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)
- ----------------------------------------------------------------------
(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>
April 28, 1999
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
19, 1999 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 three
persons who have been nominated to serve as a director of the Company, and "FOR"
approval of the CENIT Long-Term Incentive Plan described in the Proxy Statement.
YOUR VOTE IS IMPORTANT. You are urged to sign, date and mail the enclosed Proxy
Card promptly in the postage-paid envelope provided, or vote via the Internet or
by telephone in accordance with the instructions set forth on the Proxy Card. If
you attend the Meeting, you may vote in person even if you have already mailed
in your Proxy Card or voted by Internet or telephone.
On behalf of the Board of Directors and all of the employees of the Company and
its subsidiary, I wish to thank you for your continued support. We appreciate
your interest.
Sincerely yours,
/S/ Michael S. Ives
Michael S. Ives
President and Chief Executive Officer
<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 19, 1999
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 Theater, 245 West Olney Road, Norfolk, Virginia 23510, on May 19,
1999, 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 three directors for terms of three years each;
2. Approval of the CENIT Long-Term Incentive Plan; and
3. Such other matters as may properly come before the Meeting or any
adjournment thereof.
The Board of Directors has established March 22, 1999 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, OR VOTE VIA THE INTERNET OR BY TELEPHONE IN
ACCORDANCE WITH THE INSTRUCTIONS SET FORTH ON THE PROXY CARD. 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
/S/ John O. Guthrie
John O. Guthrie
Corporate Secretary
CENIT Bancorp, Inc.
Norfolk, Virginia
April 28, 1999
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. ALSO, PROXIES MAY BE RETURNED BY
INTERNET OR BY TELEPHONE IN ACCORDANCE WITH THE INSTRUCTIONS SET FORTH ON THE
PROXY CARD.
<PAGE>
CENIT Bancorp, Inc.
225 West Olney Road
Norfolk, Virginia 23510
(757) 446-6600
PROXY STATEMENT
ANNUAL MEETING OF STOCKHOLDERS
May 19, 1999
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 19, 1999, at 5:00 p.m., and at any adjournments
thereof. The 1998 Annual Report to Stockholders, including the consolidated
financial statements for the year ended December 31, 1998, accompanies this
proxy statement, which is first being mailed to stockholders on or about April
28, 1999.
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 via the Internet or by telephone in
accordance with the instructions set forth on the enclosed Proxy Card or 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, and
FOR approval of the CENIT Long-Term Incentive Plan described herein.
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 $14,000 plus expenses. Proxies
may also be solicited personally or by telephone, fax, or telegraph by
directors, officers and regular employees of the Company or CENIT Bank (the
"Bank"), without additional compensation. 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 22, 1999, 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 4,791,940. All references to shares in this proxy statement
reflect the number of shares adjusted for 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) and the shareholder proposal (which requires the
approval of a majority of the Company's issued and outstanding shares), 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 22, 1999. 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") 478,560 (2) 10.0%
and related parties
P. O. Box 7574
Columbia, South Carolina 29202
Common Stock CENIT Employees Stock 465,056 (3) 9.7%
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 22, 1999 was 4,791,940 shares.
(2) This information on beneficial ownership is based solely on information supplied by Mid-Atlantic Investors,
H. Jerry Shearer and Jerry Zucker (the "Mid-Atlantic Group") which the Company has not independently
verified. Mr. Zucker disclosed that he has sole dispositive and voting power over 325,752 shares. Mr.
Shearer disclosed that he has sole dispositive and voting power over 2,808 shares. All parties report shared
dispositive and voting power over 150,000 shares.
(3) Michael S. Ives and John O. Guthrie administer the ESOP in their capacity as trustees of the CENIT
Employees Stock Ownership Trust (the "ESOP Trust"). As of the Record Date, 237,608 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, 1999,
about beneficial ownership of the Common Stock of the Company for each director,
director nominee, certain executive officers and for all directors, director
nominees and executive officers of the Company as a group.
Number of Shares of
Common Stock
Name Beneficially Owned(1) Percent of Class
- --------------------------- --------------------- ----------------
C. L. Kaufman, Jr. 59,835 1.25%
David L. Bernd 20,835 (2) *
Patrick E. Corbin 26,580 *
William J. Davenport, III 8,688 *
Thomas J. Decker, Jr. 9,349 *
John F. Harris 6,865 *
William H. Hodges 13,515 *
Michael S. Ives 184,333 (2) 3.77%
Charles R. Malbon, Jr. 9,641 *
Roger C. Reinhold 6,655 *
Anne B. Shumadine 31,155 *
David R. Tynch 8,268 *
Barry L. French 39,022 (2) *
John O. Guthrie 46,312 (2) *
Roger J. Lambert 7,669 (2) *
Alvin D. Woods 27,229 (2) *
All directors, director nominees and 547,725 (2) (3) 11.10%
executive officers as a group (4)
- -------------
*Represents less than 1% of the outstanding shares of Common Stock.
(1) All shares shown as beneficially owned are owned directly or held by
spouses or children of the named persons, unless otherwise indicated.
(2) Includes 7,731, 4,416, 4,416, 1,500 and 4,416 shares held in the Management
Recognition Plan ("MRP") Trust as described elsewhere in this proxy
statement on behalf of Messrs. Ives, French, Guthrie, Lambert and Woods,
respectively; 14,086, 7,309, 8,287, 6,169 and 6,886 shares held in the ESOP
Trust and allocated to Messrs. Ives, French, Guthrie, Lambert and Woods,
respectively; and 5,835, 101,988, 12,816, 8,066 and 4,608 shares which
Messrs. Bernd, Ives, French, Guthrie and Woods, respectively, could acquire
within 60 days of April 15, 1999, through the exercise of stock options.
(3) Includes 3,513 shares held in the MRP Trust, 11,445 shares held in the ESOP
Trust and 10,743 shares which could be acquired within 60 days of April 15,
1999, through the exercise of stock options allocated to executive officers
other than Messrs. Ives, French, Guthrie, Lambert and Woods.
(4) Includes 144,056 shares of Common Stock which such persons could acquire
within 60 days of April 15, 1999, through the exercise of stock options.
The total number of shares of Common Stock outstanding at April 15, 1999,
was 4,791,940 shares.
3
<PAGE>
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, effective May 19, 1999, at eleven. Each
of the members of the Board of Directors of the Company also serves presently as
a director of the Bank. 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.
The three nominees proposed for election at the Meeting are Messrs. William
J. Davenport, III, Michael S. Ives, and Charles R. Malbon, Jr. 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 three 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, 1999, the names of the
nominees and continuing directors, their ages, the year in which their terms as
directors of the Company expire, and the year in which they became a director of
the Company.
<TABLE>
<CAPTION>
Expiration of Term Director of
Positions Held as Company the Company
Name with the Company Age Director Since
- ------------------------- ---------------- --- ------------------- -----------
<S> <C> <C> <C> <C>
Nominees
William J. Davenport, III Director 51 1999 1998
Michael S. Ives President/Chief 46 1999 1991
Executive Officer/
Director
Charles R. Malbon, Jr. Director 49 1999 1998
Continuing Directors
David L. Bernd Director 50 2000 1991
Patrick E. Corbin Director 45 2000 1991
Thomas J. Decker, Jr. Director 56 2000 1998
David R. Tynch Director 51 2000 1994
John F. Harris Director 61 2001 1998
William H. Hodges Director 69 2001 1991
Roger C. Reinhold Director 57 2001 1994
Anne B. Shumadine Director 56 2001 1991
</TABLE>
4
<PAGE>
Set forth below is certain information with respect to the directors and
the director nominees 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. Mr.
Kaufman is retiring from the Board of Directors, effective at the Meeting.
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 Principal of Corbin
& Company, P.C., 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 or its
predecessor bank since 1985. He is and has been a private investor and realtor
for several years.
Thomas J. Decker, Jr., has been a director of CENIT Bank or its predecessor
bank since 1987 and is President of The Prudential-Decker Realty, a real estate
brokerage company.
John F. Harris has been a director of CENIT Bank or its predecessor bank
since 1987. He is President of Affordable Homes, Inc., a developer of
residential housing in the Hampton Roads, Virginia, area.
William H. Hodges has served as a director of the Bank since 1989, when he
retired as a judge of the Virginia Court of Appeals. Judge Hodges had served on
the Court of Appeals since his appointment to that position in 1985, and had
previously served as a state circuit court judge. 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 or its
predecessor bank since 1993. He is Vice President of Tank Lines, Inc.
Roger C. Reinhold became a director of the Company and the Bank on April 1,
1994. Prior to April 1, 1994, Mr. Reinhold had been President and Chief
Executive Officer of Homestead Savings Bank, F.S.B. ("Homestead") since 1982. He
joined Homestead in 1972.
Anne B. Shumadine was elected as a director of the Bank in 1991. Mrs.
Shumadine is President of Signature Financial Management, Inc., a financial
planning firm. She is also an attorney and director of Mezzullo & McCandlish, A
Professional Corporation. Prior to that she was an attorney and principal of
Shumadine & Rose, P.C. in Norfolk, Virginia.
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 1998, the Board of Directors of the Company held thirteen meetings.
No director of the Company who served as a director during 1998 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 except Mr. Bernd, who attended 65% of the aggregate meetings.
5
<PAGE>
The Boards of Directors of the Company and the Bank 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, Decker and Reinhold and is chaired by Mr. Corbin.
This Committee meets quarterly with the Company's and the Bank's internal
auditor, and periodically with the Company's and the Bank's external auditors,
and reports to the Board of Directors and to senior management on the Company's
and the Bank's financial condition and internal auditing practices and
procedures. During the year ended December 31, 1998, the CENIT Bancorp Audit
Committee and CENIT Bank Audit Committee met jointly four times.
The Compensation Committee of the Board of Directors consists of directors,
Shumadine, Hodges, Kaufman, Reinhold and Tynch and is chaired by Mrs. Shumadine.
This Committee meets periodically to evaluate the compensation and fringe
benefits of the Company's and the bank subsidiary's directors, officers and
employees. During the year ended December 31, 1998, the Compensation Committee
met three times.
The Board of Directors of the Company appoints a Nominating Committee each
year prior to the annual meeting of its stockholders. The present members of the
Nominating Committee are Anne B. Shumadine, Michael S. Ives, and C. L. Kaufman,
Jr., and the Committee met three times in 1998. The Committee considers and
recommends the nominees for director to stand for election at the Company's
annual meeting of stockholders and will consider nominees proposed by
stockholders if the proposed nominees are submitted by the deadline described on
pages 18 and 19 of this Proxy Statement.
Directors' Fees.
Each of the Company's directors, other than the President of the Company,
receives a director's fee of $300 per month. The Chairman of the Board of the
Company receives an additional fee of $900 per month. Each of the Bank's
directors, other than the President of the Bank, receives a director's fee of
$1,200 per month plus an attendance fee of $300 for each of the 12 regular
monthly meetings. Mr. Ives, as an employee, does not receive director's fees
from any entity.
The chairman of each committee receives $300 per meeting attendance fee,
and each member receives $150 per meeting attendance fee. Directors do not
receive fees for serving on the Nominating Committee.
APPROVAL OF THE CENIT LONG-TERM INCENTIVE PLAN
Background.
The Company is submitting the CENIT Long-Term Incentive Plan (the
"Long-Term Incentive Plan") to its stockholders for approval at the Meeting. The
Long-Term Incentive Plan is substantially similar to the provisions of the
existing MRP and CENIT Stock Option Plan (the "Stock Option Plan"), all shares
of which were awarded prior to 1998. By replacing the MRP and Stock Option Plan
with the Long-Term Incentive Plan, the Company intends to continue the objective
of providing its executive officers with competitive long-term incentive
compensation relating to the Company's common stock.
The Long-Term Incentive Plan and the options granted thereunder have been
conditioned upon stockholder approval of the Long-Term Incentive Plan. The
purposes of obtaining stockholder approval include qualifying the Long-Term
Incentive Plan under the Internal Revenue Code (the "Code") for the granting of
incentive stock options; meeting the requirements for tax-deductibility of
certain compensation items under Section 162(m) of the Code; and meeting the
requirements for continued quotation of the Common Stock on The Nasdaq Stock
Market. The Company has granted stock appreciation rights to its executive
officers in amounts and with other provisions corresponding to their initial
stock option grants under the Long-Term Incentive Plan. These rights will be
effective in the event that the Company's stockholders do not approve the
Long-Term Incentive Plan, but will expire upon the Plan's approval by the
stockholders.
6
<PAGE>
A summary of the Long-Term Incentive Plan is provided below, including the
principal provisions, initial awards and certain tax consequences. The Company
will send a copy of the Plan, without charge, to any stockholder who requests a
copy.
Summary of Provisions.
The Board of Directors adopted the Long-Term Incentive Plan effective
September 22, 1998, subject to the approval of the Company's stockholders. The
Long-Term Incentive Plan authorizes the grant of non-qualified and incentive
stock options, stock appreciation rights and restricted stock. A maximum of
225,000 shares of Common Stock is reserved for potential issuance pursuant to
awards under the Long-Term Incentive Plan, and of the shares so reserved, not
more than 50,000 shares may be issued pursuant to restricted stock awards.
Unless sooner terminated, the Long-Term Incentive Plan will continue in effect
for a period of 10 years from its effective date.
The Long-Term Incentive Plan is administered by the Compensation Committee
of the Board of Directors. The Long-Term Incentive Plan provides for awards to
be made to such officers, key employees and non-employee directors of the
Company and its subsidiaries as the Board of Directors or the Committee may
select.
Stock options awarded under the Long-Term Incentive Plan may be exercisable
at such times (not later than 10 years after the date of grant) and at such
exercise prices (not less than fair market value at the date of grant) as the
Committee may determine. Whether or not exercisable, options will become
immediately exercisable upon a "change in control," which is defined in the
Long-Term Incentive Plan to occur upon any of the following events: (a) the
acquisition by any person or group, as beneficial owner, of 20% or more of the
outstanding shares or the voting power of the outstanding securities of the
Company; (b) either a majority of the directors of the Company at the annual
stockholders meeting has been nominated other than by or at the direction of the
incumbent directors of the Company's Board of Directors, or the incumbent
directors cease to constitute a majority of the Company's Board of Directors;
(c) the Company's shareholders approve a merger or other business combination
pursuant to which the outstanding common stock of the Company no longer
represents more than 50% of the combined entity after the transaction; (d) the
Company's shareholders approve a plan of complete liquidation or an agreement
for the sale or disposition of all or substantially all of the Company's assets;
or (e) any other event or circumstance determined by the Company's Board of
Directors to affect control of the Company and designated by resolution of the
Board of Directors as a change of control.
The exercise price of an option may be paid in cash or in Common Stock. No
options may be granted under the Long-Term Incentive Plan after the tenth
anniversary of its effective date. Options will be transferable only by will or
the laws of descent and distribution.
Stock appreciation rights awarded under the Long-Term Incentive Plan may be
granted as related rights, either in connection with and at the same time as an
option is granted, or by amendment of an outstanding non-qualified option. A
related stock appreciation right may be granted with respect to all or some of
the shares covered by the related option. Related stock appreciation rights
generally become exercisable at the same times as the related options become
exercisable, but may be limited so as to become exercisable only upon certain
events, such as a change in control. Upon exercise of a related right, the
grantee would receive, in lieu of purchasing stock, either stock or cash equal
to the difference between the fair market value on the date of exercise of the
underlying shares of Common Stock subject to the related option and the exercise
price of the option. Stock appreciation rights may also be granted independently
of any option, to become exercisable at such times as the Committee may
determine. Upon exercise of such a right, the grantee would receive either stock
or cash equal to the difference between the fair market value on the date of
exercise of the shares of Common Stock subject to the right and the fair market
value of the shares on the date of grant of the right.
Restricted stock awarded under the Long-Term Incentive Plan may be granted
on such terms and conditions as the Committee may determine, including
provisions that govern the lapse of restrictions and voting, dividend,
distribution and other shareholder rights with respect to the restricted stock.
However, except in the event of a change in control or a grantee's death or
disability, awards may not provide for restricted stock to be earned and vested
more rapidly than under the following permitted alternatives: (a) 20% earned and
vested each year over the five-year period after the date of grant, or (b) no
stock earned until the grantee has completed three (3) years of
7
<PAGE>
employment after the date of grant, at which time the stock will be 100% earned
and vested. If a grantee of restricted stock terminates employment for any
reason, the grantee will forfeit to the Company any restricted stock on which
the restrictions have not lapsed or been removed on or before the date of
termination of employment.
Initial Awards
The following table provides information about the initial grants of stock
options under the Long-Term Incentive Plan:
<TABLE>
<CAPTION>
Number of Shares
Positions Held Subject
Name or Group with the Company to Options
- ---------------- ----------------- ----------------
<S> <C> <C>
Michael S. Ives President/Chief Executive
Officer/Director 40,000
Barry L. French Senior Vice President 3,000
John O. Guthrie Senior Vice President/
Chief Financial Officer 3,000
Roger J. Lambert Senior Vice President 3,000
Alvin D. Woods Senior Vice President 3,000
All executive officers as a group
(5 persons) 52,000
All non-executive officer directors as a group 9,000
(9 persons) 1
- -----------------
<FN>
1Each of the 9 non-executive officer directors (including the director nominees) of the Company received options
for 1,000 shares, as did each non-executive officer director of the Bank only (2 additional persons).
</FN>
</TABLE>
All of the stock options described above were granted on September 22, 1998
and expire on September 22, 2008. The options become exercisable 25% each year
over the four-year period after the date of grant on each September 22
commencing September 22, 1999. The options may become exercisable earlier upon a
change in control, as defined in the Long-Term Incentive Plan and described
above, or upon the grantee's retirement, disability or death. The per share
exercise price for all of the options is $22.25, which was the fair market value
of a share of the Common Stock on the date of grant. At the close of business on
April 15, 1999, the price of the Common Stock on The Nasdaq Stock Market was
$19.25 per share.
Summary of Certain Tax Consequences
Grants of options or stock appreciation rights are not taxable income to
the grantees or deductible for tax purposes by the Company at the time of the
grant. In the case of non-qualified stock options, a grantee will be deemed to
receive ordinary income upon exercise of the stock option, and the Company will
be entitled to a corresponding deduction, in an amount equal to the amount by
which the fair market value of the Common Stock purchased on the date of
exercise exceeds the exercise price. The exercise of an incentive stock option
will not be taxable to the grantee or deductible by the Company, but the amount
of any income deemed to be received by a grantee due to premature disposition of
Common Stock acquired upon the exercise of an incentive stock option will be a
deductible expense of the Company for tax purposes. In the case of stock
appreciation rights, a grantee will be deemed to receive ordinary income upon
exercise of the right, and the Company will be entitled to a corresponding
deduction, in an amount equal to the cash or fair market value of shares payable
to the grantee. Grantees of restricted stock awards generally will recognize
ordinary income in an amount equal to the fair market value of the
8
<PAGE>
shares of Common Stock granted to them at the time that the restrictions on the
shares lapse and the shares become transferable. At that time, the Company will
be entitled to a corresponding deduction equal to the amounts recognized as
income by the grantees in the year in which the amounts are included in the
grantees' income. Section 162(m) of the Code generally disallows a publicly held
corporation's tax deduction for certain compensation in excess of $1 million per
year paid to each of the five most highly compensated executive officers,
exclusive of compensation that is "performance-based." The Company has designed
the Long-Term Incentive Plan in a manner that is intended to qualify the options
and any stock appreciation rights granted under the Long-Term Incentive Plan as
performance-based compensation that will not be subject to the deduction
limitation of Section 162(m). Any future grant of restricted stock could also be
designed to avoid any such deduction limitation. Consequently, the Company
believes that compensation provided under the Long-Term Incentive Plan, to the
extent otherwise deductible, will remain deductible under Section 162(m).
Changes to Plan Provisions and Awards
The Board of Directors of the Company has the power to amend the Long-Term
Incentive Plan in any respect. However, if the Long-Term Incentive Plan is
approved by the stockholders of the Company at the Meeting, the Board of
Directors may not, without further approval of the Company's stockholders, amend
the Plan so as to increase the aggregate number of shares of Common Stock that
may be issued under the Long-Term Incentive Plan, modify the requirements as to
eligibility to receive awards, or to increase materially the benefits accruing
to participants. In addition, the Board of Directors and Committee are permitted
to amend, extend or renew outstanding stock options or stock appreciation
rights. However, the Long-Term Incentive Plan prohibits the repricing of options
or rights whether by reducing the exercise price or by canceling options or
rights and issuing substitute options or rights with a reduced exercise price.
The Board of Directors and Committee are also authorized to accelerate the lapse
of restrictions on restricted stock awards or to remove any or all restrictions
at any time.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE APPROVAL OF THE CENIT
LONG-TERM INCENTIVE PLAN.
9
<PAGE>
Executive Compensation.
The following table provides certain summary information concerning the
compensation of the Company's chief executive officer and the four other most
highly compensated executive officers of the Company and the Bank during 1998
(together, the "named executive officers").
<TABLE>
SUMMARY COMPENSATION 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 (#) (4)
- ------------------ ---- ------ ----- ----------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
Michael S. Ives 1998 $220,000 $50,000 $ - 40,000 $16,387
President and CEO, 1997 173,000 50,000 72,360 (1)(3) 4,953 15,523
CENIT Bancorp, Inc. 1996 167,820 30,000 33,556 (2)(3) 7,302 53,492
and CENIT Bank
Barry L. French 1998 97,750 $17,200 $ - 3,000 $12,767
Senior Vice President/ 1997 88,400 16,000 23,580 (1)(3) 1,632 12,696
Retail Banking Group 1996 77,679 12,000 10,943 (2)(3) 2,400 33,193
Mgr., CENIT Bank
John O. Guthrie 1998 101,500 24,200 $ - 3,000 $13,667
Senior Vice President/ 1997 90,000 19,500 23,580 (1)(3) 1,632 12,741
CFO/Corporate Secretary 1996 88,000 12,000 10,943 (2)(3) 2,400 35,909
CENIT Bancorp, Inc.,
and CENIT Bank
Roger J. Lambert 1998 93,000 10,000 $ - 3,000 $11,667
Senior Vice President/ 1997 73,588 - 22,500 (1)(3) - 10,082
Information Services 1996 68,249 10,000 - - 27,416
Group Mgr., CENIT
Bank
Alvin D. Woods 1998 97,750 26,200 $ - 3,000 $13,519
Senior Vice President/ 1997 82,500 20,500 23,580 (1)(3) 1,632 12,874
Credit Policy & Admin. 1996 80,000 22,000 10,943 (2)(3) 2,400 34,938
CENIT Bancorp, Inc.,
Senior Vice President,
Chief Lending Officer
CENIT Bank
- ------------------
<FN>
(1) Represents 4,824, 1,572, 1,572, 1,500 and 1,572 shares awarded to Messrs. Ives, French, Guthrie, Lambert
and Woods, respectively, under the MRP, valued at $15.00 per share as of March 1, 1997, 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. French's, Guthrie's, Lambert's and Woods' shares become fully vested
at the end of five years.
(2) Represents 2,907, 948, 948 and 948 awarded to Messrs. Ives, French, Guthrie and Woods, respectively under
the MRP, valued at $11.54 per share as of May 1, 1996, 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. French's, Guthrie's and Woods' shares become fully vested at the end of five years.
10
<PAGE>
(3) 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, 1998, based on the closing stock price of $21.50 on that date, the value of the remaining
restricted stock held on Mr. Ives', French's, Guthrie's, Lambert's and Woods' behalf in the MRP Trust was
$166,217, $94,944, $94,944, $32,250 and $94,944, respectively.
(4) Includes $4,750, and $4,750 contributed to the Bank's 401(k) Plan by the Bank in 1997, and 1996,
respectively, on behalf of Mr. Ives; 623, 232, and 3,277 shares held in the ESOP Trust allocated to Mr. Ives
in 1998, 1997, and 1996, respectively; $3,000, $3,000, and $3,000 representing taxable compensation received
by Mr. Ives related to an automobile allowance in 1998, 1997, and 1996, respectively; and $1,632 and $408
representing taxable compensation received by Mr. Ives related to group term life insurance in 1997 and 1996.
Includes $4,750 and $3,239 contributed to the Bank's 401(k) Plan by the Bank in 1997 and 1996, respectively,
on behalf of Mr. French; 454, 144, and 1,888 shares held in the ESOP Trust allocated to Mr. French in 1998,
1997 and 1996, respectively; $3,000, $3,000 and $3,000 representing taxable compensation received by Mr.
French related to an automobile allowance in 1998, 1997 and 1996, respectively; and $1,138 and $835
representing taxable compensation received by Mr. French related to group term life insurance in 1997 and
1996.
Includes $4,750 and $3,520 contributed to the Bank's 401(k) Plan by the Bank in 1997 and 1996, respectively,
on behalf of Mr. Guthrie; 496, 159, and 2,082 shares held in the ESOP Trust allocated to Mr. Guthrie in 1998,
1997, and 1996, respectively; $3,000, $3,000, and $3,000 representing taxable compensation received by Mr.
Guthrie related to an automobile allowance in 1998, 1997, and 1996, respectively; and $766 and $592
representing taxable compensation received by Mr. Guthrie related to group term life insurance in 1997 and
1996.
Includes $3,672 and $2,773 contributed to the Bank's 401(k) Plan by the Bank in 1997 and 1996, respectively,
on behalf of Mr. Lambert; 403, 107, and 1,626 shares held in the ESOP Trust allocated to Mr. Lambert in
1998, 1997 and 1996, respectively; $3,000, $3,000 and $1,750 representing taxable compensation received by
Mr. Lambert related to an automobile allowance in 1998, 1997, and 1996; and $588 and $397 representing
taxable compensation received by Mr. Lambert related to group term life insurance in 1997 and 1996.
Includes $4,750, and $3,590 contributed to the Bank's 401(k) Plan by the Bank in 1997 and 1996,
respectively, on behalf of Mr. Woods; 489, 150, and 1,989 shares held in the ESOP Trust allocated to
Mr. Woods in 1998, 1997, and 1996, respectively; $3,000, $3,000, and $3,000 representing taxable
compensation received by Mr. Woods related to an automobile allowance in 1998, 1997, and 1996,
respectively; and $1,138 and $835 representing taxable compensation received by Mr. Woods related to group
term life insurance in 1997 and 1996.
</FN>
</TABLE>
11
<PAGE>
The following table provides information on stock option/stock appreciation
rights ("SAR") grants to the Company's named executive officers during 1998.
<TABLE>
OPTION/SAR GRANTS IN LAST FISCAL YEAR
<CAPTION>
Potential realizable value at
assumed annual rates of
stock price appreciation for
option
Individual Grants term (3)
----------------------------------------------------------- -------------------------------
Number of Percent of
securities total options
underlying granted to
options employees Exercise or
granted (#) in fiscal year base price Expiration
Name (1) (2) ($/Sh) date 5% ($) 10% ($)
---- ----------- -------------- ----------- ---------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Michael S. Ives 40,000 76.9% $22.25 9/22/08 $559,716 $1,418,431
Barry L. French 3,000 5.8% 22.25 9/22/08 41,979 106,382
John O. Guthrie 3,000 5.8% 22.25 9/22/08 41,979 106,382
Roger J. Lambert 3,000 5.8% 22.25 9/22/08 41,979 106,382
Alvin D. Woods 3,000 5.8% 22.25 9/22/08 41,979 106,382
- ---------------
<FN>
(1) The options granted to Messrs. Ives, French, Guthrie, Lambert and Woods vest over a four-year period, with
one-fourth of the options granted becoming exercisable on each September 22 commencing September 22,
1999. The options may become exercisable earlier than such dates upon a "change of control" as defined in
the Company's Long-Term Incentive Plan, which was adopted in 1998, or upon the grantee's retirement,
disability or death. The Long-Term Incentive Plan and these options are subject to the approval of the plan by
the stockholders of the Company. In the alternative, the Company granted to the same named executive
officers stock appreciation rights in amounts and with provisions corresponding to these options, subject to
expiration upon the Long-Term Incentive Plan's approval by the Company's stockholders.
(2) Excludes from percentage calculations grants to non-employee directors.
(3) Represents gain that will be realized assuming the options were held for the entire ten-year period and the
price of Common Stock increased at compounded rates of 5% and 10% from the exercise price of $22.25 per
share. Potential realizable values per option or per share under these rates of stock price appreciation would
be $13.99 and $35.46, respectively. However, these amounts represent assumed rates of appreciation only.
Actual gains, if any, on stock option exercises and common stockholdings will be dependent on overall market
conditions and on the future performance of the Company and the Common Stock. There can be no assurance
that the amounts reflected in this table will be achieved.
</FN>
</TABLE>
12
<PAGE>
The following table provides information on the number of shares acquired
on exercise and on the value of unexercised stock options/SARs held by the
Company's Chief Executive Officer and certain other executive officers at
December 31, 1998.
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION/SAR VALUES
<TABLE>
<CAPTION>
Number of Securities Value of Unexercised
Underlying Unexercised In-the-Money Stock
Stock Options/SARS at Options/ SARs At
Shares Acquired Value End of Fiscal Year End of Fiscal Year
Name on Exercise (#) Realized ($) Exercisable/ Unexercisable Exercisable/ Unexercisable
- ----------------- ---------------- ------------ --------------------------- --------------------------
<S> <C> <C> <C> <C>
Michael S. Ives 30,000 $ 559,800 98,922 / 49,198 $1,630,539 / $77,253 (1)
Barry L. French 5,316 86,369 11,808 / 6,024 150,732 / 25,392 (2)
John O. Guthrie 3,250 49,503 7,058 / 6,024 82,865 / 25,392 (3)
Roger J. Lambert - - - / 3,000 - / -
Alvin D. Woods 8,124 156,728 3,600 / 6,024 58,476 / 25,392 (4)
- ----------------
<FN>
(1) The market value of Common Stock at December 31, 1998 was $21.50 per share, and the exercise price for
in-the-money options/SARs is $3.84 per share on 81,261 shares, $7.67 on 7,302 shares, $11.55 on 7,302
shares, $12.34 on 7,302 shares and $15.00 on 4,953 shares.
(2) The market value of Common Stock at December 31, 1998 was $21.50 per share, and the exercise price for
in-the-money options/SARs is $7.09 on 6,000 shares, $7.67 on 2,400 shares, $11.55 on 2,400 shares, $12.34
on 2,400 shares and $15.00 on 1,632 shares.
(3) The market value of Common Stock at December 31, 1998 was $21.50, and the exercise price for in-the-
money options/SARs is $7.09 on 2,250 shares, $7.67 on 1,400 shares, $11.55 on 2,400 shares, $12.34 on
2,400 shares and $15.00 on 1,632 shares.
(4) The market value of Common Stock at December 31, 1998 was $21.50, and the exercise price for in-the-
money options/SARs is $3.84 on 3,000 shares, $11.55 on 1,200 shares, $12.34 on 1,200 shares, and $15.00
on 1,224 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 1998, members of the Compensation Committee engaged in the following
transactions with the Company and its subsidiaries:
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, 1998 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.
13
<PAGE>
Compensation Committee Report on Executive Compensation.
The Compensation Committee, which is composed of the nonemployee Directors
of the Company listed below, recommends to the Board of Directors of the Bank
the annual salary levels and any bonuses to be paid to the Bank's executive
officers. All salaries and bonuses paid to the Company's executive officers are
received by them from the Bank in their capacities as its officers. The members
of the Committee also serve as the committee with authority to make Long-Term
Incentive Plan awards and certain alternative stock appreciation awards, and
this report covers the Committee members' policies and actions in those
capacities.
The policy of the Compensation Committee has been to review corporate
performance on an annual basis. Stock options and other equity compensation have
been awarded to key executives who have contributed to the Company's success.
Equity compensation is intended to provide an increased incentive for key
executives to contribute to the future success of the Company, thereby enhancing
the value of the Company's Common Stock for the benefit of the stockholders. The
Committee also believes that these awards will increase the Company's ability to
attract and retain talented executives, upon whom the Company's sustained
progress, growth and profitability will depend.
During 1998, the Committee conducted a comprehensive review of the
executive officers' compensation. The Committee was concerned because all MRP
and Stock Option Plan shares had been awarded, with the result that the
Committee's established policy of making annual grants under the MRP and Stock
Option Plan could not be continued. The Committee also observed that the
executive officers' compensation appeared not to be competitive with the levels
at other similar financial institutions. Assisted by an executive compensation
consultant from the Company's independent accounting firm, the Committee
compared the executive officers' compensation with the levels provided for
comparable positions by a self-selected peer group of financial institutions
that were recommended by the consultant for purposes of assessing the
competitiveness of the officers' compensation (the "Company peer group"). The
Company peer group is comprised of fifteen institutions having average total
assets of approximately $800 million, which are located both in and outside the
Company's market area. The comparison confirmed that the overall level of the
executive officers' compensation was well below the levels provided by
institutions in the Company peer group, with the total compensation of the Chief
Executive Officer, Chief Financial Officer and Chief Lending Officer each
falling below the 25th percentile. In contrast, the Company ranked first in the
peer group total stockholder return over the five-year measurement period.
Pursuant to its compensation review, the Committee recommended additional
increases in the executive officers' salaries, effective July 1, 1998, which
supplemented previous salary increases that were effective January 1, 1998. The
Committee recommended the July 1st increases based on its subjective
determination of a reasonable salary level for each officer relative to each
individual's particular responsibilities and past performance. The Committee
determined to adjust Mr. Ives' salary from its level below the 25th percentile
of the Company peer group, up to the peer group's average salary level. Mr.
Ives' salary was thus increased to $260,000, effective July 1, 1998. Mr. Ives'
total salary paid in 1998 increased to $220,000 from $173,000 in 1997.
Also pursuant to its compensation review, the Committee recommended that
the Company adopt the Long-Term Incentive Plan in order to continue the
Committee's policy of making annual grants of long-term incentive compensation
relating to the Company's Common Stock. Upon adoption of the Long-Term Incentive
Plan, the Committee granted options thereunder with the objective of providing
competitive long-term incentives to the executive officers. The amounts of the
awards were determined so as to provide the officers generally with options
comprising approximately 12% to 30% of the officers' total compensation
opportunities (based on the options' date of grant values under a Black-Scholes
option pricing model). In determining Mr. Ives' award, the Committee also
considered as a material determining factor the Company's superior performance
relative to the other financial institutions in the Company peer group, as
evidenced by the Company's top-ranking five-year total stockholder return on its
Common Stock of approximately 1.9 times the peer group's average. The Long-Term
Incentive Plan awards were made subject to the ratification and approval of the
Long-Term Incentive Plan by the stockholders of the Company. In the alternative,
the executive officers were granted stock appreciation rights in corresponding
amounts designed to preserve the economic benefits of the Long-Term Incentive
Plan awards, subject to expiration upon the Plan's approval by the Company's
stockholders.
14
<PAGE>
Also in 1998, the Bank paid certain bonuses to executive officers pursuant
to the Bank's Key Executive Incentive Plan ("Incentive Plan") based upon 1997
performance. The Incentive Plan provided 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 the year. The award was
expressed as a percentage of the officer's base salary. The Board also
established two sets of performance measures under the Incentive Plan. The first
set, Company Performance Measures, consisted 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 was determined solely pursuant to these Company Performance
Measures. The second set, Individual Performance Measures, consisted of specific
quantitative, qualitative or project-related goals for the year. With respect to
each measure, the Board set a target goal and minimum attainment and maximum
value levels with points corresponding to each. The Board also weighed 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 equated to 100% of the officer's
target bonus award. Achievement above the target goals could result in an award
exceeding the target bonus; however, the maximum award was 40% of base salary,
unless increased by the Board. After the close of the year, the Committee
assessed the extent to which the corporate and individual performance goals had
been attained, and after making any discretionary adjustments to the total
awards or individual awards, recommended to the Board for final action the bonus
awards to be paid to the officers under the Incentive Plan.
Mr. Ives' bonus for 1997 paid in 1998 under the Incentive Plan of $50,000
represented 29% of his 1997 base salary. This bonus was based upon the
Committee's subjective assessment of Mr. Ives' contributions to the Company and
the Bank for 1997, taking into account Mr. Ives' 1997 target bonus award and the
Company's 1997 performance with respect to the Company Performance Measures
described above. Mr. Ives' target bonus award for 1997 was $60,550 (35% of base
salary). The Company's 1997 performance achieved 72.5% of Mr. Ives' aggregate
target points assigned to the Company Performance Measures. Mr. Ives' 1997
target points and actual points (indicated parenthetically) were weighted as
follows:earnings per share growth rate--15% (1.6%); return on assets--5% (2.1%);
return on equity--15% (7.3%); tangible capital ratio 5% (5.4%); operating
efficiency ratio--10% (10%); net interest margin--15% (15%); charge-offs--10%
(10%); non-performing assets--15% (18.7%); and classified assets--10% (12.4%).
COMPENSATION COMMITTEE
Anne B. Shumadine, Chair
William H. Hodges
C. L. Kaufman, Jr.
Roger C. Reinhold
David R. Tynch
Neither the Compensation Committee report above nor the stock performance
graph that follows is incorporated by reference in any prior or future SEC
filings, directly or by reference to the incorporation of proxy statements of
the Company, unless such filing specifically incorporates the report or the
stock performance graph. SEC rules provide that the Compensation Committee
report and the stock performance graph are not deemed to constitute "soliciting
material" or to be filed with the SEC, and are not subject to SEC Regulations
14A or 14C, except as provided in SEC regulations, or to the liabilities under
Section 18 of the Exchange Act.
Stock Performance Graph.
The following graph provides a comparison with the stated indices of the
percentage change in the Company's cumulative total stockholder return on its
Common Stock for the period beginning December 31, 1993. The Company's stock
performance is compared to the Center for Research in Securities Prices ("CRSP")
Total Return Index for The Nasdaq Stock Market (U.S. Companies) which is a broad
market equity index calculated by CRSP at the University of Chicago. This index
comprises all domestic common shares traded on The Nasdaq Stock Market and The
Nasdaq Small Cap Market.
In addition, the Company's stock performance is compared to The Nasdaq
Total Return Industry Index of Savings Institutions (SIC Code 603). This
industry index has also been calculated by the CRSP.
15
<PAGE>
It should be noted that in light of the short period of time reflected by
this graph, there is no reason to assume that the performance of the Company's
Common Stock for the period shown on the graph will be reflective of long- term
performance. In any event, the following graph is designed to be only a general
depiction of one measure of corporate performance to be used by stockholders in
evaluating the performance of the Company.
Comparison of Cumulative Total Return Among CENIT Bancorp, Inc., CRSP
Total eturn Index for The Nasdaq Stock Market (R) (US Companies) and
CRSP Total Return Indes for Nasdaq Savings Institutions (SIC Code 603)
[GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
12/31/93 12/30/94 12/29/95 12/31/96 12/31/97 12/31/98
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
CENIT Bancorp, Inc. $100.00 $97.87 $177.08 $204.33 $399.52 $329.91
CRSP Index For The
Nasdaq Stock Market $100.00 $97.75 $138.26 $170.02 $208.58 $293.21
CRSP Index for Savings
Institutions $100.00 $102.00 $152.89 $196.07 $340.29 $323.43
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 12/31/93
</TABLE>
Employment Agreement and Change of Control Arrangements.
President and Chief Executive Officer of the Company and the Bank. Pursuant
to an employment agreement (the "Agreement") entered into between the Company
and Michael S. Ives on November 1, 1997, Mr. Ives is employed as the President
and Chief Executive Officer of the Company and the Bank. The current term of the
Agreement expires December 31, 2000, and the Agreement is renewable by the Board
of Directors of the Company for successive one year terms.
The Agreement provides for Mr. Ives to be paid a base salary subject to
increases approved at the discretion of the Company, and for Mr. Ives to
participate in all Company benefit and compensation plans available to senior
executives. Mr. Ives' rate of base salary was increased to $260,000 effective
July 1, 1998, and for the year ended December 31, 1997, Mr. Ives received total
base salary in the amount of $220,000. Mr. Ives received a $50,000 bonus in 1998
for services rendered in 1997.
16
<PAGE>
The Agreement provides for termination of Mr. Ives' employment for "cause"
(as defined in the Agreement) at any time or in certain events specified by
banking regulations. In the event that Mr. Ives' employment is terminated for
reasons other than cause or upon a voluntary resignation by Mr. Ives for good
reason, including his assignment to render services other than in a senior
management or executive capacity or a material reduction in base salary,
Mr. Ives would be entitled to continue to receive his base salary for one year
from the date of termination. The Company is also required to continue Mr. Ives'
benefits plans for a period of one year following a termination without cause.
In addition, if a "change of control" of the Company occurs, Mr. Ives will be
entitled to additional compensation if within 12 months thereafter his
employment is terminated without cause or he voluntarily terminates his
employment. In these circumstances, Mr. Ives will be entitled to receive, in
lieu of any salary continuation otherwise payable under the Agreement, a lump
sum payment equal to 2.99 times Mr. Ives' average annual compensation received
during the five years next ending prior to the date of the change of control. A
"change of control" is defined in the Agreement to occur upon any of the
following events: (a) the acquisition by any person or group, as beneficial
owner, of 20% or more of the outstanding shares or the voting power of the
outstanding securities of the Company; (b) either a majority of the directors of
Company at the annual stockholders meeting has been nominated other than by or
at the direction of the incumbent directors of the Company's Board of Directors,
or the incumbent directors cease to constitute a majority of the Company's Board
of Directors; (c) the Company's shareholders approve a merger or other business
combination pursuant to which the outstanding common stock of the Company no
longer represents more than 50% of the combined entity after the transaction;
(d) the Company's shareholders approve a plan of complete liquidation or an
agreement for the sale or disposition of all or substantially all of the
Company's assets; or (e) any other event or circumstance determined by the
Company's Board of Directors to affect control of the Company and designated by
resolution of the Board of Directors as a change of control.
If a change of control of the Company were to occur during 1999, Mr. Ives
would be entitled to a severance payment of $1,291,498 in addition to certain
stock option and related stock appreciation rights and restricted stock
acceleration rights, subject to reduction in coordination with Section 280G of
the Internal Revenue Code. Under Section 280G, assuming that Mr. Ives' severance
payment and the value of his stock options, stock appreciation rights and
restricted stock acceleration contingent upon the change of control equaled or
exceeded three times his average W-2 compensation for the five tax years
immediately preceding the change of control, the payment and benefits would
constitute "parachute payments." As a result, the amount by which the severance
payment and benefits exceeded Mr. Ives' average annual W-2 compensation for the
five-year period would be deemed to be "excess parachute payments," a 20% excise
tax on the excess parachute payments would be imposed on Mr. Ives, and the
Company would not be entitled to deduct the excess parachute payments. Mr. Ives'
Agreement provides that if his severance payment would otherwise result in
excess parachute payments in the opinion of the Company's independent
accountants, then the Company will reduce the severance payment to an amount
that would not give rise to excess parachute payments.
The Agreement also restricts the ability of Mr. Ives to compete with the
Company or the Bank for a period of 12 months after the termination of his
employment under the Agreement, but this non-competition provision is not
operative following any change of control.
Change of Control Arrangements. Pursuant to agreements (the "Change of
Control Agreements") entered into between the Company and Barry L. French, John
O. Guthrie, Roger J. Lambert and Alvin D. Woods on December 18, 1998, the
Company agreed to make payments to these officers under certain circumstances if
a "change of control" of the Company (as defined above) occurs. Each such
officer will be entitled to a severance payment if within 12 months after a
change of control of the Company, the officer's employment is terminated without
cause or the officer voluntarily terminates his employment (other than after
circumstances constituting cause). The severance payment will be a lump sum
amount generally equal to 12 months' base salary plus an additional month's
salary for each of the officer's years of service up to 12 years. Under the
Change of Control Agreements, if the Company commits to employ the officer
during a designated transition period of up to 6 months after the change of
control without reduction of his base salary and without requiring his
relocation outside the Company's headquarters area, the officer will receive the
severance payment upon his voluntary resignation only if the resignation occurs
after the transition period. The Change of Control Agreements provide the same
limitations on "excess parachute payments" as are described above with respect
to Mr. Ives' Agreement.
17
<PAGE>
Transactions with Certain Related Persons.
A number of the Company's directors, director nominees, and officers and
their associates are customers of the Company's bank subsidiary. Except as
indicated below, extensions of credit made to them are in the ordinary course of
business, are substantially on the same terms, including interest rates and
collateral, as those prevailing at the same time for comparable transactions
with others, and do not involve more than normal risk of collectibility or
present other unfavorable features. 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. That loan was
paid off during 1998. None of such credits are classified as nonaccrual, past
due, restructured or potential problem. All outstanding loans to such officers,
directors, director nominees, and their associates are current as to principal
and interest. As of March 31, 1999, loans to directors, director nominees,
executive officers and their interests who had loans at any time during 1998 in
excess of $60,000 totaled approximately $4.0 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 1998 its officers and directors and greater than
ten percent stockholders complied with all applicable Section 16(a) filing
requirements, except that Charles R. Malbon, Jr., and William J. Davenport, III,
who became directors in April 1998, filed their initial Forms 3 in May 1998,
John F. Harris, who became a director in May 1998, filed his initial Form 3
several days late, Thomas J. Decker, Jr., who became a director in October 1998,
filed his initial Form 3 in November 1998, and Patrick L. Hillard filed a Form 4
that was required to be filed in August 1998 in October 1998.
Independent Accountants.
The Board of Directors has selected the accounting firm of
PricewaterhouseCoopers LLP, independent accountants, to be the Company's
independent accountants for the year ended December 31, 1998. A representative
of PricewaterhouseCoopers 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, 1999. 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 2000 Annual Meeting of
Stockholders (the "2000 Meeting"), then in order for the proposal to be
includible in the proxy statement for the 2000 Annual Meeting, such proposal
must be received by the Secretary of the Company no later than December 29,1999.
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
18
<PAGE>
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 2000 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, 1999,
such business may be brought before the 2000 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 2000 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, 1999. 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., or the Bank, should be
directed to Stuart F. Pollard, Vice President, Corporate Communications, CENIT
Bank, Post Office Box 1811, Norfolk, Virginia 23501-1811, Telephone (757)
446-6692.
By Order of the Board of Directors
/S/ John O. Guthrie
John O. Guthrie
Corporate Secretary
CENIT Bancorp, Inc.
Norfolk, Virginia
April 28, 1999
YOU ARE CORDIALLY INVITED TO ATTEND THE MEETING IN PERSON. WHETHER OR NOT
YOU PLAN TO ATTEND THE MEETING, YOU ARE REQUESTED TO VOTE VIA THE INTERNET OR
TELEPHONE OR TO SIGN AND PROMPTLY RETURN THE ACCOMPANYING PROXY IN THE ENCLOSED
POSTAGE-PAID ENVELOPE.
19
<PAGE>
[PROXY CARD - Front]
X
- ---------
Please mark
votes as in
this example
The Board of Directors recommends a vote FOR proposals 1 and 2
1. Election of Directors
FOR ALL DIRECTORS LISTED BELOW WITHOLD AUTHORITY
----- -----
Nominees: William J. Davenport, III, Michael S. Ives, Charles R. Malbon, Jr.
(Instruction: To withold authority to vote for any individual nominee(s) write
the name(s) of such nominee(s) in the following space.)
- ----------------------------------
FOR AGAINST ABSTAIN
2. Approval of the CENIT Long-Term Incentive Plan --- --- ---
3. 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.
Date
- ------------------------------, 1999
- ------------------------------------
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.
[PROXY CARD - Back]
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 19,
1999 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 and FOR approval of the Long-Term Incentive Plan. 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 19, 1999.
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.
<PAGE>
[FRONT COVER]
Annual Report 1998
CENIT BANCORP, INC.
<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.
CENIT Bank has been in business since 1889. The Bank is 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, 1998, CENIT Bancorp had assets of $641.1 million, deposits
of $496.8 million and stockholders' equity of $50.1 million with 4,808,806
shares of common stock outstanding.
The Bank operates twenty retail banking offices in the cities of Norfolk,
Portsmouth, Virginia Beach, Chesapeake, Hampton and Newport News and in York
County, Virginia. The Bank attracts retail deposits from the general public in
its market area by providing a variety of deposit services. As a community bank,
the focus is personal banking for local individuals and businesses. Deposits are
insured by the Federal Deposit Insurance Corporation up to applicable limits.
The Bank is a member of the Federal Home Loan Bank System.
CENIT invests its funds in permanent and construction residential loans,
consumer loans, and commercial real estate and business loans. The Bank also
invests in mortgage-backed certificates and U.S. Treasury and federal agency
securities.
The Company's common stock trades on the Nasdaq Stock Market (R) under the
symbol CNIT.
<PAGE>
Highlights of The Year
- ------------------------------------------------------------------------------
- - Record net income of $6,115,000
- - Record earnings of $1.27 per share
- - Dividend increase of 24%
- - An increase of 43% in noninterest-bearing deposits
- - An increase of 20% in deposit fee income
- - A decrease of 39% in nonperforming assets
- - Enhancement of our community banking franchise
<PAGE>
Table of Contents
- -------------------------------------------------------------
Corporate Profile
Highlights of The Year
Report To Our Stockholders 1
Board of Directors and Management Committee 5
Community Advisory Boards 6
Five Year Financial Summary 8
Management's Discussion and Analysis 9
Consolidated Financial Statements 21
Notes To Consolidated Financial Statements 26
Report of Independent Accountants 52
Investor Information 53
Corporate Information 54
Map of Retail Banking Offices
<PAGE>
Report to Our Stockholders
- ------------------------------------------------------------------------------
Your Board of Directors and I are pleased to present to you the 1998 Annual
Report for CENIT Bancorp, Inc. (the "Company").
The initiatives we have undertaken over the past three years to improve our
community banking franchise paid off handsomely in 1998. The Highlights page in
this Report lists for you just a few of our recent financial achievements. In
1998, we experienced explosive growth in our transaction account deposits, our
commercial and consumer loans, and our deposit fee income. This growth did not
occur by happenstance; rather, it was the product of plans carefully made and
carefully implemented.
- - Our Banking Strategy
[PICTURE OF MICHAEL S. IVES INSERTED HERE]
Michael S. Ives
President &
Chief Executive Officer
As we examined our assets and liabilities and our market position during
our strategic planning process several years ago, it became apparent to us that
we could improve our franchise value and earnings through systematic changes to
our assets and liabilities. By the end of 1999, we wanted to reduce our
permanent residential mortgage loans as a percentage of our outstanding loan
portfolio to approximately 40% and to increase our transaction deposits, i.e.,
checking, savings, and money market accounts as a percentage of our deposits to
approximately 50%. We plan to achieve these objectives by growth in our core
banking loans, i.e., consumer, commercial business loans, commercial real estate
loans, multi-family residential loans, and acquisition, development and
construction loans, and through growth in our transaction accounts with
particular emphasis on noninterest- bearing deposits. In executing this
strategy, we have chosen not to compete for either certificates of deposit or
commercial real estate loans from customers that did not have or wish to
establish other banking relationships with us.
The successful implementation of this strategy without incurring excessive
expenses or sacrificing asset quality would create a greater and more consistent
earnings stream for the Company and thereby enhance the value of our banking
franchise.
- - Our Competitive Situation in Our Banking Market
During 1998, competitive conditions in our local banking market changed
dramatically. Three regional banks headquartered in Virginia and operating in
our market became parts of much larger regional banks headquartered in North
Carolina. Two large thrift institutions also operating in our market became or
announced plans to become parts of two other commercial banks headquartered in
North Carolina.
In one sense, these mergers have created more vigorous competitors in that
the financial resources of the resulting institutions are greater than those of
the predecessor institutions. However, large mergers inevitably result in
customer dislocations. Large mergers create numerous customer service issues and
the sheer number of issues arising prevent rapid responses by merging banks.
These customer disruptions create significant business development
1
<PAGE>
opportunities for other banks, particularly local community banks.
There is no longer any large commercial bank with its parent company
headquartered in Hampton Roads. Only one of our larger competitors has its
headquarters in Virginia. The market opportunity is obvious.
Excluding CENIT, the remaining local community banks operate primarily in
limited geographic areas within Hampton Roads. With 20 retail banking offices
throughout Hampton Roads, CENIT is now the only local banking institution
offering close to regional geographic market coverage with a substantial range
of commercial, retail and consumer banking services. CENIT has the opportunity
to be the dominant community bank in Hampton Roads with the resulting benefits
to our stockholders from superlative core earnings and enhanced franchise value.
- - Our New Banking Initiatives
During 1998, we took a number of steps to develop our community banking
franchise and to accelerate the changes in our assets and liabilities to achieve
our targets. Among these steps were:
Introduction of New Banking Services.
During 1998, we introduced a new money market account designed to assist
our checking customers in their personal funds management. We also offered a new
consumer line of credit for overdraft protection called Checking Reserve. We
improved our interactive voice response system, BankLine, twice in 1998 to
expand our delivery of account information. These improvements helped to
increase the usage of our BankLine to nearly 250,000 calls last year.
In addition, the Company introduced successfully its new check imaging
program. We now deliver to our checking customers statements for their accounts
containing images of their checks rather than the original checks. This
decreases statement preparation time, postage costs, and handling costs for us
and improves the quality, accuracy and timeliness of our statements for our
customers.
In the second quarter of 1999, we expect to introduce a personal computer
banking program for business customers. We have completed a thorough analysis of
the existing and prospective needs of our commercial customers, and we are in
the process of implementing a personal computer banking program to handle a wide
range of customer transactions including wire transfers, access to account
information, and funds transfer from one customer account to another.
As the cost of new technology plummets, the technology gap between
community banks and their much larger competitors narrows. Community banks now
have the technological capability to offer banking services that equal, or in
many cases exceed, the services offered by our larger competitors. In the years
ahead, technology will assist us and other community banks in exploiting the
advantage in customer service that we have over our larger competitors.
New Marketing Initiatives.
During 1998, we conducted extensive marketing research to ascertain our
level of market recognition and the public perception of CENIT Bank. Using these
results, the Company launched a media campaign in the third and fourth quarters
of 1998 that accentuated the Company's strengths. From this campaign, we created
a greater public awareness of CENIT Bank as the community banking leader in
terms of products, pricing and convenience.
New Initiatives to Increase Business With Our Existing Customers.
During 1998, we focused on expanding the size and number of relationships
that we have with our existing customers. Our Retail Banking Division developed
extensive marketing data on the number of services used by our existing
customers and their banking patterns. From
2
<PAGE>
this information, our Retail Banking Division has endeavored to contact many of
our retail and commercial customers and to offer them additional banking
services that they may be obtaining from other financial institutions. The level
of success that our bankers are achieving in this program continues to improve.
As our customers learn more about the wide range of services that we offer, we
expect that they will consolidate more of their banking relationships with us.
New Advisory Boards.
We extended our reach into our communities with the addition of two
advisory boards, one for the Financial District in the city of Norfolk and the
other for the eastern portion of the Virginia Peninsula consisting of the cities
of Hampton and Newport News and York County. In Virginia Beach, we consolidated
our six advisory boards into two larger and more effective advisory boards. Our
advisory boards continue to refer a steady stream of new customers to us and to
advise us on improvements to our services and our delivery processes to take the
greatest advantage of our position in our market.
- - Our Financial Results
Even a cursory review of our financial results from 1998 proves the success
of our new banking initiatives. We are pleased to present these results to you:
29% Increase in Transaction Accounts. The Company's banking initiatives
resulted in checking, savings and money market deposits increasing by $51.5
million, or 29%, for the year. We placed particular emphasis on increasing the
balances of our noninterest- bearing deposits. These deposits increased by $23.8
million, or 43%, to a record $78.7 million in 1998. These dramatic increases in
our transaction accounts and our noninterest- bearing accounts were the direct
result of the successful execution of various commercial and retail banking
programs designed to capture these types of accounts.
From a balance sheet perspective, the Company increased the outstanding
balances of its noninterest-bearing deposits from 11% of total deposits at the
beginning of the year to 16% at December 31, 1998. Overall, the percentage of
transaction accounts as a percentage of total deposits increased from 35% at the
beginning of the year to 46% at December 31, 1998.
20% Increase in Deposit Fees. Our focus on increasing our transaction
accounts also resulted in a large increase in our deposit fee income, a very
stable and recurring source of income. During 1998, we increased our deposit fee
income by over 20% to a record $2.5 million.
31% Increase in Core Banking Loans. Our core banking loans increased by $55
million, or 31%, during 1998. These loans increased from 37% of our overall loan
portfolio at the beginning of the year to 48% of our loan portfolio at December
31, 1998. Again, this change in the mix of our loan portfolio was a significant
part of our strategic initiatives.
Record Earnings. In 1998, the Company had record net income of $6.1
million, or $1.27 per diluted share, compared to net income of $6.0 million, or
$1.20 per diluted share, in 1997. The Company achieved this increase in net
income despite the additional expenses associated with a corporate
reorganization and consolidation of its banking subsidiaries and a major
multi-media advertising campaign in the fourth quarter of 1998. The Company's
net income also was adversely impacted by the accelerated amortization of
premiums and deferred loan expenses from the rapid prepayment during 1998 of the
Company's portfolio of residential mortgage loans and mortgage-backed
securities.
Excellent Asset Quality. Notwithstanding the rapid transformation of the
Company's loan portfolio during 1998, the Company maintained its traditional
commitment to
3
<PAGE>
enhancing its asset quality. The Company reduced its total nonperforming assets
from $2.4 million at December 31, 1997 to $1.5 million at December 31, 1998.
This caused our ratio of total nonperforming assets to total assets to decrease
to 0.23% at the end of 1998. We are pleased to report that in a recent research
report one analyst following the Company's stock referred to our asset quality
as "pristine."
Stock Split. We continue to evaluate and act upon opportunities to improve
the value of your stock. In March, 1998, we evaluated the price and trading
range of our stock and made a strategic decision to announce a 3-for- 1 stock
split in order to make our stock more liquid and a more attractive investment
vehicle for new stockholders.
Completion of 5% Share Repurchase. Share repurchases demonstrate our
confidence in the Company's stock as a good investment. In addition, share
repurchases tend to increase earnings per share and return on equity over time
by the reduction in the number of shares outstanding and in the equity capital
of the Company that is not needed for current or projected operations. During
the second half of 1998 and early 1999, we repurchased 5% of our outstanding
shares for the benefit of our shareholders.
Continued Increases in Quarterly Dividends. In early 1999, the Company
announced that it had increased its quarterly dividend to $.15 per share. This
represents a 50% increase over the quarterly dividend of $.10 per share paid in
the first quarter of 1998. The continued increases in dividends demonstrate our
confidence in the future earnings of the Company.
- - Prospects for the Future
As we enter 1999, our Company is in an enviable position. In terms of
deposit market share and market coverage through retail offices, the Company is
the unchallenged leader among community banks in the Norfolk-Virginia
Beach-Newport News Metropolitan Statistical Area ("MSA"). We have shown dramatic
growth in the past two years in our transaction accounts and our core banking
loans. With this record of growth in our MSA, one of the largest in the
Southeast, we are developing a very valuable banking franchise.
Your Board of Directors continuously analyzes our strategic options for the
benefit of our stockholders. Our track record in creating value for our
stockholders is impressive. We will continue our process of evaluating our
opportunities for internal growth and our opportunities to merge with other
financial institutions, both larger and smaller, in order to maximize the return
on your investment over the long term.
We appreciate the confidence that you have shown in us through your
investment in our stock. We will continue to give our best efforts to maintain
your confidence in us and reward you with further increases in the value of your
investment.
/S/ Michael S. Ives
Michael S. Ives
President & Chief Executive Officer
4
<PAGE>
Board of Directors and Management Committee
- ------------------------------------------------------------------------------
- - Board of Directors
C. L. Kaufman, Jr.
Chairman,
Investor
David L. Bernd
President & CEO, Sentara Health System
Patrick E. Corbin, CPA
Principal, Corbin & Company, P.C.
William J. Davenport, III
Real Estate Developer/Investor
Thomas J. Decker, Jr.,
President, The Prudential-Decker Realty
L. Renshaw Fortier*
Chairman, Laren 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
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 Board Only
- - Management Committee
Michael S. Ives
President & Chief Executive Officer,
CENIT Bank
Barry L. French
Senior Vice President,
Retail Banking Group Manager
John O. Guthrie
Senior Vice President,
Chief Financial Officer &
Finance and Administration 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
Alvin D. Woods
Senior Vice President,
Chief Lending Officer &
Lending Group Manager
5
<PAGE>
Community Advisory Boards
- -------------------------------------------------------------------------------
- - Norfolk
Claus Ihlemann
Chairman
Owner, Decorum
Paulette Benson
Consulting Engineer
James G. Close, Jr.
Owner, Monticello Antiques
Norma Dorey-Cobb
President, Changes Hairstyling, Inc.
Joan D. Gifford
Chairman, Coldwell Banker
Gifford Realty, Inc.
Joseph F. Query
President, Joseph Query
Insurance Agency, Inc.
Peter W. Karangelan
President, Azalea Inn #1, Inc.
Barbara Zoby
President, Yukon Lumber Company
- - Norfolk Financial District
Wendell C. Franklin
Chairman
Senior Vice President & Partner,
S. L. Nusbaum Realty Company
Michael A. Glasser, Esq.
Vice Chairman
Partner, Glasser and Glasser PLC
Richard C. Burroughs
Vice Chairman, Harvey Lindsay
Commercial Real Estate
Sterling Cheatham
Assistant City Manager, City of Norfolk
Dennis R. Deans, CPA
Partner, McPhillips, Roberts & Deans
Karen Jaffe
Partner, Jaffe, Caplan, Fleder
Gus J. James, II, Esq.
Partner, Kaufman & Canoles PC
Walter D. Kelley, Jr., Esq.
Partner, Willcox & Savage, P.C.
Linda S. Laibstain
Partner, Hofheimer Nusbaum, P.C.
Ron A. Stine, MD
Physician, Cardiology Consultants
Alvin A. Wall, CPA
President, Wall, Einhorn &
Chernitzer, P.C.
- - Tri-City
West Chesapeake,
Suffolk, Portsmouth
Samuel H. Lamb, II
Chairman
Provost, Tidewater Community College
Michael R. Kirsch
Vice Chairman
President, K Plus, Inc.
Robert C. Barclay, IV, Esq.
Partner, Cooper, Spong & Davis
Roger L. Brown
Owner, McDonald's Franchises
Edinburgh G. Corprew
Owner, Corprew Funeral Home
B. Anne Davis
President & CEO, Diesel Tech, Inc.
Gwendolyn S. Davis
Legislative Liaison
Principal Management Analyst,
City of Portsmouth
Dan E. Griffin
Architect
Bill Moody
Vice President, Sales
Doughtie's Foodservice
Jimmy R. Spruill
Chairman, J. J. Fasteners, Inc.
Andrew M. Virga
Treasurer & CFO,
Virga's Pizza Crust of Virginia
- - Chesapeake
South Chesapeake
James A. Roy, Esq.
Chairman
Partner, Roy, Romm & Lascara, P.C.
James J. Wheaton, Esq.
Vice Chairman
Partner, Willcox & Savage, P.C.
W. Michael Bryant
President,
OBBCO Safety & Supply, Inc.
Steven B. Powers, MD
Private Practice
Debbie Ritter
Chesapeake Civic Leader
Member, City Council
City of Chesapeake
Fella Rhodes
Associate Broker,
William E. Wood & Associates
Greg Skillman
President, Seaboard Mechanical
Stephen Telfeyan, Esq.
Partner, Basnight, Kinser
& Leftwich, P.C.
Gayle A. Terwilliger, DDS
Dentist, Private Practice
Olivia T. Walton, CPA
Owner, Walton Associates
- - Virginia Beach East
Kal Kassir
Chairman
Owner, The Corner Market
Donald F. Bennis, Esq.
Attorney, Private Practice
Brian S. Burgess
Vice President, Sales
Hoffman Beverage Company
Thomas R. Eckert
Owner, Baylake Pines School
6
<PAGE>
Charles G. Faison, Jr.,
President, Bayside Exxon Service Center
Charles W. Guthrie
President, Lynnhaven Marine
Robert M. Howard
Executive Vice President,
Accounting and Finance
Professional Hospitality Resources Inc.
Robert G. Jones, Esq.
Partner,
Jones, Russotto & Walker, P.C.
John P. Martin
Owner, Great Atlantic Travel & Tour
Paul V. Michels
President, Coastal Training
Technologies Corp.
A. William Reid
President, Rising Tide Productions
John R. Savino
Agent, The Prudential-Decker Realty
Brian P. Winfield, CLU
Winfield and Associates
- - Virginia Beach West
Kirk Hammaker
Chairman
General Manager, Riedman Insurance
Wendell A. White
Vice Chairman
President, Bayside Building Corp.
Stephen B. Ballard
President, S. B. Ballard, Inc.
Richard A. Beskin
President, Beskin and Associates, Inc.
Charles W. Best, III, Esq.
Partner, Best & Best, PLC
Nancy Cheng
Administrative Vice President,
Eastern Computers, Inc.
Blair G. Ege
Regional Director,
Mass Mutual Company
William F. "Toby" Harris
Vice President, National City Mortgage
Owner, Freeman, Inc.
Owner, Bayside Commercial Lending
William A. Hearst
Agent, Riedman Insurance (Retired)
Clarence A. Holland, MD
Physician, Bayside Family Practice
Glen A. Huff, Esq.
Partner, Huff, Poole & Mahoney
Donald E. Lee, Jr., Esq.
Owner,
Donald E. Lee, Jr. and Associates
Norma O. Magpoc, MD
Physician
Frances Denney Richardson, CPA,
Failes & Associates
Robert E. Ruloff, Esq.
Partner, Shuttleworth, Ruloff &
Giordano P.C.
Mark E. Slaughter, Esq.
Partner, Pender & Coward
Harold E. Smith
Partner & Senior Vice President,
GSH Real Estate
Jerry R. Sutphin
Owner, Sutphin Enterprises, L.L.C.
J. Randolph Sutton
President,
Waterfront Marine Construction, Inc.
Jerry Womack
President,
Suburban Grading & Utilities
- - Peninsula
Hampton, Newport News,
York County
Herbert V. Kelly, Jr., Esq.
Chairman
Partner, Jones Blechman,
Woltz & Kelly, PC
Thomas R. Brooks, CPA
Vice Chairman
Partner, Witt, Mares & Co., PLC
James F. Allen, MD, F.A.C.S.
Neurosurgeon,
Peninsula Neurosurgicalc
Associates, P.C.
Randolph P. Bryant
President,
Wolftrap Operations
Charles R. Conte, Jr.
Owner,
Conte's Bike Shop, Inc.
Betty Anne Davis, CPD, A.I.B.D.
Owner, David Designs
Co-owner, Davis-Penland
Building and Remodeling, LLC
Wendy C. Drucker
Vice President,
Drucker & Falk, LLC
Howard E. Gwynn
Commonwealth's Attorney,
City of Newport News
Allen R. Jones
President,
Dominion Physical Therapy
Anna Van Buren McNider
Owner, Digital Images
Jere M. Mills
Owner,
Ferguson-Mills Construction Co.
& Ferguson Corp.
C. Dwight West, III
President, C.D. West
& Company, Insurance
Charles W. Wornom
Vice President,
Abbitt Management,
Abbitt & West
Joseph M. Ziglar, Jr.
President,
Chesapeake Masonry Corp.
7
<PAGE>
Five Year Financial Summary (1)
- -------------------------------------------------------------------------------
(Dollars in thousands, except per share)
<TABLE>
<CAPTION>
At or for the year ended December 31, (1)
1998 1997 1996 1995 1994
----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Financial Condition Data:
Total assets $ 641,056 $ 718,083 $707,100 $ 639,812 $ 575,675
Securities available for sale:
U.S. Treasury, other U.S. Government agency
and other debt securities, net 48,117 45,347 46,305 65,118 44,650
Mortgage-backed certificates, net 17,019 91,841 177,706 203,176 175,763
Loans held for investment, net 484,783 486,487 422,219 319,194 305,578
Real estate owned, net 377 1,098 2,769 1,828 5,718
Deposits 496,772 507,670 498,965 450,530 420,422
Borrowings 88,084 157,239 155,138 138,171 109,035
Stockholders' equity 50,076 49,937 49,608 46,729 42,217
Operating Data:
Interest income $ 47,031 $ 50,776 $ 48,171 $ 45,527 $ 37,826
Interest expense 25,805 29,310 28,087 27,476 19,496
----------------------------------------------------------------------
Net interest income 21,226 21,466 20,084 18,051 18,330
Provision for loan losses 510 600 377 697 490
----------------------------------------------------------------------
Net interest income after provision for loan losses 20,716 20,866 19,707 17,354 17,840
Other income 7,013 5,713 3,894 2,944 2,765
Other expenses 18,197 17,312 18,172 16,174 14,402
----------------------------------------------------------------------
Income before income taxes 9,532 9,267 5,429 4,124 6,203
Provision for income taxes 3,417 3,264 1,821 1,652 2,226
----------------------------------------------------------------------
Net income $ 6,115 $ 6,003 $ 3,608 $ 2,472 $ 3,977
======================================================================
Earnings per share:
Basic $ 1.30 $ 1.24 $ .74 $ .52 $ .84
======================================================================
Diluted $ 1.27 $ 1.20 $ .72 $ .50 $ .82
Cash dividends per share ======================================================================
$ .41 $ .33 $ .25 $ .13 $ .12
======================================================================
Selected Financial Ratios and Other Data:
Return on average assets 0.92% 0.86% (2) 0.54% (3) 0.40% (4) 0.72%
Return on average stockholders' equity 12.04 12.00 (2) 7.56 (3) 5.57 (4) 9.75
Average stockholders' equity to average assets 7.68 7.17 7.20 7.21 7.40
Stockholders' equity to total assets at year end 7.81 6.95 7.02 7.30 7.33
Interest rate spread 2.88 2.85 2.83 2.60 3.10
Net interest margin 3.43 3.27 3.22 3.07 3.47
Other expenses to average assets 2.75 2.48 (2) 2.74 (3) 2.63 (4) 2.61
Net interest income to other expenses 116.65 123.99 (2) 110.52 (3) 111.61 (4) 127.27
Nonperforming assets to total assets .23 .34 .80 .45 1.42
Allowance for loan losses to total net loans .83 .78 .90 1.16 1.24
Dividend payout ratio (5) 31.54 26.95 33.63 25.81 14.23
Book value per share $ 10.93 (6) $ 10.57 $ 10.11 $ 9.76 $ 8.89
Tangible book value per share 10.13 (6) 9.72 9.22 9.38 8.48
Number of retail branch offices 20 20 19 16 15
________
<FN>
(1) On August 1, 1995, Princess Anne became a wholly-owned subsidiary of the Company in a merger accounted for by the pooling
of interests method of accounting. Accordingly, the consolidated financial data presented gives effect to this merger and
the accounts of Princess Anne have been combined with those of the Company for all periods presented. Also, on April 1,
1994, CENIT Bank, FSB merged with 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, 1998, were $10.41 and $9.65, respectively.
</FN>
</TABLE>
8
<PAGE>
Management's Discussion and Analysis of
Financial Condition and Results of Operations
- -------------------------------------------------------------------------------
Financial Condition of the Company
Total Assets. At December 31, 1998, the Company had total assets of $641.1
million, a decrease of $77.0 million since December 31, 1997. This decrease
results primarily from sales, maturities and principal repayments of
mortgage-backed securities. Proceeds from mortgage-backed securities were used
to reduce borrowings rather than to seek alternative investment opportunities.
Securities Available For Sale. Securities available for sale totaled $65.1
million at December 31, 1998 compared to $137.2 million at December 31, 1997.
The net decrease of $72.1 million from December 31, 1997 resulted primarily from
the net effect of $66.7 million of sales, $34.9 million of repayments, $18.0
million of proceeds from maturities or calls, and $48.2 million of purchases.
The portfolio of securities available for sale at December 31, 1998 was
comprised primarily of $21.5 million of other U.S. Government agency securities,
$26.4 million of U.S. Treasury securities and $17.0 million of mortgage-backed
certificates.
Loans. The balance of net loans held for investment decreased slightly from
$486.5 million at December 31, 1997 to $484.8 million at December 31, 1998.
Single-family first mortgage loans decreased $57.4 million from $308.5 million
at December 31, 1997 to $251.1 million at December 31, 1998, while all other net
loans increased by $55.7 million from $178.0 million at December 31, 1997 to
$233.7 million at December 31, 1998. The increase in other net loans is the
result of the Company's emphasis on originating consumer and commercial loans
during 1998.
Deposits. During 1998, the Company's total deposits decreased from $507.7
million at December 31, 1997 to $496.8 million at December 31, 1998. The
Company's noninterest-bearing deposits increased by 43.4% from $54.9 million at
December 31, 1997 to $78.7 million at December 31, 1998. The balance of all
checking, savings and money market accounts at December 31, 1998 was $231.0
million, an increase of $51.5 million compared to the balance of these accounts
at December 31, 1997. Certificate of deposit balances decreased $62.4 million,
or 19.0% from $328.2 million at December 31, 1997 to $265.8 million at December
31, 1998. This increase in noninterest-bearing deposits and decrease in
certificates of deposit 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, decreased from $157.2 million at December 31, 1997 to
$88.1 million at December 31, 1998. FHLB advances decreased from $145.0 million
to $75.0 million during this period, while other borrowings and securities sold
under agreements to repurchase increased by $845,000. The primary source of
funds used to pay down FHLB advances was the sales, maturities and repayments of
mortgage-backed securities.
Capital. The Company's and Bank's capital ratios significantly exceeded
applicable regulatory requirements at both December 31, 1998 and 1997. During
1998, the Company repurchased 231,500 shares of its outstanding common stock.
Asset Quality. The Company's total nonperforming assets decreased by 39%,
to a total of $1.5 million, or .23% of assets, at December 31, 1998 compared to
$2.4 million, or .34% of assets, at December 31, 1997. Real estate owned ("REO")
and other repossessed assets decreased by 70.0%, from $1.3 million at December
31, 1997 to $398,000 at December 31, 1998. Nonperforming loans were $1.1 million
at both December 31, 1998 and 1997.
Comparison of Operating Results for the Years Ended December 31, 1998 and 1997
General. The Company's pre-tax income increased by 2.9% to $9.5 million for
the year
9
<PAGE>
ended December 31, 1998 from $9.3 million for 1997. This increase was
attributable primarily to a $1.3 million increase in other income, offset by a
$885,000 increase in other expenses and a $150,000 decrease in net interest
income after provision for loan losses.
Net Interest Income. The Company's net interest income before provision for
loan losses decreased by $240,000 for the year ended December 31, 1998, a 1.1%
decrease from 1997. This decrease resulted from a $3.7 million decrease in
interest income, which exceeded a $3.5 million decrease in interest expense. The
Company sold a substantial portion of its lower-yielding mortgage-backed
certificate portfolio during 1998 and used proceeds from the sale to fund other
interest-earning assets and to pay down borrowings, thereby reducing the asset
size of the Company. Interest on the Company's portfolio of mortgage-backed
certificates decreased by $5.5 million in 1998 primarily due to a $77.8 million
decrease in their average balances. This decrease was not totally offset by
reductions in interest expense or interest income from other sources.
Interest on loans increased by approximately $1.7 million, or 4.5%, from
$38.2 million in the year ended 1997 to $39.9 million in 1998. This increase was
attributable to a $37.1 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 8.12% in 1997 to 7.87% in 1998. 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 1998 was 7.56%.
Interest on investment securities decreased $133,000 in 1998 compared to
1997. This decrease resulted primarily from a decrease in the yield on the
portfolio from 6.24% in 1997 to 5.93% in 1998.
The Company's interest expense decreased by $3.5 million, as a result of a
decrease in interest on both deposits and borrowings. The average balance of
interest bearing deposits decreased by $19.4 million in 1998 compared to 1997,
while the average costs of interest bearing deposits decreased from 4.66% in
1997 to 4.54% in 1998. The average balance of borrowings decreased by $33.8
million in 1998 compared to 1997, while the average cost of the borrowings
decreased from 5.54% in 1997 to 5.35% in 1998.
The Company's net interest margin increased from 3.27% for the year ended
December 31, 1997 to 3.43% for the year ended December 31, 1998. This resulted
primarily from the sale of lower-yielding mortgage-backed certificates and
reduction in the asset size of the Company, and also a $13.7 million increase in
the average balance of noninterest-bearing deposits. For the fourth quarter of
1998, the Company's net interest margin was 3.57% compared to 3.31% in the
fourth quarter of 1997. The Company's interest rate spread increased from 2.85%
in the year ended December 31, 1997 to 2.88% in the comparable 1998 period. The
increase in the Company's interest rate spread occurred because the Company's
overall yield on its interest-earning assets decreased from 7.73% to 7.59%,
while the overall cost of its interest-bearing liabilities decreased from 4.88%
in 1997 to 4.71% in 1998. The Company's net interest spread in the fourth
quarter of 1998 was 2.95% compared to 2.86% in the fourth quarter of 1997. The
Company's calculations of interest rate spread and net interest rate margin
include nonaccrual loans as interest-earning assets.
Provision for Loan Losses. The Company's provision for loan losses
decreased from $600,000 in 1997 to $510,000 in 1998. Net chargeoffs totaled
$269,000 in 1998 compared to $623,000 in 1997. At December 31, 1998, the
Company's total allowance for loan losses was $4.0 million and nonperforming
loans totaled $1.1 million, resulting in a coverage ratio of 374%, compared to a
coverage ratio of 343% at December 31, 1997.
The provision for loan losses decreased by $90,000 in 1998 compared to
1997. The Company considered a number of factors in determining the 1998 loan
loss provision and the adequacy of the allowance for loan losses at December 31,
1998, including: (a) the level of nonperforming loans at
10
<PAGE>
December 31, 1998 and 1997, (b) the increase in the percentage of
non-residential mortgage loans in the loan portfolio, which have more inherent
risk in comparison to residential mortgage loans and, (c) the decrease in net
loan chargeoffs during 1998.
Other Income. Total other income increased by 22.8%, from $5.7 million in
1997 to $7.0 million in 1998. Gain on sales of loans increased $482,000 in 1998
due primarily to the increased volume of mortgage loan originations. Deposit
fees and merchant processing fees increased by $414,000 and $671,000,
respectively, in 1998 compared to 1997. Deposit fees increased in 1998 as a
result of additional transaction accounts and increases in the Company's deposit
fee schedule. Merchant processing fees increased in 1998 as the Company
continued to experience substantial growth in its merchant portfolio. Brokerage
fees recognized by the Bank's commercial mortgage loan brokerage subsidiary
decreased by $382,000 in 1998 compared to 1997, primarily as a result of a
decrease in the volume of brokerage activity.
Other Expenses. Total other expenses increased from $17.3 million in the
year ended December 31, 1997 to $18.2 million in 1998. Total other expenses for
1997 includes $405,000 of expenses relating to the proxy contest and other
matters. Merchant processing expenses increased by $636,000 in 1998 as a result
of increased volume. Expenses related to professional fees increased by $266,000
during 1998 due, in part, to a recovery of legal costs in 1997 related to
previous problem assets. Equipment, data processing and supply expenses
increased by $158,000 in 1998, reflecting increases primarily in depreciation
and maintenance.
Income Taxes. The Company's income tax expense for the year ended
December 31, 1998 was $3.4 million, which represents an effective tax rate of
35.8%. The Company's income tax expense for 1997 was $3.3 million, which
represented an effective tax rate of 35.2%. The effective tax rate increased
during 1998 primarily as a result of the increase in the income of the Bank
subject to state tax.
Comparison of Operating Results for the Years Ended December 31, 1997 and 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
11
<PAGE>
certificates; and $2.1 million, or 2.2% of the total portfolio, of fixed-rate
mortgage-backed certificates with balloon provisions. The weighted average
yields for the month of December 1997 for these three classifications were
8.43%, 6.94%, and 6.51%, respectively.
Interest on loans increased by approximately $8.0 million, or 26.4%, from
$30.2 million in the year ended 1996 to $38.2 million in 1997. This increase was
attributable to a $118.4 million increase in the average balance of loans, the
effect of which more than offset a decrease in the yield on the Company's loan
portfolio from 8.59% in 1996 to 8.12% in 1997. The increase in the average
balance of loans resulted from both an increase in originations and from the
purchase of residential single-family loans. The weighted average yield on the
loan portfolio for the month of December 1997 was 8.17%.
Interest on investment securities decreased $882,000 in 1997 compared to
1996. This decrease resulted from a $12.4 million decrease in the average
balance of the portfolio and a decrease in the yield on the portfolio from 6.44%
in 1996 to 6.25% in 1997.
The Company's interest expense increased by $1.2 million, primarily as a
result of an increase in interest on deposits, the effect of which was partially
offset by a decrease in interest on borrowings. The average balance of interest
bearing deposits increased by $41.3 million in 1997 compared to 1996, while the
average costs of interest bearing deposits decreased from 4.70% in 1996 to 4.66%
in 1997. The average balance of borrowings decreased by $13.3 million in 1997
compared to 1996, while the average cost of the borrowings increased from 5.40%
in 1996 to 5.54% in 1997.
The Company's net interest margin increased from 3.22% for the year ended
December 31, 1996 to 3.27% for the year ended December 31, 1997. This increase
was the result of an increase in the Company's interest rate spread from 2.83%
in the year ended December 31, 1996 to 2.85% in the comparable 1997 period. The
increase in the Company's interest rate spread occurred because the Company's
overall yield on its interest-earning assets remained level at 7.73%, while the
overall cost of its interest-bearing liabilities decreased from 4.90% in 1996 to
4.88% in 1997. The Company's calculations of interest rate spread and net
interest rate margin include nonaccrual loans as interest-earning assets.
The Company's net interest margin remained substantially unchanged during
1997. For the three months ended December 31, 1997, the Company's net interest
margin was 3.31% and the interest rate spread was 2.86%. For the three months
ended December 31, 1996, the Company's net interest margin was 3.30% and the
interest rate spread was 2.91%.
Provision for Loan Losses. The Company's provision for loan losses
increased from $377,000 in 1996 to $600,000 in 1997. Net chargeoffs totaled
$623,000 in 1997 compared to $267,000 in 1996. The Company's 1996 provision for
loan losses was positively 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 the 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
12
<PAGE>
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 the
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 the Bank
subject to state tax.
Liquidity
The principal sources of funds for the Company for the year ended December
31, 1998, included $587.0 million in proceeds from FHLB advances, $34. 9 million
in principal repayments of securities available for sale, $84.7 million in
proceeds from sales, maturities and calls of securities available for sale, and
$82.9 million in proceeds from the sale of loans. Funds were used primarily to
repay FHLB advances totaling $657.0 million, to fund purchases of investment
securities available for sale totaling $48.2 million, and to originate loans
held for sale of $82.6 million.
Savings institutions, such as the Bank, are required to maintain an average
daily balance of liquid assets equal to a certain percentage of the sum of its
average daily balance of net withdrawable deposit accounts and borrowings
payable in one year or less. The liquidity requirements may vary from time to
time (between 4% and 10%) depending upon economic conditions and savings flows
of all savings institutions. At the present time, the required liquid asset
ratio is 4%. The Bank's liquid asset ratio was 9.3% and 8.8% at December 31,
1998 and 1997, respectively.
At December 31, 1998, the Company had outstanding mortgage and nonmortgage
loan commitments, including unused lines of credit, of $44.7 million,
outstanding commitments to purchase loans of $27.6 million and outstanding
commitments to sell mortgage loans of $5.9 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 $216.9 million at December 31, 1998. 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
13
<PAGE>
Company's interest-earning assets and interest-bearing liabilities.
The primary goal of the Company's asset/liability management strategy is to
maximize its net interest income over time while keeping interest rate risk
exposure within levels established by the Company's management. The Company's
ability to manage its interest rate risk depends generally on the Company's
ability to match the maturities and repricing characteristics of its assets and
liabilities while taking into account the separate goals of maintaining asset
quality and liquidity and achieving the desired level of net interest income.
The principal variables that affect the Company's management of its interest
rate risk include the Company's existing interest rate gap position,
management's assessment of future interest rates, the need for the Company to
replace assets that may prepay before their scheduled maturities, and the
withdrawal of liabilities over time.
One technique used by the Company in managing its interest rate risk
exposure is the management of the Company's interest sensitivity gap. The
interest sensitivity gap is defined as the difference between the amount of
interest-earning assets anticipated, based upon certain assumptions, to mature
or reprice within a specific time period and the amount of interest-bearing
liabilities anticipated, based upon certain assumptions, to mature or reprice
within that time period. At December 31, 1998, the Company's one year "positive
gap" (interest-earning assets maturing within a period exceed interest-bearing
liabilities repricing within the same period) was approximately $120.9 million,
or 18.9% 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 interest sensitivity gap position of the Company is a static analysis
at December 31, 1998. Because many factors affect the composition of the
Company's assets and liabilities, a change in prevailing interest rates will not
necessarily result in the corresponding change in net interest income that would
be projected using only the interest sensitivity gap table for the Company at
December 31, 1998.
At December 31, 1997, the Company's one year "positive gap" was
approximately $25.0 million, or 3.5% of total assets. The increase in the one
year "positive gap" of approximately $95.9 million was primarily the result of:
(a) faster prepayment assumptions in 1998 regarding prepayment of loans which
has resulted in an increase in one year interest sensitive loans of $45.7
million, (b) a decrease in mortgage-backed securities with one year interest
sensitivity of $72.7 million due primarily to sales, maturities and principal
repayments, (c) a decrease of $33.1 million of one year interest sensitive
deposits due primarily to a decrease in the outstanding balances of certificates
of deposit and, (d) a decrease of $85.0 million in one year interest sensitive
advances from the Federal Home Loan Bank as proceeds from mortgage-backed
certificates were used to pay down advances.
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
14
<PAGE>
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, 1998 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, 1998 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
1998 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.
15
<PAGE>
<TABLE>
<CAPTION>
Interest Sensitivity Analysis
December 31, 1998
(Dollars in thousands, except footnotes)
Over
Over One Three
Total Year to Years or
0-3 4-6 7-12 Within Three Non-
Months Months Months One Year Years Sensitive Total
-------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Assets
Interest-earning assets:
Loans (1) $170,816 $ 55,313 $ 85,915 $312,044 $ 125,665 $ 54,413 $492,122
Securities available for sale:
U.S. Treasury securities 3,001 3,021 6,057 12,079 14,317 - 26,396
Other U.S. Government agency
securities 1,001 2,359 3,005 6,365 11,119 3,987 21,471
Other debt security - - - - - 250 250
Mortgage-backed certificates 6,527 4,072 3,269 13,868 1,465 1,686 17,019
Federal funds sold 42,289 - - 42,289 - - 42,289
Federal Home Loan Bank stock - - - - - 5,066 5,066
-------------------------------------------------------------------------------
Total interest-earning assets 223,634 64,765 98,246 386,645 152,566 65,402 604,613
===============================================================================
Liabilities
Interest-bearing liabilities:
Interest-bearing deposits:
Passbook, statement savings
and checking accounts (2) 3,141 3,141 6,282 12,564 19,337 46,449 78,350
Money market deposits 5,792 5,792 11,584 23,168 26,822 23,906 73,896
Certificates of deposits 76,019 59,392 81,528 216,939 39,286 9,589 265,814
-------------------------------------------------------------------------------
Total interest-bearing deposits 84,952 68,325 99,394 252,671 85,445 79,944 418,060
Advances from the Federal Home Loan Bank - - - - - 75,000 75,000
Securities sold under
agreements to repurchase 13,084 - - 13,084 - - 13,084
-------------------------------------------------------------------------------
Total interest-bearing liabilities 98,036 68,325 99,394 265,755 85,445 154,944 506,144
===============================================================================
Interest sensitivity gap $125,598 $ (3,560) $ (1,148) $120,890 $ 67,121 $(89,542) $ 98,469
===============================================================================
Cumulative interest sensitivity gap $125,598 $122,038 $120,890 $120,890 $ 188,011
========================================================
Cumulative interest sensitivity gap as a
percentage of total assets 19.6% 19.0% 18.9% 18.9% 29.3%
______________________
<FN>
(1) Excludes nonaccrual loans of $563,000
(2) Excludes $78.7 million of noninterest-bearing deposits.
</FN>
</TABLE>
16
<PAGE>
The following table provides information about the Company's financial
instruments that are sensitive to changes in interest rates as of December 31,
1998, based on the information and assumptions set forth in the notes to the
table. Totals as of December 31, 1997 are included for comparative purposes. The
Company had no derivative financial instruments, foreign currency exposure or
trading portfolio as of December 31, 1998 and 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.
Interest-earning assets maturing in one year increased and those maturing
after five years decreased at December 31, 1998 due primarily to an increase in
the loan prepayment rate assumptions at December 31, 1998. These prepayment
rates increased as a result of lower interest rates which also contributed to
the overall decreases in yields on average interest-earning assets between
December 31, 1997 and 1998.
Interest-bearing liabilities maturing in one year decreased at December 31,
1998 primarily as a result of the reduction in interest- bearing deposits and
short-term borrowings which resulted primarily from increases in
noninterest-bearing deposits and the sale of mortgage-backed certificates.
Interest-bearing liabilities maturing in years three and four changed primarily
from the assumption that Federal Home Loan Bank convertible advances were
estimated to mature in year four at December 31, 1998 instead of year three at
December 31, 1997. A lower cost mix of interest-bearing liabilities contributed
to the decrease in the average rate paid on interest- bearing liabilities at
December 31, 1998 compared to those paid at December 31, 1997.
17
<PAGE>
<TABLE>
<CAPTION>
Amount maturing in:
------------------------------------------------------------------------
There- Fair
(Dollars in thousands) 1 Year 2 Years 3 Years 4 Years 5 Years after Total Value
------ ------- ------- ------- ------- ------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans (1) (2)
Fixed rate $ 43,228 $ 26,406 $ 13,366 $ 8,583 $ 5,573 $ 9,643 $106,799 $108,022
Average interest rate 8.20% 8.20% 8.15% 8.11% 8.00% 7.62% 8.13%
Adjustable rate 178,405 75,129 42,430 28,584 18,761 42,014 385,323 388,915
Average interest rate 7.76% 7.66% 7.71% 7.87% 7.95% 8.02% 7.78%
Mortgage-backed certificates (3)
Fixed rate 1,093 793 673 578 502 274 3,913 3,913
Average interest rate 7.23% 8.42% 8.42% 8.42% 8.42% 8.95% 8.13%
Adjustable rate 6,861 3,190 1,647 857 454 97 13,106 13,106
Average interest rate 6.73% 7.44% 7.44% 7.45% 7.45% 7.49% 7.07%
Investments (4) 18,444 17,378 8,058 3,987 - 5,316 53,183 53,183
Average interest rate 6.06% 6.07% 5.40% 5.40% -% 7.58% 6.07%
Federal funds sold 42,289 - - - - - 42,289 42,289
Average interest rate 5.30% -% -% -% -% -% 5.30%
-------------------------------------------------------------------------------------
Total - December 31, 1998 $290,320 $122,896 $ 66,174 $ 42,589 $ 25,290 $ 57,344 $604,613 $609,428
Average interest rate 7.33% 7.55% 7.52% 7.68% 7.96% 7.92% 7.50%
=====================================================================================
Total - December 31, 1997 $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) $252,671 $ 56,012 $ 29,433 $ 19,997 $ 15,203 $ 44,744 $418,060 $419,849
Average interest rate 4.76% 4.55% 3.62% 3.43% 3.22% 2.30% 4.27%
Borrowings (7) 13,084 - - 75,000 - - 88,084 90,312
Average interest rate 3.96% -% 5.18% 5.11% -% -% 4.94%
-------------------------------------------------------------------------------------
Total - December 31, 1998 $265,755 $ 56,012 $ 29,433 $ 94,997 $ 15,203 $ 44,744 $506,144 $510,161
Average interest rate 4.72% 4.54% 3.62% 4.76% 3.22% 2.30% 4.38%
=====================================================================================
Total - December 31, 1997 $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, 47%;
-For single-family fixed-rate first mortgage loans, from 22% to 32%;
-For commercial real estate loans, an average of 14%;
-For consumer loans, an average of 27%; and
-For most other loans, from 2% to 64%.
(2) Excludes nonaccrual loans of $563,000.
(3) Assumes prepayment rates for adjustable mortgage-backed certificates of 48%
to 52% and for fixed-rate mortgage-backed certificates of 14% to 19%.
(4) Totals include the Companys investment in FHLB 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,
1998.
(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 $78.7 million of noninterest-bearing deposits.
(7) The estimated expected maturity at December 31, 1998 of the $75 million of
convertible FHLB advances is 3.3 years based on information from
FHLB-Atlanta.
</FN>
</TABLE>
18
<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 1998, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 133, Accounting for Derivative Instruments and Hedging Activities. This
statement establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts, and for hedging activities. The Statement is effective for all fiscal
quarters of fiscal years beginning after June 15, 1999. This Statement is not
currently applicable to the Company, because the Company does not have any
derivative instruments and is not involved in hedging activities.
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.
Also, systems and equipment that are not typically thought of as "computer
related" (referred to as "non-IT") contain imbedded hardware or software that
may have a time element.
In 1997, the Company implemented a four phase project of inventory,
assessment, renovation and testing/implementation to address the Year 2000
Issue. The scope of the project includes: ensuring the compliance of all
applications, operating systems and hardware on the mainframe, PC and LAN
systems; addressing issues related to non-IT embedded software and equipment;
and addressing the compliance of the Company's significant borrowers and third
party providers. A summary of significant milestones is presented below:
* The first three phases of inventory, assessment and renovation have been
substantially completed. The final phase, testing and implementation, is in
process and is expected to be substantially completed by March 31, 1999. The
Company plans to conduct additional testing throughout the year.
* The majority of the Company's non-IT related systems and equipment
are currently Year 2000 compliant based primarily on communications with
vendors. Compilation of written documentation regarding compliance is underway
and is scheduled to be substantially completed by the end of the first quarter
of 1999, as is any testing of critical systems that the Company determines needs
to be conducted.
* The potential impact of Year 2000 will depend not only on the corrective
measures the Company undertakes but also on other entities who provide data to
or receive data from the Company and on those whose operational capability or
financial conditions are important to the Company. The Company has received
assurances from all major third party vendors that they are either Year 2000
compliant or expect to be in compliance prior to the end of the second quarter
of 1999. In addition, management has reviewed significant lending and deposit
relationships and consulted with these customers as to their plans to address
Year 2000 issues. The plans of such parties are currently being monitored, and
any fundamental impact on the Company will be evaluated.
19
<PAGE>
* The Company has established an internal review process to evaluate its
Year 2000 testing results. Monthly progress reports are made to the Company's
senior management and Board of Directors.
* The Company estimates, based on current projections of allocations of
existing resources and known direct costs, that total costs related to the Year
2000 project will be approximately $1,150,000. The Company estimates that
approximately 78% of these costs will be related to the redeployment of existing
personnel to address Year 2000 Issues, while approximately 22% of these costs
will represent incremental expenses to the Company since inception of the Year
2000 project. Since inception, the Company has incurred approximately $500,000
of costs related to its Year 2000 project, of which approximately $40,000
represents incremental expenses. Of the $500,000 of Year 2000 project costs
incurred since inception, approximately $160,000 and approximately $340,000 were
incurred in 1997 and 1998, respectively. Some computer related initiatives have
been delayed due to the allocation of resources towards Year 2000 issues.
Management believes there has not been an adverse impact on the Company's
financial condition or day to day operations as a result of computer projects
being deferred due to reallocation of resources to the Year 2000 project.
* The Company has established a Customer Awareness Program to inform
customers of Year 2000 issues and provide status reports as to the Bank's Year
2000 efforts.
The Company expects its critical systems to be compliant well before
December 31, 1999. In the unlikely event that a critical system should not
perform as expected or if there is non-compliance by a major third party
provider, the Company is developing a contingency plan to address the possible
failure of critical systems. The Company expects to complete its contingency
plan by the end of the second quarter of 1999.
Safe Harbor Statement Under the Private Securities Litigation Reform Act of 1995
Information contained in the above discussions titled, "Report to Our
Stockholders" and "Management's Discussion and Analysis of Financial Condition
and Results of Operations," other than historical information, may contain
forward-looking statements that involve risks and uncertainties including, but
not limited to: (a) management's goals to improve interest rate margins and
increase the loan portfolio, (b) the Company's interest rate risk position,
future credit and economic trends including inflation and changing prices and
(c) the Company's compliance with Year 2000 data processing standards. These
statements are made pursuant to the safe harbor provisions of the Private
Litigation Reform Act of 1995, and are provided to assist the reader in
understanding anticipated future financial and operational results. Although the
Company believes that the assumptions underlying the forward-looking statements
contained herein are reasonable, any of these assumptions could ultimately prove
to be inaccurate. The Company's actual results may differ materially from those
projected in forward-looking statements.
20
<PAGE>
<TABLE>
Consolidated Statement of Financial Condition
- -------------------------------------------------------------------------------
(Dollars in thousands, except per share data)
December 31,
1998 1997
----------------------------
<S> <C> <C>
Assets
Cash $ 14,656 $ 16,993
Federal funds sold 42,289 37,118
Securities available for sale at fair value (adjusted cost
of $64,327 and $135,861, respectively) 65,136 137,188
Loans, net:
Held for investment 484,783 486,487
Held for sale 3,878 3,167
Interest receivable 3,723 4,888
Real estate owned, net 377 1,098
Federal Home Loan Bank and Federal Reserve
Bank stock, at cost 5,066 8,711
Property and equipment, net 13,002 14,230
Goodwill and other intangibles, net 3,647 4,010
Other assets 4,499 4,193
----------------------------
Total assets $ 641,056 $ 718,083
============================
Liabilities and Stockholders' Equity
Liabilities:
Deposits:
Noninterest-bearing $ 78,712 $ 54,874
Interest-bearing 418,060 452,796
----------------------------
Total deposits 496,772 507,670
Advances from the Federal Home Loan Bank 75,000 145,000
Other borrowings - 2,575
Securities sold under agreements to repurchase 13,084 9,664
Advance payments by borrowers for taxes and insurance 599 720
Other liabilities 5,525 2,517
----------------------------
Total liabilities 590,980 668,146
----------------------------
Commitments (Note 19)
Stockholders' equity:
Preferred stock, $.01 par value; authorized 3,000,000
shares; none outstanding - -
Common stock, $.01 par value; authorized 7,000,000
shares; issued and outstanding 4,808,806
and 4,971,243, respectively 48 50
Additional paid-in capital 14,177 18,119
Retained earnings - substantially restricted 39,600 35,416
Common stock acquired by Employees Stock
Ownership Plan (ESOP) (4,052) (4,232)
Common stock acquired by Management
Recognition Plan (MRP) (199) (271)
Net unrealized gain on securities available for sale,
net of income taxes 502 855
----------------------------
Total stockholders' equity 50,076 49,937
----------------------------
$ 641,056 $ 718,083
============================
The notes to consolidated financial statements are an integral part of this
statement.
</TABLE>
21
<PAGE>
<TABLE>
<CAPTION>
Consolidated Statement of Operations
- -------------------------------------------------------------------------------
(Dollars in thousands, except per share data)
Year Ended December 31,
1998 1997 1996
-------------------------------------------
<S> <C> <C> <C>
Interest and fees on loans $ 39,931 $ 38,220 $ 30,243
Interest on mortgage-backed certificates 3,208 8,685 13,224
Interest on investment securities 2,664 2,775 3,657
Dividends and other interest income 1,228 1,096 1,047
-------------------------------------------
Total interest income 47,031 50,776 48,171
-------------------------------------------
Interest on deposits 19,571 20,972 19,240
Interest on borrowings 6,234 8,338 8,847
-------------------------------------------
Total interest expense 25,805 29,310 28,087
-------------------------------------------
Net interest income 21,226 21,466 20,084
Provision for loan losses 510 600 377
-------------------------------------------
Net interest income after provision for loan losses 20,716 20,866 19,707
-------------------------------------------
Other income:
Deposit fees 2,454 2,040 1,425
Gains on sales of:
Securities, net 72 84 77
Loans, net 1,030 548 629
Loan servicing fees and late charges 318 322 353
Other 3,139 2,719 1,410
-------------------------------------------
Total other income 7,013 5,713 3,894
-------------------------------------------
Other expenses:
Salaries and employee benefits 8,301 8,313 7,762
Equipment, data processing, and supplies 2,861 2,703 2,529
Federal deposit insurance premiums, including
one-time SAIF special assessment of $2,340
in 1996 260 277 3,187
Expenses related to proxy contest and other
matters - 405 -
Other 6,775 5,614 4,694
-------------------------------------------
Total other expenses 18,197 17,312 18,172
-------------------------------------------
Income before income taxes 9,532 9,267 5,429
Provision for income taxes 3,417 3,264 1,821
-------------------------------------------
Net income $ 6,115 $ 6,003 $ 3,608
===========================================
Earnings per share:
Basic $ 1.30 $ 1.24 $ .74
===========================================
Diluted $ 1.27 $ 1.20 $ .72
===========================================
Dividends per common share $ .41 $ .33 $ .25
===========================================
The notes to consolidated financial statements are an integral part of this
statement.
</TABLE>
22
<PAGE>
<TABLE>
<CAPTION>
Consolidated Statement of Comprehensive Income
- -------------------------------------------------------------------------------
(Dollars in thousands)
Year Ended December 31,
1998 1997 1996
-------------------------------------------
<S> <C> <C> <C>
Net income $ 6,115 $ 6,003 $ 3,608
-------------------------------------------
Other comprehensive loss, before income taxes:
Unrealized losses on securities available for sale
Unrealized holding losses arising during the period (445) (233) (713)
Less: reclassification adjustment for gains included in
net income (72) (84) (77)
-------------------------------------------
Other comprehensive loss, before income taxes (517) (317) (790)
Income tax benefit related to items of other
comprehensive loss 164 109 242
-------------------------------------------
Other comprehensive loss, net of income taxes (353) (208) (548)
-------------------------------------------
Comprehensive income $ 5,762 $ 5,795 $ 3,060
===========================================
The notes to consolidated financial statements are an integral part of this
statement.
</TABLE>
23
<PAGE>
<TABLE>
<CAPTION>
Consolidated Statement of Changes in Stockholders' Equity
- -------------------------------------------------------------------------------
(Dollars in thousands)
Common Accumulated
Stock Other
Common Common Additional Acquired Comprehensive
Stock Stock Paid-In Retained by ESOP Income (Loss),Net
Shares Amount Capital Earnings and MRP of Income Taxes Total
----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1995,
as originally reported 1,596,675 $ 16 $ 16,903 $ 28,641 $ (442) $1,611 $ 46,729
Common stock issued in 1998
three-for-one stock split 3,193,350 32 (32) - - - -
----------------------------------------------------------------------------------------------
Balance at December 31, 1995
as restated 4,790,025 48 16,871 28,641 (442) 1,611 46,729
Comprehensive income - - - 3,608 - (548) 3,060
Cash dividends paid, net of
tax benefits relating to -
dividends paid on unallocated
shares held by ESOP - - (1,209) - - (1,209)
Principal payments on ESOP
loan - - - - 300 - 300
Exercise of stock options, stock
warrants, and related tax
benefits 115,107 1 766 - - - 767
Other - - - - (39) - (39)
----------------------------------------------------------------------------------------------
Balance, December 31, 1996 4,905,132 49 17,637 31,040 (181) 1,063 49,608
Comprehensive income - - - 6,003 - (208) 5,795
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 66,111 1 482 - - - 483
Other - - - - (90) - (90)
----------------------------------------------------------------------------------------------
Balance, December 31, 1997 4,971,243 50 18,119 35,416 (4,503) 855 49,937
Comprehensive income - - - 6,115 - (353) 5,762
Cash dividends paid - - - (1,931) - - (1,931)
Exercise of stock options
and related tax benefits 69,063 - 602 - - - 602
Stock repurchases (231,500) (2) (4,667) - - - (4,669)
Other - - 123 - 252 - 375
----------------------------------------------------------------------------------------------
Balance, December 31, 1998 4,808,806 $ 48 $ 14,177 $ 39,600 $ (4,251) $ 502 $ 50,076
==============================================================================================
The notes to consolidated financial statements are an integral part of this
statement.
</TABLE>
24
<PAGE>
<TABLE>
<CAPTION>
Consolidated Statement of Cash Flows
- -------------------------------------------------------------------------------
(Dollars in thousands)
Year Ended December 31,
1998 1997 1996
------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 6,115 $ 6,003 $ 3,608
Add (deduct) items not affecting cash during the year:
Provision for loan losses 510 600 377
Provision for losses on real estate owned 15 81 136
Amortization of loan yield adjustments 381 158 (98)
Depreciation, amortization and accretion, net 1,930 2,593 2,481
Net (gains) losses on sales/disposals of:
Securities (72) (84) (77)
Loans (1,030) (548) (629)
Real estate, property and equipment 36 16 160
Proceeds from sales of loans held for sale 82,893 45,338 46,685
Originations of loans held for sale (82,608) (46,097) (45,003)
Change in assets/liabilities, net
Decrease (increase) in interest receivable and other assets 1,168 (1,121) (3,689)
Increase (decrease) in other liabilities 3,176 (46) (532)
------------------------------------------------
Net cash provided by operating activities 12,514 6,893 3,419
------------------------------------------------
Cash flows from investing activities:
Purchases of securities available for sale (48,237) (16,087) (67,906)
Proceeds from sales of securities available for sale 66,660 35,447 14,792
Principal repayments on securities available for sale 34,855 49,243 66,519
Proceeds from maturities and calls of securities available
for sale 18,000 17,000 29,160
Net increase in loans held for investment 2,307 (64,572) (105,602)
Net proceeds on sales of real estate owned 597 1,224 1,837
Additions to real estate owned (86) (129) (398)
Purchases of Federal Home Loan Bank stock
and Federal Reserve Bank stock (1,650) (1,850) (7,942)
Redemption of Federal Home Loan Bank stock 5,295 1,000 7,110
Purchases of property and equipment (1,273) (2,727) (2,662)
Proceeds from sales of property and equipment 453 10 -
------------------------------------------------
Net cash provided by (used for) investing activities 76,921 18,559 (65,092)
------------------------------------------------
Cash flows from financing activities:
Proceeds from exercise of stock options and warrants 173 357 583
Net (decrease) increase in deposits (10,898) 8,705 48,435
Proceeds from Federal Home Loan Bank advances 587,000 1,255,000 1,918,000
Repayment of Federal Home Loan Bank advances (657,000) (1,258,000) (1,903,000)
Proceeds from other borrowings - 4,000 -
Repayment of other borrowings (2,575) (1,425) (300)
Net increase in securities sold under agreement
to repurchase 3,420 2,526 2,267
Cash dividends paid (1,931) (1,627) (1,215)
Purchase of common stock by ESOP - (4,232) -
Common stock repurchases (4,669) - -
Other, net (121) (123) (24)
------------------------------------------------
Net cash (used for) provided by financing activities (86,601) 5,181 64,746
------------------------------------------------
Increase in cash and cash equivalents 2,834 30,633 3,073
Cash and cash equivalents, beginning of year 54,111 23,478 20,405
------------------------------------------------
Cash and cash equivalents, end of year $ 56,945 $ 54,111 $ 23,478
================================================
Supplemental disclosures of cash flow information:
Cash paid during the year for interest $ 8,910 $ 11,624 $ 11,883
Cash paid during the year for income taxes 2,855 2,820 1,595
Schedule of noncash investing and financing activities:
Real estate acquired in settlement of loans 312 1,603 3,920
Loans to facilitate sale of real estate owned 470 2,058 1,622
Loan to facilitate sale of property 1,336 - -
The notes to consolidated financial statements are an integral part of this
statement.
</TABLE>
25
<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, a federally chartered stock savings bank.
On June 3, 1998, the Company, as the sole shareholder of its two subsidiary
banks, merged Princess Anne Bank ("Princess Anne") into CENIT Bank, FSB. In July
1998, CENIT Bank FSB ceased the use of "FSB" and became CENIT Bank (the "Bank").
The Company operates in one business segment, providing retail and
commercial banking services to customers within its market area.
The preparation of the financial statements in conformity with 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 wholly-owned subsidiary, the Bank, and the Bank's wholly-owned subsidiaries.
All significant intercompany balances and transactions have been eliminated.
Investment Securities
Investment securities are 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.
Premium amortization and discount accretion are included in interest income
and are calculated using the interest method over the period to maturity of the
related asset. The adjusted cost of specific securities sold is used to compute
realized gain or loss on sale. The gain or loss realized on sale is recognized
on the trade date.
Loans
Loans held for investment are carried at their outstanding principal
balance. Unearned discounts, premiums, deferred loan fees and costs, and the
allowance for loan losses are treated as adjustments of loans in the
consolidated statement of financial condition.
At December 31, 1998 and 1997, approximately seventy-five percent and
seventy-one percent, respectively, of the principal balance of the Bank's real
estate loans were to residents of or secured by properties located in Virginia.
This geographic concentration is also considered in management's establishment
of loan loss reserves.
Interest on loans is credited to income as earned. Interest receivable is
accrued only if deemed collectible. Generally, interest is not accrued on loans
over ninety days past due. Uncollectible interest on loans that are
contractually past due is charged-off or an allowance is established based on
management's periodic evaluation. The allowance is established by a charge to
interest income equal to all interest previously accrued, and income is
subsequently recognized only to the extent that cash payments are received
until, in management's judgment, the borrower has reestablished the ability to
make periodic interest and principal payments, in which case the loan is
returned to accrual status. Interest income is recognized on loans which are
ninety days or more past due only if management considers the principal and
interest balance to be fully collectible. Loan origination and commitment fees
and certain direct loan origination costs and premiums and discounts related to
purchased loans are deferred and amortized as an adjustment of yield
26
<PAGE>
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.
Impaired Loans
Impaired loans are specifically reviewed loans for which it is probable
that the Company will be unable to collect all amounts due according to the
terms of the loan agreement. The specific factors that influence management's
judgment in determining when a loan is impaired include evaluation of the
financial strength of the borrower and the fair value of the collateral.
Impaired loans are measured and reported based on the present value of expected
cash flows discounted at the loan's effective interest rate, or at the fair
value of the loan's collateral if the loan is deemed "collateral dependent." A
valuation allowance is required to the extent that the measure of the impaired
loans is less than the recorded investment.
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, the relative inherent risk of loan types
that comprise the loan portfolio, and other judgmental factors. The allowance
for loan losses is increased by charges to income and decreased by charge-offs,
net of recoveries. Actual future losses may differ from estimates as a result of
unforeseen events.
Real Estate Owned
Real estate acquired in settlement of loans is recorded at the lower of the
unpaid loan balance or estimated fair value 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.
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.
27
<PAGE>
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 Bank enters into sales of securities under agreements to repurchase
(reverse repurchase agreements). Fixed-coupon reverse repurchase agreements are
treated as financing transactions, and the obligations to repurchase securities
sold are reflected as liabilities in the statement of financial condition. The
securities underlying the agreements continue to be recorded as assets.
Income Taxes
The provision for income taxes is based upon income taxes estimated to be
currently payable and certain changes in deferred income tax assets and
liabilities. The deferred tax assets and liabilities relate principally to the
use of different reporting methods for bad debts, depreciation, and Federal Home
Loan Bank stock dividends.
Statement of Cash Flows
For purposes of the statement of cash flows, the Company considers cash 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, 1998, 1997, and 1996 were determined by dividing net income for the
respective year by 4,715,697 shares, 4,853,484 shares, and 4,850,151 shares,
respectively. Diluted earnings per share for the years ended December 31, 1998,
1997, and 1996 were determined by dividing net income for the respective year by
4,829,641 shares, 4,986,066 shares, and 4,998,495 shares, respectively. The
difference in the number of shares used for basic earnings per share and diluted
earnings per share calculations for each of the three years results solely from
the dilutive effect of stock options and warrants. Options on approximately
65,000 shares were not included in computing diluted earnings per share for the
year ended December 31, 1998 because their effects were antidilutive. There were
no options on shares at December 31, 1997 and 1996 that were antidilutive.
Comparative Financial Statements
The financial statements for 1996 and 1997 have been reclassified to
conform to the 1998 presentation. Such reclassifications had no impact on
previously reported net income.
Note 2
Cash
The Bank is required by the Federal Reserve Bank to maintain average
reserve balances. The average amount of these reserve balances for the year
ended December 31, 1998 was $2,703,000. On December 31, 1998, the required
reserve balance was $5,108,000.
28
<PAGE>
Note 3
Acquisition of Deposits
On September 26, 1996 and November 7, 1996, the 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, the 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. The
Bank used the majority of the cash proceeds received in connection with the
deposit assumptions to reduce its Federal Home Loan Bank (FHLB) advances.
The 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 Bank retail offices in those neighborhoods, and the
deposits associated ated into the Bank's existing Kiln Creek office located in
York County, Virginia.with Essex's Grafton, Virginia office were consolidated
into the 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
follows (in thousands):
<TABLE>
<CAPTION>
Core Deposit
Goodwill Intangible Total
-----------------------------------------------------------
<S> <C> <C> <C>
Balance, December 31, 1996 $ 3,944 $ 437 $ 4,381
Amortization (290) (81) (371)
-----------------------------------------------------------
Balance, December 31, 1997 3,654 356 4,010
Amortization (290) (73) (363)
-----------------------------------------------------------
Balance, December 31, 1998 $ 3,364 $ 283 $ 3,647
===========================================================
</TABLE>
At December 31, 1998, the Company had recorded $1,162,000 of accumulated
amortization.
29
<PAGE>
Note 5
Securities Available for Sale
Securities available for sale are as follows (in thousands):
<TABLE>
<CAPTION>
December 31,
1998 1997
-------------------------------------------- -------------------------------------------------
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 $ 26,043 $ 353 $ - $ 26,396 $ 39,139 $ 215 $ (11) $ 39,343
----------------------------------------------- -------------------------------------------------
Other U. S. Government agency
securities 21,344 134 (7) 21,471 5,999 6 (1) 6,004
----------------------------------------------- -------------------------------------------------
Other debt security 250 - - 250 - - - -
----------------------------------------------- -------------------------------------------------
Mortgage-backed certificates:
Federal Home Loan
Mortgage Corporation
participation certificates 11,445 214 - 11,659 81,382 880 (2) 82,260
Federal National Mortgage
Association pass-through
certificates 3,293 53 (1) 3,345 6,646 150 (2) 6,794
Government National
Mortgage Association
pass-through certificates 1,952 63 - 2,015 2,695 92 - 2,787
----------------------------------------------- -------------------------------------------------
Total mortgage-backed
certificates 16,690 330 (1) 17,019 90,723 1,122 (4) 91,841
----------------------------------------------- -------------------------------------------------
$ 64,327 $ 817 $ (8) $ 65,136 $ 135,861 $ 1,343$ (16) $ 137,188
=============================================== =================================================
</TABLE>
During 1998, 1997, and 1996, the Company recognized gross gains of
$143,000, $111,000, and $140,000, respectively, and gross losses of $71,000,
$27,000, and $63,000, respectively, on the sale of available for sale
securities.
The amortized cost and fair value of securities available for sale at
December 31, 1998 are shown below by contractual maturity (in thousands):
Amortized Fair
Cost Value
--------------------------
Due in one year or less $ 12,010 $ 12,079
Due after 1 year through 5 years 35,377 35,788
Due after 5 years 250 250
Mortgage-backed certificates 16,690 17,019
---------------------------
$ 64,327 $ 65,136
===========================
30
<PAGE>
Note 6
Loans
Loans held for investment consist of the following (in thousands):
December 31,
1998 1997
-----------------------------
First mortgage loans:
Single family $ 251,117 $ 308,525
Multi-family 7,874 6,374
Construction:
Residential 66,853 56,992
Nonresidential 4,101 1,420
Commercial real estate 76,611 57,913
Consumer lots 3,703 4,573
Acquisition and development 11,444 13,327
Equity and second mortgage 52,845 45,194
Purchased mobile home 52 95
Boat 4,275 5,685
Other consumer 10,537 7,250
Commercial business 33,485 24,222
----------------------------
522,897 531,570
Undisbursed portion of construction
and acquisition and development loans (35,463) (42,067)
Allowance for loan losses (4,024) (3,783)
Unearned discounts, premiums, and loan
fees, net 1,373 767
----------------------------
$ 484,783 $ 486,487
============================
At December 31, 1998, the Company's gross loan portfolio contains
$215,833,000 of adjustable-rate mortgage loans and $55,022,000 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 $98,595,000 at December 31, 1998.
31
<PAGE>
Nonaccrual loans are as follows (in thousands):
December 31,
1998 1997 1996
-------------------------------------------
Single family $ 416 $ 528 $ 1,172
Commercial real estate - - 457
Land acquisition - 200 200
Purchased mobile home 15 48 83
Other consumer 68 24 17
Commercial business 64 240 483
------------------------------------------
$ 563 $ 1,040 $ 2,412
==========================================
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,
1998 1997 1996
-----------------------------
Interest income based on contractual terms $ 61 $ 92 $ 252
Interest income recognized 36 30 114
-----------------------------
Interest income foregone $ 25 $ 62 $ 138
=============================
Changes in the allowance for loan losses are as follows (in thousands):
Year Ended December 31,
1998 1997 1996
-------------------------------------------
Balance at beginning of year $ 3,783 $ 3,806 $ 3,696
Provision for loan losses 510 600 377
Losses charged to allowance (382) (836) (738)
Recovery of prior losses 113 213 471
---------------------------------------------
Balance at end of year $ 4,024 $ 3,783 $ 3,806
==============================================
There were no impaired loans at December 31, 1998 and 1997.
Loans serviced for others approximate $13,826,000 at December 31, 1998,
$16,013,000 at December 31, 1997, and $17,740,000 at December 31, 1996.
32
<PAGE>
Note 7
Interest Receivable
The components of interest receivable are as follows (in thousands):
December 31,
1998 1997
---------------------------
Interest on loans $ 2,766 $ 3,054
Interest on mortgage-backed certificates 178 1,090
Interest on investments and interest-bearing
deposits 819 909
----------------------------
3,763 5,053
Less: Allowance for uncollected interest (40) (165)
----------------------------
$ 3,723 $ 4,888
============================
Note 8
Real Estate Owned
Real estate owned is as follows (in thousands):
December 31,
1998 1997
---------------------------
Residential - Single family $ 325 $ 1,204
Land 105 -
---------------------------
430 1,204
Less: Valuation allowance (53) (106)
----------------------------
$ 377 $ 1,098
============================
Changes in the valuation allowance for real estate owned are as follows (in
thousands):
Year Ended December 31,
1998 1997 1996
-------------------------------------------
Balance at beginning of year $ 106 $ 200 $ 161
Provision for losses 15 81 136
Losses charged to allowance (68) (175) (97)
--------------------------------------------
Balance at end of year $ 53 $ 106 $ 200
============================================
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 the Bank. No ready market
exists for the stock and it has no quoted market value. The FHLB is required
under the Financial Institutions Reform, Recovery and Enforcement Act of 1989
("FIRREA") to use its future earnings in various government-mandated programs
including low to moderate income housing. These programs and other uses of the
FHLB's future earnings could impair its ability to pay dividends to the Company
on this investment.
Investment in the stock of the Federal Reserve Bank is required by law for
insured institutions such as Princess Anne. Due to the merger of Princess Anne
with the Bank in 1998, investment in the stock of the Federal Reserve Bank is no
longer required and the stock has been redeemed.
Note 10
Property and Equipment
Property and equipment consist of the following (in thousands):
December 31,
1998 1997
---------------------------
Buildings and leasehold improvements $ 9,857 $ 11,829
Furniture and equipment 9,845 8,904
----------------------------
19,702 20,733
Less: Accumulated depreciation and
amortization (9,404) (9,318)
----------------------------
10,298 11,415
Land 2,704 2,815
----------------------------
$ 13,002 $ 14,230
============================
Depreciation and amortization expense is $1,251,000, $1,154,000, and
$1,037,000 for the years ended December 31, 1998, 1997 and 1996, respectively.
In December 1998, the Company sold its corporate office building and leased
back a portion of the building over a three-year period that ends December 31,
2001. The transaction was accounted for as a sale-leaseback. Accordingly, gain
on the sale of $404,000 has been deferred and will be recognized in proportion
to the related gross rent charged to expense over the lease term.
34
<PAGE>
Note 11
Deposits
Deposit balances by type and range of interest rates at December 31, 1998
and 1997 are as follows (in thousands):
December 31,
1998 1997
---------------------------
Noninterest-bearing:
Commercial checking $ 69,801 $ 47,499
Personal checking 8,911 7,375
---------------------------
Total noninterest-bearing deposits 78,712 54,874
---------------------------
Interest-bearing:
Passbook and statement savings
(interest rates of 2.46% at 1998 and
3.34% at 1997) 36,588 44,118
Checking accounts (interest rates of 1.43% at
1998 and 2.05% at 1997) 41,762 32,754
Money market deposits (interest rates of
3.36% at 1998 and 3.25% at 1997) 73,896 47,726
Certificates:
3.99% or less 345 519
4.00% to 4.99% 121,862 70,286
5.00% to 5.99% 113,417 218,016
6.00% to 6.99% 18,818 27,210
7.00% to 7.99% 9,958 10,369
8.00% to 8.99% 294 668
9.00% to 9.99% 1,120 1,130
---------------------------
Total certificates 265,814 328,198
---------------------------
Total interest-bearing deposits 418,060 452,796
---------------------------
Total deposits $ 496,772 $ 507,670
===========================
Certificates in denominations greater than $100,000 aggregated $24,940,000
and $28,831,000 at December 31, 1998 and 1997, respectively. The weighted
average cost of deposits approximates 4.54% and 4.66% for the years ended
December 31, 1998 and 1997, respectively.
35
<PAGE>
The following is a summary of interest expense on deposits (in thousands):
Year Ended December 31,
1998 1997 1996
-------------------------------------------
Passbook and statement savings $ 1,235 $ 1,522 $ 1,558
Checking accounts 605 602 677
Money market deposits 2,412 1,566 1,398
Certificates 15,373 17,351 15,678
Less: Early withdrawal penalties (54) (69) (71)
--------------------------------------------
$ 19,571 $ 20,972 $ 19,240
============================================
At December 31, 1998, remaining maturities on certificates are as follows (in
thousands):
1999 $ 216,939
2000 29,582
2001 9,704
2002 5,406
2003 4,183
-----------
$ 265,814
===========
At December 31, 1998, the Bank has pledged mortgage-backed certificates, U.
S. Treasury securities, and other U. S. Government agency securities with a
total carrying value of $2,763,000 to the State Treasury Board as collateral for
certain public deposits.
Note 12
Advances from the Federal Home Loan Bank
At December 31, 1998, advances from the Federal Home Loan Bank (FHLB)
consist of a $60,000,000 convertible fixed-rate advance with an interest rate of
5.18% and a $15,000,000 convertible fixed-rate advance with an interest rate of
4.84%. The $60,000,000 fixed-rate advance was 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. Through December 31,
1998, the FHLB has not exercised its option. The $15,000,000 fixed-rate advance
matures in December 2003 and is subject, in December 2001, to a one-time option
by the FHLB to convert to an adjustable-rate advance. These advances are
collateralized by mortgage-backed certificates with a net book value of
approximately $2,421,000 and by first mortgage loans with a net book value of
approximately $244,203,000.
The weighted average cost of advances from the FHLB is 5.43% and 5.58% for
the years ended December 31, 1998 and 1997, 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 was paid in full during
1998.
36
<PAGE>
Note 14
Securities Sold under Agreements to Repurchase
At December 31, 1998, mortgage-backed certificates sold under agreements to
repurchase had a carrying value of $12,717,000 and a market value of
$13,346,000. 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, 1998, 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,
1998 1997
---------------------------
Balance at end of year $ 13,084 $ 9,664
Average amount outstanding during the year 12,026 8,893
Maximum amount outstanding at any month end 22,913 12,199
Weighted average interest rate during the year 4.45% 4.60%
Weighted average interest rate at end of year 3.96% 4.57%
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,
1998 1997 1996
-------------------------------------------
Other income:
Brokerage fees $ 468 $ 850 $ 413
Merchant processing fees 2,062 1,391 738
Other miscellaneous 609 478 259
-------------------------------------------
$ 3,139 $ 2,719 $ 1,410
===========================================
Other expense:
Net occupancy expense of premises 1,901 $ 1,848 $ 1,715
Professional fees 611 345 474
Expenses, gains/losses on sales,
and provision for losses on real
estate owned, net 89 215 38
Merchant processing 1,766 1,130 586
Other miscellaneous 2,408 2,076 1,881
-------------------------------------------
$ 6,775 $ 5,614 $ 4,694
============================================
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,
1998 1997 1996
-------------------------------------------
Deferred tax assets:
Bad debt reserves $ 1,474 $ 1,251 $ 1,297
Other 324 219 34
-------------------------------------------
1,798 1,470 1,331
-------------------------------------------
Deferred tax liabilities:
Federal Home Loan Bank
stock dividends (696) (696) (696)
Unrealized gains on securities
available for sale (308) (472) (580)
Depreciation (344) (296) (327)
Other (251) (299) (106)
--------------------------------------------
(1,599) (1,763) (1,709)
--------------------------------------------
Net deferred tax asset (liability) $ 199 $ (293) $ (378)
============================================
38
<PAGE>
The provision for income taxes consists of the following (in thousands):
Year Ended December 31,
1998 1997 1996
-------------------------------------------
Current:
Federal $ 3,452 $ 3,109 $ 1,810
State 294 131 -
-------------------------------------------
3,746 3,240 1,810
-------------------------------------------
Deferred:
Federal (277) 20 8
State (52) 4 3
-------------------------------------------
(329) 24 11
-------------------------------------------
$ 3,417 $ 3,264 $ 1,821
===========================================
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,
1998 1997 1996
-------------------------------------------
Computed "expected" tax provision $ 3,241 $ 3,151 $ 1,846
Increase (decrease) in taxes
resulting from:
State income taxes, net of
federal tax benefit 194 86 2
Other (18) 27 (27)
--------------------------------------------
Provision for income taxes $ 3,417 $ 3,264 $ 1,821
============================================
For tax purposes, the Bank may only deduct bad debts as charged off. This
amount may differ significantly from the amount deducted for book purposes.
Retained earnings at December 31, 1998 includes $6,134,000 representing that
portion of the Bank's tax bad debt allowance for which no provision for income
taxes has been made. This amount would be subject to federal income taxes if the
Bank were to use the reserve for purposes other than to absorb losses.
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. 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. There were no contributions to the ESOP nor any ESOP related
compensation expense recognized in 1998 or 1997.
In 1998 and 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 1998 totaled $93,000, of which $72,000 was distributed to
participants. Dividends received on allocated shares in 1997 totaled $81,000, of
which $63,000 was distributed to participants. In 1996, dividends received on
both unallocated and allocated shares were used for debt service. Dividends
received in 1996 totaled $63,000. 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, 1998, the ESOP has 216,950 allocated shares. A total of
14,581 shares were distributed in 1998 to terminated employees. All shares held
by the ESOP relating to the 1992 stock purchase are considered outstanding for
earnings per share calculations.
Stock Purchase - 1997
The Company recognizes compensation expense on an accrual basis based upon
the estimated annual number of shares to be released valued at the shares' fair
value. ESOP related compensation expense recognized by the Company totaled
$467,933 in 1998.
The loan between the ESOP and the holding company has a fifteen-year term
with monthly principal and interest payments which commenced as of January 1998.
Shares are released and allocated to eligible participants annually. The number
of shares released and allocated annually is based upon the pro rata amount of
the total principal and interest paid in that year as compared to the total
estimated principal and interest to be paid over the entire term of the loan.
Dividends received on unallocated shares were used for debt service.
All of the 248,157 shares purchased in 1997 were unallocated at December
31, 1997. In 1998, 20,709 shares were allocated and were included in earnings
per share calculations. At December 31, 1998, the fair value of unearned shares
approximated $4,890,000.
401(k) Plan
The Company has a 401(k) plan to which eligible employees may contribute a
specified percentage of their gross earnings each year. For the years ended
December 31, 1998, 1997 and 1996, the maximum percentage that could be
contributed by employees was 15%, 10%, and 7%, respectively. The Company
contributed a total of $207,000, and $154,000 to these plans during the years
ended December 31, 1997, and 1996, respectively. In 1998, no contribution was
made.
40
<PAGE>
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, 1998 and December 31, 1997,
the Company's unfunded accumulated postretirement benefit obligation totaled
$804,000 and $537,000, respectively, and the accrued postretirement benefit cost
recognized in the statement of financial condition totaled $177,000 and
$136,000, respectively. Postretirement benefit cost was $97,000, $69,000, and
$71,000 in 1998, 1997 and 1996, respectively.
Note 18
Stock Options and Awards
At December 31, 1998, 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.
Stock Option Plans
In conjunction with the Bank's 1992 conversion, the Company adopted the
CENIT Stock Option Plan for the benefit of non- employee directors and key
officers. During the period 1992-1997, the Company granted options relating to
370,875 shares of common stock, which is the total number of shares reserved for
issuance under the Stock Option Plan. Options granted in 1992 in connection with
the conversion became exercisable in full from two to five years after the date
of grant, options granted in 1993 became exercisable in full two years after the
date of grant, and options granted in 1994, 1995, 1996 and 1997 are exercisable
25% each year over the four-year period after the applicable date of grant. In
addition, limited stock appreciation rights were granted with the options issued
under the Stock Option Plan. These rights may be exercised in lieu of the
related stock options only in the event of a change in control of the Company,
as defined in the Stock Option Plan.
In 1998, the Company adopted the CENIT Long-Term Incentive Plan for the
benefit of non-employee directors and key officers and employees. The total
number of shares of common stock reserved for issuance under the Long-Term
Incentive Plan is 251,238. Options granted in 1998 are exercisable 25% each year
over the four-year period after the date of grant. The Long-Term Incentive Plan
and 1998 option awards are subject to the ratification and approval of the plan
by the stockholders of the Company. In the alternative, the Company granted to
the same optionees stock appreciation rights in amounts corresponding to the
1998 option awards, subject to expiration upon the Long-Term Incentive Plan's
approval by the Company's stockholders.
Under both the Stock Option Plan and the Long-Term Incentive Plan, the
option price cannot be less than the fair market value of the common stock on
the date of the grant, and options expire no later than ten years after the date
of the grant.
41
<PAGE>
<TABLE>
<CAPTION>
Year Ended December 31,
1998 1997 1996
----------------------------------------------------------------------------------------------
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 271,938 $ 6.09 343,149 $ 5.40 399,681 $ 4.95
Granted 67,000 22.25 12,705 15.00 18,702 11.54
Exercised (84,798) 5.31 (83,916) 4.63 (73,923) 4.49
Forfeited (5,030) 15.65 - - (1,311) 5.94
---------- ---------- ---------
Outstanding at end of year 249,110 10.50 271,938 6.09 343,149 5.40
========== ========== =========
Options exercisable at
year end 164,331 233,424 289,983
</TABLE>
The weighted average fair value of options granted during 1998, 1997 and
1996 was $6.09, $4.89 and $3.73, respectively.
The weighted average fair value of all of the options granted during the
period 1995 through 1998 has been estimated using the Black-Scholes
option-pricing model with the following weighted average assumptions:
<TABLE>
<CAPTION>
Year Ended December 31,
1998 1997 1996
--------------------------------------------------------------------
<S> <C> <C> <C>
Annual dividend yield 2.70% 2.22% 2.31%
Weighted average risk-free interest rate 4.76% 6.47% 6.55%
Weighted average expected volatility 29.00% 28.00% 29.00%
Weighted average expected life in years 6.0 6.3 6.0
The provisions of FAS 123 require pro forma disclosure of compensation
expense for the Company based on the fair value of the awards at the date of the
grant. Under those provisions, the Company's net income and earnings per share
would have been reduced to the following pro forma amounts (in thousands, except
per share data):
Year Ended December 31,
1998 1997 1996
-------------------------------------------------------------------
Net income:
As reported $6,115 $6,003 $3,608
Pro forma 6,071 5,973 3,590
Basic earnings per share:
As reported $ 1.30 $ 1.24 $ 0.74
Pro forma 1.29 1.23 0.74
Diluted earnings per share:
As reported $ 1.27 $ 1.20 $ 0.72
Pro forma 1.26 1.20 0.72
</TABLE>
42
<PAGE>
The following table summarizes information about the options outstanding at
December 31, 1998:
<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>
$3.84 107,266 3.58 $ 3.84 107,266 $ 3.84
$5.95 16,527 2.45 5.95 16,527 5.95
$7.09 to $7.73 21,056 5.08 7.44 21,056 7.44
$11.55 to $12.34 29,004 7.58 12.04 17,223 11.67
$15.00 10,257 8.17 15.00 2,259 15.00
$22.25 65,000 9.75 22.25 - 22.25
------- -------
249,110 5.90 10.50 164,331 5.49
======= =======
</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. The Bank contributed $247,250 to the MRP to enable the
MRP trustees to acquire a total of 64,500 shares of the common stock in the
conversion at $3.84 per share. As a result of an oversubscription in the
subscription offering, the MRP was able to acquire only 45,000 shares in the
conversion. In 1997 and 1996, the MRP purchased 14,118 and 10,605 additional
shares, respectively, at an average price of approximately $15.13 and $11.26 per
share, respectively. No shares were purchased in 1998.
A total of 37,086 shares were granted in 1992 and vested 20% each year over
five years beginning in 1993. The shares granted in 1996 and 1997 vest at the
end of three to five years. Compensation expense, which is recognized as shares
vest, totaled $72,320, $122,000, and $82,000 for 1998, 1997 and 1996,
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,
1998 1997 1996
--------------------------------------
Outstanding at beginning of year 34,182 30,393 27,204
Granted - 14,118 10,605
Exercised (2,907) (10,329) (7,416)
--------------------------------------
Outstanding at end of year 31,275 34,182 30,393
======================================
No grants were forfeited during 1997 and 1996 and no grants were
exercisable at December 31, 1998, 1997, and 1996. During 1998, 3,783 shares were
forfeited and returned to the outstanding balance. At December 31, 1998, the
weighted average period until the awards become vested is approximately one and
one-half years. The weighted average fair value of shares granted in 1997 and
1996 was $15.00, and $11.54, 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, 1998, 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, 1998.
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,
1998 1997
--------------------------
Commitments outstanding:
Mortgage loans:
Fixed rate (rates between 6.00% and 8.25% at
1998 and between 7.00% and 9.50% at 1997) $ 4,615 $ 2,766
Variable rate 1,219 1,745
Commercial business loans 5,617 2,857
---------------------------
$ 11,451 $ 7,368
===========================
At December 31, 1998, the Company has granted unused consumer and
commercial lines of credit of $29,577,000 and $4,684,000, respectively, and has
commitments to purchase loans totaling $27,551,000.
Standby letters of credit are written unconditional commitments issued to
guarantee the performance of a customer to a third party and total approximately
$3,964,000 at December 31, 1998. 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, 1998, the Company had no such commitments.
Rent expense under long-term operating leases for property approximates
$713,000, $709,000, and $620,000 for the years ended December 31, 1998, 1997 and
1996, 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):
1999 $ 856
2000 693
2001 597
2002 374
2003 312
Thereafter 1,423
---------
$ 4,255
=========
44
<PAGE>
Note 20
Regulatory matters
Capital Adequacy
The Bank is subject to various regulatory capital requirements administered
by the OTS. Failure to meet minimum capital requirements can initiate certain
mandatory and possibly additional discretionary actions by regulators that, if
undertaken, could have a direct material effect on the Company's financial
statements. Under capital adequacy guidelines and the regulatory framework for
prompt corrective action, the Bank must meet specific capital guidelines that
involve quantitative measures of the Bank's assets, liabilities and certain
off-balance-sheet items as calculated under regulatory accounting practices. The
Bank's capital amounts and classifications are also subject to qualitative
judgments by regulators about components, risk weighting and other factors.
As set forth in the table below, quantitative measures established by
regulation to ensure capital adequacy require the Bank to maintain minimum
amounts and ratios of tier 1 (core) capital to adjusted total assets, of tier 1
risk-based and total risk-based capital to risk-weighted assets and tangible
equity capital to adjusted total assets. As of December 31, 1998, the Bank
exceeded all capital adequacy requirements to which it is subject.
As of December 31, 1998, the most recent notification from the OTS
categorized the Bank as "well capitalized" under the framework for prompt
corrective action. To be considered well capitalized under prompt corrective
action provisions, the Bank must maintain capital ratios as set forth in the
following table. There are no conditions or events since that notification that
management believes have changed the Bank's categorizations.
The Bank's actual capital amounts and ratios are as follows (dollars in
thousands):
<TABLE>
<CAPTION>
Required for
Actual Required Well Capitalized
--------------------------- --------------------------- ---------------------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
As of December 31, 1998:
<S> <C> <C> <C> <C> <C> <C>
Tier 1 (core) capital $ 45,271 7.1% $ 25,481 4.0% $ 31,851 5.0%
Tier 1 risk-based capital 45,271 10.5 17,221 4.0 25,832 6.0
Total risk-based capital 49,074 11.4 34,442 8.0 43,053 10.0
Tangible equity capital 45,271 7.1 12,740 2.0 - -
As of December 31, 1997:
Core capital $ 32,302 6.6% $ 14,744 3.0% $ 24,575 5.0%
Tier 1 risk-based capital 32,302 11.1 11,610 4.0 17,416 6.0
Total risk-based capital 34,799 12.0 23,221 8.0 29,026 10.0
Tangible capital 32,302 6.6 7,372 1.5 - -
</TABLE>
The regulatory capital of the Bank increased during 1998 primarily as a
result of the merger of the Company's two subsidiary banks.
45
<PAGE>
Dividend Restrictions
The 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.
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 the Bank's conversion from a federally chartered mutual savings
bank to a federally chartered stock savings bank, the Bank established a
liquidation account for the benefit of eligible depositors who continue to
maintain their deposit accounts in the Company after conversion. In the unlikely
event of a complete liquidation of the Bank, each eligible depositor will be
entitled to receive a liquidation distribution from the liquidation account, in
the proportionate amount of the then current adjusted balance for deposit
accounts held, before distribution may be made with respect to the Bank's
capital stock. The Bank may not declare or pay a cash dividend to the Company
on, or repurchase any of, its capital stock if the effect thereof would cause
the retained earnings of the Bank to be reduced below the amount required for
the liquidation account. Except for such restrictions, the existence of the
liqui dation account does not restrict the use or application of the Bank's
retained earnings. At December 31, 1998, the liquidation account balance was
$3,243,000.
46
<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, 1998 $ 2,892
Originations - 1998 2,581
Repayments - 1998 (1,178)
-----------
Balance at December 31, 1998 $ 4,295
===========
Under the Company's current policy, related party loans are made on
substantially the same terms, including interest rate and collateral
requirements, as are available to the general public. The Company believes loans
to related parties do not involve more than the normal risk of collectibility.
Commitments to extend credit and letters of credit to related parties totaled
$944,000 at December 31, 1998.
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,
1998, 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.
47
<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 Stock
The carrying value of Federal Home Loan 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.
48
<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,
1998 1997
--------------------------- --------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
-------------------------- --------------------------
<S> <C> <C> <C> <C>
Financial assets:
Loans held for investment, net $ 484,783 $ 489,598 $ 486,487 $ 494,207
Financial liabilities:
Deposits with stated maturities 265,814 267,603 328,198 330,314
Long-term borrowings 75,000 77,228 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,
1998 1997
---------------------------
Assets:
Cash $ 56 $ 1
Securities available for sale at fair value 250 -
Equity in net assets of the Bank 49,420 51,173
Other assets 776 1,908
---------------------------
$ 50,502 $ 53,082
===========================
Liabilities:
Other borrowings $ - $ 2,575
Other liabilities 426 570
---------------------------
426 3,145
---------------------------
Stockholders' equity 50,076 49,937
---------------------------
$ 50,502 $ 53,082
===========================
49
<PAGE>
Condensed Statement of Operations
(In thousands)
Year Ended December 31,
1998 1997 1996
-------------------------------------------
Equity in earnings of the Bank $ 6,520 $ 6,767 $ 3,943
Interest income 22 - -
Interest expense (76) (110) (16)
Salaries and employee benefits (296) (349) (276)
Expenses related to proxy contest
and other matters - (405) -
Professional fees (202) (247) (108)
Other expenses (86) (87) (122)
-------------------------------------------
Income before income taxes 5,882 5,569 3,421
Benefit from income taxes 233 434 187
-------------------------------------------
Net income $ 6,115 $ 6,003 $ 3,608
===========================================
Condensed Statement of Cash Flows
(In thousands)
Year Ended December 31,
1998 1997 1996
--------------------------------
Cash flows from operating activities:
Net income $ 6,115 $ 6,003 $ 3,608
Add (deduct) items not affecting cash:
Distributions in excess of earnings
(undistributed earnings) of the Bank 1,399 (3,157) (1,941)
Amortization 6 3 26
Decrease (increase) in other assets 1,860 (114) (1,192)
(Decrease) increase in liabilities (73) 189 121
--------------------------------
Net cash provided by operations 9,307 2,924 622
--------------------------------
Cash flows from investing activities:
Purchase of securities available for sale (250) - -
--------------------------------
Net cash used for investing activities (250) - -
--------------------------------
Cash flows from financing activities:
Cash dividends paid (1,931) (1,627) (1,215)
Net proceeds from issuance of common stock 173 357 583
Increase in other borrowings - 4,000 -
Principal payments on other borrowings (2,575) (1,425) -
Common stock repurchases (4,669) - -
-
Purchase of common stock by ESOP - (4,232) -
--------------------------------
Net cash used for financing activities (9,002) (2,927) (632)
--------------------------------
Net increase (decrease) in cash and cash
equivalents 55 (3) (10)
Cash and cash equivalents at beginning of period 1 4 14
--------------------------------
Cash and cash equivalents at end of period $ 56 $ 1 $ 4
================================
50
<PAGE>
Note 25
Quarterly Results of Operations (Unaudited)
(Dollars in thousands, except per share data)
<TABLE>
Year Ended December 31, 1998
First Second Third Fourth
Quarter Quarter Quarter Quarter
-----------------------------------------------------------
<S> <C> <C> <C> <C>
Total interest income $ 12,564 $ 12,317 $ 11,367 $ 10,783
Total interest expense 7,177 7,014 6,006 5,608
-----------------------------------------------------------
Net interest income 5,387 5,303 5,361 5,175
Provision for loan losses 204 136 100 70
-----------------------------------------------------------
Net interest income after provision
for loan losses 5,183 5,167 5,261 5,105
Other income 1,565 1,869 1,803 1,776
Other expenses 4,498 4,701 4,506 4,492
-----------------------------------------------------------
Income before income taxes 2,250 2,335 2,558 2,389
Provision for income taxes 793 831 934 860
-----------------------------------------------------------
Net income $ 1,457 $ 1,504 $ 1,624 $ 1,529
===========================================================
Earnings per share:
Basic $ .31 $ .32 $ .34 $ .33
===========================================================
Diluted $ .30 $ .31 $ .33 $ .33
===========================================================
Dividends per common share $ .10 $ .10 $ .10 $ .11
===========================================================
Year Ended December 31, 1997
First Second Third Fourth
Quarter Quarter Quarter Quarter
-----------------------------------------------------------
Total interest income $ 12,551 $ 12,766 $ 12,858 $ 12,601
Total interest expense 7,221 7,385 7,461 7,243
-----------------------------------------------------------
Net interest income 5,330 5,381 5,397 5,358
Provision for loan losses 150 150 150 150
-----------------------------------------------------------
Net interest income after provision
for loan losses 5,180 5,231 5,247 5,208
Other income 971 1,359 1,376 2,007
Other expenses 4,527 4,194 3,979 4,612
-----------------------------------------------------------
Income before income taxes 1,624 2,396 2,644 2,603
Provision for income taxes 570 848 935 911
-----------------------------------------------------------
Net income $ 1,054 $ 1,548 $ 1,709 $ 1,692
===========================================================
Earnings per share:
Basic $ .22 $ .31 $ .35 $ .36
===========================================================
Diluted $ .21 $ .30 $ .34 $ .35
===========================================================
Dividends per common share $ .08 $ .08 $ .08 $ .08
===========================================================
</TABLE>
NOTE: May not add to total for year due to rounding.
51
<PAGE>
Report of Independent Accountants
- -------------------------------------------------------------------------------
[LETTERHEAD OF PRICEWATERHOUSECOOPERS LLP APPEARS HERE]
To the Board of Directors and Stockholders of CENIT Bancorp, Inc.
Norfolk, Virginia
In our opinion, the accompanying consolidated statement of financial
condition and the related consolidated statements of operations, of
comprehensive income, of changes in stockholders' equity and of cash flows
present fairly, in all material respects, the financial position of CENIT
Bancorp, Inc. and its subsidiary at December 31, 1998 and 1997, and the results
of their operations and their cash flows for each of the three years in the
period ended December 31, 1998, 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 these financial
statements 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.
PricewaterhouseCoopers LLP
Virginia Beach, Virginia
January 29, 1999
52
<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 19, 1999 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(R) under the
symbol CNIT. Newspapers and other stock
tables may identify the stock under various
abbreviations for CENIT Bancorp, Inc.
The table below shows the reported high
and low sales prices of CENIT Bancorp, Inc.
Common Stock by quarters in fiscal years
1998 and 1997.
1998 1997
Quarter High Low High Low
- -------------------------------------------------------
First $29.00 $23.33 $15.92 $13.33
- -------------------------------------------------------
Second $28.67 $20.50 $16.88 $13.17
- -------------------------------------------------------
Third $24.63 $16.75 $21.00 $15.83
- -------------------------------------------------------
Fourth $21.50 $14.13 $27.15 $19.33
- -------------------------------------------------------
Source: The Nasdaq Stock Market (R)
Note:
Sales prices have 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
PricewaterhouseCoopers LLP
One Columbus Center, Suite 400
Virginia Beach, Virginia 23462
53
<PAGE>
Corporate Information
- ------------------------------------------------------------------------------
- - Executive Offices
225 West Olney Road
Norfolk, VA 23510-1586
Telephone (757) 446-6600
- - 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)
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
Newport News
13307 Warwick Boulevard
Hampton
2205 Executive Drive
550 Settlers Landing Road
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
- - Personal & Commercial Banking Services
Personal Banking
Checking and Savings Accounts
Retirement Accounts
24 Hour Banking ATMs
Members, HONOR (R) PLUS (R) CIRRUS (R) &
VISA (R) Networks with access to DISCOVER (R)
MASTERCARD (R) AMERICAN EXPRESS (R)
ARMED FORCES FINANCIAL (R) (AFFN)
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
54
<PAGE>
CENIT Bank Retail Banking Offices
- ------------------------------------------------------------------------------
[GRAPHIC OMITTED]
[MAP SHOWN HERE]
* 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.
<PAGE>
[BACK COVER]
CENIT BANCORP, INC.
Corporate Offices
225 West Olney Road
Norfolk, Virginia 23510-1586
(757) 446-6600
