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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
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FORM 10-Q
(Mark One)
[X] Quarterly report pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the quarterly period ended SEPTEMBER 30, 1997
[ ] Transition report under Section 13 or 15(d)
of the Exchange Act
For the transition period from __________ to __________
Commission file number 0-2456
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CARNEGIE BANCORP
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(Exact name of small business issuer as specified in its charter)
NEW JERSEY 22-3257100
- --------------------------------- -------------------
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
619 ALEXANDER ROAD, PRINCETON, NEW JERSEY 08540
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(Address of principal executive offices)
(609) 520-0601
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(Registrant's telephone number, including area code)
NOT APPLICABLE
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(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 Sections 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
--- ---
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date.
COMMON STOCK, NO PAR -- 2,733,108 SHARES OUTSTANDING
AS OF NOVEMBER 10, 1997
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INDEX
CARNEGIE BANCORP AND SUBSIDIARIES
PAGE NO.
--------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Condensed Balance Sheets at September 30, 1997
(Unaudited) and December 31, 1996 ............................ 3
Consolidated Condensed Statements of Income for the three
months and nine months ended September 30, 1997 and 1996
(Unaudited) .................................................. 4
Consolidated Condensed Statements of Cash Flows for the
nine months ended September 30, 1997 and 1996 (Unaudited) .... 5
Notes to Consolidated Condensed Financial Statements ......... 6 - 11
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations .................................... 12 - 25
PART II. OTHER INFORMATION
Item 1. Legal Proceedings ............................................ 26
Item 2. Changes in Securities ........................................ 26
Item 3. Defaults Upon Senior Securities .............................. 26
Item 4. Submission of Matters to a Vote of Security Holders .......... 26
Item 5. Other Information ............................................ 26
Item 6. Exhibits and Reports on Form 8-K
a. Exhibit 27 -- Financial Data Schedule ................ 26
b. Reports on Form 8-K .................................. 26
SIGNATURES ............................................................ 27
2
CARNEGIE BANCORP AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
September 30,
1997 December 31,
(Unaudited) 1996
------------- ------------
(Dollars in thousands)
ASSETS
Cash and cash equivalents:
Cash and due from banks ............................ $ 12,010 $ 16,745
Federal funds sold ................................. 5,600 --
--------- ---------
Total cash and cash equivalents .......... 17,610 16,745
--------- ---------
Investment Securities:
Available for sale ................................... 55,821 30,110
Held to maturity (fair value $72,989 at September 30,
1997 and $23,258 at December 31, 1996) ............. 72,721 23,264
--------- ---------
Total investment securities .............. 128,542 53,374
--------- ---------
Loans, net of allowance for loan losses of $2,965 at
September 30, 1997 and $2,665 at December 31, 1996 . 266,677 263,797
Premises and equipment, net ............................ 4,475 4,482
Other real estate owned ................................ 1,015 473
Accrued interest receivable and other assets ........... 4,549 4,486
--------- ---------
Total Assets ............................. $ 422,868 $ 343,357
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Non-interest bearing demand deposits ................. $ 47,359 $ 42,372
Interest bearing deposits:
Savings deposits .................................. 168,117 139,671
Other time deposits ............................... 47,348 62,008
Certificates of deposit $100,000 and over ......... 60,725 58,511
--------- ---------
Total deposits ........................... 323,549 302,562
--------- ---------
Short-term borrowings .................................. 33,320 1,000
Long-term debt ......................................... 29,425 14,425
Accrued interest payable and other liabilities ......... 2,302 1,628
--------- ---------
Total liabilities ........................ 388,596 319,615
--------- ---------
Commitments and contingencies
Stockholders' equity:
Common stock, no par value, authorized 5,000,000
shares; issued and outstanding 2,733,108 at
September 30, 1997 and 1,940,942 at
December 31, 1996 ............................. 13,666 9,705
Capital surplus ................................... 19,224 12,711
Undivided profits ................................. 1,319 1,530
Net unrealized holding gains (losses) on
securities available for sale ................. 63 (204)
--------- ---------
Total stockholders' equity ............... 34,272 23,742
--------- ---------
Total Liabilities and
Stockholders' Equity ................ $ 422,868 $ 343,357
========= =========
See accompanying notes to consolidated condensed financial statements.
3
CARNEGIE BANCORP AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF INCOME (Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
----------------- ------------------
1997 1996 1997 1996
------ ------ ------- -------
(000's omitted except per share data)
Interest income:
Loans, including fees................ $6,551 $5,210 $19,235 $13,977
Federal funds sold................... 75 18 275 39
Investment securities:
Taxable.......................... 1,731 1,007 3,865 2,813
Tax-exempt....................... 126 12 315 374
------ ------ ------- -------
Total interest income ....... 8,483 6,247 23,690 17,203
------ ------ ------- -------
Interest expense:
Savings deposits..................... 1,942 628 5,553 1,986
Other time deposits.................. 859 894 2,728 2,590
Certificates of deposit $100,000
and over .......................... 695 516 2,193 1,542
Short-term borrowings................ 376 416 623 949
Long-term debt....................... 319 228 621 397
------ ------ ------- -------
Total interest expense ...... 4,191 2,682 11,718 7,464
------ ------ ------- -------
Net interest income ......... 4,292 3,565 11,972 9,739
Provision for loan losses................ 50 668 346 1,161
------ ------ ------- -------
Net interest income after
provision for loan losses... 4,242 2,897 11,626 8,578
------ ------ ------- -------
Non-interest income:
Service fees on deposits............. 116 108 342 306
Other fees and commissions........... 131 86 385 258
Gain on sale of other real-estate
owned ............................. - - - 294
Investment securities gains.......... - 82 15 399
Investment securities losses......... - - (106) (94)
------ ------ ------- -------
Total non-interest income ... 247 276 636 1,163
------ ------ ------- -------
Non-interest expense:
Salaries and wages................... 1,136 982 3,252 2,823
Employee benefits.................... 247 212 733 652
Occupancy expense.................... 385 371 1,125 1,036
Furniture and equipment.............. 284 240 829 684
Other................................ 865 695 2,409 2,153
------ ------ ------- -------
Total non-interest expense .. 2,917 2,500 8,348 7,348
------ ------ ------- -------
Income before income taxes .. 1,572 673 3,914 2,393
Income tax expense....................... 526 255 1,295 805
------ ------ ------- -------
Net Income .................. $1,046 $418 $2,619 $1,588
====== ====== ======= =======
Per Common Share:
Net income - primary................. $0.42 $0.20 $1.10 $0.76
Net income - fully diluted........... $0.41 $0.19 $1.09 $0.75
Cash Dividends....................... $0.14 $0.12 $0.42 $0.36
Weighted average shares outstanding
(in thousands):
Primary.............................. 2,518 2,110 2,387 2,087
Fully Diluted....................... 2,546 2,156 2,412 2,110
See notes to consolidated condensed financial statements.
4
CARNEGIE BANCORP AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (Unaudited)
Nine Months Ended September 30,
-------------------------------
1997 1996
----------- -------------
(000's omitted)
Cash flows from operating activities:
Net income................................................. $ 2,619 $ 1,588
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization........................ 848 698
Provision for loan losses............................ 346 1,161
Accretion of investment discount..................... (200) (8)
Amortization of investment premium................... 226 314
Gain on sale of available-for-sale securities........ (15) (399)
Loss on sale of available-for-sale securities........ 106 94
Loss on disposal of equipment........................ -- 6
Gain on sale of other real estate owned.............. -- (294)
Increase in accrued interest receivable and
other assets...................................... (221) (1,115)
Increase in accrued interest payable and
other liabilities................................. 674 96
------- -------
Net cash provided by operating activities 4,383 2,141
------- -------
Cash flows from investing activities:
Proceeds from sale of securities available-for-sale........ 35,815 35,865
Proceeds from maturities and principal paydowns of
securities available-for-sale........................... 1,930 11,155
Proceeds from maturities and principal paydowns of
securities held-to-maturity............................. 2,999 1,258
Purchase of securities available-for-sale.................. (63,055) (7,746)
Purchase of securities held-to-maturity.................... (52,549) (24,972)
Net increase in loans made to customers.................... (3,824) (79,733)
Cash collected on previously charged-off loans............. 56 6
Additions to premises and equipment........................ (841) (1,081)
Proceeds from sale of other real-estate owned.............. -- 622
------- -------
Net cash used in investing activities ............ (79,469) (64,626)
------- -------
Cash flows from financing activities:
Net increase in deposits................................... 20,987 47,748
Net increase in short-term borrowings...................... 32,320 12,500
Net increase in long-term debt............................. 15,000 14,425
Proceeds from common stock issued on exercise of
options and warrants.................................... 8,619 25
Cash paid for dividends.................................... (975) (653)
------- -------
Net cash provided by financing activities ........ 75,951 74,045
------- -------
Net change in cash and cash equivalents ...................... 865 11,560
Cash and cash equivalents as of beginning of year ............ 16,745 10,207
------- -------
Cash and cash equivalents as of end of period ................ $17,610 $21,767
======= =======
Supplemental disclosures:
Cash paid during the period for:
Interest................................................... $11,294 $7,342
Income taxes............................................... $ 1,077 $ 877
See accompanying notes to consolidated condensed financial statements.
5
CARNEGIE BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Unaudited)
NOTE A -- BASIS OF PRESENTATION
The consolidated condensed financial statements included herein have been
prepared without audit pursuant to the rules and regulations of the Securities
and Exchange Commission. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to such rules and
regulations. The preparation of financial statements requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities as of the
financial statement date and the reported amounts of revenues and expenses
during the reporting period. Since management's judgement involves making
estimates concerning the likelihood of future events, the actual results could
differ from those estimates which will have a positive or negative effect on
future period results. The accompanying consolidated condensed financial
statements reflect all adjustments which are, in the opinion of management,
necessary to a fair statement of the results for the interim periods presented.
Such adjustments are of a normal recurring nature. These consolidated condensed
financial statements should be read in conjunction with the audited financial
statements and the notes thereto as of and for the year ended December 31, 1996.
The results for the three and nine months ended September 30, 1997 are not
necessarily indicative of the results that may be expected for the year ended
December 31, 1997.
Income per common share is computed by dividing net income by the weighted
average number of common shares and common share equivalents (when dilutive)
outstanding during each period after giving retroactive effect to stock
dividends declared. The common share equivalents of options and warrants in the
computation of primary earnings per share is computed utilizing the Treasury
Stock method. For purposes of this computation, the average market price of
common stock during each three-month quarter included in the period being
reported upon, is used, when dilutive. The ending market price of common stock
is used, however, for fully diluted income per share if the ending price is
higher than the average price.
The consolidated condensed financial statements include the accounts of the
Company and Carnegie Bank, N.A., its wholly-owned subsidiary. All significant
inter-company accounts and transactions have been eliminated.
NOTE B -- INVESTMENT SECURITIES
The Company classifies its investments in accordance with Statement of Financial
Accounting Standards No. 115, "Accounting for Certain Investments in Debt and
Equity Securities," ("SFAS 115"). SFAS 115 requires that an enterprise classify
its investments in debt securities as either securities held to maturity
(carrying amount equals amortized cost), securities available for sale (carrying
amount equals estimated fair value; unrealized gains and losses recorded in a
separate component of stockholder's equity, net of taxes) or trading securities
(carrying amount equals estimated fair value; unrealized gains and losses
included in the determination of net income).
The Company has evaluated all of its investments in debt securities and has
classified them as either held to maturity or available for sale. Any security
which is a U.S. Government security, U.S. Government agency security, and agency
mortgage-backed security, or an obligation of a state or political subdivision
may be placed in the held-to-maturity category if acquired with the intent and
ability to maintain the security in the portfolio until maturity. Premiums and
discounts on these securities are amortized or accreted on a basis that
approximates the effective yield method. Realized gains and losses from the sale
of securities available for sale are determined on a specific identification
cost basis.
6
CARNEGIE BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Unaudited)--Continued
Management determines the appropriate classification of securities at the time
of purchase. Investment securities classified as available for sale will affect
the Company's stockholders' equity as changing interest rates affect the market
price of these securities. At September 30, 1997, no investment securities were
classified as trading securities.
The following tables present the book values, market values and gross unrealized
gains and losses of the Company's investment securities portfolio as of
September 30, 1997 and December 31, 1996.
September 30, 1997
------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
--------- ---------- ---------- -------
(Dollars in thousands)
Securities available for sale (1):
U.S. Government .................. $14,041 $134 ($ -- ) $14,175
Mortgage-backed securities ....... 22,206 140 (119) 22,227
Obligations of State and
Political Subdivisions ......... 8,868 5 -- 8,873
Other securities ................. 10,602 -- (56) 10,546
------- ---- ------ -------
$55,717 $279 ($ 175) $55,821
======= ==== ====== =======
Securities held to maturity:
U.S. Government .................. $ 8,037 $221 ($ -- ) $ 8,258
Mortgage-backed securities ....... 64,684 108 (61) 64,731
------- ---- ------ -------
$72,721 $329 ($ 61) $72,989
======= ==== ====== =======
- ----------
(1) Net unrealized gains of $63 thousand, net of a tax provision of $41
thousand, were reported as an increase to stockholders' equity at
September 30, 1997.
December 31, 1996
------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
--------- ---------- ---------- -------
(Dollars in thousands)
Securities available for sale (2):
U.S. Government .................. $ 5,986 $ -- ($ 50) $ 5,936
Mortgage-backed securities ....... 15,524 49 (267) 15,306
Obligations of State and
Political Subdivisions ......... 890 -- -- 890
Other securities ................. 8,032 -- (54) 7,978
------- ---- ------ -------
$30,432 $ 49 ($ 371) $30,110
======= ==== ====== =======
Securities held to maturity:
U.S. Government .................. $ 9,035 $208 $ -- $ 9,243
Mortgage-backed securities ....... 14,229 -- (214) 14,015
------- ---- ------ -------
$23,264 $208 ($ 214) $23,258
======= ==== ====== =======
- ----------
(2) Net unrealized losses of $204 thousand, net of a tax benefit of $118
thousand, were reported as a reduction to stockholders' equity at December
31, 1996.
7
CARNEGIE BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Unaudited)--Continued
NOTE C -- LOANS AND ALLOWANCE FOR LOAN LOSSES
The following table summarizes the components of the loan portfolio as of
September 30, 1997 and December 31, 1996.
LOAN PORTFOLIO BY TYPE OF LOAN
September 30, 1997 December 31, 1996
------------------ -------------------
Amount % Amount %
-------- ----- -------- -----
(Dollars in thousands)
Commercial and financial ......... $ 80,906 30.0% $ 79,907 30.0%
Real estate construction ......... 10,258 3.8% 16,905 6.3%
Residential mortgage ............. 24,990 9.3% 23,173 8.7%
Commercial mortgage .............. 142,085 52.7% 133,908 50.3%
Installment ...................... 11,403 4.2% 12,569 4.7%
-------- ----- -------- -----
$269,642 100.0% $266,462 100.0%
======== ===== ======== =====
The following table represents activity in the allowance for loan losses for the
nine month period ended September 30, 1997 and 1996.
ALLOWANCE FOR LOAN LOSSES
Nine Months Ended
September 30,
----------------------
1997 1996
------ ------
(Dollars in thousands)
Balance-beginning of period ...................... $2,665 $1,754
Charge-offs ...................................... (102) (429)
Recoveries ....................................... 56 6
------ ------
Net (charge-offs) recoveries ..................... (46) (423)
Provision for loan losses ........................ 346 1,161
------ ------
Balance-end of period ............................ $2,965 $2,492
====== ======
NOTE D -- ACCOUNTING FOR LOAN IMPAIRMENT
Loans aggregated for evaluation under SFAS No. 114 are those loans risk rated by
the Bank as substandard and doubtful. At September 30, 1997, the recorded
investment in loans for which impairment has been recognized totaled $5,234,000
of which $1,070,000 related to loans with no valuation allowance because the
Bank expects repayment in full and $4,164,000 is related to loans with a
corresponding valuation allowance of $440,000. The total amount of impaired
loans measured using the present value of expected future cash flows amounted to
$1,882,000 and the total amount of impaired loans measured using the fair value
of the loan's collateral amounted to $3,352,000. For the nine months ended
September 30, 1997, the average recorded investment in impaired loans was
approximately $4,943,000. The Company recognized $104,000 in income on impaired
loans during the portion of the year that they were impaired.
At December 31, 1996, the recorded investment in loans for which impairment has
been recognized totaled $4,175,000 of which $1,070,000 related to loans with no
valuation allowance because the Bank expects repayment in full and $3,105,000 is
related to loans with a corresponding valuation allowance of $315,000.
8
CARNEGIE BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Unaudited)--Continued
The total amount of impaired loans measured using the present value of expected
future cash flows amounted to $714,000 and the total amount of impaired loans
measured using the fair value of the loan's collateral amounted to $3,461,000.
For the year ended December 31, 1996, the average recorded investment in
impaired loans was approximately $3,523,000. The Company recognized $15,000 of
interest on impaired loans on a cash basis, during the portion of the year that
they were impaired.
NOTE E -- RECLASSIFICATIONS
Certain amounts in the financial statements presented for prior periods have
been reclassified to conform with the 1997 presentation.
NOTE F -- DIVIDENDS
The Board of Directors declared both a stock dividend and a cash dividend in
January, 1997. Stockholders of record on February 12, 1997 received a 5% stock
dividend on March 19, 1997 and stockholders of record on February 19, 1997
received a $.14 per share cash dividend, paid on March 19, 1997. Weighted
average shares outstanding and earnings per share have been retroactively
adjusted to reflect the stock dividend.
The Board of Directors declared a second quarter cash dividend of $.14 per share
on April 23, 1997. The dividend was paid on June 18, 1997 to shareholders of
record on May 21, 1997.
The Board of Directors declared a third quarter cash dividend of $.14 per share
on July 16, 1997. The dividend was paid on September 17, 1997 to shareholders of
record on August 27, 1997.
On October 15, 1997, the Board of Directors also declared a fourth quarter cash
dividend of $.14 per share. The dividend will be payable on December 17, 1997 to
shareholders of record on November 19, 1997.
NOTE G -- STOCK WARRANTS
On August 16, 1994 the Company issued, through a public offering, 690,000 units.
Each unit consisted of one share of common stock and one warrant to purchase one
share of common stock at an exercise price of $15.09 for a period of three years
from the date of issuance. As of August 18, 1997, the expiration date for the
exercise of the warrants, substantially all of the warrants had been exercised,
increasing Carnegie Bancorp's capital by $9.9 million.
9
CARNEGIE BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Unaudited)--Continued
NOTE H -- SHORT-TERM BORROWINGS
The composition of short-term borrowings follows:
September 30, December 31,
1997 1996
------------ ------------
(Dollars in thousands)
Overnight Federal funds purchased
-- balance .......................................... $ -- $ 1,000
-- weighted average rate ............................ -- 7.38%
-- maturity date .................................... -- 1/02/97
Repurchase agreement with Morgan Stanley dated 9/19/97
-- balance .......................................... $23,320 $ --
-- weighted average rate ............................ 5.620% --
-- maturity date .................................... 10/20/97 --
Term borrowing from FHLB-NY
-- balance .......................................... $10,000 $ --
-- weighted average rate ............................ 6.267% --
-- maturity date .................................... 4/22/98 --
NOTE I -- LONG-TERM DEBT
The composition of long-term debt follows:
September 30, December 31,
1997 1996
------------ ------------
(Dollars in thousands)
6.27% fixed rate term borrowing with Federal Home
Loan Bank-NY, due 4/22/98 .................... $ -- $10,000
6.50% fixed rate repurchase agreement with Salomon
Bros., due 4/19/99 ........................... 4,425 4,425
5.910% fixed rate repurchase agreement with Salomon
Bros., due 7/22/02 ........................... 12,500 --
5.840% fixed rate repurchase agreement with Salomon
Bros., due 8/13/02 ........................... 12,500 --
------- -------
$29,425 $14,425
======= =======
NOTE J -- RECENTLY ISSUED ACCOUNTING STANDARDS
ACCOUNTING FOR TRANSFERS AND SERVICING OF FINANCIAL ASSETS AND
EXTINGUISHMENTS OF LIABILITIES.
FASB has issued SFAS No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities", as amended by
SFAS No. 127, "Deferral of the Effective Date of Certain Provisions of SFAS
125", effective for transfers and servicing of financial assets and
extinguishments of liabilities occurring after December 31, 1996. Earlier or
retroactive application is not permitted. This Statement provides accounting and
reporting standards for transfers and servicing of financial assets and
extinguishments of liabilities based on consistent application of a
10
CARNEGIE BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Unaudited)--Continued
financial-components approach that focuses on control. Adoption of this
pronouncement did not have a material impact on the Company's consolidated
financial statements.
EARNINGS PER SHARE.
Issued in March, 1997, SFAS No. 128, "Earnings per Share", establishes standards
for computing and presenting earnings per share (EPS) and applies to entities
with publicly held common stock or potential common stock. This Statement
simplifies the standards for computing earnings per share previously found in
APB Opinion No. 15, "Earnings per Share", and makes them comparable to
international EPS standards. It replaces the presentation of primary EPS with a
presentation of basic EPS. It also requires dual presentation of basic and
diluted EPS on the face of the income statement for all entities with complex
capital structures and requires a reconciliation of the numerator and
denominator of the basic EPS computation to the numerator and denominator of the
diluted EPS computation. This Statement is effective for financial statements
issued for periods ending after December 15, 1997, including interim periods;
earlier application is not permitted. This Statement requires restatement of all
prior-period EPS data presented. Adoption of this pronouncement is not expected
to have a material impact on the Company's consolidated financial statements.
DISCLOSURE OF INFORMATION ABOUT CAPITAL STRUCTURE.
FASB has also issued SFAS No. 129, "Disclosure of Information about Capital
Structure", establishing standards for disclosing information about an entity's
capital structure. This Statement continues the previous requirements to
disclose certain information about an entity's capital structure found in APB
Opinions No. 10, "Omnibus Opinion - 1966", and No. 15, "Earnings per Share", and
FASB Statement No. 47, "Disclosure of Long-Term Obligations", for entities that
were subject to the requirements of those standards. This Statement eliminates
the exemption of nonpublic entities from certain disclosure requirements on
Opinion No. 15 as provided by FASB Statement No. 21, "Suspention of the
Reporting of Earnings per Share and Segment Information by Nonpublic
Enterprises". It supersedes specific disclosure requirements of Opinions No. 10
and No. 15 and Statement No. 47 and consolidates them in this Statement for ease
of retrieval and for greater visibility to nonpublic entities. This Statement is
effective for financial statements issued for periods ending after December 15,
1997. It contains no change in disclosure requirements for entities that were
previously subject to the requirements of Opinions No. 10 and No. 15 and
Statement No. 47 and therfore its adoption will have no effect on the Company's
consolidated financial statements.
REPORTING COMPREHENSIVE INCOME.
FASB has also issued SFAS No. 130, "Reporting Comprehensive Income", effective
for fiscal years beginning after December 15, 1997. This Statement establishes
standards for reporting and display of comprehensive income and its components
in a full set of general-purpose financial statements. Comprehensive income
is defined as the change in equity of a business enterprise during a period
from transactions and other events and circumstances from nonowner sources. It
includes all changes in equity during a period except those resulting from
investments by owners and distributions to owners. An example of comprehensive
income is the unrealized gains and losses on securities available for sale,
net of taxes. The Company will implement the disclosure requirements related to
this pronouncement beginning in 1998.
11
CARNEGIE BANCORP AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
This financial review presents Management's discussion and analysis of financial
condition and results of operations. It should be read in conjunction with the
consolidated condensed financial statements and the accompanying notes included
elsewhere herein.
FINANCIAL CONDITION
Total assets at September 30, 1997 increased by $79.5 million, or 23.2%, to
$422.9 million compared to $343.4 million at December 31, 1996. Total assets
averaged $375.0 million in the first nine months of 1997, a $89.2 million, or
31.2%, increase from the 1996 full year average of $285.8 million. Average loans
increased $64.8 million, or 31.5%, to $270.3 million in the first nine months of
1997, from the 1996 full year average of $205.5 million. Average investment
securities increased by $19.4 million, or 31.0%, to $81.9 million; average
Federal funds sold increased by $4.8 million, or 240.0%, to $6.8 million; and
the average of all other assets increased by $1.1 million, or 6.1%, to $19.2
million during the first nine months of 1997 compared to the full year 1996
averages.
These increases in average assets were funded primarily by a $87.1 million, or
37.5%, increase in average deposits, as average deposits during the first nine
months of 1997 increased to $319.2 million from the full year 1996 average of
$232.1 million. The decrease in average borrowed funds from $30.9 million for
the 1996 full year average to $27.3 million during the first nine months of
1997, an average decrease of $3.6 million, or 11.7%, was also attributable to
the increase in average deposits.
During the third quarter of 1997, average borrowed funds increased to $46.0
million compared to $19.4 million for the second quarter of 1997, an increase of
137.1%, or $26.6 million. The increase in average borrowed funds during this
period was attributable to the Company funding investment security purchases
with $50.0 million in repurchase agreements, for asset/liability management
purposes.
It is the intention of management to use both its borrowing capacity and deposit
raising capacity in a proportion that best controls cost, meets liquidity needs,
and satisfies asset/liability management objectives.
LENDING ACTIVITY
Total loans at September 30, 1997 were $269.6 million, a 1.2%, or $3.1 million
increase from December 31, 1996. Average loans increased by $64.8 million, or
31.5%, to $270.3 million in the first nine months of 1997 compared to the 1996
full year average. Changes in the composition of the average loan portfolio
during the period included increases of 34.1%, or $59.4 million in commercial
loans and commercial mortgages, 10.8%, or $2.4 million in residential mortgages
and 33.0%, or $3.0 million in other installment loans.
The 34.1% increase in average commercial loans and commercial mortgages over the
1996 full year averages is partially attributable to the greater penetration of
the marketplace and an
12
improvement in the general ecomonic environment in New Jersey and partially to
the purchase of $32.8 million of loan participations from Regent National Bank
in September and October, 1996, with Carnegie's purchase of the remaining
balance of $3.3 million in these loans in January, 1997. Carnegie opened a new
branch office in Toms River, New Jersey in the fourth quarter of 1995 and during
the first six months of 1996, a new office in Montgomery and Flemington, New
Jersey and a new office in Langhorne, Pennsylvania. Having regional lenders on
site in these offices has helped to provide the growth Carnegie has experienced
during 1996 and has contributed to the higher average loan volume in late 1996
and early 1997. Management intends to continue to pursue quality loans in all
lending categories within the Company's market area.
ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses was $3.0 million, or 1.10% of total loans, at
September 30, 1997 compared to $2.7 million, or 1.00% of total loans, at
December 31, 1996. The balance of non-performing loans, which includes
non-accrual loans and excludes accruing loans past due 90 days or more of $195
thousand, was $4.3 million, or 1.6% of total loans at September 30, 1997. This
compares to non-performing loans, excluding accruing loans past due 90 days or
more of $839 thousand, of $3.3 million, or 1.2% of total loans at December 31,
1996.
The majority of the Company's loans are collateralized by real estate and
personal guarantees. Asset quality is a major corporate objective and management
believes that the total allowance for loan losses is adequate to absorb
potential losses in the loan portfolio, although future changes in economic
conditions, borrowers ability to repay their loans, regulatory requirements and
other factors may require future additions to the allowance.
INVESTMENT SECURITIES ACTIVITY
Average investment securities increased by 31.0%, or $19.4 million in the first
nine months of 1997 compared to the 1996 full year average. At period end
September 30, 1997 compared to December 31, 1996, investments increased $75.2
million, or 140.8%. During 1996, some of the proceeds of securities sales,
principal paydowns and maturities were used to fund loan growth rather than to
fund additional purchases of investment securities. Strong deposit growth during
the fourth quarter of 1996 and first quarter of 1997 was primarily used to
reduce borrowed funds, and secondarily to increase the investment securities
portfolio. During the third quarter of 1997, investment securities purchases
were funded primarily with $50.0 million in repurchase agreements, for
asset/liability management purposes.
During the first nine months of 1997, proceeds from the sales of securities
available-for-sale amounted to $35.8 million, resulting in a $91 thousand loss
on the sales, and was offset by the purchase of $63.1 million in securities
classified as available-for-sale and $52.5 million in securities classified as
held-to-maturity. These purchases were funded primarily by a net increase in
deposits of $21.0 million, an increase in borrowed funds of $47.3 million,
proceeds from common stock issued on exercise of options and warrants amounting
to $8.6 million.
During the first nine months of 1996, proceeds from the sale of securities
available-for-sale were $35.9 million, and the Company purchased $32.7 million
of securities, of which $7.7 million were classified as available-for-sale and
$25.0 million as held-to-maturity.
13
At September 30, 1997, net unrealized gains in the Company's available-for-sale
securities portfolio amounted to $104 thousand and net unrealized gains in the
held-to-maturity securities portfolio amounted to $268 thousand. Net unrealized
gains of $63 thousand, net of a tax provision of $41 thousand, were reported as
an increase to stockholders' equity at September 30, 1997.
DEPOSITS
Average total deposits increased by $87.1 million, or 37.5%, to $319.2 million
for the nine months ended September 30, 1997 compared to the 1996 full year
average of $232.1 million. The growth in deposits during this period was
primarily due to the expansion of the Company's branch system and its aggressive
pricing on certificates of deposit in comparison to the Company's marketplace.
Additionally, a new product was introduced in September 1996, a seven month "no
penalty" certificate of deposit that allows for complete or partial withdrawals
without penalty. This product is reflected in the Company's "savings deposits"
which grew from $73.6 million at September 30, 1996 to $168.1 million at
September 30, 1997.
Changes in the average deposit mix for the nine months ended September 30, 1997
compared to the 1996 full year average include a $14.2 million, or 13.8%,
increase in certificates of deposit; a $10.3 million, or 19.3%, decrease in
money market deposit accounts; a $76.7 million, or 393.8%, increase in savings
deposits, including the Company's "no penalty" certificate of deposit; a $2.7
million, or 16.8%, increase in NOW account deposits; and a $3.7 million, or
9.2%, increase in non-interest bearing demand deposits. The dramatic increase in
savings deposits reflects the increase in the Company's new "no penalty" seven
month certificate of deposit.
Deposits are obtained primarily from the market areas which the Company serves.
As of September 30, 1997 the Company did not have any brokered deposits and
neither solicited nor offered premiums for such deposits.
LIQUIDITY
Liquidity is a measurement of the Company's ability to meet present and future
funding obligations and commitments. The Company adjusts its liquidity levels in
order to meet funding needs for deposit outflows, repayment of borrowings, when
applicable, and the funding of loan commitments. The Company also adjusts its
liquidity level as appropriate to meet its asset/liability objectives. Principal
sources of liquidity are deposit generation, access to purchased funds,
including Federal Home Loan Bank borrowings and other financial institutions
repurchase agreements, maturities and repayments of loans and investment
securites, net interest income and fee income. Liquid assets (consisting of
cash, Federal funds sold and investment securities classified as
available-for-sale) comprised 17.4% and 13.6% of the Company's total assets at
September 30, 1997 and December 31, 1996, respectively.
As shown in the Consolidated Condensed Statements of Cash Flows, the Company's
primary source of funds at September 30, 1997 was from deposit growth of $21.0
million, an increase in borrowed funds of $47.3 million, proceeds from common
stock issued on exercise of options and warrants amounting to $8.6 million,
proceeds from securities sales, maturities and principal paydowns amounting to
$40.7 million, in addition to net income of $2.6 million. Funds provided by
these sources primarily funded securities purchases of $115.6 million, which
supported the Company's asset/liability management philosophy, during a period
of weak loan growth.
14
During the same period in 1996, funds were generated primarily from deposit
growth of $47.7 million, proceeds from securities sales, maturities and
principal paydowns amounting to $48.3 million, and an increase in borrowed funds
of $26.9 million, in addition to net income of $1.6 million. Funds provided by
these sources primarily funded loan growth amounting to $79.7 million,
securities purchases of $32.7 million, and increase in cash and cash equivalents
of $11.6 million.
The Company also has several secondary sources of liquidity. Many of the
Company's loans are originated pursuant to underwriting standards which make
them readily marketable to other financial institutions or investors in the
secondary market. In addition, in order to meet liquidity needs on a temporary
basis, the Bank has lines of credit in the amount of $5.5 million for the
purchase of Federal funds with other financial institutions and may borrow funds
at the Federal Reserve discount window, subject to the Bank's ability to supply
collateral. In addtion, the Bank has an overnight line of credit with the
Federal Home Loan Bank-New York ("FHLB-NY") in the amount of $16.2 million. In
aggregate with the overnight line, subject to certain requirements the Bank may
also obtain term advances with FHLB-NY of up to 25% of the Bank's assets.
The Company believes that its liquidity position is sufficient to provide funds
to meet future loan demand or the possible outflow of deposits, in addition to
being able to adapt to changing interest rate conditions. Long term debt of
$29.4 million and short-term borrowings of $33.3 million as of September 30,
1997 are matched against specific loans or investments, for asset and liability
management purposes.
CAPITAL RESOURCES
Stockholder's equity increased by $10.5 million at September 30, 1997 compared
to December 31, 1996. The changes in stockholders' equity during the nine months
ended September 30, 1997 were comprised of an increase from net income of $2.6
million, an increase of $267 thousand (net of tax provision) due to decreased
unrealized holding losses in the Company's portfolio of securities
available-for-sale, as a $204 thousand unrealized loss became a $63 thousand
unrealized gain, a reduction by cash dividends paid of $975 thousand, and an
increase of $8.6 million in proceeds from exercised options and warrants.
During the nine months ended September 30, 1997, the Company paid $975 thousand,
or 37.2% of net income, in cash dividends compared to $653 thousand, or 41.1% of
net income in cash dividends for the same period in 1996.
The Company's primary regulator, the Board of Governors of the Federal Reserve
System (which regulates bank holding companies), has issued guidelines
classifying and defining bank holding company capital into the following
components: (1) Tier I Capital, which includes tangible stockholders' equity for
common stock and certain qualifying preferred stock, and excludes net unrealized
gains or losses on available-for-sale securities and deferred tax assets that
are dependent on projected taxable income greater than one year in the future,
and (2) Tier II Capital (Total Capital), which includes a portion of the
allowance for loan losses and certain qualifying long-term debt and preferred
stock that does not qualify for Tier I Capital. The risk-based capital
guidelines require financial institutions to apply certain risk factors ranging
from 0% to 100%, against assets to determine total risk-based assets. The
minimum Tier I and the
15
combined Tier I and Tier II capital to risk-weighted assets ratios are 4.0% and
8.0%, respectively. The Federal Reserve Bank also has adopted regulations which
supplement the risk-based capital guidelines to include a minimum leverage ratio
of Tier I Capital to total assets of 3.0% to 5.0%. Regulations have also been
issued by the Bank's primary regulator, the Office of the Comptroller of the
Currency, establishing similary ratios.
The following table summarizes the risk-based and leverage capital ratios for
the Company and the Bank at September 30, 1997, as well as the regulatory
required minimum capital ratios:
Regulatory
September 30, 1997 Requirements
------------------------------- ------------------
Company Bank Minimum "Well Capitalized"
------- ---- ------- ------------------
Risk-based Capital:
Tier I capital ratio... 12.05% 9.59% 4.00% 6.00%
Total capital ratio.... 13.09% 10.65% 8.00% 10.00%
Leverage ratio........... 8.54% 6.76% 3.00%-5.00% 5.00% or greater
As noted in the above table, the Company's and the Bank's capital ratios exceed
the regulatory requirements of a "well-capitalized' institution.
16
RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997
COMPARED TO THE NINE MONTHS ENDED SEPTEMBER 30, 1996
NET INCOME
The Company earned $2.6 million, or $1.10 net income per share on a primary
basis and $1.09 net income per share of a fully diluted basis, for the nine
months ended September 30, 1997, compared to $1.6 million, or $0.76 net income
per share on a primary basis and $0.75 net income per share on a fully diluted
basis for the months ended September 30, 1996, an increase of $1.0 million, or
64.9%. The increase in net income was primarily due to a $2.2 million, or 22.9%,
increase in net interest income, and a $815 thousand, or 70.2%, decrease in
provision for loan losses; these items were partially offset by a reduction in
non-interest income of $527 thousand, or 45.3%, a $1.0 million, or 13.6%,
increase in non-interest expenses and a $490 thousand, or 60.9%, increase in
income tax provision.
NET INTEREST INCOME
Net interest income on a fully tax-equivalent ("FTE") basis, which adjusts for
the tax-exempt status of income earned on certain investments and loans to
express such income as if it were taxable, increased $2.2 million, or 22.3% for
the nine months ended September 30, 1997 compared to the same prior year period.
Interest income on a "FTE" basis, increased $6.5 million, or 37.2%, to $23.9
million for the nine months ended September 30, 1997 compared to $17.4 million
for the same period in 1996. The improvement in interest income was primarily
due to volume increases in the loan portfolio as Carnegie benefited from strong
loan demand and the purchase of $32.8 million in loan participations from Regent
National Bank during the last two quarters of 1996 and $3.3 million in the first
quarter of 1997, which produced a volume related increase in interest income on
loans of $6.1 million. Volume related interest income was further increased by
$233 thousand due to increased Federal funds sold and further increased by $827
thousand due to investment securities purchases which were primarily funded by
repurchase agreements during the third quarter of 1997, as part of the Company's
asset/liability management program, during a period of weak loan growth.
The $7.2 million volume related increase in total interest income was reduced by
$638 thousand resulting primarily from rate related reductions amounting to $788
thousand as loan interest rates repriced to lower current yields and was offset
by investment securities rate related increases amounting to $147 thousand as
lower yielding securities were replaced with higher yielding securities, and
Federal Funds sold rate related increases of $59 thousand. Total interest income
was further reduced by $64 thousand due to one additional day during the first
nine months of 1996 compared to the first nine months of 1997.
Interest expense for the first nine months of 1997 increased $4.3 million, or
57.0%, compared to the same prior year period. The increase in interest expense
was due primarily to net volume increases in deposits which accounted for $2.8
million, and net rate increases in deposits which accounted for $1.6 million,
and was offset by reduced net volume and rate borrowings expense of $98
thousand. Total interest expense was further offset by a decrease of $26
thousand attributable to one less day during the first nine months of 1997
compared to the first nine months of 1996. The interest expense rate and volume
increases are the result of product decisions made by management in response to
the need for cost effective sources of funds,
17
primarily provided by the "7 month-no penalty" certificate of deposit and
repurchase agreements.
Interest on loans to and obligations of states, municipalities and other public
entities is not subject to Federal income tax. As such, the stated (pre-tax)
yield on these assets is lower than the yields on taxable assets of similar risk
and maturity. In order to make the pre-tax income and resultant yields
comparable to taxable loans and investments, a tax-equivalent basis adjustment
was added to interest income in the following tables. This adjustment has been
calculated using the U.S. Federal statutory income tax rate of 34%. The
following table summarizes the amount that has been added to interest income as
presented in the Consolidated Condensed Statements of Income.
Three Months Ended Nine Months Ended
September 30, September 30,
--------------- -----------------
1997 1996 1997 1996
------ ------ ------- -------
Income per consolidated
statements of income ................. $8,483 $6,247 $23,690 $17,203
Tax equivalent basis adjustment:
Loans ................................ 8 8 26 8
Investment securities ................ 65 6 162 193
------ ------ ------- -------
Interest income adjusted to fully
tax-equivalent basis ................. 8,556 6,261 23,878 17,404
Interest expense ....................... 4,191 2,682 11,718 7,464
------ ------ ------- -------
Net interest income adjusted to
fully tax-equivalent basis ........... $4,365 $3,579 $12,160 $ 9,940
====== ====== ======= =======
The following tables titled "Consolidated Average Balance Sheets with Resultant
Interest and Average Rates" and "Analysis of Changes in Consolidated Net
Interest Income" present by category the major factors that contributed to the
changes in net interest income for the quarter ended September 30, 1997 compared
to the quarter ended September 30, 1996 and the nine months ended September 30,
1997 compared to the same prior year period.
18
CARNEGIE BANCORP AND SUBSIDIARIES
CONSOLIDATED AVERAGE BALANCE SHEETS WITH RESULTANT INTEREST AND AVERAGE RATES
Three Months Ended Three Months Ended
September 30, 1997 September 30, 1996
------------------------------ ------------------------------
Average Interest Average Average Interest Average
Balance Earned Rate Balance Earned Rate
------- -------- ------- ------- -------- -------
(Dollars in thousands)
ASSETS
Earning Assets:
Federal Funds Sold..................... $ 5,263 $ 75 5.65% $ 1,335 $ 18 5.35%
Investment Securities:
Securities available for sale:
U. S. Gov't & Mtge-backed
Securities ...................... 32,905 557 6.72% 27,116 467 6.83%
Non-taxable State & Political
Subdivisions (1)................. 8,547 191 8.88% 658 18 10.96%
Other Securities................... 9,065 155 6.78% 6,005 96 6.34%
-------- ------ ---- -------- ------ ----
50,517 903 7.09% 33,779 581 6.83%
Securities held to maturity:
U. S. Gov't & Mtge-backed
Securities ...................... 56,202 1,019 7.19% 23,799 444 7.40%
Non-taxable State & Political
Subdivisions (1) ................ - - - - - -
-------- ------ ---- -------- ------ ----
56,202 1,019 7.19% 23,799 444 7.40%
Total Investment Securities 106,719 1,922 7.15% 57,578 1,025 7.06%
-------- ------ ---- -------- ------ ----
Loans:(2)(3)
Comm'l Loans & Comm'l Mtgs......... 234,645 5,767 9.75% 178,715 4,570 10.15%
Residential Mortgages.............. 24,837 522 8.34% 22,045 449 8.08%
Installment Loans.................. 11,940 270 8.97% 8,543 199 9.24%
-------- ------ ---- -------- ------ ----
Total Loans.................... 271,422 6,559 9.59% 209,303 5,218 9.89%
-------- ------ ---- -------- ------ ----
Total Earning Assets................ 383,404 8,556 8.85% 268,216 6,261 9.26%
Non-Interest Earning Assets:
Loan Loss Reserve...................... (2,939) (2,084)
Held For Sale Securities Valuation..... (74) (735)
All Other Assets....................... 19,712 19,259
-------- --------
Total Assets........................ 400,103 284,656
======== ========
LIABILITIES & EQUITY
Interest-Bearing Liabilities:
Savings and Money Market Accounts...... $165,221 1,942 4.66% $ 73,350 628 3.40%
Time Deposits.......................... 109,179 1,554 5.65% 102,039 1,410 5.48%
Short-term borrowings.................. 25,223 376 5.91% 30,303 416 5.45%
Long-term debt......................... 20,729 319 6.11% 14,425 228 6.27%
-------- ------ ---- -------- ------ ----
Total Interest-Bearing Liabilities.. 320,352 4,191 5.19% 220,117 2,682 4.83%
Demand Deposits........................ 47,585 41,973
Other Liabilities...................... 2,144 640
Shareholders' Equity................... 30,022 21,926
-------- --------
Total Liabilities & Equity.......... $400,103 $284,656
======== ========
NET INTEREST INCOME (fully taxable basis)................ $4,365 $3,579
====== ======
NET INTEREST MARGIN (fully taxable basis)................ 4.52% 5.29%
==== ====
EQUITY TO ASSETS RATIO................................... 7.50% 7.70%
==== ====
<FN>
- ----------
(1) The tax-equivalent basis adjustment was computed based on a Federal income tax rate of 34%.
(2) Includes nonperforming loans.
(3) Included in interest income are loan fees.
</FN>
19
CARNEGIE BANCORP AND SUBSIDIARIES
Consolidated Average Balance Sheets with Resultant Interest and Average Rates
Nine Months Ended Nine Months Ended
September 30, 1997 September 30, 1996
------------------------------ ------------------------------
Average Interest Average Average Interest Average
Balance Earned Rate Balance Earned Rate
------- -------- ------- ------- -------- -------
(Dollars in thousands)
ASSETS
Earning Assets:
Federal Funds Sold....................... $ 6,797 $ 275 5.41% $ 972 $ 39 5.34%
Investment Securities:
Securities available for sale:
U. S. Gov't & Mtge-backed Securities. 32,278 1,594 6.60% 33,336 1,679 6.71%
Non-taxable State & Political
Subdivisions (1).................. 7,069 477 9.03% 9,815 567 7.69%
Other Securities..................... 8,396 401 6.39% 5,373 248 6.15%
-------- ------ ---- -------- ------ -----
47,743 2,472 6.92% 48,524 2,494 6.85%
Securities held to maturity:
U. S. Gov't & Mtge-backed Securities. 34,115 1,870 7.33% 16,901 886 6.98%
Non-taxable State & Political
Subdivisions (1).................. -- -- -- -- -- --
-------- ------ ---- -------- ------ -----
34,115 1,870 7.33% 16,901 886 6.98%
Total Investment Securities ..... 81,858 4,342 7.09% 65,425 3,380 6.88%
-------- ------ ---- -------- ------ -----
Loans:(2)(3)
Comm'l Loans & Comm'l Mtgs........... 233,616 16,878 9.66% 158,102 11,965 10.08%
Residential Mortgages................ 24,630 1,566 8.50% 22,126 1,442 8.68%
Installment Loans.................... 12,055 817 9.06% 8,311 578 9.26%
-------- ------ ---- -------- ------ -----
Total Loans...................... 270,301 19,261 9.53% 188,539 13,985 9.88%
-------- ------ ---- -------- ------ -----
Total Earning Assets.................. 358,956 23,878 8.89% 254,936 17,404 9.09%
Non-Interest Earning Assets:
Loan Loss Reserve........................ (2,827) (1,905)
Held For Sale Securities Valuation....... (247) (155)
All Other Assets......................... 19,162 17,621
-------- --------
Total Assets.......................... 375,044 270,497
======== ========
LIABILITIES & EQUITY
Interest-Bearing Liabilities:
Savings and Money Market Accounts........ $158,169 5,553 4.69% $ 75,695 1,986 3.50%
Time Deposits............................ 116,632 4,921 5.64% 100,871 4,132 5.46%
Short-term borrowings.................... 14,094 623 5.91% 22,740 949 5.56%
Long-term debt........................... 13,184 621 6.30% 8,577 397 6.17%
-------- ------ ---- -------- ------ -----
Total Interest-Bearing Liabilities.... 302,079 11,718 5.19% 207,883 7,464 4.78%
Demand Deposits.......................... 44,419 40,114
Other Liabilities........................ 1,991 528
Shareholders' Equity..................... 26,555 21,972
-------- --------
Total Liabilities & Equity............ $375,044 $270,497
======== ========
NET INTEREST INCOME (fully taxable basis)............... $12,160 $9,940
====== ======
NET INTEREST MARGIN (fully taxable basis)............... 4.53% 5.19%
==== =====
EQUITY TO ASSETS RATIO.................................. 7.08% 8.12%
==== =====
<FN>
- ----------
(1) The tax-equivalent basis adjustment was computed based on a Federal income tax rate of 34%.
(2) Includes nonperforming loans.
(3) Included in interest income are loan fees.
</FN>
20
CARNEGIE BANCORP AND SUBSIDIARIES
ANALYSIS OF CHANGES IN CONSOLIDATED NET INTEREST INCOME
The Rate/Volume Analysis reflects the extent to which changes in interest rates and changes in the volume of interest-earning assets
and interest-bearing liabilities have affected the Company's interest income and interest expense during the periods presented. This
analysis is presented on a tax equivalent basis. Changes attributable to both volume and rate have been allocated proportionately.
Three Months Ended Nine Months Ended
September 30, 1997 September 30, 1997
Compared to Three Months Ended Compared to Nine Months Ended
September 30, 1996 September 30, 1996
------------------------------ ------------------------------------
Increase (Decrease) Due To Increase (Decrease) Due To
------------------------------ ------------------------------------
Volume Rate Net Volume Rate Time Net
------ ---- --- ------ ---- ---- ---
(Dollars in thousands) (Dollars in thousands)
Interest Earned On:
Federal Funds Sold ........................................ 53 4 57 233 3 0 236
Investment Securities:
Securities available for sale:
U. S. Gov't & Mtge-backed Securities .................. 100 (10) 90 (53) (26) (6) (85)
Non-taxable State & Political Subdivisions ............ 218 (45) 173 (158) 70 (2) (90)
Other Securities ...................................... 49 10 59 139 15 (1) 153
----- ---- ----- ----- ------ --- -----
367 (45) 322 (72) 59 (9) (22)
----- ---- ----- ----- ------ --- -----
Securities held to maturity:
U. S. Gov't & Mtge-backed Securities .................. 605 (30) 575 899 88 (3) 984
Non-taxable State & Political Subdivisions ............ 0 0 0 0 0 0 0
----- ---- ----- ----- ------ --- -----
605 (30) 575 899 88 (3) 984
----- ---- ----- ----- ------ --- -----
Total Investment Securities ....................... 972 (75) 897 827 147 (12) 962
----- ---- ----- ----- ------ --- -----
Loans:
Comm'l Loans & Comm'l Mtgs ............................ 1,430 (233) 1,197 5,694 (737) (44) 4,913
Residential Mortgages ................................. 57 16 73 163 (33) (6) 124
Installment Loans ..................................... 79 (8) 71 259 (18) (2) 239
----- ---- ----- ----- ------ --- -----
Total Loans ....................................... 1,566 (225) 1,341 6,116 (788) (52) 5,276
----- ---- ----- ----- ------ --- -----
Total Interest Income .................................. 2,591 (296) 2,295 7,176 (638) (64) 6,474
----- ---- ----- ----- ------ --- -----
Interest Paid On:
Savings and Money Market Accounts ......................... 787 527 1,314 2,156 1,418 (7) 3,567
Time Deposits ............................................. 99 45 144 643 161 (15) 789
Short-term borrowings ..................................... (70) 30 (40) (360) 37 (3) (326)
Long-term debt ............................................ 100 (9) 91 212 13 (1) 224
----- ---- ----- ----- ------ --- -----
Total Interest Expense ................................. 916 593 1,509 2,651 1,629 (26) 4,254
----- ---- ----- ----- ------ --- -----
Net Interest Income .................................... 1,675 (889) 786 4,525 (2,267) (38) 2,220
===== ==== ===== ===== ====== === =====
21
PROVISION FOR LOAN LOSSES
The provision for loan losses decreased to $346 thousand for the first nine
months of 1997 compared to a provision of $1.2 million for the same period in
1996. The provision is the result of management's review of several factors,
including increased loan balances and management's assessment of economic
conditions, credit quality and other factors that would have an impact on future
possible losses in the loan portfolio. The allowance for loan losses totaled
$3.0 million, or 1.10% of total loans, and 68.8% of non-performing loans, and
non-performing loans totaled $4.3 million, or 1.6% of total loans at September
30, 1997.
The moderate provision for loan losses during the first nine months of 1997 is a
result of normal loan growth and management's evaluation of the adequacy of the
allowance for loan losses to absorb potential losses in the loan portfolio.
NON-INTEREST INCOME
Total non-interest income was $636 thousand for the first nine months of 1997
compared to $1.2 million for the first nine months of 1996, a decrease of $527
thousand, or 45.3%. The decrease was primarily attributable to net losses on
securities sales amounting to $91 thousand during the first nine months of 1997
compared to net gains on securities sales of $305 thousand during the first nine
months of 1996, offset by higher first nine months of 1997 service fees on
deposits of $36 thousand and higher other fees and commissions of $127 thousand.
The increase in service fees on deposits was due to normal deposit growth and
the increase in other fees and commissions was primarily due to $85 thousand for
an investment security placement fee collected during the first quarter of 1997
and further increased by a $41 thousand recovery during the third quarter of
1997 on previously charged-off fraudulent checks. Non-interest income for the
first nine months of 1996 was further increased by $294 thousand in gains on
sale of other real-estate owned compared to $0 for the comparable 1997 period.
NON-INTEREST EXPENSE
Total non-interest expenses increased $1.0 million, or 13.6%, for the nine
months ended September 30, 1997 compared to the same period in 1996. The
increase was due primarily to increased employment expense resulting from staff
expansion as the Company increased loan production staff and other department
support staff and fully staffed its new branches, as well as increases in
occupancy expenses, equipment expenses and other expenses generally attributable
to the Company's growth. Of this increase, employment costs increased $510
thousand, or 14.7%, and reflected increases in the average number of employees
from 116 full-time equivalents for the nine months ended September 30, 1996
compared to an average of 123 full-time equivalents for the nine months ended
September 30, 1997, as well as merit and cost of living adjustments. The actual
number of full-time equivalent employees was 126 at September 30, 1996 and 125
at September 30, 1997. The lack of staff growth is due primarily to reduced loan
demand during the first nine months of 1997, as adequate staffing was in place
at the beginning of 1997.
Occupancy expenses increased $89 thousand, or 8.6%, for the first nine months of
1997 compared to the same period in 1996. The increase was attributable
primarily to increased lease expense of $43 thousand, increased leasehold
depreciation expenses of $6 thousand, increased maintenance and utilities
expenses of $41 thousand, and was offset by reduced other occupancy expenses of
$1 thousand. These increases were due to two newly opened branch offices as well
as normal annual lease increases on other office facilities, and increased
leasehold depreciation due to the new facilities.
22
Furniture and equipment expenses increased $145 thousand, or 21.2%, for the
first nine months of 1997 compared to the first nine months of 1996 due
primarily to depreciation and maintenance costs on purchases of enhanced
computer equipment, depreciation on replacements of other furniture and
equipment, as well as depreciation and maintenance costs associated with the new
facilities.
Other expenses increased $256 thousand, or 11.9%, for the first nine months of
1997 compared to the first nine months of 1996. The increase was attributable to
increased other expenses resulting from the continued growth of the Company, as
costs of supplies, communications, advertising, shareholder relations,
insurance, professional fees and miscellaneous other expenses increased. In
addition, FDIC insurance increased by $55 thousand to $57 thousand as the asset
growth of the Company outpaced the capital growth at the end of the first
quarter of 1997. Exercised warrants and internally generated net income as of
September 30, 1997, again place the Company in the "well-capitalized"
classification for FDIC insurance purposes, thus reducing this expense in future
periods.
INCOME TAX EXPENSE
The Company recognized an income tax provision, which includes both Federal and
State taxes, of $1.3 million for the nine months ended September 30, 1997, for
an effective income tax rate of 33.1%. This compared to $805 thousand, for an
effective income tax rate of 33.6% for the same period in 1996.
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1997
COMPARED TO THE THREE MONTHS ENDED SEPTEMBER 30, 1996
NET INCOME
The Company earned $1.0 million, or $0.42 net income per share on a primary
basis and $0.41 on a fully diluted basis for the quarter ended September 30,
1997 compared to $418 thousand, or $0.20 on a primary basis and $0.19 on a fully
diluted basis for the quarter ended September 30, 1996, an increase of $628
thousand, or 150.2%. The increase in net income was primarily due to a $727
thousand, or 20.4% increase in net interest income and a reduction in provision
for loan losses of $618 thousand; and was offset by a reduction in non-interest
income of $29 thousand, or 10.5%; higher non-interest expenses which increased
$417 thousand, or 16.7%; and increased income taxes of $271 thousand, or 106.3%.
NET INTEREST INCOME
Net interest income for the third quarter of 1997, on a "FTE" basis, increased
$786 thousand, or 22.0%, compared to the third quarter of 1996. This increase in
net interest income resulted primarily from a higher level of earning assets
which was offset by a higher level of interest yielding liabilities, lower loan
and investment securities yields, and higher yields paid on funding sources.
Although net interest income on a "FTE" basis increased $786 thousand, the net
interest margin decreased from 5.29% to 4.52% as net interest income related to
volume increased by $1.7 million and was offset by lower income related to yield
reductions on earning assets amounting to $296 thousand and higher interest
expense related to higher yields on funding sources amounting to $593 thousand.
With rates generally declining as new loan and investment
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securities volume increased, the Company funded these assets with the higher
yielding seven month "no penalty" certificate of deposit and repurchase
agreements, which management has found to be the most cost effective funding
sources.
Average earning assets for the third quarter of 1997 increased by $115.2
million, or 42.9%, compared to the third quarter of 1996, primarily as a result
of a $62.1 million, or 29.7% increase in average loans; and a $49.2 million, or
85.3% increase in average investment securities; and further increased by a $3.9
million increase in average Federal Funds sold. Funding for the growth in loans
and investment securities came from deposit growth generated by the Company's
maturing branch offices and from the promotion of the seven month "no penalty"
certificate of deposit, as average deposits for the quarter ended September 30,
1997 increased to $322.0 million compared to $217.4 million for the quarter
ended September 30, 1996, an increase in average deposits of $104.6 million, or
48.1%.
Although average borrowings during the third quarter of 1996 amounting to $44.7
million were replaced substantially by deposit growth during the subsequent
quarter, average borrowings amounted to $46.0 million during the third quarter
of 1997 as the Company primarily funded investment securities purchases with
$50.0 million in repurchase agreements as part of its asset/liability management
program.
PROVISION FOR LOAN LOSSES
The provision for loan losses was $50 thousand in the third quarter of 1997
compared to $668 thousand in the same period of 1996. The provision for loan
losses for the third quarter of 1997 is a result of loan growth and management's
assessment of economic conditions, credit quality, loan administration
effectiveness and other factors that would have an impact on possible losses in
the loan portfolio. Asset quality is a major corporate objective and management
believes that the total allowance for loan losses is adequate to absorb
potential losses in the loan portfolio.
The provision for loan losses was increased to $668 thousand for the third
quarter of 1996 as a result of the acquisition of the loan participations from
Regent, normal Carnegie loan growth and management's evaluation of the adequacy
of the allowance for loan losses to absorb potential losses in the portfolio.
NON-INTEREST INCOME
Total non-interest income decreased $29 thousand, or 10.5%, to $247 thousand for
the third quarter of 1997 compared to $276 thousand for the same quarter of
1996. The decrease is attributable to net gains on investment securities sales
amounting to $82 thousand during the third quarter of 1996, compared to no
security gains during the third quarter of 1997, and was offset by a $41
thousand recovery during the third quarter of 1997 on charged-off fraudulent
checks.
NON-INTEREST EXPENSE
Total non-interest expense increased $417 thousand, or 16.7%, for the third
quarter of 1997 compared to the same quarter in 1996. The increase is primarily
due to increased employment expenses, as well as increases in occupancy
expenses, equipment expenses and other expenses generally attributable to the
Company's growth.
24
Employment costs increased $189 thousand, or 15.8%, for the third quarter of
1997 compared to the same quarter in 1996 due primarily to increased loan
production staff and other support staff as well as normal merit and cost of
living adjustments.
Occupancy expenses increased $14 thousand, or 3.8%, for the third quarter of
1997 compared to the third quarter of 1996. The increase is attributable
primarily to increased lease expense of $5 thousand incurred for normal annual
lease increases on branch facilities, an increase of $10 thousand in leasehold
depreciation on these facilities, and generally consistent utilities and
maintenance costs.
Furniture and equipment expenses increased $44 thousand, or 18.3%, due primarily
to depreciation on purchases of new computer equipment and other furniture and
equipment, which amounted to $46 thousand, and was offset by lower
non-capitalized minor purchases.
Other expenses increased $170 thousand, or 24.5%, for the third quarter of 1997
compared to the third quarter of 1996. The increase was attributable to
increased other expenses resulting from the continued growth of the Company, as
costs of supplies, communications, advertising, insurance, professional fees and
miscellaneous other expenses increased, as well as FDIC insurance which
increased $34 thousand.
INCOME TAX EXPENSE
The Company recognized an income tax provision, which includes both Federal and
State taxes, of $526 thousand for the third quarter of 1997, for an effective
income tax rate of 33.5%. This compared to $255 thousand, for an effective
income tax rate of 37.9%, for the same quarter in 1996. The lower effective
income tax rate for the quarter ended September 30, 1997 was the result
primarily of higher tax-exempt investment securities income which amounted to
$126 thousand for the third quarter of 1997 compared to $12 thousand for the
third quarter of 1996.
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PART II. OTHER INFORMATION
Item 1. Legal Proceedings -- NONE
Item 2. Changes in Securities -- NONE
Item 3. Defaults Upon Senior Securities -- NONE
Item 4. Submission of Matters to a Vote of Security Holders -- NONE
Item 5. Other Information -- NONE
On October 6, 1997, Carnegie Bancorp announced that it had retained
Janney Montgomery Scott and First Colonial Securities to evaluate and
respond to an unsolicited expression of interest received from a third
party relating to a possible strategic alliance with the Company, and
to evaluate alternative strategies for the Company. In making the
announcement, however, the Company noted that there could be no
assurances that the Company will ultimately pursue a definitive
transaction or, if consummated, what the terms of the transaction
would be.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits -- Financial Data Schedule
(b) Reports on Form 8-K --
The Registrant filed a Current Report on Form 8-K dated October 22,
1997 announcing its third quarter results of operations and that on
October 15, 1997 its board of directors approved a fourth quarter cash
dividend of $0.14 per share.
26
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CARNEGIE BANCORP
(Registrant)
Date: November 12, 1997 By: /s/ RICHARD ROSA
----------------------------------
Richard Rosa
Senior Vice President
and Chief Financial Officer
27