10-Q 1 form10q_march01.txt FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 2001 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549 FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 or 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For Quarter Ended March 31, 2001 Commission File Number 0-20378 CENIT BANCORP, INC. ----------------------------------------------------- (Exact name of registrant as specified in its charter) Delaware 54-1592546 ---------------------------------------- ------------------------------------- (State or other jurisdiction of (I.R.S. Employer Identification incorporation or organization) Number) 300 East Main Street, Suite 1350 Norfolk, Virginia 23510 ---------------------------------------- ------------------------------------- (Address of principal executive (Zip code) office) Registrant's telephone number, including area code: (757) 446-6600 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES X NO ----- ----- Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Common Stock $.01 Par Value 4,430,171 --------------------------- --------------------------------------- Title of Class Number of Shares Outstanding as of April 13, 2001 CENIT BANCORP, INC. AND SUBSIDIARIES Contents -------------------------------------------------------------------------------- Page PART I - FINANCIAL INFORMATION Item 1 Financial Statements Consolidated Statements of Financial Condition as of March 31, 2001 Unaudited)and December 31, 2000 .............................................. 1 Unaudited Consolidated Statements of Income for the Three Months Ended March 31, 2001 and March 31, 2000 ..................................... 2 Unaudited Consolidated Statements of Comprehensive Income for the Three Months Ended March 31, 2001 and March 31, 2000 ......................... 3 Unaudited Consolidated Statement of Changes in Stockholders' Equity for the Three Months ended March 31, 2001 .................................... 4 Unaudited Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2001 and March 31, 2000 ......................... 5 Notes to Unaudited Consolidated Financial Statements ......................... 6 Item 2 Management's Discussion and Analysis of Financial Condition and Results of Operations ................................................. 7 Item 3 Quantitative and Qualitative Disclosures about Market Risk.................15 PART II - OTHER INFORMATION Item 1 Legal Proceedings..........................................................15 Item 2 Changes in Securities......................................................15 Item 3 Defaults Upon Senior Securities............................................15 Item 4 Submission of Matters to a Vote of Security Holders........................15 Item 5 Other Information .........................................................15 Item 6 Exhibits and Reports on Form 8-K...........................................15 Signatures.................................................................16

The notes to unaudited consolidated financial statements are an integral part of these statements. 1 CENIT BANCORP, INC. AND SUBSIDIARIES UNAUDITED CONSOLIDATED STATEMENTS OF INCOME (Dollars in thousands, except per share data) Three Months Ended March 31, 2001 2000 ---- ---- Interest and fees on loans ........................... $ 9,240 $ 9,132 Interest on mortgage-backed certificates ............. 2,047 1,429 Interest on investment securities .................... 6 776 Dividends and other interest income .................. 214 261 ------- ------- Total interest income ............................. 11,507 11,598 ------- ------- Interest on deposits ................................. 4,507 4,261 Interest on borrowings ............................... 1,464 1,943 ------- ------- Total interest expense ............................ 5,971 6,204 ------- ------- Net interest income ............................... 5,536 5,394 Provision for loan losses ............................ 12 29 ------- ------- Net interest income after provision for loan losses 5,524 5,365 ------- ------- Other income: Deposit fees ...................................... 740 708 Merchant processing fees .......................... 528 511 Gains on sales of loans, net ...................... 294 132 Commercial mortgage brokerage fees ................ 6 - Other ............................................. 188 242 ------- ------- Total other income .............................. 1,756 1,593 ------- ------- Other expenses: Salaries and employee benefits .................... 2,154 2,296 Equipment, data processing and supplies ........... 795 808 Net occupancy expense of premises ................. 543 572 Merchant processing ............................... 410 391 Professional fees ................................. 185 157 Expenses, gains/losses on sales, and provision for losses on real estate owned, net ............ 5 6 Other ............................................. 622 557 ------- ------- Total other expenses ............................ 4,714 4,787 ------- ------- Income before income taxes ........................... 2,566 2,171 Provision for income taxes ........................... 949 782 ------- ------- Net income ........................................ $ 1,617 $ 1,389 ------- ======= Earnings per share: Basic ............................................. $ .38 $ .31 ======= ======= Diluted ........................................... $ .38 $ .30 ======= ======= Dividends per common share ........................... $ .16 $ .15 ======= ======= The notes to unaudited consolidated financial statements are an integral part of these statements. 2

The notes to unaudited consolidated financial statements are an integral part of these statements. 3

The notes to unaudited consolidated financial statements are an integral part of this statement. 4

The notes to unaudited consolidated financial statements are an integral part of these statements. 5 CENIT BANCORP, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS -------------------------------------------------------------------------------- Note 1 - Basis of Presentation The accompanying unaudited consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and, therefore, do not include all of the disclosures and notes required by accounting principles generally accepted in the United States of America. In the opinion of the management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. The results of operations for the three month periods ended March 31, 2001 and 2000 are not necessarily indicative of results that may be expected for the entire year or any interim periods. Certain previously reported amounts have been reclassified to agree with the current presentation. The interim financial statements should be read in conjunction with the December 31, 2000 consolidated financial statements of CENIT Bancorp, Inc. (the "Company"). Note 2 - Per Share Data Basic earnings per share is calculated using weighted average shares outstanding. For the three month period ended March 31, 2001, weighted average shares used to compute basic earnings per share were 4,244,087. For the three months ended March 31, 2000, weighted average shares used to compute basic earnings per share were 4,543,261. Diluted earnings per share is calculated by adding common stock equivalents to the weighted average shares outstanding. For the three month period ended March 31, 2001, weighted average shares used to compute diluted earnings per share were 4,301,469. For the three months ended March 31, 2000, weighted average shares used to compute diluted earnings per share were 4,599,677. 6 Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations -------------------------------------------------------------------------------- General The Company's business currently consists of the business of its sole subsidiary, CENIT Bank and subsidiaries (the "Bank"). The principal business of the Bank consists of attracting retail deposits from the general public in its market area through a variety of deposit products and investing these funds in commercial, real estate and consumer loans. The Bank also invests in mortgage-backed certificates, securities issued by the U.S. Treasury and U.S. Government agencies, federal funds sold, Federal Home Loan Bank stock, and other investments permitted by applicable laws and regulations. Financial Condition Of The Company Total Assets At March 31, 2001, the Company had total assets of $664.8 million, compared to $632.2 million at December 31, 2000, an increase of $32.6 million, or 5.2%. Securities Available for Sale Securities available for sale totaled $137.0 million at March 31, 2001 and are comprised of mortgage-backed certificates and other debt securities. The net increase of $37.7 million, or 38.0% from the December 31, 2000 balance of $99.3 million resulted primarily from the purchase of $44.0 million in adjustable mortgage-backed certficates available for sale, partially offset by principal repayments of $7.2 million. Loans The balance of net loans decreased to $466.8 million at March 31, 2001 from $475.1 million at December 31, 2000, a decrease of $8.3 million, or 1.7%. The decrease was primarily due to mortgage loan paydowns associated with declines in mortgage lending rates. Declines in lending rates often accelerate the refinancing of mortgage loans. A $12.1 million, or 5.9% decrease in permanent single-family mortgage loans held for investment was partially offset by an increase in core banking loans and loans held for sale of $3.8 million or, 1.4% from December 31, 2000 to March 31, 2001. The portion of the loan portfolio excluding residential mortgage loans ("core banking loans") reached a record balance of $271.0 million at March 31, 2001. 7

8 Deposits Total deposits increased $10.1 million, or 2.0%, from $494.5 million at December 31, 2000 to $504.6 million at March 31, 2001. The Company's transaction deposits (its checking, savings, and money market deposits) increased $14.0 million, or 5.6% to a record balance of $265.4 million at March 31, 2001 from $251.4 million at December 31, 2000. The increase in transaction deposits was primarily attributable to the Company's continued successful execution of its business strategy to grow this line of business. Capital The Company's and the Bank's capital ratios exceeded applicable regulatory requirements at March 31, 2001. In January 2001, the Company's Board of Directors gave the Company's management the discretion to repurchase up to 200,000, or approximately 4.5% of the Company's shares. The Company is not obligated to conduct these repurchases at all, and the Company's decision to do so, as well as the timing of any repurchase, will depend on a variety of factors. During the first quarter of 2001, the Company repurchased 15,100 shares under this discretionary authority at an average price of $15.58. Asset Quality Nonperforming Assets. Nonperforming assets consist of nonperforming loans, real estate acquired in settlement of loans ("REO"), and other repossessed assets. Generally the Company does not accrue interest on loans that are 90 days or more past due, with the exception of certain VA-guaranteed or FHA insured one- to four-family permanent mortgage loans, certain credit card loans, and matured loans for which the borrowers are still making required monthly payments of interest, or principal and interest, and with respect to which the Bank is negotiating extensions or refinancings with the borrowers. 9 The following table sets forth information about the Company's nonperforming loans, REO, and other repossessed assets at the dates indicated. March 31, December 31, 2001 2000 ------------ -------------- (Dollars in Thousands) Nonperforming loans: Real estate loans: Permanent residential 1- to 4-family Nonaccrual $1,825 $ 1,379 Accruing loans 90 days or more past due 48 - ------ ------- Total 1,873 1,379 ------ ------- Land acquisition and development: Nonaccrual 46 46 ------ ------- Total 46 46 ------ ------- Consumer loans: Nonaccrual Boats 34 5 Home equity and second mortgage 34 34 Other 40 14 ------ ------- Total 108 53 ------ ------- Commercial business loans: Nonaccrual 52 202 ------ ------- Total 52 202 ------ ------- Total nonperforming loans: Nonaccrual 2,031 1,680 Accruing loans 90 or more days past due 48 - ------ ------- Total 2,079 1,680 Real estate owned, net 363 - ------ ------- Total nonperforming assets, net $2,442 $ 1,680 ====== ======= Total nonperforming assets, net, to total assets .37% .27% === === 10 Allowance for Loan Losses. The following table sets forth activity of the allowance for loan losses for the periods indicated. Three months ended March 31, 2001 2000 ---- ---- (Dollars in Thousands) Balance at beginning of period $ 3,804 $ 3,860 Provision for loan losses 12 29 Losses charged to allowance (63) (76) Recovery of prior losses 9 22 ------- ------- Balance at end of period $ 3,762 $ 3,835 ======= ======= The Company's coverage ratio (total allowance for loan losses to total nonperforming loans) was approximately two times, two times, and four times the nonperforming loans at March 31, 2001, December 31, 2000, and March 31, 2000, respectively. For the three months ended March 31, 2001 and March 31, 2000, the difference between the provision for loan losses and net loans charged off during the respective period relates primarily to loan types in which the Bank is no longer active and for which provisions for loan losses have previously been made. Management believes that these provisions and the allowance for loan losses are adequate. Average Balance Sheets The following tables set forth, for the periods indicated, information regarding: (i) the total dollar amounts of interest income from interest-earning assets and the resulting average yields; (ii) the total dollar amounts of interest expense from interest-bearing liabilities and the resulting average costs; (iii) net interest income; (iv) interest rate spread; (v) net interest position; (vi) the net yield earned on interest-earning assets; and (vii) the ratio of total interest-earning assets to total interest- bearing liabilities. Average balances shown in the following tables have been calculated using daily average balances. 11

12 Comparison of Operating Results for the Three Months Ended March 31, 2001 and March 31, 2000. General The Company's pre-tax income increased $395,000 to $2.6 million for the three months ended March 31, 2001 from $2.2 million for the three months ended March 31, 2000. The increase was the result of increases in net interest income after provision for loan losses and other income of $159,000 and $163,000, respectively, as well as a $73,000 decrease in other expenses. Net Interest Income The Company's net interest income before provision for loan losses increased $142,000 or 2.6% to $5.5 million for the first quarter of 2001 compared to $5.4 million for the first quarter of 2000. This increase was substantially due to a $233,000, or 3.8% decrease in interest expense partially offset by a decrease of $91,000, or 0.8% in interest income for the first quarter of 2001 compared to the same period in 2000. Interest on loans increased $108,000, or 1.2%, to $9.2 million for the first quarter 2001 compared to $9.1 million for the same period in 2000. While the average loan yield increased to 7.9% for the first three months of 2001 as compared to 7.8% for the same period in 2000, the average loan balance decreased $2.0 million to $468.1 million in the first quarter of 2001. The decrease in the average loan balance was attributable, in part, to mortgage loan paydowns. Interest on the Company's portfolio of mortgage-backed certificates increased $618,000, to $2.0 million for the quarter ended March 31, 2001 from $1.4 million for the comparable 2000 period. The average balance of the portfolio increased $39.9 million from $83.2 million in the first quarter of 2000 to $123.1 million in the first quarter of 2001. This increase was primarily attributable to the Company's restructuring of its securities portfolio. The Company sold its U. S. Govenment agency securities and purchased additional mortgage-backed certficates. The average yield on mortgage-backed certficates decreased from 6.87% for the three months ended March 31, 2000 to 6.65% for the same period in 2001. The decrease in yield between the two quarters is primarily a result of the purchase of lower yielding adjustable rate mortgage-backed certificates during 2000 and the first quarter of 2001. Interest on investments decreased from $776,000 for the first quarter of 2000 to $6,000 for the same quarter in 2001. The decrease is due primarily to the sale of the Company's U.S. Government agency securities in the fourth quarter of 2000. Interest on deposits increased by $246,000, or 5.8%, for the quarter ended March 31, 2001 compared to the quarter ended March 31, 2000. While the overall average balance of interest-bearing deposits decreased by $3.8 million, the average balance of transaction deposits reached a record balance of $237.1 million for the first quarter of 2001 compared to $215.1 for the first quarter of 2000, an increase of 10.2%. The average balance of noninterest-bearing deposits increased 20.0%, from $62.0 million to $74.4 million in the first quarter of 2001. Interest on borrowings decreased $479,000 for the three months ended March 31, 2001 compared to the same period in 2000. This decrease was substantially due to a $27.4 million decrease in the average balance of FHLB advances to $94.9 million for the first quarter of 2001 compared to $122.3 million for the comparable period in 2000. The total average cost of borrowings for the first quarter of 2001 decreased to 5.3% from 5.7% for the same period in 2000, primarily due to the recent reductions in the interest rate environment. Net interest margin was 3.66% for the first quarter of 2001 compared to 3.46% for the same period in 2000. The Company is seeking to improve its net interest margin through increases in transaction deposits and restructuring operations. During the first quarter of 2001, the Company implemented a program to reduce nonearning cash balances. Cash balance reductions realized from this program will not substantially begin until the second quarter of 2001. When fully implemented, the Company expects to reduce average nonearning cash by as much as $4.0 to $5.0 million, which should enhance the net interest margin going forward. 13 Provision for Loan Losses The Company's provision for loan losses remained substantially the same for the three months ended March 31, 2001 as compared to the same period in 2000, decreasing from $29,000 to $12,000. Net loans charged off during both the three months ended March 31, 2001 and March 31, 2000 were $54,000. For the three months ended March 31, 2001 and March 31, 2000, the difference between the provision for loan losses and net loans charged off during the respective period relates primarily to loan types in which the Bank is no longer active and for which provisions for loan losses have previously been made. Management believes that these provisions are adequate. Other Income Total other income increased by $163,000, or 10.2%, for the first quarter of 2001 compared to the same period in 2000. The increase is primarily due to a $162,000 increase in gains on sales of loans. The increase is attributed to the increased mortgage lending activity as a result of the reduction of mortgage lending rates that occurred at the end of 2000 and continued into the first quarter of 2001. Other Expenses Total other expense decreased by $73,000 or 1.5%, for the three months ended March 31, 2001 compared to the same period in 2000. Liquidity The principal sources of funds for the Company for the three months ended March 31, 2001 included $123.0 million in advances from the FHLB, $16.7 million in proceeds from the sale of loans, a $10.1 million increase in deposits, a $10.0 million decrease in loans held for investment, and $7.2 million in proceeds from principal repayments on securities available for sale. Funds were used primarily to repay $105.0 million in FHLB advances, to fund purchases of securities available for sale of $44.0 million, and to originate loans held for sale of $18.8 million. The Company's liquidity could be impacted by a decrease in the renewals of deposits or general deposit runoff. However, the Company has the ability to raise deposits by conducting deposit promotions. In the event the Company requires funds beyond its ability to generate them internally, the Company could obtain additional advances from the FHLB. The Company could also obtain funds through the sale of investment securities from its available for sale portfolio. Safe Harbor Statement Under the Private Securities Litigation Reform Act of 1995 This Quarterly Report contains forward-looking statements with respect to the goals, plans, objectives, intentions, expectations, financial condition, results of operations, future performance and business of the Company, including, without limitation, statements relating to the earnings outlook of the Company. These forward-looking statements may be preceded by, followed by or include the words "may", "could", "would", "should", "believes", "expects", "anticipates", "estimates", "intends", "plans" or similar expressions. These forward-looking statements involve risks and uncertainties that are subject to change based on various factors, many of which are beyond the Company's control. Some of these factors include (1) the strength of the U. S. economy in general and the strength of the local economy in which the Company conducts its operations, which may be different than expected and which may result in, among other things, deterioration in credit quality or reduced demand for credit; (2) the effects of, and changes in, the interest rate policies of the board of governors of the Federal Reserve system, which may be different from those anticipated by the Company in this Quarterly Report; (3) legislation or regulatory changes that adversely affect the businesses in which the Company is engaged; (4) changes in accounting principles, practices, policies or guidelines; and (5) changes in the real estate market generally and in the markets in which the Company conducts its operations, which may affect the demand for mortgages and other real estate-based loans. This Quarterly Report, including the forward-looking statements contained herein, speaks only as of the date hereof, and the Company disclaims any obligation to update or revise the statements contained in this Quarterly Report following the date hereof. 14 Item 3 - Quantitative and Qualitative Disclosure About Market Risk Market Risk Management The Company's primary market risk exposure is interest rate risk. Fluctuations in interest rates will impact both the level of interest income and interest expense and the market value of the Company's interest-earning assets and interest-bearing liabilities. There were no material changes in the Company's market risk management strategy, as stated in the Company's 2000 annual report, during the first three months of 2001. PART II - OTHER INFORMATION Item 1 - Legal Proceedings - Inapplicable Item 2 - Changes in Securities - Inapplicable Item 3 - Defaults Upon Senior Securities - Inapplicable Item 4 - Submission of Matters to a Vote of Security Holders - None Item 5 - Other Information - None Item 6 - Exhibits and Reports on Form 8-K On January 24, 2001, the Company filed Form 8-K, Item 5 and Item 7. Item 5 reported the Registrant had issued a News Release announcing the results for the fourth quarter and year ended December 31, 2000 and other information. Item 7 was an exhibit of that News Release. Also, on January 24, 2001, the Company filed Form 8-K, Item 5 and Item 7. Item 5 reported the Registrant had issued a News Release announcing share repurchase, dividend increase, and earnings guidance. Item 7 was an exhibit of that News Release. 15 SIGNATURES ---------- Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. CENIT BANCORP, INC. DATE: April 20, 2001 /S/ Michael S. Ives ------------------------------------- Michael S. Ives President and Chief Executive Officer DATE: April 20, 2001 /S/ John O. Guthrie -------------------------------------- John O. Guthrie Senior Vice President and Chief Financial Officer 16

CENIT BANCORP INC 10-Q