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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1996
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 0-26384
CENTER FINANCIAL CORPORATION
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Connecticut 06-1260924
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization Identification No.)
60 North Main Street, Waterbury, Connecticut 06702
(Address of principal executive offices) (Zip Code)
(203) 578-7000
(Registrant's telephone number, including area code)
Not applicable
(Former name, former address and former fiscal year,
if changed since last report.)
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 or No X .
15,086,881 shares of the registrant's common stock, par value $1.00, were
outstanding as of August 2, 1996.
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Total number of pages: 37
The Exhibits Index, filed as a part of this report, appears on page 23.
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TABLE OF CONTENTS AND FORM 10-Q CROSS-REFERENCE INDEX
Part I - Financial Information
Management's Discussion and Analysis of Financial Condition
and Results of Operations (Item 2) 3
Financial Statements (Item 1):
Consolidated Balance Sheet (unaudited) 16
Consolidated Statement of Operations (unaudited) 17
Consolidated Statement of Changes in Shareholders'
Equity (unaudited) 18
Consolidated Statement of Cash Flows (unaudited) 19
Notes to Consolidated Financial Statements 20
Selected Statistical Information:
Consolidated Average Balance Sheet, Net Interest Income
and Interest Rates 21
Part II - Other Information
Legal Proceedings (Item 1) 23
Exhibits and Reports on Form 8-K (Item 6) 23
Signatures 25
FINANCIAL HIGHLIGHTS Three months ended Six months ended
------------------------------- -------------------------------
June 30, June 30,
------------------------------- -------------------------------
(in thousands, except per share amounts) 1996 1995 1996 1995
--------------- --------------- --------------- ---------------
Operating Results
Net income $ 8,037 $ 5,603 $ 13,429 $ 10,201
Return on average assets 0.83 % 0.65 % 0.71 % 0.59 %
Return on average equity 14.10 10.97 11.94 10.10
Net interest margin 3.14 3.62 3.24 3.66
Efficiency ratio 66.00 % 71.24 % 70.87 % 73.92 %
Per Common Share
Net income $ 0.54 $ 0.39 $ 0.90 $ 0.72
Dividends declared $ 0.07 $ 0.05 $ 0.14 $ 0.10
Payout ratio 12.96 % 12.82 % 15.56 % 13.89 %
Balances at June 30,
Loans and leases $ 3,127,972 $ 2,713,788
Allowance for loan and lease losses 44,397 46,317
Total assets 4,018,341 3,450,456
Deposits 2,558,684 2,389,364
Shareholders' equity 233,936 206,988
Book value per common share $ 15.58 $ 14.48
Capital Ratios at June 30,
Shareholders' equity to total assets 5.82 % 6.00 %
Tier 1 capital 8.92 8.76
Total capital 11.19 11.15
Leverage 5.71 % 5.64 %
2
CENTER FINANCIAL CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
TABLE 1 - SUMMARY OF RESULTS OF OPERATIONS
Three months ended Six months ended
------------------------------- -------------------------------
June 30, June 30,
------------------------------- -------------------------------
(in thousands, except per share amounts) 1996 1995 1996 1995
--------------- --------------- --------------- ---------------
Statement of Operations
Interest and dividend income $ 67,814 $ 63,472 $ 134,227 $ 124,418
Interest expense 39,424 34,511 77,159 66,313
Net interest income 28,390 28,961 57,068 58,105
Provision for loan and lease losses 2,085 1,248 3,737 2,496
Noninterest income 12,659 13,488 22,219 20,194
Noninterest expenses 27,046 32,857 55,528 60,987
Income before income taxes 11,918 8,344 20,022 14,816
Income tax expense 3,881 2,741 6,593 4,615
Net income $ 8,037 $ 5,603 $ 13,429 $ 10,201
Net income per common share $ 0.54 $ 0.39 $ 0.90 0.72
Selected Ratios and Other Data
Per common share at June 30:
Book value $ 15.58 14.48
Tangible book value 14.63 13.64
Market value $ 24.16 14.50
Total shareholders' equity to total assets as of: 5.82 % 6.00 %
Ratios for the period ending:
Return on average assets 0.83 % 0.65 % 0.71 % 0.59 %
Return on average shareholders' equity 14.10 10.97 11.94 10.10
Dividend payout ratio 12.96 12.82 15.56 13.89
Average shareholders' equity to average assets 5.90 5.90 5.97 5.87
Yield on interest-earning assets 7.51 7.94 7.62 7.85
Cost of interest-bearing liabilities 4.65 4.53 4.68 4.38
Net interest spread 2.86 3.41 2.94 3.47
Net interest margin 3.14 % 3.62 % 3.24 3.66
Regulatory Ratios
As of:
Center Financial Corporation:
Tier 1 capital 8.92 % 8.76 %
Total capital 11.19 11.15
Leverage 5.71 % 5.64 %
Centerbank:
Tier 1 capital 8.87 % 8.76 %
Total capital 11.14 11.15
Leverage 5.68 % 5.64 %
3
OVERVIEW
General
Center Financial Corporation (the "Corporation" or "Center Financial") and First
Union Corporation ("First Union") of Charlotte, North Carolina, announced on
June 17, 1996, that a definitive agreement had been signed whereby First Union
would acquire the Corporation for approximately $379 million. The transaction is
to be accounted for as a purchase and is expected to be completed during the
fourth quarter of 1996. Under the terms of the agreement, First Union will
exchange shares of its common stock for each share of the Corporation's common
stock at a value equal to $25.44 per Center Financial share. The merger is
subject to the approval of Federal and Connecticut banking regulators, the
Corporation's shareholders and other conditions of closing.
First Union reported total assets of $139.9 billion, net loans of $91.3 billion,
deposits of $91.5 billion and shareholders' equity of $9.3 billion at June 30,
1996. First Union also reported earnings of $435.7 million, or $1.55 per common
share, and $674.6 million, or $2.40 per common share, for the three and six
months ended June 30, 1996.
The Corporation completed its merger with Heritage Bank on April 12, 1996. The
transaction was accounted for as a pooling of interests. The 1996 financial
information included in Management's Discussion and Analysis and the
consolidated financial statements reflect the Corporation's financial position
and results of operations on a combined basis with Heritage Bank. The 1995
financial information included in Management's Discussion and Analysis and the
consolidated financial statements reflect the Corporation's financial position
and results of operations on a combined basis with Great Country Bank, but due
to the relative size of the Heritage Bank acquisition compared with Center
Financial, the 1995 financial information and statements have not been restated.
The Great Country Bank merger was completed December 15, 1995 and was accounted
for as a pooling of interests.
Three Months Ended June 30, 1996
The Corporation reported net income of $8.0 million, or $0.54 per share, for the
quarter ended June 30, 1996, an increase of 43 percent, over net income of $5.6
million, or $0.39 per share, for the second quarter of 1995. Net income for the
quarter ended June 30, 1995 included a $4.9 million gain on the sale of two
branches and a $5.9 million restructuring charge.
Net interest income for the second quarters of 1996 and 1995 was $28.4 million
and $29.0 million, respectively. Net interest margin declined to 3.14 percent
from 3.62 percent for the same periods. The Corporation's cost of funds on
interest-bearing liabilities continued to increase while the rates earned on
interest-earning assets declined during the second quarter of 1996, compared
with the same period of 1995. This trend reflects the shift from lower cost or
no cost funds such as savings, money market and demand deposits into higher
costing funds such as time deposits and borrowings.
The provision for loan and lease losses increased $0.8 million to $2.1 million
for the second quarter of 1996 from $1.3 million during the 1995 second quarter.
The allowance for loan and lease losses was $44.4 million at June 30, 1996,
compared with $43.0 million at December 31, 1995. The ratio of the allowance for
loan and lease losses to nonaccruing loans and leases decreased from 67.2
percent at December 31, 1995 to 56.4 percent at June 30, 1996.
Nonaccruing loans plus real estate owned ("nonperforming assets") at June 30,
1996 totaled $107.9 million, up $13.8 million, or 15 percent, from $94.3 million
at December 31, 1995. The ratio of nonperforming assets to related asset
categories (total loans and leases plus real estate owned) increased 22 basis
points to 3.42 percent at June 30, 1996 from 3.20 percent at December 31, 1995.
4
Noninterest income was $11.4 million for the second quarter of 1996, compared
with $7.7 million for the prior year period, excluding securities gains and
losses and the gain on the sale of two branches, an increase of $3.7 million, or
48 percent. The increase is primarily attributable to higher levels of
mortgagebanking activity.
Noninterest expenses were $27.0 million for the quarter ended June 30, 1996,
compared with $27.2 million for the second quarter of 1995, excluding the
restructuring charge . The efficiency ratio, a measure of operating expenses to
net revenue--before special charges and gains--was 66.00 percent for the second
quarter of 1996, down from 71.24 percent for the comparable 1995 period.
Return on average shareholders' equity increased from 10.97 percent for the June
30, 1995 quarter to 14.10 percent for the second quarter of 1996. Return on
average assets increased from 0.65 percent to 0.83 percent for the second
quarters of 1995 and 1996, respectively. The Corporation's Tier 1 capital ratio
was 8.92 percent, its Total capital ratio was 11.19 percent and its Leverage
ratio was 5.71 percent. These ratios are as of June 30, 1996.
Six Months Ended June 30, 1996
Net income for the six months ended June 30, 1996 was $13.4 million, or $0.90
per share, compared with net income of $10.2 million, or $0.72 per share, for
the comparable 1995 period. Net income for the six months ended June 30, 1995
included a $4.9 million gain on the sale of two branches and a $5.7 million
restructuring charge.
Net interest income for the first six months of 1996 was $57.1 million, compared
with $58.1 million for the comparable 1995 period. Net interest margin declined
to 3.24 percent from 3.66 percent for the same periods. The decline in net
interest income is attributable to increased utilization of borrowings to fund
the growth in the Corporation's balance sheet. Net interest margin declined due
to the higher cost of funds resulting from the shift away from no cost and low
cost funds such as savings, money market and demand deposits into higher costing
funds such as time deposits and borrowings.
The provision for loan and lease losses was $3.7 million for the first six
months of 1996, up $1.2 million or 50 percent, from $2.5 million during the 1995
period. The increase is attributable to the integration of acquired loan
portfolios into the Corporation's existing methodologies, policies and
procedures.
Noninterest income, excluding securities gains and losses and the gain on the
sale of branches, totaled $19.1 million, up $5.1 million or 37 percent, from
$14.0 million during the first six months of 1996 and 1995, respectively. The
increase is primarily attributable to the higher levels of mortgage-banking
activities experienced during 1996 versus 1995.
Noninterest expenses, excluding the restructuring charge, were $55.5 million
during the six month period ended June 30, 1996, compared with $55.3 million for
the same period of 1995. The efficiency ratio was 70.87 percent for the 1996 six
month period, compared with 73.92 percent for the comparable 1995 period.
Net Interest Income
The Corporation's net interest income was $28.4 million and $29.0 million for
the second quarters of 1996 and 1995, respectively. Average loans and leases
increased to $3.0 billion during the 1996 second quarter from $2.7 billion
during the second quarter of 1995, an increase of $309.4 million, or 11 percent.
The increase reflects the $321.8 million growth in the average residential
mortgage portfolio. Average investment securities and other interest-earning
assets increased $59.2 million, or 11 percent, to $581.6 million during the
second quarter of 1996 from $522.4 million for the comparable 1995 period.
Average interest-bearing liabilities were $3.4 billion for the three months
ended June 30, 1996, compared with $3.0 billion during the comparable 1995
period, an increase of $345.7 million, or 11 percent.
5
The Corporation's mortgage-banking operations continued to experience
substantial closing volume during the second quarter of 1996, reflecting reduced
mortgage interest rates following the lowering of the prime interest rate at the
end of 1995. Its national scope provides the opportunity to originate mortgage
loans outside the Northeast, where competition is fierce and margins are thin,
in other more profitable markets. Loan applications closed were almost triple
the volume of one year ago ($904.3 million during the 1996 quarter, compared
with $334.2 million during the second quarter of 1995). Of the loans closed, the
Corporation retained the adjustable rate residential mortgage loans, while
selling the fixed rate residential mortgage loans.
The increase in the average residential mortgage portfolio contributed
approximately $6.0 million of additional interest income during the second
quarter of 1996 compared with the same period a year ago. However, the weighted
average yield on residential mortgages decreased from 7.41 percent during the
second quarter of 1995 to 7.30 percent during the 1996 period. The decrease in
yield resulted in the loss of approximately $0.5 million in interest income
during the 1996 second quarter, compared with the second quarter of 1995.
The Corporation also experienced increases in its cost of funds. The growth in
average interest-earning assets has been funded primarily through increased
utilization of borrowings. Interest on borrowings increased approximately $2.6
million in the second quarter of 1996 to $14.3 million from $11.7 million during
the comparable 1995 period.
The Corporation's deposit base increased $158.9 million in average balances
during the second quarter of 1996 from the second quarter of 1995. The
Corporation began increasing the rates paid on its time deposits during the
third quarter of 1995 in an effort to reduce or reverse the flow of deposits out
of the bank. The rates stabilized during the first quarter of 1996 after
deposits began to increase. The weighted average rate paid on interest-bearing
deposits increased 18 basis points during the second quarter of 1996 to 4.16
percent from 3.98 percent during the comparable 1995 period. As a result of this
initiative, interest expense on deposits increased approximately $2.3 million
from $22.5 million during the 1995 second quarter to $24.8 million in the
comparable 1996 period, with volume contributing approximately $1.2 million and
rate contributing approximately $1.0 million to the increase.
An analysis of net interest income is presented in Table 2 below.
TABLE 2 - ANALYSIS OF NET INTEREST INCOME
Three months ended Six months ended
------------------------------- -------------------------------
June 30, June 30,
------------------------------- -------------------------------
(in thousands) 1996 1995 1996 1995
--------------- --------------- --------------- ---------------
Interest and Dividend Income
Residential first mortgage loans $ 36,458 $ 31,018 $ 73,371 $ 59,984
Other loans and leases 22,247 24,367 44,790 47,509
Mortgage-backed securities 7,661 7,250 13,704 15,413
Other earning assets 1,448 837 2,362 1,512
------------- ------------- ------------- -------------
Total interest and dividend income 67,814 63,472 134,227 124,418
------------- ------------- ------------- -------------
Interest Expense
Deposits 24,785 22,539 49,557 42,819
Borrowings 14,342 11,719 27,116 23,061
Mortgage escrow deposits 297 253 486 433
------------- ------------- ------------- -------------
Total interest expense 39,424 34,511 77,159 66,313
------------- ------------- ------------- -------------
Net Interest Income $ 28,390 $ 28,961 $ 57,068 $ 58,105
============= ============= ============= =============
Net Interest Spread 2.86 % 3.41 % 2.94 % 3.47 %
Net Interest Margin 3.14 % 3.62 % 3.24 % 3.66 %
6
Net Interest Margin
The net interest margin for the June 30, 1996 quarter was 3.14 percent, a
decline of 48 basis points, compared with 3.62 percent for the comparable prior
year quarter. Net interest margin for the fourth quarter of 1995 was 3.24
percent. The decline in net interest margin from the second quarter of 1996
reflects the liability sensitive nature of the Corporation's balance sheet.
Interest-bearing liabilities are repricing faster than interest-earning assets.
The Corporation utilizes borrowings, including advances from the Federal Home
Loan Bank and securities sold under agreements to repurchase, as a source of
funding a portion of its interest-earning assets. The average interest rate paid
on total borrowings decreased from 6.20 percent for the second quarter of 1995
to 5.85 percent for the same quarter of 1996. The Corporation took advantage of
the reduction in the Federal Funds rate initiated by the Federal Reserve Board
early in 1996 to restructure borrowings maturing during 1996. This initiative
enabled the Corporation to reduce its borrowing costs. The Corporation had
$538.7 million of FHLB fixed rate term borrowings outstanding at December 31,
1995 with a weighted average rate of interest of 6.28 percent, compared with
$858.1 million at June 30, 1996 with a weighted average rate of interest of 5.70
percent.
As previously stated, the Corporation embarked on a program to increase the
rates paid on certain time deposits in an effort to retain and attract new
deposits into the bank. Average deposits increased during the second quarter of
1996, compared with the second and fourth quarters of 1995. The weighted average
rate paid on deposits increased 18 basis points from 3.98 percent during the
second quarter of 1995 to 4.16 percent for the comparable 1996 period. If
interest rates continue to increase, the resultant contraction of the spread
between the Corporation's interest-earning assets and interest-bearing
liabilities would continue to reduce net interest margin.
The Corporation also increased its utilization of noninterest-bearing sources of
funds from $151.3 million to $176.1 million during the second quarters of 1995
and 1996, respectively. Noninterest-bearing sources of funds include demand
deposits and shareholders' equity.
A discussion of interest rate risk appears on page 10. An analysis of net
interest margin is presented in Table 3 below.
TABLE 3 - ANALYSIS OF NET INTEREST MARGIN
Three months ended Six months ended
------------------------------- -------------------------------
June 30, June 30,
------------------------------- -------------------------------
(in thousands) 1996 1995 1996 1995
--------------- --------------- --------------- ---------------
Net Interest Income $ 28.4 $ 29.0 $ 57.1 $ 58.1
============= ============= ============= =============
Average interest-earning assets supported by:
Interest-bearing liabilities $ 3,392.5 $ 3,046.9 $ 3,300.3 $ 3,029.2
Noninterest-bearing liabilities 176.1 151.3 176.9 142.6
------------- ------------- ------------- -------------
Total average interest-earning assets $ 3,568.6 $ 3,198.2 $ 3,477.2 $ 3,171.8
============= ============= ============= =============
Average yields and average rates:
Yield on interest-earning assets 7.51 % 7.94 % 7.62 % 7.85 %
Rate paid on interest-bearing liabilities 4.65 4.53 4.68 4.38
------------- ------------- ------------- -------------
Net Interest Spread 2.86 % 3.41 % 2.94 % 3.47 %
============= ============= ============= =============
Net Interest Margin 3.14 % 3.62 % 3.24 % 3.66 %
7
Provision for Loan and Lease Losses
The provision for loan and lease losses was $2.1 million for the second quarter
of 1996, up $0.8 million, or 67 percent, from $1.3 million for the second
quarter of 1995. The increase in the provision for loan and lease losses
reflects the integration of the loans acquired in the Heritage Bank merger and
refining the classification of the loans acquired in the Great Country Bank
merger into the Corporation's existing methodologies, policies and procedures.
Management believes the provision for loan and lease losses is adequate to
maintain the allowance for loan and lease losses at a level sufficient to absorb
credit losses inherent in the loan and lease portfolio. Future levels of the
allowance and provisions for loan and lease losses may be affected by changes in
economic conditions, loan quality and the regulatory environment.
Noninterest Income
Noninterest income, excluding gains on sales of securities and on the sale of
branches, was $11.4 million for the three-month period ended June 30, 1996, up
$3.7 million, or 48 percent, from $7.7 million for the comparable 1995 period.
Gains on sales of loans and servicing rights increased $2.3 million to $5.1
million during the 1996 second quarter from $2.8 million for the second quarter
of 1995. Mortgage servicing income increased to $3.2 million during the second
quarter of 1996, an increase of $0.6 million, or 23 percent, from $2.6 million
for the same period of 1995 and loan fees increased $0.5 million, or 126
percent, to $0.9 million from $0.4 million for the second quarters of 1996 and
1995, respectively. All of these increases reflect the significant
mortgage-banking activity which the Corporation has experienced during 1996.
An analysis of noninterest income is presented in Table 4 below.
TABLE 4 - NONINTEREST INCOME
Three months ended Six months ended
------------------------------- -------------------------------
June 30, June 30,
------------------------------- -------------------------------
(in thousands) 1996 1995 1996 1995
--------------- --------------- --------------- ---------------
Customer service fees $ 1,706 $ 1,594 $ 3,396 $ 3,168
Mortgage servicing income, net 3,181 2,579 5,460 5,569
Gain on sale of loans and servicing rights, net 5,056 2,787 7,643 4,009
Gain on sale of securities, net 1,259 905 3,156 1,346
Gain on sale of branches - 4,889 - 4,889
Other income:
Loan and lease fees 934 414 1,633 859
Miscellaneous 523 320 931 354
------------- ------------- ------------- -------------
Total Noninterest Income $ 12,659 $ 13,488 $ 22,219 $ 20,194
============= ============= ============= =============
Noninterest Expenses
Noninterest expenses, excluding the restructuring charge, were $27.0 million and
$27.2 million for the second quarters of 1996 and 1995, respectively. Salaries
and employee benefits increased $0.7 million, or 5 percent, during the second
quarter of 1996, compared with the same period of 1995. The increase reflects
higher incentive and employee stock compensation costs. The FDIC and state
assessment expense declined $1.9 million during the second quarter of 1996,
compared with the quarter ended June 30, 1995. The decrease reflects
Centerbank's achievement of regulatory capital ratios in excess of ratios
required to be classified as a "well capitalized" financial institution.
Institutions which have achieved such capital strength are afforded reduced FDIC
insurance premium rates.
8
The credit balance for the second quarter of 1996 is due to interest received
from the FDIC on an assessment attributable to deposit balances of Great
Country, which the Corporation acquired during December 1995. The FDIC
determined the assessment was incorrectly made and returned the entire
assessment, plus interest.
Advertising and public relations expense was $1.0 million for the quarter ended
June 30, 1996, compared with $0.9 million for the second quarter of 1995.
Stationery, supplies and printing; postage, express and freight and telephone
expenses were $0.3 million, $0.4 million and $0.3 million for the quarter ended
June 30, 1996, respectively, up 82 percent, 87 percent and 42 percent,
respectively, from the comparable 1995 period. These increases are attributable
to integrating the branches acquired in the Great Country Bank and the Heritage
Bank mergers into the Corporation's branch system.
An analysis of noninterest expenses is presented in Table 5 below.
TABLE 5 - NONINTEREST EXPENSES
Three months ended Six months ended
------------------------------- -------------------------------
June 30, June 30,
------------------------------- -------------------------------
(in thousands) 1996 1995 1996 1995
--------------- --------------- --------------- ---------------
Salaries and employee benefits $ 13,554 $ 12,893 $ 26,883 $ 26,093
Occupancy and equipment 3,986 4,276 8,442 8,876
Professional and other services 3,410 3,243 7,068 6,748
Net cost of real estate owned 1,332 1,488 2,844 2,940
FDIC and state assessment (155) 1,772 14 3,545
Advertising and public relations 1,003 926 2,217 1,906
Restructuring charge - 5,689 - 5,689
Other expenses:
Stationery, supplies and printing 757 416 1,612 759
Postage, express and freight 761 406 1,357 904
Telephone 995 703 1,918 1,384
Miscellaneous 1,403 1,045 3,173 2,143
------------- ------------- ------------- -------------
Total Noninterest Expenses $ 27,046 $ 32,857 $ 55,528 $ 60,987
============= ============= ============= =============
The table below provides an analysis of the Corporation's restructuring reserve
established during the second quarter of 1995 related to its High Performance
'97 initiative to streamline operations and reduce operating expenses.
TABLE 6 - ANALYSIS OF RESTRUCTURING RESERVE
Quarter ended
June 30,
(in thousands) 1996
-----------------
Beginning balance $ 256
Expenses charged to the reserve ( 256)
-----------------
Ending balance $ 0
=================
9
CONSOLIDATED BALANCE SHEET ANALYSIS
Total assets were $4.0 billion at June 30, 1996 and $3.6 billion at December 31,
1995. Total loans were $3.1 billion at June 30, 1996 and $2.9 billion at
December 31, 1995. The Corporation's loan to deposit ratio as of June 30, 1996
was 121 percent, compared with 116 percent at December 31, 1995.
Total securities increased $218.0 million, or 53 percent, from $408.9 million at
December 31, 1995 to $626.9 million at June 30, 1996. Securities classified as
held to maturity and reported at amortized cost increased $8.0 million to $170.0
million at June 30, 1996 from $162.0 million at December 31, 1995. Securities
classified as available for sale and reported at fair value totaled $414.0
million at June 30, 1996, compared with $214.6 million at December 31, 1995.
Total deposits at June 30, 1996 were $2.6 billion, up from $2.4 billion at
year-end 1995. Savings, demand and money market deposits totaled $1.1 billion at
June 30, 1996 and December 31, 1995. Time deposits increased $72.2 million, or 5
percent, reflecting the shift of balances from savings into higher yielding,
longer-term deposits. Time deposits totaled $1.4 billion at June 30, 1996 and
$1.3 billion at December 31, 1995.
Total borrowings, primarily securities sold under agreements to repurchase and
advances from the Federal Home Loan Bank, increased $329.1 million, or 42
percent, to $1.1 billion at June 30, 1996 from $787.4 million at year-end 1995.
The increase in borrowings was primarily due to funding the growth in
interest-earning assets.
Interest Rate Risk
As indicated in the interest rate sensitivity table on page 12, the twelve-month
cumulative gap, representing the total net assets and liabilities that are
projected to reprice over the next twelve months, was liability sensitive in the
amount of $712.2 million at June 30, 1996.
A liability sensitive interest rate gap would tend to reduce earnings over a
period of rising interest rates, while declining rates would tend to enhance
earnings. The Corporation utilizes modeling and other analytical techniques to
measure the effect on net interest income under different interest rate
scenarios. Given an immediate and sustained 100 basis point increase in interest
rates, the effect on net interest income would be a reduction of approximately
$5.6 million when compared with the amount of net interest income assumed to be
earned absent an interest rate increase for the twelve-month period following
June 30, 1996.
The Corporation manages the net interest rate sensitivity position, expressed as
a percentage of total assets to total liabilities repricing over a one year
period, between plus or minus 25 percent based on management's assessment of the
balance sheet composition and macroeconomic conditions. The ratio of total
assets to total liabilities repricing within one year was 75.60 percent at June
30, 1996, compared with 77.16 percent at December 31, 1995. The decrease in the
ratio reflects the Corporation's increased reliance on short-term borrowings to
fund longer term assets.
As a financial intermediary, the Corporation is subject to the term and pricing
preferences of its customers, which may result in an interest rate sensitivity
position that does not meet corporate policy or is otherwise undesirable. In
this case, the Corporation may choose to utilize off-balance sheet financial
instruments to manage the interest rate risk associated with the mismatched
position. There were no such financial instruments outstanding at June 30, 1996.
LIQUIDITY
Liquidity is the ability to meet cash needs arising from fluctuations in loans,
securities, deposits and other borrowings. Management routinely monitors
liquidity. The primary sources of funds include deposits, cash flows from
operations and cash flows from principal prepayments and repayments of loans and
securities.
10
The Corporation also has additional sources of liquidity in the form of a credit
facility with the Federal Home Loan Bank of Boston. The Corporation had
borrowings of $858.1 million at June 30, 1996 from the Federal Home Loan Bank of
Boston and additional borrowing capacity of $695.2 million, consisting of $54.6
million through the Ideal Way Program and $640.6 million through advances. The
Corporation also has a $25.0 million unused facility for the purchase of federal
funds from a commercial bank.
Centerbank is required to monitor its liquidity level utilizing criteria
established by the FDIC. The liquidity ratio is defined as the total of net
cash, short-term investments and other marketable assets divided by total net
deposits and short-term liabilities. Management has established a policy
requiring a liquidity ratio of 10.00 percent or greater at each quarter end. The
liquidity ratio was 14.99 percent at June 30, 1996, compared with 14.93 percent
at December 31, 1995.
CAPITAL
The Corporation's total shareholders' equity at June 30, 1996 was $233.9
million, or 5.82 percent of total assets, compared with $221.4 million at
December 31, 1995. Volatility in shareholders' equity may occur in future
periods as the fair value of the available for sale securities portfolio changes
with market conditions.
The Corporation must now file regulatory reports with the Federal Reserve Board
(the "FRB") which are similar in nature to the reports currently filed by
Centerbank with the FDIC. One component of the FRB reports is information
necessary to compute the holding company's risk-based capital ratios. The
Corporation's Tier 1 capital ratio was 8.92 percent, its Total capital ratio was
11.19 percent and its Leverage ratio was 5.71 percent. These ratios are as of
June 30, 1996.
Centerbank must also calculate separate risk-based capital ratios. Centerbank's
Tier 1 and Total capital ratios were 8.87 percent and 11.14 percent,
respectively, at June 30, 1996, compared with 8.82 percent and 11.17 percent,
respectively, at December 31, 1995. Centerbank's Leverage ratio was 5.68 percent
at June 30, 1996 and 5.74 percent at December 31, 1995.
Under Federal banking regulations, an institution is deemed to be
wellcapitalized if it has a Risk-based Tier 1 capital ratio of 6.00 percent or
greater, a Risk-based Total capital ratio of 10.00 percent or greater and a
Leverage ratio of 5.00 percent or greater. The Corporation and Centerbank both
exceeded the requirements for a well-capitalized financial institution at June
30, 1996.
The Corporation's ability to pay dividends is governed by Connecticut banking
law. Accordingly, the Corporation may not declare a dividend unless it has
sufficient net profits from which to do so. The Corporation had sufficient net
profits to declare a cash dividend of $.07 per common share, payable August 12,
1996, to shareholders of record on August 2, 1996.
TABLE 7 - INTEREST RATE SENSITIVITY GAP ANALYSIS
The table below depicts the Corporation's interest rate sensitivity as of June
30, 1996. Allocations of assets and liabilities, including noninterest-bearing
sources of funds, to specific periods are based upon management's assessment of
contractual or anticipated repricing characteristics and amortization, adjusted
periodically to reflect actual experience. Management considers all demand
deposits to be stable sources of funds and, therefore, includes these deposits
in the over one year category. Prepayment characteristics are spread throughout
the categories below based upon management's expectations of changes in interest
rates as well as industry statistics regarding prepayment rates. Nonaccruing
loans are included in the respective loan categories. Available for sale
securities are included in the 1 to 30 day category as these assets could be
readily converted into cash flows and are so included at market value. Mortgage
servicing rights and other assets are included based upon anticipated cash flows
and scheduled amortization, adjusted for actual and anticipated experience
regarding prepayment and valuation impairment.
11
Period to repricing
1-30 31-90 91-180 181-365 Total Over
(in thousands, except ratios) days days days days one year one year Total
------------ ---------- ---------- ---------- ------------ ------------ ------------
Assets:
Residential first mortgage loans $ 30,637 $ 188,022 $ 183,899 $ 377,398 $ 779,956 $ 1,066,966 $ 1,846,922
Residential first mortgage loans
held for sale 230,462 230,462 8,492 238,954
Other consumer loans 24,628 230,714 13,237 22,940 291,519 97,689 389,208
Commercial first mortgage loans 57,652 17,600 25,477 44,991 145,720 214,900 360,620
Other commercial loans 78,802 6,136 4,572 5,816 95,326 25,351 120,677
Leases 1,556 14,386 21,188 37,132 74,262 97,329 171,591
Mortgage-backed securities and
other investments 463,561 17,478 14,936 49,608 545,583 81,343 626,926
Mortgage servicing rights and
excess servicing fees receivable 1,572 3,134 4,706 9,412 18,824 75,298 94,122
Other assets 511 3,340 5,255 15,395 24,501 144,820 169,321
------------ ---------- ---------- ---------- ------------ ------------ ------------
Total assets $ 889,381 $ 480,810 $ 273,270 $ 562,692 $ 2,206,153 $ 1,812,188 $ 4,018,341
============ ========== ========== ========== ============ ============ ============
Liabilities and shareholders' equity:
Transaction accounts * $ 930,636 $ - $ - $ - $ 930,636 $ 290,131 $ 1,220,767
Time deposits 181,828 232,121 290,420 404,907 1,109,276 308,203 1,417,479
FHLB borrowings 105,774 236,997 113,662 187,300 643,733 212,821 856,554
Other borrowings 135,459 80,713 18,531 29 234,732 25,242 259,974
Other liabilities and]
shareholders' equity - - - - - 263,567 263,567
------------ ---------- ---------- ---------- ------------ ------------ ------------
Total $ 1,353,697 $ 549,831 $ 422,613 $ 592,236 $ 2,918,377 $ 1,099,964 $ 4,018,341
============ ========== ========== ========== ============ ============ ============
Asset (liability) sensitivity:
For the period $ (464,316)$ (69,021)$ (149,343)$ (29,544)$ (712,224)$ 712,224 -
On a cumulative basis (464,316) (533,337) (682,680) (712,224) (712,224) - -
============ ========== ========== ========== ============ ============ ============
Ratio of assets to liabilities
available for repricing-
on a cumulative basis 65.70 % 71.98 % 70.65 % 75.60 % 75.60 % 100.00 % -
============ ========== ========== ========== ============ ============ ============
Net liability sensitivity as
a percentage of interest-earning
assets - on a cumulative basis (11.55)% (13.27)% (16.99)% (17.72)% (17.72)% - -
============ ========== ========== ========== ============ ============ ============
<FN>
* Transaction accounts include savings, NOW, MMG, escrow and demand deposits.
</FN>
12
CREDIT QUALITY
TABLE 8 - ALLOWANCE FOR LOAN AND LEASE LOSSES
June 30,
---------------------------------------
(in thousands) 1996 1995
----------------- -----------------
Allowance for loan and lease losses
at beginning of period $ 43,583 $ 46,434
Provision charged to operations 2,085 1,248
Loans charged off
Gross ( 3,428 ) ( 2,670 )
Recoveries 2,157 1,305
----------------- -----------------
Net ( 1,271 ) ( 1,365 )
----------------- -----------------
Allowance for loan and lease losses
at end of period $ 44,397 $ 46,317
================= =================
Net loan and lease charge-offs
to average loans and leases 0.04 % 0.05 %
Allowance for loan and lease losses
to average loans and leases 1.49 1.73
The allowance for loan and lease losses was $44.4 million at June 30, 1996,
compared with $43.0 million at December 31, 1995. The ratio of the allowance for
loan and lease losses to average loans and leases was 1.49 percent at June 30,
1996, compared with 1.53 percent at December 31, 1995. Net charge-offs were $1.3
million for the second quarter of 1996, compared with $1.4 million for the same
period a year ago.
The Corporation had $40.8 million of impaired loans at June 30, 1996, consisting
of $28.2 million of commercial mortgage loans and $12.6 million of other
commercial loans. Impairment reserves at June 30, 1996, determined in accordance
with SFAS 114, were approximately $1.5 million. However, based upon the
Corporation's general reserving methodology, the portion of the allowance for
loan and lease losses associated with impaired loans totaled approximately $10.9
million at June 30, 1996. Approximately $19.4 million of impaired loans, which
had been subjected to a specific review, did not require an impairment reserve
due primarily to charge-offs. The Corporation's impaired loans averaged $34.4
million during the quarter ended June 30, 1996, compared with $27.7 million for
the quarter ended December 31, 1995. The amount of interest income recognized on
impaired loans was immaterial for the quarter ended June 30, 1996.
13
TABLE 9 - NONACCRUING LOANS AND LEASES AND REAL ESTATE OWNED
June 30,
---------------------------------------
(in thousands) 1996 1995
----------------- -----------------
Nonaccruing loans and leases:
Residential first mortgage loans:
1 to 4 family $ 27,657 $ 23,275
Other 3,860 2,422
Home equity and other consumer loans 4,203 3,193
Commercial first mortgage loans 28,239 24,166
Other commercial loans 12,441 8,644
Leases 2,295 2,619
----------------- -----------------
Total nonaccruing loans and leases 78,695 64,319
----------------- -----------------
Real estate owned:
Commercial 24,204 29,449
Residential 5,049 5,320
----------------- -----------------
Total real estate owned 29,253 34,769
----------------- -----------------
Total nonperforming assets $ 107,948 $ 99,088
================= =================
Nonaccruing loans and leases
to total loans and leases 2.52 % 2.37 %
Allowance for loan and lease losses
to nonaccruing loans and leases 56.42 72.01
Quarter ended
June 30,
---------------------------------------
(in thousands) 1996 1995
----------------- -----------------
Allowance for real estate owned losses:
Balance at beginning of period $ 4,246 $ 6,738
Provision for losses on real estate owned 835 759
(Charge-offs) recoveries ( 867 ) ( 274)
(Loss) gain on sales and other ( 119 ) ( 260)
----------------- -----------------
Balance at end of period $ 4,095 $ 6,830
================= =================
Allowances for loan, lease and
real estate owned losses to
nonperforming assets 44.92 % 53.64 %
Nonperforming assets to total loans
and leases plus real estate owned 3.42 3.61
Nonperforming assets to total assets 2.69 2.87
Nonaccruing loans and leases were $78.7 million at June 30, 1996, compared with
$64.0 million at December 31, 1995. Nonaccruing loans and leases increased by
$14.7 million since year-end 1995. The increase reflects the integration of the
loans acquired in the Heritage Bank merger and refining the classification of
the loans acquired in the Great Country Bank merger into the Corporation's
existing methodologies, policies and procedures. The ratio of nonaccruing loans
and leases to total loans and leases was 2.52 percent and 2.20 percent at June
30, 1996 and December 31, 1995, respectively. The allowance for loan and lease
losses to nonaccruing loans and leases decreased to 56.42 percent at June 30,
1996, from 67.23 percent at December 31, 1995.
14
Management believes the allowance for loan and lease losses is adequate to
absorb losses inherent within the loan and lease portfolio at June 30, 1996,
even though nonaccruing loans have increased and the coverage ratios have
declined.
Real estate owned decreased from $30.2 million at December 31, 1995, to $29.3
million at June 30, 1996, a decrease of $0.9 million, or 3 percent. The
reduction in real estate owned reflects the Corporation's aggressive sales
efforts to reduce its real estate owned portfolio, thereby reducing the earnings
drain. Real estate owned was also reduced due to writedowns based on recent
appraised values.
Nonperforming assets totaled $107.9 million at June 30, 1996, an increase of
$13.8 million, or 15 percent, from $94.1 million at December 31, 1995. The ratio
of nonperforming assets to total loans and leases plus real estate owned
increased 22 basis points from 3.20 percent at December 31, 1995, to 3.42
percent at June 30, 1996
Restructured loans, which are loans with original terms that have been modified
as a result of a change in the borrower's financial condition, totaled $1.5
million at June 30, 1996 and $1.0 million at December 31, 1995. Restructured
loans are included in Table 9 in nonaccruing loans and leases.
15
CENTER FINANCIAL CORPORATION
CONSOLIDATED BALANCE SHEET
(Unaudited)
(In thousands, except share amounts) June 30, December 31, June 30,
1996 1995 1995
------------ ------------ ------------
Assets
Cash and due from banks $ 67,920 $ 77,069 $ 87,529
Federal funds sold - - 5,400
Securities:
Federal Home Loan Bank stock, at cost 42,905 32,321 28,850
Available for sale (amortized cost: $414,246,
$208,823 and $39,132) 413,984 214,625 41,366
Held to maturity (fair value: $167,487, $160,437 and $404,994) 170,037 161,988 407,375
------------ ------------ ------------
Total securities 626,926 408,934 477,591
------------ ------------ ------------
Loans and leases:
Residential first mortgage loans available for sale 238,954 153,173 138,410
Residential first mortgage loans held for investment 1,846,922 1,732,253 1,575,443
Consumer home equity loans 230,400 247,127 261,971
Other consumer loans 158,808 131,293 101,869
Commercial first mortgage loans:
Permanent 333,335 295,202 299,111
Construction 27,285 33,896 14,041
Other commercial loans 120,677 123,026 118,189
Leases 171,591 193,762 204,754
Allowance for loan and lease losses (44,397) (43,025) (46,317)
------------ ------------ ------------
Total loans and leases, net 3,083,575 2,866,707 2,667,471
------------ ------------ ------------
Real estate owned, net 25,158 25,659 27,939
Premises and equipment, net 48,949 46,617 47,478
Accrued interest receivable 22,086 21,816 18,938
Mortgage servicing rights 78,100 65,461 56,868
Excess servicing fees receivable 16,022 15,264 12,248
Deferred tax assets, net 14,575 15,399 15,455
Acquisition related intangibles 14,356 15,277 12,069
Other assets 20,674 22,216 21,470
------------ ------------ ------------
$ 4,018,341 $ 3,580,419 $ 3,450,456
============ ============ ============
Liabilities and Shareholders' Equity
Liabilities:
Deposits:
Demand $ 210,568 $ 216,163 207,147
Savings 649,160 777,829 784,780
Money market 281,477 137,334 142,962
Time 1,417,479 1,345,298 1,254,475
------------ ------------ ------------
Total deposits 2,558,684 2,476,624 2,389,364
------------ ------------ ------------
Escrow on first mortgage loans 79,562 63,546 71,402
Borrowings 1,116,528 787,385 747,668
Other liabilities 29,631 31,438 35,034
------------ ------------ ------------
3,784,405 3,358,993 3,243,468
------------ ------------ ------------
Shareholders' equity:
Preferred stock - voting; no par value; 1,000,000 authorized - - -
shares; issued and outstanding - none
Preferred stock - nonvoting; no par value; 10,000,000 - - -
authorized shares; issued and outstanding - none
Common stock; par value $1; 75,000,000 authorized shares; 15,013,864, 14,445,649
and 14,293,690 shares issued and outstanding at June 30,1996, December 31,
1995 and June 30, 1995, respectively 15,014 14,446 14,294
Paid-in capital 183,453 176,048 175,130
Retained earnings 35,623 27,594 16,426
Net unrealized gain (loss) on securities available for sale,
net of tax effect (154) 3,338 1,138
------------ ------------ ------------
233,936 221,426 206,988
------------ ------------ ------------
$ 4,018,341 $ 3,580,419 $ 3,450,456
============ ============ ============
<FN>
The accompanying notes are an integral part of this consolidated financial statement.
</FN>
16
CENTER FINANCIAL CORPORATION
CONSOLIDATED STATEMENT of OPERATIONS
(Unaudited)
(In thousands, except per share amounts)
Three months ended Six months ended
June 30, June 30,
------------------------ -------------------------
1996 1995 1996 1995
------------ ----------- ------------ ------------
Interest and Dividend Income
Residential first mortgage loans $ 36,458 $ 31,018 $ 73,371 $ 59,984
Other loans 18,603 20,080 37,286 38,878
Leases 3,644 4,287 7,504 8,631
------------ ----------- ------------ ------------
Total interest and fees on loans and leases 58,705 55,385 118,161 107,493
------------ ----------- ------------ ------------
Interest on mortgage-backed securities 7,661 7,250 13,704 15,413
Interest and dividends on other earning assets 1,448 837 2,362 1,512
------------ ----------- ------------ ------------
Total interest income 67,814 63,472 134,227 124,418
------------ ----------- ------------ ------------
Interest Expense
Interest on deposits 24,785 22,539 49,557 42,819
Escrow on first mortgage loans 297 253 486 433
Interest on borrowings 14,342 11,719 27,116 23,061
------------ ----------- ------------ ------------
Total interest expense 39,424 34,511 77,159 66,313
------------ ----------- ------------ ------------
Net interest income 28,390 28,961 57,068 58,105
Provision for loan and lease losses 2,085 1,248 3,737 2,496
------------ ----------- ------------ ------------
Net interest income after provision for loan and lease losses 26,305 27,713 53,331 55,609
------------ ----------- ------------ ------------
Noninterest Income
Customer service fees 1,706 1,594 3,396 3,168
Mortgage servicing income, net 3,181 2,579 5,460 5,569
Gain on sale of loans and servicing rights, net 5,056 2,787 7,643 4,009
Gain on sale of securities, net 1,259 905 3,156 1,346
Gain on sale of branches 4,889 4,889
Other income 1,457 734 2,564 1,213
------------ ----------- ------------ ------------
Total noninterest income 12,659 13,488 22,219 20,194
------------ ----------- ------------ ------------
Noninterest Expenses
Salaries and employee benefits 13,554 12,893 26,883 26,093
Occupancy and equipment 3,986 4,276 8,442 8,876
Professional and other services 3,410 3,243 7,068 6,748
Net cost of real estate owned 1,332 1,488 2,844 2,940
FDIC and state assessment (155) 1,772 14 3,545
Advertising and public relations 1,003 926 2,217 1,906
Restructuring charge 5,689 5,689
Other expenses 3,916 2,570 8,060 5,190
------------ ----------- ------------ ------------
Total noninterest expenses 27,046 32,857 55,528 60,987
------------ ----------- ------------ ------------
Income before income taxes 11,918 8,344 20,022 14,816
Income tax expense 3,881 2,741 6,593 4,615
------------ ----------- ------------ ------------
Net income $ 8,037 $ 5,603 $ 13,429 $ 10,201
============ =========== ============ ============
Net income per common share $ 0.54 $ 0.39 $ 0.90 $ 0.72
============ =========== ============ ============
Average common shares outstanding 14,957,763 14,275,977 14,928,977 14,263,835
============ =========== ============ ============
<FN>
The accompanying notes are an integral part of this consolidated financial statement.
</FN>
17
CENTER FINANCIAL CORPORATION
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
(Unaudited)
(In thousand)
Six months ended June 30, 1996
Net
unrealized
Common Paid-in Retained gain on Total
--------- --------- --------- ------------ ---------
Balance at December 31, 1995 $ 14,446 $ 176,048 $ 27,594 $ 3,338 $ 221,426
Heritage Bank balances at
December 31, 1995 438 5,928 ( 3,069) ( 7) 3,290
Net income - - 13,429 - 13,429
Dividends - - ( 2,058) - ( 2,058)
Issuance of common stock 130 1,477 ( 273) - 1,334
Net unrealized gain on securities
available for sale, net of tax
effect - - - ( 3,485) ( 3,485)
--------- --------- --------- ------------- ---------
Balance at June 30, 1996 $ 15,014 $ 183,453 $ 35,623 $( 154) $ 233,936
========= ========= ========= ============= =========
Six months ended June 30, 1995
Net
unrealized
Common Paid-in Retained gain on
stock capital earnings securities Total
--------- --------- --------- ------------ ---------
Balance at December 31, 1994 $ 14,229 $ 174,893 $ 7,493 $( 669) $ 195,946
Net income - - 10,201 - 10,201
Dividends - - ( 1,268) - ( 1,268)
Issuance of common stock 65 237 - - 302
Net unrealized gain on securities
available for sale, net of tax
effect - - - 1,807 1,807
--------- --------- --------- ------------- ---------
Balance at June 30, 1995 $ 14,294 $ 175,130 $ 16,426 $ 1,138 $ 206,988
========= ========= ========= ============= =========
<FN>
The accompanying notes are an integral part of this consolidated financial statement.
</FN>
18
CENTER FINANCIAL CORPORATION
CONSOLIDATED STATEMENT of CASH FLOWS
(Unaudited)
(In thousand)
Six months ended
June 30,
1996 1995
--------- ---------
Cash flows from operating activities:
Net income (loss) $ 10,086 $ 10,201
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Provision for loan and lease losses 3,737 2,496
Provision for losses on real estate owned 1,619 1,599
Amortization of mortgage and excess servicing rights 6,086 4,841
Depreciation 2,997 2,873
Gain on sale of loans, servicing rights, securities and other assets ( 10,799) ( 5,274)
Gain on sale of premises and equipment ( 42) ( 4,970)
Deferred income tax expense (benefit) 3,395 2,515
(Increase) decrease in first mortgage loans available for sale ( 86,045) ( 22,880)
(Increase) decrease in other assets 7,397 3,787
Increase (decrease) in other liabilities ( 1,807) 5,201
Other adjustments, net 2,026 103
--------- ---------
Net cash provided by operating activities ( 61,350) 492
--------- ---------
Cash flows from investing activities:
Purchases of securities available for sale (372,704) (31,554)
Purchases of securities held to maturity (61,704) (5,306)
Proceeds from sales of securities available for sale 137,218 59,874
Principal payments and maturities of securities available for sale 22,669 3,540
Principal payments and maturities of securities held to maturity 53,122 70,030
Proceeds from bulk sales of loans and real estate owned - 5,523
Originations and principal payments on loan and lease portfolio, net (142,240) (109,731)
Proceeds from other sales of real estate owned 5,314 10,231
Additions to mortgage servicing rights (28,509) (5,796)
Other, net 5,901 2,933
--------- ---------
Net cash used by investing activities (380,933) (256)
--------- ---------
Cash flows from financing activities:
Increase (decrease) in deposits 82,060 (37,387)
Increase (decrease) in escrow on first mortgage loans 16,016 11,403
Increase (decrease) in borrowings, net 329,143 55,750
Issuance of common stock 7,973 302
Cash dividends (2,058) (1,268)
--------- ---------
Net cash provided (used) by financing activities 433,134 28,800
--------- ---------
Increase (decrease) in cash and cash equivalents (9,149) 29,036
Cash and cash equivalents at beginning of period 77,069 63,893
--------- ---------
Cash and cash equivalents at end of period $ 67,920 $ 92,929
========= =========
Supplemental information:
Interest paid on deposits and borrowings 77,073 60,971
Income taxes paid (refunded), net 227 2,430
Loans transferred to real estate owned 6,990 5,727
Loans made to facilitate the sale of real estate owned - 75
Securitization of mortgage loans 89,594 -
<FN>
The accompanying notes are an integral part of this consolidated financial statement.
</FN>
19
CENTER FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - BASIS OF PRESENTATION
The accompanying consolidated financial statements include the accounts of
Center Financial Corporation and its subsidiary (the "Corporation" or "Center
Financial"). These financial statements reflect, in management's opinion, all
adjustments (consisting of normal recurring adjustments) necessary for a fair
presentation of the Corporation's financial position, results of operations and
cash flows for the periods presented. Certain amounts for prior periods have
been reclassified to conform to current period presentation. These financial
statements should be read in conjunction with the financial statements and notes
thereto included in the Corporation's 1995 Annual Report.
The accompanying consolidated financial statements have been retroactively
restated to reflect the combination of the Corporation with Great Country Bank,
which was acquired on December 15, 1995, as if the acquisition had occurred at
the beginning of the earliest period presented. The Corporation completed its
merger with Heritage Bank on April 12, 1996. The transaction was accounted for
as a pooling of interests, but due to the relative size of the Heritage Bank
acquisition compared with Center Financial, the 1995 financial statements have
not been restated. The 1996 consolidated financial statements reflect the
Corporation's financial position and results of operations on a combined basis
with Heritage Bank. The Corporation issued 15,048 shares of common stock to
certain founding directors of Heritage Bank in conjunction with the acquisition.
The fair value of the shares at the date of issue was approximately $273,000.
Since the shares were issued at no cost to the directors, the issuance was
treated as if it was a stock dividend.
Earnings per share is computed based on weighted average shares outstanding.
Stock options outstanding did not materially dilute earnings per share and, as
such were not included in the earnings per share computations. Weighted average
shares outstanding for the three-month periods ended June 30, 1996 and 1995 were
14,957,763 and 14,275,977, respectively. Weighted average shares outstanding for
the six-month periods ended June 30, 1996 and 1995 were 14,928,977 and
14,263,835, respectively.
NOTE 2 - MERGERS AND ACQUISITIONS
Center Financial and First Union Corporation ("First Union") of Charlotte, North
Carolina, announced on June 17, 1996, that a definitive agreement had been
signed whereby First Union would acquire the Corporation for approximately $379
million. The transaction is to be accounted for as a purchase and is expected to
be completed during the fourth quarter of 1996. Under the terms of the
agreement, First Union will exchange shares of its common stock for each share
of the Corporation's common stock at a value equal to $25.44 per Center
Financial share. The merger is subject to the approval of Federal and
Connecticut banking regulators, the Corporation's shareholders and other
conditions of closing.
First Union reported total assets of $139.9 billion, net loans of $91.3 billion,
deposits of $91.5 billion and shareholders' equity of $9.3 billion at June 30,
1996. First Union also reported earnings of $435.7 million, or $1.55 per common
share, and $674.6 million, or $2.40 per common share, for the three and six
months ended June 30, 1996.
20
CONSOLIDATED AVERAGE BALANCE SHEET, NET INTEREST INCOME AND INTEREST RATES
The following are the Corporation's average balance sheet, net interest income
and interest rates:
Three months ended
June 30, 1996
---------------------------------------------------------
Average Average
(in thousands) Balance Interest Rate
--------------- ----------------- -------
ASSETS
Interest-earning assets:
Residential first
mortgage loans $ 1,998,369 $ 36,458 7.30 %
Other loans and leases 1,033,612 22,247 8.61
--------------- -----------------
Total loans and leases 3,031,981 58,705 7.74
--------------- -----------------
Mortgage-backed securities 485,528 7,661 6.31
Other interest-earning assets 96,098 1,448 6.03
--------------- -----------------
Total securities and other
interest-earning assets 581,626 9,109 6.26
--------------- -----------------
Total interest-earning assets 3,613,607 67,814 7.51
-----------------
Noninterest-earning assets:
Cash and due from banks 65,862
Premises and equipment 48,974
Other 135,482
---------------
Total assets $ 3,863,925
===============
LIABILITIES AND
SHAREHOLDERS' EQUITY:
Interest-bearing liabilities:
Savings, NOW and money
market deposits $ 926,161 $ 5,611 2.42 %
Time deposits 1,095,676 14,591 5.33
Other 389,359 4,880 5.01
--------------- -----------------
Total interest-
bearing deposits 2,411,196 25,082 4.16
--------------- -----------------
Short-term borrowings 567,614 7,857 5.54
Long-term borrowings 413,712 6,486 6.27
--------------- -----------------
Total borrowings 981,325 14,342 5.85
--------------- -----------------
Total interest-
bearings liabilities 3,392,522 39,424 4.65
--------------- -----------------
Noninterest-bearing liabilities:
Demand deposits 218,725
Other liabilities 24,716
Shareholders' equity 227,961
---------------
Total liabilities and
shareholders' equity $ 3,863,925
===============
Net interest income $ 28,390
=================
Net interest spread 2.86
Net interest margin 3.14
21
CONSOLIDATED AVERAGE BALANCE SHEET, NET INTEREST INCOME AND INTEREST RATES
(continued)
Three months ended
June 30, 1996
---------------------------------------------------------
Average Average
(in thousands) Balance Interest Rate
--------------- ----------------- -------
ASSETS
Interest-earning assets:
Residential first
mortgage loans $ 1,676,520 $ 31,018 7.41 %
Other loans and leases 1,049,016 24,367 9.29
--------------- -----------------
Total loans and leases 2,722,536 55,385 8.14
--------------- -----------------
Mortgage-backed securities 466,777 7,250 6.21
Other interest-earning assets 55,654 837 6.02
--------------- -----------------
Total securities and other
interest-earning assets 522,431 8,087 6.19
Total interest-earning assets 3,244,967 63,472 7.82
--------------- -----------------
Noninterest-earning assets:
Cash and due from banks 56,425
Premises and equipment 47,605
Other 166,673
---------------
Total assets $ 3,463,689
===============
LIABILITIES AND
SHAREHOLDERS' EQUITY:
Interest-bearing liabilities:
Savings, NOW and money
market deposits $ 954,503 $ 5,976 2.50 %
Time deposits 998,049 12,155 4.87
Other 338,523 4,661 5.51
--------------- -----------------
Total interest-
bearing deposits 2,291,075 22,792 3.98
--------------- -----------------
Short-term borrowings 398,827 6,629 6.65
Long-term borrowings 356,949 5,090 5.70
--------------- -----------------
Total borrowings 755,776 11,719 6.20
--------------- -----------------
Total interest-
bearings liabilities 3,046,851 34,511 4.53
--------------- -----------------
Noninterest-bearing liabilities:
Demand deposits 179,939
Other liabilities 32,530
Shareholders' equity 204,369
---------------
Total liabilities and
shareholders' equity $ 3,463,689
===============
Net interest income $ 34,511
=================
Net interest spread 3.29
Net interest margin 3.57
22
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
The Corporation is subject to various pending and threatened lawsuits in which
claims for monetary damages are asserted. Management, after consultation with
legal counsel, does not anticipate that the ultimate liability, if any, arising
out of such other pending and threatened lawsuits will have a material effect on
the Corporation's results of operations or financial position.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits required by Item 601 of Regulation S-K are listed on the
Exhibits Index on page 2 of this report and are filed herewith or are
incorporated herein by reference.
3(I) Certificate of Incorporation of Center Financial
Corporation, incorporated herein by reference to the
Corporation's registration statement of Form 8-A
dated July 6, 1995.
3(ii) By-Laws of Center Financial Corporation,
incorporated herein by reference to the
Corporation's 1995 Annual Report on Form 10-K filed
March 30, 1996.
4(I) 1. Common Stock Rights, incorporated herein by
reference to the Corporation's registration
statement of Form 8-A dated July 6, 1995.
4(ii) 2. Preferred Stock Purchase Rights, incorporat-
ed herein by reference to the Corporation's
registration statement of Form 8-A dated
July 7, 1995.
10(ii)D Lease Agreement dated December 30, 1988 between
Centerbank and Norman S. Drubner, Trustee, as
amended, incorporated herein by reference to the
Corporation's registration statement of Form 8-A
dated July 6, 1995.
10(iii)A The following documents are incorporated herein by
reference to the Corporation's registration
statement of Form 8-A dated July 6, 1995.
1. Executive Stock Incentive Plan, as amended
through Amendment No. 3.
2. 1992 Executive Stock Incentive Plan, as
amended through Amendment No. 1.
3. Directors Deferred Compensation Plan, as
amended.
4. 1991 Directors Stock Option Plan, as amended
through Amendment No. 3.
5. 1993 Directors Stock Option Plan, as amended
through Amendment No. 1.
6. Executive Severance Plan, dated August 27,
1992.
7. Severance Pay Policy for employees other
than executive officers, dated July 13,
1992.
8. Severance Pay Agreement with Joseph M.
Murphy, dated October 26, 1992.
23
9. Severance Pay Agreement with Maureen A.
Frank, dated May 17, 1993.
10. Senior Executive Officer Deferred Compensa-
tion Plan, dated December 20, 1993.
11. Directors Retirement Plan, as amended.
12. Employment Agreement with Robert J. Narkis,
dated September 1, 1994.
13. Employment Agreement with Joseph Carlson II,
dated September 1, 1994.
14. Employment Agreement with William H. Placke,
dated September 1, 1994.
15. Employment Agreement with Thomas C. Brown,
dated September 1, 1994.
The Centerbank 1993 Employee Stock Purchase Plan,
incorporated herein by reference to the
Corporation's registration statement on Form S-8
dated July 28, 1995.
The Centerbank Savings and Investment Plan, as
amended and restated, incorporated herein by
reference to the Corporation's registration
statement on Form S-8 dated July 28, 1995.
11 Computation re: earnings per share
27 Financial Data Schedules
99.1 Press release of the Corporation, dated June 22,
1996, entitled "First Union to acquire $3.7 billion
Center Financial with 46 banking offices in Connect-
icut, 33 in New Haven County."
99.2 Press release of the Corporation, dated July 22,
1996, entitled "Center Financial Corporation announ-
ces 43% increase in e arnings; continues earnings
momentum."
(b) Reports on Form 8-K - The Corporation filed the following reports on
Form 8-K during the quarter ended June 30, 1996.
1. The report dated June 14, 1996 (item 5) reported
that the Corporation entered into an Agreement and
Plan of Merger with its wholly-owned subsidiary,
Centerbank, First Union Corporation, a North
Carolina corporation ("First Union"), and First
Union Bank of Connecticut, a subsidiary of First
Union, whereby the Corporation will merge with and
into First Union and Centerbank will merge with and
into First Union Bank of Connecticut.
2. The report dated June 28, 1996 (item 5) announced
earnings of the Corporation, including the earnings
of the merged operations of Heritage Bank, following
the merger with Heritage Bank on April 12, 1996.
This filing was undertaken in accordance with the
terms of the Agreement and Plan of Merger between
the Corporation and Heritage Bank.
24
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.
CENTER FINANCIAL CORPORATION
(Registrant)
Date: August 14, 1996 By: /s/ Joseph Carlson II
Joseph Carlson II
Chief Financial Officer
Date: August 14, 1996 By: /s/ Edward L. Olcese
Edward L. Olcese
Controller
(Principal Accounting Officer)
25