729 42,217 39,810
Operating Data:
Interest income $ 50,776 $ 48,171 $ 45,527 $ 37,826 $ 34,004
Interest expense 29,310 28,087 27,476 19,496 16,910
----------------------------------------------------------------------
Net interest income 21,466 20,084 18,051 18,330 17,094
Provision for loan losses 600 377 697 490 1,667
----------------------------------------------------------------------
Net interest income after provision for loan losses 20,866 19,707 17,354 17,840 15,427
Other income 5,713 3,894 2,944 2,765 2,956
Other expenses 17,312 18,172 16,174 14,402 13,099
----------------------------------------------------------------------
Income before income taxes 9,267 5,429 4,124 6,203 5,284
Provision for income taxes 3,264 1,821 1,652 2,226 1,637
----------------------------------------------------------------------
Net income $ 6,003 $ 3,608 $ 2,472 $ 3,977 $ 3,647
----------------------------------------------------------------------
Earnings per share:
Basic $ 3.71 $ 2.23 $ 1.55 $ 2.53 $ 2.33
----------------------------------------------------------------------
Diluted 3.61 2.17 1.50 2.46 2.30
----------------------------------------------------------------------
Cash dividends per share $ 1.00 $ .75 $ .40 $ .36 $ .27
----------------------------------------------------------------------
Pro forma earnings per share to reflect 3 for 1
stock split approved by Board of Directors
on March 24, 1998
Basic $ 1.24 $ .74 $ .52 $ .84 $ .78
----------------------------------------------------------------------
Diluted 1.20 .72 .50 .82 .77
----------------------------------------------------------------------
Selected Financial Ratios and Other Data:
Return on average assets .86% (2) 0.54% (3) 0.40% (4) 0.72% 0.76%
Return on average stockholders' equity 12.00 (2) 7.56 (3) 5.57 (4) 9.75 9.83
Average stockholders' equity to average assets 7.17 7.20 7.21 7.40 7.76
Stockholders' equity to total assets at year end 6.95 7.02 7.30 7.33 7.83
Interest rate spread 2.85 2.83 2.60 3.10 3.36
Net interest margin 3.27 3.22 3.07 3.47 3.78
Other expenses to average assets 2.48 (2) 2.74 (3) 2.63 (4) 2.61 2.76
Net interest income to other expenses 123.99 (2) 110.52 (3) 111.61 (4) 127.27 130.50
Nonperforming assets to total assets .34 .80 .45 1.42 1.01
Allowance for loan losses to total net loans .78 .90 1.16 1.24 1.56
Dividend payout ratio (5) 26.95 33.63 25.81 14.23 11.59
Book value per share $ 31.72 (6) $ 30.34 $ 29.27 $ 26.66 $ 25.41
Tangible book value per share 29.17 (6) 27.66 28.15 25.45 25.41
Number of retail branch offices 20 19 16 15 12
- ------------
<FN>
(1) On August 1, 1995, Princess Anne 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 $405 of expenses related to the proxy contest and other
matters and the related tax effect, the return on average assets and return
on average stockholders' equity for the year ended December 31, 1997 would
have been .90% and 12.50%, respectively, and the ratio of other expenses to
average assets and net interest income to other expenses would have been
2.42% and 126.97%, respectively.
(3) Exclusive of the $2,340 one-time SAIF special assessment paid in November,
1996 and the related tax effect, the return on average assets and return on
average stockholders' equity for the year ended December 31, 1996 would
have been .76% and 10.52%, respectively, and the ratio of other expenses to
average assets and net interest income to other expenses would have been
2.39% and 126.86%, respectively.
(4) Exclusive of the $757 of merger expenses and the $563 loss on the sale of
securities and the related tax effect, the return on average assets and
return on average stockholders' equity for the year ended December 31, 1995
would have been .57% and 7.91%, respectively. Exclusive of the $757 of
merger expenses relating to the Princess Anne combination, the ratio of
other expenses to average assets and net interest income to other expenses
would have been 2.50% and 117.09%, respectively.
(5) Represents dividends per share divided by basic income per share. Dividends
per share represent historical dividends declared by the Company.
(6) Book value per share and tangible book value per share, computed by
including unallocated common stock held by the Company's Employee Stock
Ownership Plan at December 31, 1997, were $30.14 and $27.72, respectively.
</FN>
</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, 1997, the Company had total assets of $718.1
million, an increase of $11.0 million since December 31, 1996. This increase is
accounted for primarily by increases in residential single-family loans, home
equity and second mortgage loans and by an increase in federal funds sold, the
effect of which was partially offset by a decrease in securities available for
sale.
Securities Available For Sale. Securities available for sale totaled $137.2
million at December 31, 1997 compared to $224.0 million at December 31, 1996.
This decline resulted from the Company's effort to reinvest funds from the
securities available for sale portfolio to the loan portfolio. The net decrease
of $86.8 million from December 31, 1996 resulted primarily from the net effect
of $49.2 million of mortgage-backed certificate repayments, $17.0 million of
proceeds from the maturities or calls of securities, $16.1 million of U.S.
Treasury and other U.S. Government agency securities purchases, and $35.4
million of proceeds from the sale of securities.
The portfolio of securities available for sale at December 31, 1997 was
comprised of $6.0 million of other U.S. Government agency securities, $39.3
million of U.S. Treasury securities and $91.8 million of mortgage-backed
certificates.
Loans. The balance of net loans held for investment increased 15.2% from
$422.2 million at December 31, 1996 to $486.5 million at December 31, 1997.
Adjustable-rate residential single-family loans increased from $157.5
million at December 31, 1996 to $213.7 million at December 31, 1997. The
increase in adjustable-rate residential single-family loans resulted from both
the origination of loans by the Company and from the purchase of loans,
including bulk purchases totaling $45.5 million during 1997. These purchased
loans are secured by real estate located outside the Company's primary market
area. Bulk loan purchases for 1996 totaled $84.6 million. The Company will
continue to make bulk purchases of adjustable-rate single-family loans secured
by real estate located outside of its primary market area in 1998.
Home equity and second mortgage loans increased from $29.6 million at
December 31, 1996 to $45.2 million at December 31, 1997. This increase resulted
primarily from the continuation of a successful program added to the Company's
retail banking strategy in 1996, which was evidenced by a 64.3% increase in
originations from $19.9 million in 1996 to $32.7 million in 1997.
Deposits. During 1997, the Company's total deposits increased from $499.0
million at December 31, 1996 to $507.7 million at December 31, 1997. The
Company's noninterest-bearing deposits increased by 18.9% from $46.2 million at
December 31, 1996 to $54.9 million at December 31, 1997. This increase in
noninterest-bearing deposits resulted from the Company's ongoing strategy to
seek lower-cost deposits to further enhance the Company's profitability.
Borrowed Funds. The Company's borrowed funds, which include Federal Home
Loan Bank ("FHLB") advances, other borrowings, and securities sold under
agreements to repurchase, increased from $155.1 million at December 31, 1996 to
$157.2 million at December 31, 1997. FHLB advances decreased from $148.0 million
to $145.0 million during this period, while other borrowings and securities sold
under agreements to repurchase increased by $5.1 million. The Company may
continue to use FHLB advances to fund the purchase of residential mortgage
loans, U.S. Treasury or other U.S. Government agency securities with maturities
of three years or less, or mortgage-backed certificates.
Capital. The Company's and Banks' capital ratios significantly exceeded
applicable regulatory requirements at both December 31, 1997 and 1996.
11
<PAGE>
Asset Quality. The Company's total nonperforming assets decreased by 57.1%,
to a total of $2.4 million, or .34% of assets, at December 31, 1997 compared to
$5.7 million, or .80% of assets, at December 31, 1996. Real estate owned ("REO")
and other repossessed assets decreased by 53.0%, from $2.8 million at December
31, 1996 to $1.3 million at December 31, 1997. Nonperforming loans decreased by
61.1%, from $2.8 million at December 31, 1996 to $1.1 million at December 31,
1997.
Comparison of Operating Results for the Years Ended December 31, 1997 and
December 31, 1996
General. The Company's pre-tax income increased by 70.7% to $9.3 million
for the year ended December 31, 1997 from $5.4 million for 1996. This increase
was attributable primarily to a $1.4 million increase in net interest income, a
$1.8 million increase in other income and an $860,000 decrease in other
expenses, the effect of which more than offset a $223,000 increase in the
provision for loan losses. Other expenses decreased in 1997 primarily as a
result of a reduction in federal deposit insurance premiums. Expenses in 1996
included a one-time assessment of $2.3 million in connection with the federal
legislation to recapitalize SAIF.
Net Interest Income. The Company's net interest income before provision for
loan losses increased by $1.4 million for the year ended December 31, 1997, a
6.9% increase from 1996. This increase resulted from a $2.6 million increase in
interest income, which exceeded a $1.2 million increase in interest expense. The
increase in interest income was primarily attributable to an increase in the
average balance of loans.
Interest on the Company's portfolio of mortgage-backed certificates
decreased by approximately $4.5 million from $13.2 million for the year ended
December 31, 1996 to $8.7 million for the comparable 1997 period. The decrease
resulted from a $72.8 million decrease in the average balance of the portfolio
which was partially offset by an increase in the average yield of the portfolio
from 6.69% in 1996 to 6.96% in 1997. The decrease in the average balance was a
consequence of the Company's sale of mortgage-backed certificates and
repayments. No mortgage-backed certificates were purchased in 1997.
The mortgage-backed certificate portfolio at December 31, 1997 had a total
amortized cost of $90.7 million and had a weighted average yield of 7.01% for
the month of December, 1997. The portfolio includes $5.1 million, or 5.6% of the
total portfolio, of fixed- rate mortgage-backed certificates; $83.6 million, or
92.2% of the total portfolio, of adjustable-rate mortgage-backed certificates;
and $2.1 million, or 2.2% of the total portfolio, of fixed-rate mortgage-backed
certificates with balloon provisions. The weighted average yields for the month
of December 1997 for these three classifications were 8.43%, 6.94%, and 6.51%,
respectively.
Interest on loans increased by approximately $8.0 million, or 26.4%, from
$30.2 million in the year ended 1996 to $38.2 million in 1997. This increase was
attributable to a $118.4 million increase in the average balance of loans, the
effect of which more than offset a decrease in the yield on the Company's loan
portfolio from 8.59% in 1996 to 8.12% in 1997. The increase in the average
balance of loans resulted from both an increase in originations and from the
purchase of residential single-family loans. The weighted average yield on the
loan portfolio for the month of December 1997 was 8.17%.
Interest on investment securities decreased $882,000 in 1997 compared to
1996. This decrease resulted from a $12.4 million decrease in the average
balance of the portfolio and a decrease in the yield on the portfolio from 6.44%
in 1996 to 6.25% in 1997.
The Company's interest expense increased by $1.2 million, primarily as a
result of an increase in interest on deposits, the effect of which was partially
offset by a decrease in interest on borrowings. The average balance of interest
bearing deposits increased by $41.3 million in 1997 compared to 1996, while the
average costs of interest bearing deposits decreased from 4.70% in 1996 to 4.66%
in 1997. The average balance of borrowings decreased by $13.3 million in 1997
12
<PAGE>
compared to 1996, while the average cost of the borrowings increased from 5.40%
in 1996 to 5.54% in 1997.
The Company's net interest margin increased from 3.22% for the year ended
December 31, 1996 to 3.27% for the year ended December 31, 1997. This increase
was the result of an increase in the Company's interest rate spread from 2.83%
in the year ended December 31, 1996 to 2.85% in the comparable 1997 period. The
increase in the Company's interest rate spread occurred because the Company's
overall yield on its interest-earning assets remained level at 7.73%, while the
overall cost of its interest-bearing liabilities decreased from 4.90% in 1996 to
4.88% in 1997. The Company's calculations of interest rate spread and net
interest rate margin include nonaccrual loans as interest-earning assets.
The Company's net interest margin remained substantially unchanged during
1997. For the three months ended December 31, 1997, the Company's net interest
margin was 3.31% and the interest rate spread was 2.86%. For the three months
ended December 31, 1996, the Company's net interest margin was 3.30% and the
interest rate spread was 2.91%.
Provision for Loan Losses. The Company's provision for loan losses
increased from $377,000 in 1996 to $600,000 in 1997. Net chargeoffs totaled
$623,000 in 1997 compared to $267,000 in 1996. The Company's 1996 provision for
loan losses was positively impacted by a $288,000 recovery relating to one loan.
At December 31, 1997, the Company's total allowance for loan losses was $3.8
million and nonperforming loans totaled $1.1 million, resulting in a coverage
ratio of 343.0%.
Other Income. Total other income increased by 46.7%, from $3.9 million in
1996 to $5.7 million in 1997. Deposit fees and merchant processing fees
increased by $615,000 and $653,000, respectively, in 1997 compared to 1996.
Deposit fees increased in 1997 as a result of additional transaction accounts,
the addition of two ATMs, full implementation of ATM surcharges and increases in
the Company's deposit fee schedule. Merchant processing fees increased in 1997
as the Company continued to experience substantial growth in its merchant
portfolio. Brokerage fees recognized by CENIT Bank's commercial mortgage loan
brokerage subsidiary increased by $437,000 in 1997 compared to 1996.
Other Expenses. Total other expenses decreased from $18.2 million in the
year ended December 31, 1996 to $17.3 million in 1997. Total other expenses for
1996 includes the $2.3 million SAIF special assessment and for 1997 includes
$405,000 of expenses relating to the proxy contest and other matters. Exclusive
of the SAIF special assessment in 1996 and the proxy and other expenses in 1997,
total other expenses were $15.8 million in 1996 and $16.9 million in 1997.
Salaries and employee benefits increased by $551,000 in 1997 primarily as a
result of overall increases in wages and benefits, expansion of the retail
banking group, including the opening of two new Super Kmart offices, one in
August 1996 and one in November 1997, and additional commissions from CENIT
Bank's commercial mortgage loan brokerage subsidiary related to the increase in
mortgage loan brokerage revenue. Merchant processing expenses increased by
$544,000 in 1997 as a result of increased volume. Expenses related to real
estate owned increased by $177,000 during 1997 due to disposal of properties
during the year. Net occupancy expenses of premises increased by $133,000 in
1997, reflecting the incremental costs associated with additional retail
locations and the renovation of certain existing locations. The impact of the
increases in the above expenses was partially offset by a $570,000 decrease in
federal deposit insurance premiums in 1997 due primarily to lower premium rates,
and a $129,000 decrease in professional fees.
Income Taxes. The Company's income tax expense for the year ended
December 31, 1997 was $3.3 million, which represents an effective tax rate of
35.2%. The Company's income tax expense for 1996 was $1.8 million, which
represented an effective tax rate of 33.5%. The effective tax rate increased
during 1997 primarily as a result of the increase in the income of CENIT Bank
subject to state tax.
13
<PAGE>
Comparison of Operating Results for the Years Ended December 31, 1996 and
December 31, 1995
General. The Company's pre-tax income increased to $5.4 million for the
year ended December 31, 1996 from $4.1 million for 1995. This increase was
attributable primarily to a $2.0 million increase in net interest income, a
$950,000 increase in other income and a $320,000 decrease in the provision for
loan losses, the effect of which more than offset a $2.0 million increase in
other expenses. Other expenses increased primarily as a result of the $2.3
million pretax charge against earnings relating to the special assessment
charged to the Company in connection with the federal legislation to
recapitalize the SAIF.
Net Interest Income. The Company's net interest income before provision for
loan losses increased by $2.0 million for the year ended December 31, 1996, an
11.3% increase from 1995. This increase resulted from a $2.6 million increase in
interest income, which exceeded a $611,000 increase in interest expense. The
increase in interest income was primarily attributable to an increase in the
average balance of loans and to an increase in the average balance and average
yield of the mortgage-backed certificate portfolio.
Interest on the Company's portfolio of mortgage-backed certificates
increased by approximately $1.8 million from $11.4 million for the year ended
December 31, 1995 to $13.2 million for the comparable 1996 period. This increase
resulted from both a $16.4 million increase in the average balance of the
portfolio and an increase in the average yield of the portfolio from 6.30% in
1995 to 6.69% in 1996. The increase in the average balance was a consequence of
the Company's purchase of mortgage-backed certificates in the latter part of
1995 and the first part of 1996 to increase income of the Company. The increase
in the yield on mortgage-backed certificates occurred primarily as a result of
the Company's December, 1995 sale of lower yielding mortgage-backed certificates
with five-year balloon provisions and the replacement of those assets in
December, 1995 and January, 1996 with higher-yielding, adjustable-rate
mortgage-backed certificates.
The mortgage-backed certificate portfolio at December 31, 1996 had a total
amortized cost of $176.2 million and had a weighted average yield of 6.85% for
the month of December, 1996. The portfolio was comprised of $18.0 million, or
10.2% of the total portfolio, of mortgage-backed certificates with five- and
seven-year balloon provisions; $151.9 million, or 86.2% of the total portfolio,
of adjustable-rate mortgage-backed certificates; and $6.3 million, or 3.6% of
the total portfolio, of fixed-rate mortgage-backed certificates.
Interest on loans increased by approximately $1.3 million from $28.9
million in 1995 to $30.2 million in 1996. This increase was attributable to a
$27.8 million increase in the average balance of loans, the effect of which more
than offset a decrease in the yield on the Company's loan portfolio from 8.91%
in 1995 to 8.59% in 1996. The increase in the average balance of loans resulted
from both an increase in originations and from the purchase of residential loans
discussed above.
Interest on investment securities decreased $389,000 in 1996 compared to
1995. This decrease resulted from a $7.8 million decrease in the average balance
of the portfolio, the effect of which more than offset an increase in the yield
on the portfolio from 6.26% in 1995 to 6.44% in 1996.
The Company's interest expense increased by $611,000 primarily as a result
of an increase in interest on borrowings. Interest on borrowings totaled $8.8
million in the year ended December 31, 1996 compared to $8.1 million in 1995.
The average balance of FHLB advances increased by $26.4 million in 1996 compared
to 1995 as the Company continued to utilize FHLB advances to fund a portion of
its growth. The impact of the increase in average balances of FHLB advances was
partially offset by a decrease in the average cost of the advances from 6.16% in
1995 to 5.44% in 1996.
14
<PAGE>
The Company's net interest margin increased from 3.07% for the year ended
December 31, 1995 to 3.22% for the year ended December 31, 1996. This increase
was the result of an increase in the Company's interest rate spread from 2.60%
in the year ended December 31, 1995 to 2.83% in the comparable 1996 period. The
increase in the Company's interest rate spread occurred because the Company's
overall yield on its interest-earning assets remained level at 7.73%, while the
overall cost of its interest-bearing liabilities decreased from 5.13% in 1995 to
4.90% in 1996. The Company's calculations of interest rate spread and net
interest rate margin include nonaccrual loans as interest-earning assets.
The Company's net interest margin and interest rate spread gradually
increased during 1996. For the three months ended December 31, 1996, the
Company's net interest margin was 3.30% and the interest rate spread was 2.91%.
Provision for Loan Losses. The Company's provision for loan losses
decreased from $697,000 in 1995 to $377,000 in 1996. The Company's 1996
provision for loan losses was positively impacted by a $288,000 recovery
received relating to one loan. Net chargeoffs totaled $267,000 in 1996 compared
to $790,000 in 1995. At December 31, 1996, the Company's total allowance for
loan losses was $3.8 million and nonperforming loans totaled $2.8 million,
resulting in a coverage ratio of 134.2%.
Other Income. Total other income increased from $2.9 million in 1995 to
$3.9 million in 1996. Deposit fees and merchant processing fees increased by
$401,000 and $236,000, respectively, in 1996 compared to 1995. Deposit fees
increased in 1996 as a result of additional transaction accounts, the addition
of seven ATMs and increases in the Company's deposit fee schedule. Merchant
processing fees increased in 1996 as the Company continued to experience
substantial growth in its merchant portfolio. Gains on the sale of individual
loans and servicing from mortgage operations increased by $85,000 in 1996
compared to 1995, primarily as a result of an increase in the volume of loans
sold. Also, the Company recognized a net gain of $77,000 on the sale of
securities in 1996 compared to a loss of $563,000 in 1995. The effect of these
items was partially offset by a $303,000 decrease in brokerage fees recognized
by CENIT Bank's commercial mortgage loan brokerage subsidiary.
Other Expenses. Total other expenses increased from $16.2 million in the
year ended December 31, 1995 to $18.2 million in 1996. Total other expenses for
1996 includes the $2.3 million SAIF special assessment and for 1995 includes
$757,000 of expenses relating to the Princess Anne merger. Exclusive of the SAIF
special assessment in 1996 and the merger expenses in 1995, total other expenses
were $15.8 million and $15.4 million, respectively. Salaries and employee
benefits increased by $293,000 in 1996 primarily as a result of overall
increases in wages and benefits and CENIT Bank's opening of two new Super Kmart
offices, one in November, 1995 and one in August, 1996. The impact of the
increase in wages and benefits was partially offset by a $141,000 net decrease
in commissions in 1996. Net occupancy expense of premises increased by $311,000
in 1996 primarily as a result of incremental costs associated with the opening
of three new offices and the relocation of two offices. Merchant processing
expenses increased by $209,000 in 1996 as a result of increased volume. The
impact of the increases in the above expenses was partially offset by a $334,000
decrease in expenses, gains/losses, and provision for losses on real estate
owned and a $202,000 decrease in professional fees in 1996.
Income Taxes. The Company's income tax expense for the year ended
December 31, 1996 was $1.8 million, which represents an effective tax rate of
33.5%. The Company's income tax expense for 1995 was $1.7 million, which
represented an effective tax rate of 40.0%. The effective tax rate was higher in
the 1995 period due to the nondeductibility of certain merger expenses.
Liquidity
The Company's primary sources of funds are deposits, principal repayments
on loans and mortgage-backed certificates, FHLB advances,
15
<PAGE>
proceeds from maturities of investment securities, short-term investments, and
funds provided by operations. While scheduled loan and mortgage-backed
certificate amortization and short-term investments are a relatively predictable
source of funds, deposit flows are greatly influenced by general interest rates,
economic conditions, and competition.
CENIT Bank is required to maintain specific levels of liquid investments.
Current regulations require CENIT Bank to maintain liquid assets, which include
short-term assets such as cash, certain time deposits and bankers' acceptances,
short-term U.S. Treasury obligations, and mortgage-backed certificates with
final maturities of five years or less, as well as certain long-term assets,
equal to not less than 5.0% of its net withdrawable accounts plus short-term
borrowings. CENIT Bank has generally maintained regulatory liquidity in excess
of its required levels. CENIT Bank's liquidity ratio was 8.8% and 9.5% at
December 31, 1997 and December 31, 1996, respectively. As a Virginia state
chartered bank, Princess Anne is not required by regulation to maintain specific
levels of liquid investments.
At December 31, 1997, the Company had outstanding mortgage and nonmortgage
loan commitments, including unused lines of credit, of $41.1 million,
outstanding commitments to purchase loans of $28.1 million, outstanding
commitments to purchase approximately $9.3 million of adjustable-rate
mortgage-backed certificates, and outstanding commitments to sell mortgage loans
of $3.9 million, if such loans close. The Company anticipates that it will have
sufficient funds available to meet its current commitments.
Certificates of deposit that are scheduled to mature within one year
totaled $258.9 million at December 31, 1997. The Company believes that a
significant portion of the certificates of deposit maturing in this period will
remain with the Company. The Company's liquidity could be impacted by a decrease
in the renewals of deposits or general deposit runoff. However, the Company has
the ability to raise deposits by conducting deposit promotions. In the event the
Company requires funds beyond its ability to generate them internally, the
Company could obtain additional advances from the FHLB. The Company could also
obtain funds through the sale of investment securities from its available for
sale portfolio.
Market Risk Management
The Company's primary market risk exposure is interest rate risk.
Fluctuations in interest rates will impact both the level of interest income and
interest expense and the market value of the Company's interest-earning assets
and interest-bearing liabilities.
The primary goal of the Company's asset/liability management strategy is to
maximize its net interest income over time while keeping interest rate risk
exposure within levels established by the Company's management. The Company's
ability to manage its interest rate risk depends generally on the Company's
ability to match the maturities and repricing characteristics of its assets and
liabilities while taking into account the separate goals of maintaining asset
quality and liquidity and achieving the desired level of net interest income.
The principal variables that affect the Company's management of its interest
rate risk include the Company's existing interest rate gap position,
management's assessment of future interest rates, the need for the Company to
replace assets that may prepay before their scheduled maturities, and the
withdrawal of liabilities over time.
The Company's primary technique for managing its interest rate risk
exposure is the management of the Company's interest sensitivity gap. The
interest sensitivity gap is defined as the difference between the amount of
interest-earning assets anticipated, based upon certain assumptions, to mature
or reprice within a specific time period and the amount of interest-bearing
liabilities anticipated, based upon certain assumptions, to mature or reprice
within that time period. At December 31, 1997, the Company's one year "positive
gap" (interest-earning assets maturing within a period exceed interest-bearing
liabilities repricing within the same period) was
16
<PAGE>
approximately $25.0 million, or 3.5% of total assets. Thus, during periods of
rising interest rates, this implies that the Company's net interest income would
be positively affected because the yield of the Company's interest-earning
assets is likely to rise more quickly than the cost on its interest-bearing
liabilities. In periods of falling interest rates, the opposite effect on net
interest income is likely to occur.
The Company manages its interest rate risk by influencing the adjustable
and fixed rate mix of its loans, securities, deposits and borrowings. The
Company can add loans or securities with adjustable, balloon or call features,
as well as fixed rate loans and mortgage securities if the yield on such loans
and securities is consistent with the Company's asset/liability management
strategy. Also, the Company can manage its interest rate risk by extending the
maturity of its borrowings or selling certain assets and repaying borrowings.
Certain shortcomings are inherent in any method of analysis used to
estimate a financial institution's interest rate gap. The analysis is based at a
given point in time and does not take into consideration that changes in
interest rates do not affect all assets and liabilities equally. For example,
although certain assets and liabilities may have similar maturities or
repricing, they may react differently to changes in market interest rates. The
interest rates on certain types of assets and liabilities also may fluctuate in
advance of changes in market interest rates, while interest rates on other types
may lag behind changes in market rates. The interest rates on loans with balloon
or call features may or may not change depending upon their interest rates
relative to market interest rates. Additionally, certain assets, such as
adjustable-rate mortgages, have features that may restrict changes in interest
rates on a short-term basis and over the life of the asset.
The Company is also subject to prepayment risk, particularly in falling
interest rate environments or in environments where the slope of the yield curve
is relatively flat or negative. Such changes in the interest rate environment
can cause substantial changes in the level of prepayments of loans and
mortgage-backed certificates, which may also affect the Company's interest rate
gap position.
As part of its borrowings, the Company may utilize from time-to-time,
convertible advances from the FHLB-Atlanta. Convertible advances generally
provide for a fixed-rate of interest for a portion of the term of the advance,
an ability for the FHLB-Atlanta to convert the advance from a fixed rate to an
adjustable rate at some predetermined time during the remaining term of the
advance (the "conversion" feature), and a concurrent opportunity for the Company
to prepay the advance with no prepayment penalty in the event the FHLB-Atlanta
elects to exercise the conversion feature. Changes in interest rates from those
at December 31, 1997 may result in a change in the estimated maturity of
convertible advances and, therefore, the Company's interest rate gap position.
Also, the methodology used estimates various rates of withdrawal (or
"decay") for money market deposit, savings, and checking accounts, which may
vary significantly from actual experience.
The following table sets forth the amounts of interest-earning assets and
interest-bearing liabilities outstanding at December 31, 1997 that are subject
to repricing or that mature in each of the future time periods shown. The table
reflects certain assumptions regarding prepayment of loans and mortgage-backed
certificates that are outside of actual contractual terms, and are based on the
1997 prepayment experience of the Company. Additionally, loans and securities
with call or balloon provisions are included in the period in which they balloon
or may first be called. Except as stated above, the amount of assets and
liabilities shown that reprice or mature during a particular period were
determined in accordance with the contractual terms of the asset or liability.
17
<PAGE>
<TABLE>
Interest Sensitivity Analysis
December 31, 1997
(Dollars in thousands)
<CAPTION>
Over Over
Total One Three
Within Year to Years or
0-3 4-6 7-12 One Three Non-
Months Months Months Year Years Sensitive Total
-------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Assets
Interest-earning assets:
Loans (1) $130,591 $ 51,440 $ 84,297 $ 266,328 $141,082 $ 84,987 $492,397
Securities available for sale:
U.S. Treasury securities 4,001 6,012 4,027 14,040 25,303 - 39,343
Other U.S. Government agency
securities - 1,000 3,004 4,004 2,000 - 6,004
Mortgage-backed certificates 25,187 24,440 36,906 86,533 1,677 3,631 91,841
Federal funds sold 37,118 - - 37,118 - - 37,118
Federal Home Loan Bank and Federal
Reserve Bank stock - - - - - 8,711 8,711
-------------------------------------------------------------------------------
Total interest-earning assets $196,897 $ 82,892 $128,234 $ 408,023 $170,062 $ 97,329 $675,414
===============================================================================
Liabilities
Interest-bearing liabilities:
Interest-bearing deposits:
Passbook, statement savings
and checking accounts (2) $ 2,987 $ 2,987 $ 5,974 $ 11,948 $ 18,552 $ 46,372 $ 76,872
Money market deposits 3,744 3,743 7,487 14,974 17,327 15,425 47,726
Certificates of deposits 95,871 67,422 95,603 258,896 55,149 14,153 328,198
-------------------------------------------------------------------------------
Total interest-bearing deposits 102,602 74,152 109,064 285,818 91,028 75,950 452,796
Advances from the Federal Home Loan Bank 85,000 - - 85,000 60,000 - 145,000
Other borrowings 2,575 - - 2,575 - - 2,575
Securities sold under
agreements to repurchase 9,664 - - 9,664 - - 9,664
-------------------------------------------------------------------------------
Total interest-bearing liabilities $199,841 $ 74,152 $109,064 $ 383,057 $151,028 $ 75,950 $610,035
===============================================================================
Interest sensitivity gap $ (2,944) $ 8,740 $ 19,170 $ 24,966 $ 19,034 $ 21,379 $ 65,379
===============================================================================
Cumulative interest sensitivity gap $ (2,944) $ 5,796 $ 24,966 $ 24,966 $ 44,000
=======================================================
Cumulative interest sensitivity gap as
a percentage of total assets (0.4%) 0.8% 3.5% 3.5% 6.1%
<FN>
(1) Excludes nonaccrual loans of $1.0 million.
(2) Excludes $54.9 million of noninterest-bearing deposits.
</FN>
</TABLE>
The following table provides information about the Company's financial
instruments that are sensitive to changes in interest rates as of December 31,
1997, based on the information and assumptions set forth in the notes to the
table. The Company had no derivative financial instruments, foreign currency
exposure or trading portfolio as of December 31, 1997. The amounts included
under each expected maturity date for loans, mortgage-backed certificates, and
other investments were calculated by adjusting the instrument's contractual
maturity date for expectations of prepayments, as set forth in the notes to the
table. Similarly, expected maturity date amounts for interest-bearing core
deposits were calculated based upon estimates of the period over which the
deposits would be outstanding as set forth in the notes. With respect to the
Company's adjustable rate instruments, amounts included under each expected
maturity date were measured by adjusting the instrument's contractual maturity
date for expectations of prepayments, as set forth in the notes. From a risk
management perspective, however, the Company believes that repricing dates, as
opposed to expected maturity dates, may be more relevant in analyzing the
interest sensitivity of such instruments.
18
<PAGE>
<TABLE>
<CAPTION>
EXPECTED MATURITY DATE - YEAR ENDED DECEMBER 31,
-----------------------------------------------------------------------------------
There- Fair
(Dollars in thousands) 1998 1999 2000 2001 2002 after Total Value
---- ---- ---- ---- ---- ------ ----- -----
ON-BALANCE SHEET
FINANCIAL INSTRUMENTS
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans (1) (2)
Fixed rate $ 27,163 $ 16,776 $ 14,180 $ 10,656 $ 8,571 $ 30,529 $107,875 $109,993
Average interest rate 8.19% 8.55% 8.58% 8.56% 8.51% 8.54% 8.46%
Adjustable rate 120,101 61,945 45,568 32,812 24,821 99,275 384,522 390,124
Average interest rate 8.43% 8.02% 7.88% 7.97% 7.95% 7.94% 8.10%
Mortgage-backed certificates (3)
Fixed rate 3,052 874 776 699 634 1,304 7,339 7,339
Average interest rate 6.83% 8.43% 8.44% 8.44% 8.44% 8.47% 7.77%
Adjustable rate 24,927 17,898 12,881 9,304 6,752 12,740 84,502 84,502
Average interest rate 6.94% 6.94% 6.94% 6.93% 6.93% 6.92% 6.94%
Investments (4) 18,044 12,109 15,194 - - 8,711 54,058 54,058
Average interest rate 6.20% 5.99% 6.19% -% -% 7.21% 6.31%
Federal funds sold 37,118 - - - - - 37,118 37,118
Average interest rate 5.55% -% -% -% -% -% 5.55%
-------------------------------------------------------------------------------------
Total $230,405 $109,602 $ 88,599 $ 53,471 $ 40,778 $152,559 $675,414 $683,134
Average interest rate 7.58% 7.70% 7.57% 7.91% 7.91% 7.94% 7.73%
=====================================================================================
Interest-bearing liabilities:
Interest-bearing deposits (5) (6) $285,818 $ 51,634 $ 39,394 $ 20,763 $ 14,668 $ 40,519 $452,796 $454,912
Average interest rate 5.06% 4.65% 5.09% 4.07% 4.03% 2.93% 4.75%
Borrowings (7) 97,239 - 60,000 - - - 157,239 157,816
Average interest rate 5.56% -% 5.18% -% -% -% 5.41%
-------------------------------------------------------------------------------------
Total $383,057 $ 51,634 $ 99,394 $ 20,763 $ 14,668 $ 40,519 $610,035 $612,728
Average interest rate 5.19% 4.65% 5.14% 4.07% 4.03% 2.93% 4.92%
=====================================================================================
____________________
<FN>
(1) Assumes the following annual prepayment rates:
-For single-family residential adjustable loans which adjust based
upon changes in the one-year constant maturity treasury index, from
14% to 25%;
-For single-family fixed-rate first mortgage loans, from 11% to 17%;
-For commercial real estate loans, an average of 12%;
-For consumer loans, an average of 41%; and
-For most other loans, from 3% to 71%.
(2) Excludes nonaccrual loans of $1.0 million.
(3) Assumes prepayment rates for adjustable mortgage-backed certificates of
25-32% and for fixed-rate mortgage-backed certificates of 12% to 15%.
(4) Totals include the Company's investment in FHLB and Federal Reserve Bank
Stock. Investment securities with call features are reflected in the
maturity period in which the security is expected to be called based on
interest rates at December 31, 1997.
(5) For money market deposits, savings and checking accounts, assumes annual
decay rates of 31%, 14% and 18%, respectively. These estimated rates are
those last published by the Office of Thrift Supervision in November, 1994.
(6) Excludes $54.9 million of noninterest-bearing deposits.
(7) For the $60 million FHLB convertible fixed-rate advance with an interest
rate of 5.18%, which is convertible at the option of the FHLB to an
adjustable-rate advance beginning in September, 1998 and quarterly
thereafter until the advance's maturity in September, 2007, the estimated
expected maturity at December 31, 1997 is 2.5 years based on information
from FHLB-Atlanta.
</FN>
</TABLE>
19
<PAGE>
Impact of Inflation and Changing Prices
The Consolidated Financial Statements and Notes presented herein have been
prepared in accordance with generally accepted accounting principles, which
generally require the measurement of financial position and operating results in
terms of historical dollars without considering the changes in the relative
purchasing power of money over time due to inflation. The impact of inflation is
reflected in the increased cost of the Company's operations. Unlike most
industrial companies, nearly all of the assets and liabilities of the Company
are monetary. As a result, interest rates have a greater impact on the Company's
performance than do the effects of general levels of inflation.
Impact of New Accounting Standards
In June 1997, Statement of Financial Accounting Standards No. 130,
"Reporting Comprehensive Income" ("FAS 130"), was issued and establishes
standards for reporting and displaying comprehensive income and its components.
FAS 130 requires comprehensive income and its components, as recognized under
the accounting standards, to be displayed in a financial statement with the same
prominence as other financial statements. The Company plans to adopt the
standard, as required, beginning in 1998; adoption is not expected to have a
material impact on the Company.
Statement of Financial Accounting Standards No. 131, "Disclosures about
Segments of an Enterprise and Related Information," also issued in June 1997,
establishes new standards for reporting information about operating segments in
annual and interim financial statements. The standard also requires descriptive
information about the determination of operating segments, the products and
services provided by the segments and the nature of differences between
reportable segment measurements and those used for the consolidated enterprise.
This standard is effective for years beginning after December 15, 1997. Adoption
in interim financial statements is not required until the year after initial
adoption; however, comparative prior period information is required. The Company
is evaluating the standard and plans adoption as required in 1998; adoption is
not expected to have a significant financial impact on the Company.
Impact of the Year 2000 Issue
The Year 2000 Issue is the result of computer programs being written using
two digits rather than four to define the applicable year. As a result, such
computer programs will not recognize the correct date after December 31, 1999.
In 1997, the Company implemented a process of software inventory, analysis,
modification and testing to address the Year 2000 Issue. This process is
currently underway and the Company expects to substantially complete its Year
2000 software conversion project by the end of 1998.
Based on its most recent assessment, management of the Company believes
that modification of the Company's software will be completed in a timely manner
for its computer systems to properly utilize dates beyond December 31, 1999. The
Company estimates that the cost to modify its computer systems will be between
$500,000 and $600,000. These costs will not be incremental costs to the Company,
but rather will represent the redeployment of existing information technology
resources.
The potential impact of the Year 2000 Issue will depend not only on the
corrective measures the Company will undertake but also on other entities who
provide data to or receive data from the Company and on those whose operational
capability or financial condition are important to the Company, including the
Company's borrowers, lenders, suppliers and service providers. The Company has
communicated with some of these parties to ensure their awareness of the Year
2000 Issue. The plans of such parties to address the Year 2000 Issue will be
monitored, and any fundamental impact on the Company will be evaluated. At this
time, however, the Company is not able to determine whether the failure to
address the Year 2000 Issue by any of its borrowers, lenders, suppliers or
service providers will affect the Company's operations or financial condition.
Safe Harbor Statement Under the Private Securities Litigation Reform Act of 1995
The above discussion contains certain forward looking statements that
involve potential risk and uncertainties. The Company's future results could
differ materially from those discussed herein. Readers should not place undue
reliance on these forward looking statements which are applicable only as of the
date hereof.
20
<PAGE>
<TABLE>
<CAPTION>
Consolidated Statement of Financial Condition
(Dollars in thousands, except per share data)
December 31,
1997 1996
---------------------------
<S> <C> <C>
Assets
Cash $ 16,993 $ 17,475
Federal funds sold 37,118 6,003
Securities available for sale at fair value (adjusted cost
of $135,861 and $222,367, respectively) 137,188 224,011
Loans, net:
Held for investment 486,487 422,219
Held for sale 3,167 1,900
Interest receivable 4,888 5,456
Real estate owned, net 1,098 2,769
Federal Home Loan Bank and Federal Reserve
Bank stock, at cost 8,711 7,861
Property and equipment, net 14,230 12,664
Goodwill and other intangibles, net 4,010 4,381
Other assets 4,193 2,361
---------------------------
Total assets $ 718,083 $ 707,100
===========================
Liabilities and Stockholders' Equity
Liabilities:
Deposits:
Noninterest-bearing $ 54,874 $ 46,154
Interest-bearing 452,796 452,811
---------------------------
Total deposits 507,670 498,965
Advances from the Federal Home Loan Bank 145,000 148,000
Other borrowings 2,575 ---
Securities sold under agreements to repurchase 9,664 7,138
Advance payments by borrowers for taxes and insurance 720 631
Other liabilities 2,517 2,758
---------------------------
Total liabilities 668,146 657,492
---------------------------
Commitments (Note 19)
Stockholders' equity: (Note 26)
Preferred stock, $.01 par value; authorized 3,000,000
shares; none outstanding - -
Common stock, $.01 par value; authorized 7,000,000
shares; issued and outstanding 1,657,081
and 1,635,044, respectively 17 16
Additional paid-in capital 18,152 17,670
Retained earnings - substantially restricted 35,416 31,040
Common stock acquired by Employees Stock
Ownership Plan (ESOP) (4,232) -
Common stock acquired by Management
Recognition Plan (MRP) (271) (181)
Net unrealized gain on securities available for sale,
net of income taxes 855 1,063
---------------------------
Total stockholders' equity 49,937 49,608
---------------------------
$ 718,083 $ 707,100
===========================
<FN>
The notes to consolidated financial statements are an integral part of this
statement.
</FN>
</TABLE>
21
<PAGE>
<TABLE>
<CAPTION>
Consolidated Statement of Operations
(Dollars in thousands, except per share data)
Year Ended December 31,
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Interest and fees on loans $ 38,220 $ 30,243 $ 28,907
Interest on mortgage-backed certificates 8,685 13,224 11,406
Interest on investment securities 2,775 3,657 4,046
Dividends and other interest income 1,096 1,047 1,168
-------------------------------------------
Total interest income 50,776 48,171 45,527
-------------------------------------------
Interest on deposits 20,972 19,240 19,382
Interest on borrowings 8,338 8,847 8,094
-------------------------------------------
Total interest expense 29,310 28,087 27,476
-------------------------------------------
Net interest income 21,466 20,084 18,051
Provision for loan losses 600 377 697
-------------------------------------------
Net interest income after provision for loan losses 20,866 19,707 17,354
-------------------------------------------
Other income:
Deposit fees 2,040 1,425 1,024
Gains (losses) on sales of:
Securities, net 84 77 (563)
Loans, net 548 629 544
Loan servicing fees and late charges 322 353 441
Other 2,719 1,410 1,498
-------------------------------------------
Total other income 5,713 3,894 2,944
-------------------------------------------
Other expenses:
Salaries and employee benefits 8,313 7,762 7,469
Equipment, data processing, and supplies 2,703 2,529 2,512
Federal deposit insurance premiums, including
one-time SAIF special assessment of $2,340
in 1996 277 3,187 893
Merger expenses - - 757
Expenses related to proxy contest and other
matters 405 - -
Other 5,614 4,694 4,543
-------------------------------------------
Total other expenses 17,312 18,172 16,174
-------------------------------------------
Income before income taxes 9,267 5,429 4,124
Provision for income taxes 3,264 1,821 1,652
-------------------------------------------
Net income $ 6,003 $ 3,608 $ 2,472
===========================================
Earnings per share:
Basic $ 3.71 $ 2.23 $ 1.55
===========================================
Diluted $ 3.61 $ 2.17 $ 1.50
===========================================
Dividends per common share $ 1.00 $ .75 $ .40
===========================================
Pro forma earnings per share to reflect 3 for 1
stock split approved by Board of Directors on
March 24, 1998 (unaudited)
Basic $ 1.24 $ .74 $ .52
===========================================
Diluted $ 1.20 $ .72 $ .50
===========================================
<FN>
The notes to consolidated financial statements are an integral part of this
statement.
</FN>
</TABLE>
22
<PAGE>
<TABLE>
Consolidated Statement of Cash Flows
(Dollars in thousands)
Year Ended December 31,
1997 1996 1995
------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 6,003 $ 3,608 $ 2,472
Add (deduct) items not affecting cash during the year:
Provision for loan losses 600 377 697
Provision for losses on real estate owned 81 136 199
Amortization of loan yield adjustments 158 (98) (227)
Depreciation, amortization and accretion, net 2,593 2,481 1,617
Net (gains) losses on sales/disposals of:
Securities (84) (77) 563
Loans (548) (629) (544)
Real estate, property and equipment 16 160 (244)
Proceeds from sales of loans held for sale 45,338 46,685 37,848
Originations of loans held for sale (46,097) (45,003) (33,424)
Change in assets/liabilities, net
Increase in interest receivable and other assets (1,121) (3,689) (772)
Decrease in other liabilities (46) (532) (410)
------------------------------------------------
Net cash provided by operating activities 6,893 3,419 7,775
------------------------------------------------
Cash flows from investing activities:
Purchases of securities available for sale (16,087) (67,906) (103,420)
Purchases of securities held to maturity - - (53,321)
Proceeds from sales of securities available for sale 35,447 14,792 68,689
Principal repayments on securities available for sale 49,243 66,519 8,499
Principal repayments on securities held to maturity - - 24,020
Proceeds from maturities and calls of securities available
for sale 17,000 29,160 10,000
Net increase in loans held for investment (64,572) (105,602) (10,517)
Net proceeds on sales of real estate owned 1,224 1,837 828
Additions to real estate owned (129) (398) (727)
Purchases of Federal Home Loan Bank stock
and Federal Reserve Bank stock (1,850) (7,942) (5,191)
Redemption of Federal Home Loan Bank stock 1,000 7,110 3,900
Purchases of property and equipment (2,727) (2,662) (2,620)
Proceeds from sales of property and equipment 10 - 389
------------------------------------------------
Net cash provided by (used for) investing activities 18,559 (65,092) (59,471)
------------------------------------------------
Cash flows from financing activities:
Proceeds from exercise of stock options and warrants 357 583 196
Net increase in deposits 8,705 48,435 30,108
Proceeds from Federal Home Loan Bank advances 1,255,000 1,918,000 1,247,000
Repayment of Federal Home Loan Bank advances (1,258,000) (1,903,000) (1,221,000)
Proceeds from other borrowings 4,000 - -
Repayment of other borrowings (1,425) (300) (300)
Net increase in securities sold under agreement
to repurchase 2,526 2,267 3,436
Cash dividends paid (1,627) (1,215) (531)
Purchase of Common Stock by ESOP (4,232) - -
Other, net (123) (24) (168)
------------------------------------------------
Net cash provided by financing activities 5,181 64,746 58,741
------------------------------------------------
Increase in cash and cash equivalents 30,633 3,073 7,045
Cash and cash equivalents, beginning of year 23,478 20,405 13,360
------------------------------------------------
Cash and cash equivalents, end of year $ 54,111 $ 23,478 $ 20,405
================================================
Supplemental disclosures of cash flow information:
Cash paid during the year for interest $ 11,624 $ 11,883 $ 15,082
Cash paid during the year for income taxes 2,820 1,595 1,691
Schedule of noncash investing and financing activities:
Real estate acquired in settlement of loans 1,603 3,920 3,055
Loans to facilitate sale of real estate owned 2,058 1,622 3,486
<FN>
The notes to consolidated financial statements are an integral part of this
statement.
</FN>
</TABLE>
23
<PAGE>
<TABLE>
Consolidated Statement of Changes in Stockholders' Equity
(Dollars in thousands)
<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, 1994 1,583,595 $ 16 $ 16,588 $ 26,720 $ (718) $ (389) $ 42,217
Net income - - - 2,472 - - 2,472
Cash dividends paid, net of
tax benefits relating to
dividends paid on unallo-
cated shares held by ESOP - - - (523) - - (523)
Principal payments on ESOP
loan - - - - 300 - 300
Exercise of stock options, stock
warrants, and related tax
benefits 13,783 - 276 - - - 276
Net unrealized gain on
securities transferred on
November 30, 1995 to
available for sale, net of
income taxes - - - - - 103 103
Net change in unrealized gain
(loss) on securities available
for sale, net of income taxes - - - - - 1,897 1,897
Other (703) - 39 (28) (24) - (13)
-------------------------------------------------------------------------------------------
Balance, December 31, 1995 1,596,675 16 16,903 28,641 (442) 1,611 46,729
Net income - - - 3,608 - - 3,608
Cash dividends paid, net of
tax benefits relating to
dividends paid on unallo-
cated shares held by ESOP - - - (1,209) - - (1,209)
Principal payments on ESOP
loan - - - - 300 - 300
Exercise of stock options, stock
warrants, and related tax
benefits 38,369 - 767 - - - 767
Net change in unrealized gain
(loss) on securities avail-
able for sale, net of income
taxes - - - - - (548) (548)
Other - - - - (39) - (39)
-------------------------------------------------------------------------------------------
Balance, December 31, 1996 1,635,044 16 17,670 31,040 (181) 1,063 49,608
Net income - - - 6,003 - - 6,003
Cash dividends paid - - - (1,627) - - (1,627)
Purchase of Common Stock
by ESOP - - - - (4,232) - (4,232)
Exercise of stock options
and related tax benefits 22,037 1 482 - - - 483
Net change in unrealized gain
(loss) on securities avail-
able for sale, net of income
taxes - - - - - (208) (208)
Other - - - - (90) - (90)
-------------------------------------------------------------------------------------------
Balance, December 31, 1997 1,657,081 $ 17 $ 18,152 $ 35,416 $ (4,503) $ 855 $ 49,937
===========================================================================================
<FN>
The notes to consolidated financial statements are an integral part of this
statement.
</FN>
</TABLE>
24
<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. Effective February 6, 1998, Princess Anne Bank changed its name
to CENIT Bank. See Note 2 for a discussion of the business combination between
the Company and Princess Anne.
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and that affect the reported amounts of income and expenses during
the reporting period. Actual results could differ from those estimates.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company,
its two wholly-owned subsidiaries, CENIT Bank, FSB, and Princess Anne Bank (the
"Banks"), CENIT Bank's wholly-owned subsidiaries, and Princess Anne's wholly-
owned subsidiary. All significant intercompany balances and transactions have
been eliminated.
Investment Securities
Investment securities are accounted for in accordance with Statement of
Financial Accounting Standards No. 115 (FAS 115), "Accounting for Certain
Investments in Debt and Equity Securities." FAS 115 requires that certain
securities be classified into one of three categories: held to maturity,
available for sale, or trading. Securities classified as held to maturity are
carried at amortized cost; securities classified as available for sale are
carried at their fair value with the amount of unrealized gains and losses, net
of income taxes, reported as a separate component of stockholders' equity; and
securities classified as trading are carried at fair value with the unrealized
gains and losses included in earnings.
In November 1995, The Financial Accounting Standards Board issued "A Guide
to Implementation of FAS 115 - Questions and Answers." This guide allowed
entities such as the Company a one-time opportunity to reassess the
appropriateness of the classifications of securities held in their investment
portfolios. On November 30, 1995, the Company transferred its U. S. Government
agency securities and mortgage-backed certificates from held to maturity to
available for sale.
Premium amortization and discount accretion are included in interest income
and are calculated using the interest method over the period to maturity of the
related asset. The adjusted cost of specific securities sold is used to compute
realized gain or loss on sale. The gain or loss realized on sale is recognized
on the trade date.
Loans
Loans held for investment are carried at their outstanding principal
balance. Unearned discounts, premiums, deferred loan fees, and the allowance for
loan losses are treated as adjustments of loans in the consolidated statement of
financial condition.
Effective January 1, 1995, the Company adopted Statement of Financial
Accounting Standards No. 114 (FAS 114), "Accounting by Creditors for Impairment
of a Loan," and Statement of Financial Accounting Standards No. 118 (FAS 118),
"Accounting by Creditors for Impairment of a Loan - Income Recognition and
Disclosures." These statements require creditors to account for impaired loans,
except for those loans that are accounted for at fair value or at the lower of
cost or fair value, at the present value of the expected future cash flows
discounted at the loan's effective interest rate, or the fair value of the
collateral if the loan is collateral dependent. A loan is impaired when, based
on current information and events, it is probable that a creditor will be unable
to collect all principal and interest amounts due according to the contractual
terms of the loan agreement.
25
<PAGE>
At December 31, 1997 and 1996, approximately seventy-one percent and
seventy-four percent, respectively, of the principal balance of the Banks' real
estate loans were to residents of or secured by properties located in Virginia.
This geographic concentration is also considered in management's establishment
of loan loss reserves.
Interest on loans is credited to income as earned. Interest receivable is
accrued only if deemed collectible. Generally, interest is not accrued on loans
over ninety days past due. Uncollectible interest on loans that are
contractually past due is charged-off or an allowance is established based on
management's periodic evaluation. The allowance is established by a charge to
interest income equal to all interest previously accrued, and income is
subsequently recognized only to the extent that cash payments are received
until, in management's judgment, the borrower has reestablished the ability to
make periodic interest and principal payments, in which case the loan is
returned to accrual status. Interest income is recognized on loans which are
ninety days or more past due only if management considers the principal and
interest balance to be fully collectible. Loan origination and commitment fees
and certain direct loan origination costs are deferred and amortized as an
adjustment of yield over the contractual life of the related loan. The
unamortized portion of net deferred fees is recognized in income if loans prepay
or if commitments expire unfunded. The amortization of net fees or costs is
included in interest and fees on loans in the consolidated statement of
operations.
Loans held for sale are carried at the lower of cost or market on an
aggregate basis. Loan fees collected and direct origination costs incurred with
respect to loans held for sale are deferred as an adjustment of the carrying
value of the loans and are included in the determination of gain or loss on
sale.
Allowance for Loan Losses
The allowance for loan losses represents management's estimate of an amount
adequate to absorb potential losses on loans that may become uncollectible.
Factors considered in the establishment of the allowance for loan losses include
management's evaluation of specific loans, the level and composition of
classified loans, historical loss experience, expectations of future economic
conditions, concentrations of credit and other judgmental factors. The allowance
for loan losses is increased by charges to income and decreased by charge-offs,
net of recoveries. Actual future losses may differ from estimates as a result of
unforeseen events.
Real Estate Owned
Real estate acquired in settlement of loans is recorded at the lower of the
unpaid loan balance or estimated fair value less estimated costs of sale at the
date of foreclosure. Subsequent valuations are periodically performed and
valuation allowances are established if the carrying value of the real estate
exceeds estimated fair value less estimated costs of sale. Costs related to
development and improvement of real estate are capitalized. Net costs related to
holding assets are expensed.
Property and Equipment
Property and equipment are stated at cost less accumulated depreciation and
amortization. Major renewals or betterments are capitalized and depreciated over
their estimated useful lives. Repairs and maintenance are charged to expense in
the year incurred. Depreciation and amortization are computed principally on the
straight-line basis over the estimated useful lives of the related assets.
Goodwill and other intangibles
Goodwill represents the excess of cost over the fair value of net assets
acquired and is amortized on a straight-line basis over 15 years. The core
deposit intangible represents the estimated fair value of certain customer
relationships acquired and is amortized on an accelerated basis over 10 years.
26
<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 dif ferent reporting methods for bad debts, depreciation, and Federal
Home Loan Bank stock dividends.
Statement of Cash Flows
For purposes of the statement of cash flows, the Company considers cash and
federal funds sold to be cash and cash equivalents.
Earnings Per Share
Effective December 31, 1997, the Company adopted Statement of Financial
Accounting Standards No. 128, "Earnings per Share" (FAS 128). FAS 128 replaced
the primary and fully diluted earnings per share ("EPS") calculations with two
new calculations, basic EPS and diluted EPS. Basic EPS excludes dilution and is
computed by dividing income by the weighted average number of shares outstanding
for the period. Diluted EPS reflects the potential dilution of stock options
computed using the treasury stock method. In accordance with FAS 128, all prior
periods have been restated. Basic earnings per share for the years ended
December 31, 1997, 1996, and 1995 were determined by dividing net income for the
respective year by 1,617,828 shares, 1,616,717 shares, and 1,590,535 shares,
respectively. Diluted earnings per share for the years ended December 31, 1997,
1996, and 1995 were determined by dividing net income for the respective year by
1,662,022 shares, 1,666,165 shares, and 1,646,735 shares, respectively. The
difference in the number of shares used for basic earnings per share and diluted
earnings per share calculations for each year above results solely from the
dilutive effect of stock options and warrants.
Dividends Per Share
Dividends per share were determined by dividing historical dividends
declared by the Company by historical common shares outstanding of the Company,
without adjustment for the shares issued in connection with the Princess Anne
merger. Princess Anne declared no dividends in 1995.
27
<PAGE>
Comparative Financial Statements
The financial statements for 1995 and 1996 have been reclassified to
conform to the 1997 presentation. Such reclassifications had no impact on
previously reported net income.
Note 2
Business Combination
On August 1, 1995, the Company and Princess Anne Bank became affiliated
pursuant to a definitive agreement entered into in November 1994. The
transactions contemplated by the Agreement and Plan of Reorganization were
approved by the shareholders of both the Company and Princess Anne at special
meetings held on July 26, 1995. Under the terms of the agreement, Princess
Anne's shareholders received 0.3364 shares of CENIT Bancorp common stock for
each share of Princess Anne common stock. This resulted in the issuance of
353,779 shares of CENIT Bancorp common stock. This combination was accounted for
as a pooling of interests. In connection with this transaction, merger expenses
totaling $757,000 were recognized in 1995.
As part of this transaction, effective August 1, 1995, Princess Anne began
operating as a wholly-owned subsidiary of the Company. At August 1, 1995,
Princess Anne reported total assets of $94.1 million and stockholders' equity of
$6.9 million. Effective November 1, 1995, CENIT Bank's three Virginia Beach
branch offices, with total deposits of $80.6 million on that date, were
transferred to Princess Anne. As a result, subsequent to the transfer, Princess
Anne had six branch offices in Virginia Beach.
The following summarizes the separate historical results of operations for
CENIT Bancorp and Princess Anne for periods prior to the merger, during which
time there were no intercompany transactions (in thousands):
CENIT Princess
Bancorp Anne Combined
Six months ended June 30, 1995:
(Unaudited)
Net interest income $7,092 $1,938 $9,030
Net income 1,283 492 1,775
CENIT Bancorp's total stockholders' equity increased from $36.2 million at
December 31, 1994 to approximately $38.0 million at June 30, 1995. This increase
resulted primarily from $1,283,000 of net income during the period and a
$517,000 change in the net unrealized gain (loss) on securities available for
sale, net of income taxes. Princess Anne's total stockholders' equity increased
from approximately $6.0 million at December 31, 1994 to approximately $6.8
million at June 30, 1995. This increase resulted primarily from $492,000 of net
income during the period, a $259,000 change in the net unrealized gain (loss) on
securities available for sale, net of income taxes, and $82,000 of proceeds on
the exercise of stock options and warrants.
28
<PAGE>
Note 3
Acquisition of deposits
On September 26, 1996 and November 7, 1996, CENIT Bank assumed the deposits
of five Essex Savings Bank, FSB ("Essex") branches pursuant to a Branch Purchase
and Deposit Assumption Agreement dated July 2, 1996. As part of these
transactions, CENIT Bank assumed approximately $68.1 million of deposits,
acquired certain other assets and liabilities, received approximately $65.5
million of cash and recorded total intangible assets of approximately $2.8
million. CENIT Bank used the majority of the cash proceeds received in
connection with the deposit assumptions to reduce its Federal Home Loan Bank
(FHLB) advances.
CENIT Bank still operates the former Essex offices located in Downtown
Hampton, Virginia and in the Denbigh area of Newport News, Virginia. The
deposits associated with Essex's Norfolk and Portsmouth, Virginia offices were
consolidated into existing CENIT Bank retail offices in those neighborhoods, and
the deposits associated with Essex's Grafton, Virginia office were consolidated
into CENIT Bank's existing Kiln Creek office located in York County, Virginia.
Note 4
Intangible Assets
Goodwill and core deposit intangibles, and the related amortization, are as
following (in thousands):
Core Deposit
Goodwill Intangible Total
Balance, December 31, 1995 $ 1,777 $ - $ 1,777
Additions 2,340 458 2,798
Amortization (173) (21) (194)
----------------------------------------
Balance, December 31, 1996 3,944 437 4,381
Amortization (290) (81) (371)
Balance, December 31, 1997 ----------------------------------------
$ 3,654 $ 356 $ 4,010
========================================
Goodwill in 1996 resulted from the acquisition of deposits from Essex. In
connection with the acquisition of deposits from Essex, CENIT Bank also recorded
a core deposit intangible. At December 31, 1997, the Company had recorded
$799,000 of accumulated amortization.
29
<PAGE>
Note 5
Securities Available for Sale
Securities available for sale are as follows (in thousands):
<TABLE>
<CAPTION>
December 31,
1997 1996
---------------------------------------------- --------------------------------------------------
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 $ 39,139 $ 215 $ (11) $ 39,343 $ 40,178 $ 181 $ (63) $ 40,296
---------------------------------------------- ---------------------------------------------
Other U. S. Government
agency securities 5,999 6 (1) 6,004 6,000 14 (5) 6,009
---------------------------------------------- ---------------------------------------------
Mortgage-backed certificates:
Federal Home Loan
Mortgage Corporation
participation certificates 81,382 880 (2) 82,260 162,890 1,302 (139) 164,053
Federal National Mortgage
Association pass-through
certificates 6,646 150 (2) 6,794 9,867 250 (4) 10,113
Government National
Mortgage Association
pass-through certificates 2,695 92 - 2,787 3,432 108 - 3,540
---------------------------------------------- ---------------------------------------------
Total mortgage-backed
certificates 90,723 1,122 (4) 91,841 176,189 1,660 (143) 177,706
---------------------------------------------- ---------------------------------------------
$ 135,861 $ 1,343 $ (16) $ 137,188 $222,367 $ 1,855 $ (211) $ 224,011
============================================== =============================================
</TABLE>
During 1997 and 1996, the Company recognized gross gains of $111,000 and
$140,000, respectively, and gross losses of $27,000 and $63,000, respectively,
on the sale of available for sale securities. During 1995, the Company
recognized gross losses of $563,000 on the sale of available for sale
securities.
The amortized cost and fair value of securities available for sale at
December 31, 1997 are shown below by contractual maturity (in thousands):
Amortized Fair
Cost Value
---------------------------
Due in one year or less $ 16,022 $ 16,044
Due after 1 year through 5 years 29,116 29,303
Mortgage-backed certificates 90,723 91,841
---------------------------
$ 135,861 $ 137,188
---------------------------
At December 31, 1997, the Company's amortized cost of its investment in
mortgage-backed certificates available for sale includes $7,134,000 at fixed
rates, including $2,060,000 and $6,000 with five- and seven-year balloon
provisions, respectively, and $83,589,000 at variable rates.
30
<PAGE>
Note 6
Loans
Loans held for investment consist of the following (in thousands):
December 31,
1997 1996
----------------------------
First mortgage loans:
Single family $ 308,525 $ 263,498
Multi-family 6,374 7,100
Construction:
Residential 56,992 52,662
Nonresidential 1,420 3,365
Commercial real estate 57,913 58,314
Consumer lots 4,573 5,396
Acquisition and development 13,327 16,010
Equity and second mortgage 45,194 29,578
Purchased mobile home 95 137
Boat 5,685 7,814
Other consumer 7,250 6,606
Commercial business 24,222 17,922
----------------------------
531,570 468,402
Undisbursed portion of construction
and acquisition and development loans (42,067) (42,309)
Allowance for loan losses (3,783) (3,806)
Unearned discounts, premiums, and loan
fees, net 767 (68)
----------------------------
$ 486,487 $ 422,219
============================
At December 31, 1997, the Company's gross loan portfolio contains
$241,060,000 of adjustable-rate mortgage loans and $63,712,000 of loans which
are callable or balloon at various dates over the next seven years. Prime-based
loans, net of the undisbursed portion of construction and acquisition and
development loans, totaled $76,187,000 at December 31, 1997.
31
<PAGE>
Nonaccrual loans are as follows (in thousands):
December 31,
1997 1996 1995
-----------------------------
Single family $ 528 $ 1,172 $ 527
Commercial real estate - 457 -
Land acquisition 200 200 200
Purchased mobile home 48 83 134
Other consumer 24 17 3
Commercial business 240 483 70
-----------------------------
$ 1,040 $ 2,412 $ 934
=============================
Interest income that would have been recorded under the contractual terms
of such nonaccrual loans and the interest income actually recognized are
summarized as follows (in thousands):
Year Ended December 31,
1997 1996 1995
----------------------------
Interest income based on contractual terms $ 92 $ 252 $ 80
Interest income recognized 30 114 33
----------------------------
Interest income foregone $ 62 $ 138 $ 47
============================
Changes in the allowance for loan losses are as follows (in thousands):
Year Ended December 31,
1997 1996 1995
----------------------------
Balance at beginning of year $3,806 $3,696 $3,789
Provision for loan losses 600 377 697
Losses charged to allowance (836) (738) (995)
Recovery of prior losses 213 471 205
----------------------------
Balance at end of year $3,783 $3,806 $3,696
============================
Impaired loans at December 31, 1997 and 1996 were not significant.
Loans serviced for others approximate $16,013,000 at December 31, 1997,
$17,740,000 at December 31, 1996, and $20,284,000 at December 31, 1995.
32
<PAGE>
Note 7
Interest Receivable
The components of interest receivable are as follows (in thousands):
December 31,
1997 1996
---------------------------
Interest on loans $ 3,054 $ 2,808
Interest on mortgage-backed certificates 1,090 1,962
Interest on investments and interest-bearing
deposits 909 907
---------------------------
5,053 5,677
Less: Allowance for uncollected interest (165) (221)
---------------------------
$ 4,888 $ 5,456
===========================
Note 8
Real Estate Owned
Real estate owned is as follows (in thousands):
December 31,
1997 1996
---------------------------
Residential - Single family $ 1,204 $ 2,165
Land - 97
Commercial real estate - 707
---------------------------
1,204 2,969
Less: Valuation allowance (106) (200)
---------------------------
$ 1,098 $ 2,769
===========================
Changes in the valuation allowance for real estate owned are as follows(in
thousands):
Year Ended December 31,
1997 1996 1995
---------------------------
Balance at beginning of year $ 200 $ 161 $ 192
Provision for losses 81 136 199
Losses charged to allowance (175) (97) (230)
---------------------------
Balance at end of year $ 106 $ 200 $ 161
==========================
The provision for losses on real estate owned is included in other expense
in the accompanying consolidated statement of operations.
33
<PAGE>
Note 9
Federal Home Loan Bank and Federal Reserve Bank Stock
Investment in the stock of the Federal Home Loan Bank (FHLB) is required by
law for federally insured savings associations such as CENIT Bank. Princess Anne
has also invested in FHLB stock as a requisite for membership in the FHLB. No
ready market exists for the stock and it has no quoted market value. The FHLB is
required under the Fi nancial Institutions Reform, Recovery and Enforcement Act
of 1989 ("FIRREA") to use its future earnings in various government-mandated
programs including low to moderate income housing. These programs and other uses
of the FHLB's future earnings could impair its ability to pay dividends to the
Company on this investment.
Investment in the stock of the Federal Reserve Bank is required by law for
insured institutions such as Princess Anne. No ready market exists for the stock
and it has no quoted market value.
Note 10
Property and Equipment
Property and equipment consist of the following (in thousands):
December 31,
1997 1996
-------------------------
Buildings and improvements $ 11,829 $ 10,686
Furniture and equipment 8,904 8,457
-------------------------
20,733 19,143
Less: Accumulated depreciation and
amortization (9,318) (9,294)
-------------------------
11,415 9,849
Land 2,815 2,815
-------------------------
$ 14,230 $ 12,664
========================
Depreciation and amortization expense is $1,154,000, $1,037,000, and
$1,061,000 for the years ended December 31, 1997, 1996 and 1995, respectively.
34
<PAGE>
Note 11
Deposits
Deposit balances by type and range of interest rates at December 31, 1997 and
1996 are as follows (in thousands):
December 31,
1997 1996
-----------------------
Noninterest-bearing:
Commercial checking $ 47,499 $ 40,130
Personal checking 7,375 6,024
-----------------------
Total noninterest-bearing deposits 54,874 46,154
-----------------------
Interest-bearing:
Passbook and Statement Savings
(interest rates of 3.34% at 1997 and
3.38% at 1996) 44,118 48,042
Checking accounts (interest rates of 2.05% at
1997 and 2.24% at 1996) 32,754 30,266
Money market deposits (interest rates of
3.25% at 1997 and 1996) 47,726 44,815
Certificates:
3.99% or less 519 451
4.00% to 4.99% 70,286 100,302
5.00% to 5.99% 218,016 179,399
6.00% to 6.99% 27,210 37,244
7.00% to 7.99% 10,369 10,280
8.00% to 8.99% 668 775
9.00% to 9.99% 1,130 1,237
-----------------------
Total certificates 328,198 329,688
-----------------------
Total interest-bearing deposits 452,796 452,811
-----------------------
Total deposits $ 507,670 $ 498,965
======================
Certificates in denominations greater than $100,000 aggregated $28,831,000
and $23,967,000 at December 31, 1997 and 1996, respectively. The weighted
average cost of deposits approximates 4.66% and 4.70% for the years ended
December 31, 1997 and 1996, respectively.
35
<PAGE>
The following is a summary of interest expense on deposits (in thousands):
Year Ended December 31,
1997 1996 1995
----------------------------------------
Passbook and statement savings $ 1,522 $ 1,558 $ 1,561
Checking accounts 602 677 767
Money market deposits 1,566 1,398 1,506
Certificates 17,351 15,678 15,593
Less: Early withdrawal penalties (69) (71) (45)
-----------------------------------------
$ 20,972 $ 19,240 $ 19,382
=========================================
At December 31, 1997, remaining maturities on certificates are as follows (in
thousands):
1998 $ 258,896
1999 31,290
2000 23,859
2001 8,757
2002 5,396
-----------
$ 328,198
===========
At December 31, 1997, the Banks have pledged mortgage-backed certificates,
U. S. Treasury securities, and other U. S. Government agency securities with a
total carrying value of $12,793,000 to the State Treasury Board as collateral
for certain public deposits.
Note 12
Advances from the Federal Home Loan Bank
At December 31, 1997, advances from the Federal Home Loan Bank (FHLB)
consist of $85,000,000 of short-term variable rate advances and a $60,000,000
convertible fixed-rate advance with an interest rate of 5.18%. The $60,000,000
fixed-rate advance is convertible to an adjustable-rate advance at the option of
the FHLB beginning in September, 1998, and quarterly thereafter until the
advance's maturity in September, 2007. These advances are collateralized by
mortgage-backed cer tificates with a net book value of approximately $61,748,000
and by first mortgage loans with a net book value of approximately $178,016,000.
The weighted average cost of advances from the FHLB is 5.58% and 5.44% for
the years ended December 31, 1997 and 1996, respectively.
Note 13
Other Borrowings
In 1997, the Company borrowed $4,000,000 from an unrelated third party
lender for general corporate purposes. The loan balance is $2,575,000 at
December 31, 1997, and bears interest at a variable rate of one month LIBOR plus
1.75%, payable in monthly principal and interest installments of $61,116 based
on a seven-year amortization period. At December 31, 1997, the interest rate on
the loan was 7.72%. The remaining principal balance, if any, is due and payable
in August, 2004. The loan is unsecured and may be prepaid without penalty. The
loan agreement requires that the Company and the Banks maintain capital in
accordance with applicable regulatory guidelines sufficient to be considered
"well capitalized." The loan agreement also requires the Company to maintain
certain ratios regarding nonperforming loans to total loans and regarding the
allowance for loan losses to nonperforming loans. The covenants relating to
nonperforming loans and the allowance for loan losses expire when the
outstanding principal balance reaches $2,000,000.
36
<PAGE>
Note 14
Securities Sold under Agreements to Repurchase
At December 31, 1997, mortgage-backed certificates sold under agreements to
repurchase had a carrying value of $10,465,000 and a market value of $9,680,000.
The mortgage-backed certificates underlying these repurchase agreements were
delivered to a branch of the Federal Reserve Bank which is acting as custodian
in the transaction. The Company enters into reverse repurchase agreements with
dealers and certain commercial deposit customers. The reverse repurchase
agreements executed with commercial deposit customers do not constitute savings
accounts or deposits and are not insured by the Federal Deposit Insurance
Corporation. At December 31, 1997, all of the Company's reverse repurchase
agreements were with commercial customers.
The following is a summary of certain information regarding the Company's
reverse repurchase agreements (dollars in thousands):
December 31,
1997 1996
--------------------------
Balance at end of year $ 9,664 $ 7,138
Average amount outstanding during the year 8,893 8,616
Maximum amount outstanding at any month end 12,199 30,382
Weighted average interest rate during the year 4.60% 4.67%
Weighted average interest rate at end of year 4.57% 4.40%
Weighted average maturity at end of year daily daily
Note 15
Other Income and Other Expense
The components of other income and other expense are as follows (in thousands):
Year Ended December 31,
1997 1996 1995
-----------------------------------------
Other income:
Brokerage fees $ 850 $ 413 $ 716
Merchant processing fees 1,391 738 502
Other miscellaneous 478 259 280
-----------------------------------------
$ 2,719 $ 1,410 $ 1,498
=========================================
Other expense:
Net occupancy expense of premises $ 1,848 $ 1,715 $ 1,404
Professional fees 345 474 676
Expenses, gains/losses on sales,
and provision for losses on real
estate owned, net 215 38 372
Merchant processing 1,130 586 377
Other miscellaneous 2,076 1,881 1,714
-----------------------------------------
$ 5,614 $ 4,694 $ 4,543
=========================================
37
<PAGE>
Note 16
Income Taxes
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial and income
tax reporting purposes.
Significant components of the Company's deferred tax assets and liabilities are
as follows (in thousands):
December 31,
1997 1996 1995
-------------------------------------------
Deferred tax assets:
Bad debt reserves $ 1,251 $ 1,297 $ 1,199
Other 219 34 107
-------------------------------------------
1,470 1,331 1,306
===========================================
Deferred tax liabilities:
Federal Home Loan Bank
stock dividends (696) (696) (696)
Unrealized gains on securities
available for sale (472) (580) (821)
Depreciation (296) (327) (291)
Other (299) (106) (106)
-------------------------------------------
(1,763) (1,709) (1,914)
-------------------------------------------
Net deferred tax liability $ (293) $ (378) $ (608)
===========================================
38
<PAGE>
The provision for income taxes consists of the following (in thousands):
Year Ended December 31,
1997 1996 1995
-----------------------------------------
Current:
Federal $ 3,109 $ 1,810 $ 1,615
State 131 - 56
-----------------------------------------
3,240 1,810 1,671
-----------------------------------------
Deferred:
Federal 20 8 (19)
State 4 3 -
-----------------------------------------
24 11 (19)
-----------------------------------------
$ 3,264 $ 1,821 $ 1,652
=========================================
The reconciliation of "expected" federal income tax computed at the statutory
rate (34%) to the reported provision for income taxes is as follows (in
thousands):
Year Ended December 31,
1997 1996 1995
-------------------------------------
Computed "expected" tax provision $ 3,151 $ 1,846 $ 1,402
Increase (decrease) in taxes
resulting from:
State income taxes, net of federal
tax benefit 86 2 37
Nondeductible merger expenses - - 172
Other 27 (27) 41
-------------------------------------
Provision for income taxes $ 3,264 $ 1,821 $ 1,652
=====================================
For tax purposes, CENIT Bank may only deduct bad debts as charged off. This
amount may differ significantly from the amount deducted for book purposes.
Retained earnings at December 31, 1997 includes $6,134,000 representing that
portion of CENIT Bank's tax bad debt allowance for which no provision for income
taxes has been made. This amount would be subject to federal income taxes if
CENIT Bank were to use the reserve for purposes other than to absorb losses.
39
<PAGE>
Note 17
Employee Benefit Plans
Employees Stock Ownership Plan
The following summarizes information relating to the Company's Employee
Stock Ownership Plan, which covers substantially all employees after they have
met certain eligibility requirements.
Stock Purchase - 1992
The Company recognized compensation expense on an accrual basis based upon
the annual number of shares to be released valued at historical cost, plus
estimated annual administrative expenses of the ESOP, less estimated annual
dividends to be used for debt service and administrative expenses. ESOP related
compensation expense recognized by the Company totaled $238,000 in 1996 and
$281,000 in 1995. The Company recognized interest expense on the ESOP loan and
made quarterly contributions to the ESOP sufficient to fund such interest
payments. Total contributions to the ESOP, which were used to fund principal and
interest payments on the ESOP loan and administrative expenses of the ESOP,
totaled $254,000 in 1996 and $322,000 in 1995. There were no contributions to
the ESOP nor any ESOP related compensation expense recognized in 1997.
In 1997, dividends received by the ESOP, all of which related to allocated
shares, were first used for administrative expenses, and dividends remaining
were distributed to plan participants. Dividends received on allocated shares in
1997 totaled $81,000, of which $63,000 was distributed to participants. In 1995
and 1996, dividends received on both unallocated and allocated shares were used
for debt service. Dividends received in 1995 and 1996 totaled $34,000 and
$63,000, respectively. The tax benefit relating to dividends paid on unallocated
shares held by the ESOP is reflected as an addition to retained earnings. Shares
were released and allocated to eligible participants on an annual basis. The
number of additional shares released and allocated annually was based upon the
pro rata amount of the total ESOP loan principal paid in that year as compared
to the ESOP loan principal balance at the beginning of that year. At
December 31, 1997, the ESOP has 77,177 allocated shares. A total of 5,350 shares
were distributed in 1997 to terminated employees. All shares held by the ESOP
relating to the 1992 stock purchase are considered outstanding for earnings per
share calculations.
Stock Purchase - 1997
The Company will recognize compensation expense on an accrual basis based
upon the estimated annual number of shares to be released valued at the shares'
fair value. No ESOP related compensation expense was recognized by the Company
in 1997 relating to the 1997 share purchase as none of these shares were
released or committed-to-be released in 1997. The Company intends to make
contributions to the ESOP sufficient to fund principal and interest payments on
the ESOP loan. The Company made no contributions to the ESOP in 1997.
The loan between the ESOP and the holding company has a fifteen-year term
with monthly principal and interest payments commencing in 1998. Shares will be
released and allocated to eligible participants annually. The number of shares
released and allocated annually is based upon the pro rata amount of the total
principal and interest paid in that year as compared to the total estimated
principal and interest to be paid over the entire term of the loan. As no
payments were made under the ESOP loan in 1997, no shares were released in 1997.
Dividends received on both allocated and unallocated shares will be used for
debt service.
All of the 82,719 shares purchased in 1997 were unallocated at December 31,
1997 and were excluded from earnings per share calculations. At December 31,
1997, the fair value of unearned shares approximated $6,576,000.
40
<PAGE>
401(k) Plans
The Company has a 401(k) plan to which eligible employees may contribute a
specified percentage of their gross earnings each year. For the years ended
December 31, 1997, 1996 and 1995, the maximum percentage that could be
contributed by employees was 10%, 7%, and 6%, respectively. The Company matched
50% of employee contributions. Effective January 1, 1996, the 401(k) plan was
amended to allow participation by Princess Anne. In 1995, Princess Anne had a
separate 401(k) plan covering substantially all employees. Princess Anne
employees could have contributed a specified percentage of their gross earnings
to a maximum of 15% each year. Princess Anne matched 50% of the first 7% of
employees' contributions in 1995. The Company contributed a total of $207,000,
$154,000 and $131,000 to these plans during the years ended December 31, 1997,
1996 and 1995, respectively.
Postretirement Benefit Plan
The Company sponsors a postretirement health care and life insurance
benefit plan. This plan is unfunded and the Company retains the right to modify
or eliminate these benefits. Participating retirees and eligible dependents
under the age of 65 are covered under the Company's regular medical and dental
plans. Participating retirees and eligible dependents age 65 or older are
eligible for a Medicare supplement plan. The medical portion of the plan is
contributory for retirees, with retiree contributions adjusted annually, and
contains other cost-sharing features such as deductibles and copays. The life
insurance portion of the plan is noncontributory.
As permitted by FAS 106, the Company elected to amortize its unrecognized
transition obligation over 20 years. At December 31, 1997 and December 31, 1996,
the Company's unfunded accumulated postretirement benefit obligation totaled
$537,000 and $537,000, respectively, and the accrued postretirement benefit cost
recognized in the statement of financial condition totaled $136,000 and
$110,000, respectively. Postretirement benefit cost was $69,000, $71,000, and
$71,000 in 1997, 1996 and 1995, respectively.
Note 18
Stock Options and Awards
At December 31, 1997, the Company has two stock-based compensation plans,
the CENIT Stock Option Plan and the Management Recognition Plan, which are
described below. Princess Anne also had three stock option plans prior to the
merger with the Company. The Company has elected not to adopt the recognition
provisions of Statement of Financial Accounting Standards No. 123 (FAS 123),
"Accounting for Stock-Based Compensation," which requires a fair- value based
method of accounting for stock options and similar equity awards, and will
continue to follow Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees," and related Interpretations to account for its
stock-based compensation plans. If the Company had accounted for stock options
granted in 1995, 1996, and 1997 under the provisions of FAS No. 123, the pro
forma effect on 1995, 1996, and 1997 net income and earnings per share would not
be material.
41
<PAGE>
CENIT Stock Option Plan
In conjunction with CENIT Bank's conversion, the Company adopted a stock
option plan for the benefit of directors and specified key officers. The total
number of shares of common stock reserved for issuance under the stock option
plan is 123,625. Under the plan, the option price cannot be less than the fair
market value of the common stock on the date of the grant and options expire no
later than ten years after the date of the grant. Options issued in connection
with the conversion are exercisable in full from two to five years after the
date of grant. Options granted in 1993 became exercisable in full two years
after the date of grant and options granted in 1994, 1995, 1996 and 1997 are
exercisable 25% each year over four years. In addition, limited stock
appreciation rights have been granted with the options issued. These may be
exercised in lieu of the related stock options only in the event of a change in
control of the Company, as defined in the stock option plan.
Princess Anne Stock Option Plans
Princess Anne had three stock option plans prior to the merger with the
Company. On August 1, 1995, all options outstanding under these plans converted
into options for common stock of the Company in accordance with the terms of the
stock option plan under which each was issued. Both the number of shares subject
to option and the per share exercise price under each option were adjusted by
the exchange ratio of .3364. On the date of the merger, all options became fully
vested and exercisable.
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,
1997 1996 1995
---------------------------- -------------------------------------- -------------------------
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 114,383 $16.21 133,227 $14.85 139,000 $13.90
Granted 4,235 45.00 6,234 34.63 5,234 37.00
Exercised (27,972) 13.89 (24,641) 13.47 (10,839) 13.25
Forfeited - - (437) 17.83 (168) 23.19
------- ------- -------
Outstanding at end of year 90,646 18.27 114,383 16.21 133,227 14.85
======= ======= =======
Options exercisable at
year end 77,808 96,661 119,123
</TABLE>
The weighted average fair value of options granted during 1997, 1996 and
1995 was $14.68, $11.20 and $13.92, respectively.
42
<PAGE>
The following table summarizes information about the options outstanding at
December 31, 1997:
<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 51,666 4.6 years $ 11.50 51,666 $ 11.50
$17.83 12,539 4.7 years 17.83 12,539 17.83
$21.25 to $23.18 10,738 5.9 years 22.18 9,429 22.06
$34.63 to $37.00 11,468 8.6 years 35.71 4,174 36.12
$45.00 4,235 9.2 years 45.00 - 45.00
------- -------
90,646 5.5 years 18.27 77,808 15.12
======= =======
</TABLE>
Management Recognition Plan
The objective of the MRP is to enable the Company to retain personnel of
experience and ability in key positions of responsibility. The MRP was
authorized to acquire up to 2% of the shares of common stock of the Company
issued in the conversion. CENIT Bank contributed $247,250 to the MRP to enable
the MRP trustees to acquire a total of 21,500 shares of the common stock in the
conversion at $11.50 per share. As a result of an oversubscription in the
subscription offering, the MRP was able to acquire only 15,000 shares in the
conversion. In 1997, 1996 and 1995, the MRP purchased 4,706, 3,535 and 1,484
additional shares, respectively, at an average price of approximately $45.38,
$33.78 and $39.30 per share, respectively.
A total of 12,362 shares were granted in 1992 and vested 20% each year over
five years beginning in 1993. The shares granted in 1995, 1996 and 1997 vest at
the end of three to five years. Compensation expense, which is recognized as
shares vest, totaled $122,000, $82,000, and $50,000 for 1997, 1996 and 1995,
respectively. The unamortized cost of the shares purchased, which represents
deferred compensation, is reflected as a reduction of stockholders' equity in
the Company's consolidated statement of financial condition.
A summary of MRP grants is as follows:
Year Ended December 31,
1997 1996 1995
-------------------------------
Outstanding at beginning of year 10,131 9,068 9,479
Granted 4,706 3,535 2,061
Exercised (3,443) (2,472) (2,472)
-------------------------------
Outstanding at end of year 11,394 10,131 9,068
===============================
There were no grants forfeited during these periods and no grants were
exercisable at the end of each period. At December 31, 1997, the weighted
average period until the awards become vested is approximately two and one-half
years. The weighted average fair value of shares granted in 1997, 1996 and 1995
was $45.00, $34.63, and $38.50, respectively.
43
<PAGE>
Note 19
Commitments and Financial Instruments With Off-Balance Sheet Credit Risk
The Company is a party to financial instruments with off-balance sheet
credit risk in the normal course of business to meet the financing needs of its
customers and, to a lesser extent, to reduce its own exposure to fluctuations in
interest rates. These financial instruments include commitments to extend credit
in the form of loans or through letters of credit, interest rate caps and
interest rate swaps. At December 31, 1997, financial instruments with
off-balance sheet risk are limited to outstanding loan commitments and letters
of credit. There are no open interest rate cap or interest rate swap positions
at December 31, 1997.
Loan commitments are agreements to extend credit to a customer provided
that there are no violations of the terms of the contracts prior to funding.
Commitments generally have fixed expiration dates or other termination clauses
and may require payment of a fee by the customer. Because certain of the
commitments are expected to be withdrawn or expire unused, the total commitment
amount does not necessarily represent future cash requirements. The Company
evaluates each customer's creditworthiness on a case-by-case basis. The type and
amount of collateral obtained varies but generally includes real estate or
personal property.
The Company had loan commitments, excluding the undisbursed portion of
construction and acquisition and development loans, as follows (in thousands):
December 31,
1997 1996
-------------------------
Commitments outstanding:
Mortgage loans:
Fixed rate (rates between 7.00% and 9.50% at 1997
and between 7.25% and 9.00% at 1996) $ 2,766 $ 1,201
Variable rate 1,745 1,594
Commercial business loans 2,857 638
Consumer loans - -
-------------------------
$ 7,368 $ 3,433
=========================
At December 31, 1997, the Company has granted unused consumer and
commercial lines of credit of $22,128,000 and $11,558,000, respectively, and has
commitments to purchase loans totaling $28.1 million.
Standby letters of credit are written unconditional commitments issued to
guarantee the performance of a customer to a third party and total approximately
$3,431,000 at December 31, 1997. The credit risk involved in issuing standby
letters of credit is essentially the same as that involved in extending a loan
and the collateral obtained, if any, varies but generally includes real estate
or personal property. Because most of these letters of credit expire without
being drawn upon, they do not necessarily represent future cash requirements.
Commitments to purchase securities are contracts for delayed delivery of
securities in which the seller agrees to make delivery on a specified future
date of a specified instrument, with a specified coupon, for a specified price.
At December 31, 1997, the Company had commitments to purchase approximately
$9,346,000 of adjustable-rate mortgage- backed certificates.
Rent expense under long-term operating leases for property approximates
$709,000, $620,000, and $460,000 for the years ended December 31, 1997, 1996 and
1995, respectively. The minimum rental commitments under noncancelable leases
with an initial term of more than one year for the years ending December 31, are
as follows (in thousands):
1998 $ 696
1999 652
2000 538
2001 442
2002 371
Thereafter 1,728
---------
$ 4,427
=========
44
<PAGE>
Note 20
Regulatory matters
Capital Adequacy
CENIT Bank and Princess Anne Bank are subject to various regulatory capital
requirements administered by the Office of Thrift Supervision and Federal
Reserve Board, respectively. Failure to meet minimum capital requirements can
initiate certain mandatory and possibly additional discretionary actions by
regulators that, if undertaken, could have a direct material effect on the
Banks' financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Banks must meet specific
capital guidelines that involve quantitative measures of the Banks' assets,
liabilities and certain off-balance-sheet items as calculated under regulatory
accounting practices. The Banks' capital amounts and classifications are also
subject to qualitative judgments by regulators about components, risk weighting
and other factors.
As set forth in the table below, quantitative measures established by
regulation to ensure capital adequacy require CENIT Bank to maintain minimum
amounts and ratios of tangible capital to adjusted total assets, of core capital
to adjusted total assets and total capital to risk-weighted assets. Princess
Anne is required to maintain minimum amounts and ratios of leverage capital to
adjusted average total assets, and Tier 1 and total capital to risk-weighted
assets. As of December 31, 1997, the Banks exceeded all capital adequacy
requirements to which they are subject.
As of December 31, 1997, the most recent notification from the Office of
Thrift Supervision and Federal Reserve Board categorized CENIT Bank and Princess
Anne Bank, respectively, as Well Capitalized under the framework for prompt
corrective action. To be considered Well Capitalized under prompt corrective
action provisions, the Banks must maintain capital ratios as set forth in the
following table. There are no conditions or events since that notification that
management believes have changed the Banks' categorizations.
As a bank holding company, the Company is also subject to the capital
adequacy guidelines established by the Federal Reserve Board.
45
<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, 1997:
<S> <C> <C> <C> <C> <C> <C>
CENIT Bank
Core capital $ 32,302 6.6% $ 14,744 3.0% $ 24,575 5.0%
Tangible capital 32,302 6.6 7,372 1.5 - -
Tier 1 risk-based 32,302 11.1 11,610 4.0 17,416 6.0
Total risk-based 34,799 12.0 23,221 8.0 29,026 10.0
Princess Anne Bank
Tier 1 leverage $ 14,006 7.1% $ 7,931 4.0% $ 9,914 5.0%
Tier 1 risk-based 14,006 11.4 4,905 4.0 7,358 6.0
Total risk-based 15,184 12.4 9,810 8.0 12,263 10.0
CENIT Bancorp
Tier 1 leverage $ 45,071 6.6% $ 27,383 4.0% $ - -%
Tier 1 risk-based 45,071 10.8 16,632 4.0 - -
Total risk-based 48,854 11.7 33,264 8.0 - -
As of December 31, 1996:
CENIT Bank
Core capital $ 28,991 6.0% $ 14,594 3.0% $ 24,323 5.0%
Tangible capital 28,991 6.0 7,297 1.5 - -
Tier 1 risk-based 28,991 11.0 10,547 4.0 15,820 6.0
Total risk-based 31,510 11.9 21,094 8.0 26,367 10.0
Princess Anne Bank
Tier 1 leverage $ 13,789 7.1% $ 7,738 4.0% $ 9,672 5.0%
Tier 1 risk-based 13,789 12.7 4,350 4.0 6,525 6.0
Total risk-based 14,986 13.8 8,700 8.0 10,875 10.0
CENIT Bancorp
Tier 1 leverage $ 44,163 6.5% $ 27,171 4.0% $ - -%
Tier 1 risk-based 44,163 11.8 14,959 4.0 - -
Total risk-based 47,969 12.8 29,919 8.0 - -
</TABLE>
46
<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 21
Stockholders' Equity
As part of CENIT Bank's conversion from a federally chartered mutual
savings bank to a federally chartered stock savings bank, CENIT Bank established
a liquidation account for the benefit of eligible depositors who continue to
maintain their deposit accounts in the Company after conversion. In the unlikely
event of a complete liquidation of CENIT Bank, each eligible depositor will be
entitled to receive a liquidation distribution from the liquidation account, in
the proportionate amount of the then current adjusted balance for deposit
accounts held, before distribution may be made with respect to CENIT Bank's
capital stock. CENIT Bank may not declare or pay a cash dividend to the Company
on, or repurchase any of, its capital stock if the effect thereof would cause
the retained earnings of CENIT Bank to be reduced below the amount required for
the liquidation account. Except for such restrictions, the existence of the
liquidation ac count does not restrict the use or application of CENIT Bank's
retained earnings. At December 31, 1997, the liquidation account balance was
$3,819,000.
47
<PAGE>
Note 22
Related Party Transactions
The Company has made loans to executive officers, directors, and to
companies in which the executive officers and directors have a financial
interest. The following is a summary of related party loans (in thousands):
Balance at January 1, 1997 $ 3,055
Originations - 1997 454
Repayments - 1997 (617)
----------
Balance at December 31, 1997 $ 2,892
==========
Under the Company's current policy, related party loans are made on
substantially the same terms, including interest rate and collateral
requirements, as are available to the general public. The Company's previous
policy permitted the Company's directors and executive officers to borrow from
the Company at an interest rate one percentage point in excess of the Company's
then existing cost of funds. There is one loan made under the Company's previous
policy still outstanding at December 31, 1997, which has a balance of $154,000
and a fixed interest rate of 7.875%. The Company believes loans to related
parties do not involve more than the normal risk of collectibility. Commitments
to extend credit and letters of credit to related parties totaled $1,390,000 at
December 31, 1997.
Note 23
Disclosures About Fair Value of Financial Instruments
The following summary presents the methodologies and assumptions used to
estimate the fair value of the Company's financial instruments presented below.
The Company operates as a going concern and except for its investment securities
portfolio and certain residential loans, no active market exists for its
financial instruments. Much of the information used to determine fair value is
highly subjective and judgmental in nature and therefore the results may not be
precise. The subjective factors include, among other things, estimates of cash
flows, risk characteristics, credit quality, and interest rates, all of which
are subject to change. Since the fair value is estimated as of December 31,
1997, the amounts which will actually be realized or paid upon settlement or
maturity of the various instruments could be significantly different.
Cash and Federal Funds Sold
For cash and federal funds sold, the carrying amount is a reasonable
estimate of fair value.
Investment Securities
Fair values are based on quoted market prices or dealer quotes for U.S.
Treasury securities, other U.S. government agency securities, and
mortgage-backed certificates. As required by FAS 115, securities available for
sale are recorded at fair value.
48
<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 short-term advances from the
Federal Home Loan Bank and securities sold under agreements to repurchase), the
carrying amount is a reasonable estimate of fair value.
Long-term Borrowings
Rates currently available to the Company for borrowings with similar terms
and remaining maturities are used to estimate fair value of existing borrowings.
Loan Commitments and Standby Letters of Credit
The Company has reviewed its loan commitments and standby letters of credit
and determined that differences between the fair value and notional principal
amounts are not significant.
49
<PAGE>
The estimated fair values of the Company's financial instruments that differ
from their carrying amount are as follows (in thousands):
<TABLE>
<CAPTION>
December 31,
1997 1996
-------------------------- ---------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
-------------------------- ---------------------------
<S> <C> <C> <C> <C>
Financial assets:
Loans held for investment, net $ 486,487 $ 494,207 $ 422,219 $ 427,615
Financial liabilities:
Deposits with stated maturities 328,198 330,314 329,688 332,098
Long-term borrowings 62,575 63,152 - -
</TABLE>
As mentioned in the assumptions above, the estimated fair value of loans
and deposits does not include any value for the customer relationship or the
right to future fee income which may be generated by these relationships.
Note 24
Condensed Parent Company Only Financial Statements
The following condensed financial statements for CENIT Bancorp, Inc. should
be read in conjunction with the consolidated financial statements and the notes
thereto.
Condensed Statement of Financial Condition
(In thousands)
December 31,
1997 1996
---------------------------
Assets:
Cash $ 1 $ 4
Equity in net assets of the Banks 51,173 48,223
Other assets 1,908 1,762
---------------------------
$ 53,082 $ 49,989
===========================
Liabilities:
Other borrowings 2,575 -
Other liabilities 570 381
---------------------------
3,145 381
---------------------------
Stockholders' equity 49,937 49,608
---------------------------
$ 53,082 $ 49,989
===========================
50
<PAGE>
Condensed Statement of Operations
(In thousands)
Year Ended December 31,
1997 1996 1995
-------- -------- --------
Equity in earnings of the Banks $ 6,767 $ 3,943 $ 3,084
Interest expense (110) (16) (41)
Salaries and employee benefits (349) (276) (65)
Expenses related to proxy contest
and other matters (405) - -
Professional fees (247) (108) (155)
Merger expenses - - (397)
Other expenses (87) (122) (86)
------------------------------------
Income before income taxes 5,569 3,421 2,340
Benefit from income taxes 434 187 132
------------------------------------
Net income $ 6,003 $ 3,608 $ 2,472
====================================
<TABLE>
<CAPTION>
Condensed Statement of Cash Flows
(In thousands)
Year Ended December 31,
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 6,003 $ 3,608 $ 2,472
Add (deduct) items not affecting cash:
Undistributed earnings of the Banks (3,157) (1,941) (2,368)
Amortization 3 26 16
(Increase) decrease in other assets (114) (1,192) 163
Increase in liabilities 189 121 57
-------------------------------------------
Net cash provided by operations 2,924 622 340
-------------------------------------------
Cash flows from financing activities:
Cash dividends paid (1,627) (1,215) (531)
Net proceeds from issuance of common stock 357 583 196
Increase in other borrowings 4,000 - -
Principal payments on other borrowings (1,425) - -
Purchase of common stock by ESOP (4,232) - -
-------------------------------------------
Net cash used for financing activities (2,927) (632) (335)
-------------------------------------------
Net increase (decrease) in cash and cash
equivalents (3) (10) 5
Cash and cash equivalents at beginning of period 4 14 9
-------------------------------------------
Cash and cash equivalents at end of period $ 1 $ 4 $ 14
===========================================
</TABLE>
51
<PAGE>
Note 25
Quarterly Results of Operations (Unaudited)
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
Year Ended December 31, 1997
First Second Third Fourth
Quarter Quarter Quarter Quarter
------------------------------------------------------------
<S> <C> <C> <C> <C>
Total interest income $ 12,551 $ 12,766 $ 12,858 $ 12,601
Total interest expense 7,221 7,385 7,461 7,243
----------------------------------------------------------
Net interest income 5,330 5,381 5,397 5,358
Provision for loan losses 150 150 150 150
----------------------------------------------------------
Net interest income after provision
for loan losses 5,180 5,231 5,247 5,208
Other income 971 1,359 1,376 2,007
Other expenses 4,527 4,194 3,979 4,612
----------------------------------------------------------
Income before income taxes 1,624 2,396 2,644 2,603
Provision for income taxes 570 848 935 911
----------------------------------------------------------
Net income $ 1,054 $ 1,548 $ 1,709 $ 1,692
==========================================================
Earnings per share:(1)
Basic $ .64 $ .94 $ 1.05 $ 1.08
==========================================================
Diluted $ .62 $ .92 $ 1.03 $ 1.04
==========================================================
Dividends per common share $ .25 $ .25 $ .25 $ .25
==========================================================
Pro forma earnings per share to reflect 3 for 1
stock split approved by Board of Directors on
March 24, 1998
Basic $ .22 $ .31 $ .35 $ .36
==========================================================
Diluted $ .21 $ .30 $ .34 $ .35
==========================================================
</TABLE>
<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 (loss) before income taxes 1,849 1,880 (277) 1,977
Provision for (benefit from) income taxes 646 659 (162) 678
-----------------------------------------------------------
Net income (loss) $ 1,203 $ 1,221 $ (115) $ 1,299
===========================================================
Earnings (loss) per share:(1)
Basic $ .75 $ .75 $ (.07) $ .80
===========================================================
Diluted $ .73 $ .74 $ (.07) $ .77
===========================================================
Dividends per common share $ .10 $ .20 $ .20 $ .25
===========================================================
Pro forma earnings per share to reflect 3 for 1
stock split approved by Board of Directors on
March 24, 1998
Basic $ .25 $ .25 $ (.02) $ .26
===========================================================
Diluted $ .24 $ .24 $ (.02) $ .26
===========================================================
<FN>
(1) Amounts previously reported on Form 10-Q have been adjusted to reflect
the adoption of FAS 128, "Earnings Per Share."
</FN>
</TABLE>
52
<PAGE>
Note 26
Subsequent Event (Unaudited)
On March 24, 1998, the Company's Board of Directors approved a 3 for 1
stock split and maintained the par value per common share at $.01. The pro forma
impact on annual earnings per share is reflected on the face of the income
statement and the pro forma impact on quarterly earnings per share is included
in Note 25, "Quarterly Results of Operations, (Unaudited)." The pro forma impact
on the number of common shares outstanding, the amount of common stock and
additional paid in capital is as follows (dollars in thousands):
Historical Pro Forma
---------- ---------
December 31, 1997
Number of common shares outstanding 1,657,081 4,971,243
Common Stock amount $ 17 $ 50
Additional paid-in capital $ 18,152 $ 18,119
December 31, 1996
Number of common shares outstanding 1,635,044 4,905,132
Common Stock amount $ 16 $ 49
Additional paid-in capital $ 17,670 $ 17,637
53
<PAGE>
Report of Independent Accountants
To the Board of Directors and Stockholders of CENIT Bancorp, Inc.
Norfolk, Virginia
In our opinion, the accompanying consolidated statements of financial condition
and the related consolidated statements of operations, of changes in
stockholders' equity and of cash flows present fairly, in all material respects,
the financial position of CENIT Bancorp, Inc. and its subsidiaries at
December 31, 1997 and 1996, and the results of their operations and their cash
flows for each of the three years in the period ended December 31, 1997, in
conformity with generally accepted accounting principles. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of the financial statements of CENIT
Bancorp, Inc. in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
PRICE WATERHOUSE LLP
Norfolk, Virginia
January 30, 1998
54
<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, May 20, 1998 in the theater of
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
1997 and 1996.
1997 1996
- -------------------------------------------------------------------------------
Quarter High Low High Low
- -------------------------------------------------------------------------------
First $47 3/4 $40 $36 5/16 $33
Second 50 5/8 39 1/2 35 1/2 33
Third 63 47 1/2 41 1/4 31 3/4
Fourth 81 7/16 58 41 1/2 38 1/2
Source: Nasdaq
Note: 1997 and 1996 sales prices have not
been restated for the 3-for-1 stock split
declared on March 24, 1998.
- - 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
55
<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
(Retail, Mortgage, Real Estate & Commercial Offices)
Super Kmart Center, 5007 Victory Boulevard
- - Subsidiary of CENIT Bank
CENIT Commercial Mortgage Corporation
- - CENIT Bank, Virginia Beach
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
- - Personal and Commercial Banking Services
Personal Banking
Checking and Savings Accounts
Retirement Accounts
24 Hour Banking ATMs
Members, HONOR(R) PLUS
Networks with access to DISCOVER
and AMERICAN EXPRESS
BankLine(sm) 24 Hour Account Information
Full Service Investment Brokerage
Safe Deposit Boxes
Construction and Permanent
Residential Mortgages
Lot Loans
Equity Loans and Lines of Credit
Car and Personal Loans
Personal Credit Cards
Private Banking Services
Commercial Banking
Business Checking Accounts
Interest Deposit Accounts
Interest on Lawyers' Trust Accounts
ESTEEM(sm) Banking for Medical Professionals
BusinessManager(R) Receivables Financing
Corporate Cash Management Services
Wire Transfers and EFT Services
Corporate Credit 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
Commercial Mortgage Loan Brokerage
56
<PAGE>
CENIT Bancorp, Inc., Retail Banking Offices
- ------------------------------------------------------------------------------
(MAP INSERTED)
- - Norfolk
1 - 745 Duke Street
2 - 300 East Main Street
3 - 2203 E. Little Creek Road
4 - Super Kmart, 6101 Military Hwy.
- - Chesapeake
5 - 675 N. Battlefield Boulevard
6 - 2600 Taylor Road
7 - 3220 Churchland Boulevard
- - Portsmouth
8 - 3315 High Street
- - Virginia Beach
9 - 1616 Laskin Road
10 - 699 Independence Boulevard
11 - 905 Kempsville Road
12 - 641 Lynnhaven Parkway
13 - 3001 Shore Drive
14 - 4801 Columbus Street
15 - Super Kmart, 3901 Holland Road
- - Hampton
16 - 2205 Executive Drive
17 - 550 Settlers Landing Road
- - Newport News
18 - 13307 Warwick Boulevard
- - York County
19 - Victory Boulevard and
Commonwealth Drive
20 - Super Kmart, 5007 Victory Blvd.
57
