UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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 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 0-17907
CONTINENTAL BANCORPORATION
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[Exact name of registrant as specified in its charter]
New Jersey 52-1625583
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(State or other jurisdiction (I.R.S. Employer
or organization) Identification No.)
1345 Chews Landing Road, Laurel Springs, New Jersey 08021
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[Address of principal executive offices]
[Zip Code]
(609) 227-8000
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[Registrant's telephone number, including area code]
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES __X__ NO _____
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date. At July 31, 1996
there were 4,712,408 common shares outstanding.
CONTINENTAL BANCORPORATION AND SUBSIDIARY
FORM 10-Q
INDEX
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PAGE
PART I. FINANCIAL INFORMATION
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Item 1. Financial Statements
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Consolidated Statement of Condition as of June 30, 1996 (Unaudited) and December 31, 1995 3
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Consolidated Statement of Earnings for the Six Month Periods Ended June 30, 1996 4
and 1995(Unaudited)
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Consolidated Statement of Cash Flows for the Six Month Periods Ended June 30, 1996 5
and 1995 (Unaudited)
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Notes to Consolidated Financial Statements for the Six Month Periods Ended June 6
30, 1996 and 1995(Unaudited)
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Item 2. Management's Discussion and Analysis of Financial Condition and Results of 7
Operations
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PART II. OTHER INFORMATION
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Item 6. Exhibits and Reports on Form 8-K 18
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Signatures 19
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PART 1. Financial Information
CONTINENTAL BANCORPORATION
Consolidated Statement of Condition
6/30/96 12/31/95
------- --------
(unaudited)
(in thousands)
ASSETS
Cash and due from banks 9,513 9,897
Federal Funds Sold 1,500 2,975
----------- -----------
11,013 12,872
Investment securities available-for-sale 69,084 65,765
Investment securities held-to-maturity (approximate market value
of $18,884,000 and $29,102,000 at 6/30/96 and 12/31/95, respectively) 19,114 29,424
Loans, less allowance for credit losses of $1,239,000 and
$1,400,000 at 6/30/96 and 12/31/95, respectively 67,834 77,689
Premises and equipment, net 2,858 3,010
Accrued interest receivable on loans 471 532
Accrued interest receivable on securities 1,125 780
Other assets 2,229 1,691
----------- -----------
Total assets $ 173,728 $ 191,763
=========== ===========
LIABILITIES
Deposits
Demand $ 23,955 $ 24,969
Savings 59,296 65,228
Time, $100,000 and over 9,544 7,406
Other time 29,764 30,993
----------- -----------
122,559 128,596
Federal Home Loan Bank advances/other borrowings 37,239 50,180
Convertible debentures 1,096 1,096
Other liabilities 1,378 745
----------- -----------
Total liabilities 162,272 180,617
----------- -----------
STOCKHOLDERS' EQUITY
Common stock, $2.00 par value; 10,000,000 shares authorized, 4,807,561 issued
and outstanding, at 6/30/96 and 4,807,561 at 12/31/95 9,615 9,615
Additional paid-in capital 4,549 4,549
Accumulated defici (2,402) (2,887)
Unrealized gain on investments available for sale (143) 32
----------- -----------
11,619 11,309
Less treasury stock, at cost (95,153 shares) (163) (163)
----------- -----------
Total stockholders' equity 11,456 11,146
----------- -----------
Total liabilities and stockholders' equity $ 173,728 $ 191,763
============= ==========
The accompanying notes are an integral part of these financial statements.
3
CONTINENTAL BANCORPORATION
Consolidated Statement of Earnings
(unaudited)
Three Months Ended Six Months Ended
------------------ ----------------
6/30/96 6/30/95 6/30/96 6/30/95
---------- ---------- ---------- ----------
(in thousands, except per share data)
Interest income:
Interest and fees on loans $ 1,718 $ 1,990 $ 3,564 $ 3,938
Interest on federal funds sold 13 11 26 20
Interest on investment securities 1,448 1,423 2,953 2,769
---------- ---------- ---------- ----------
Total interest income 3,179 3,424 6,543 6,727
---------- ---------- ---------- ----------
Interest expense:
Interest on certificates of deposit 556 496 1,106 779
Interest on other deposits 454 487 937 974
Interest on securities sold under agreement to repurchase -- 279 -- 452
Interest on FHLB advances 552 620 1,238 1,392
Interest on debentures 30 30 60 60
---------- ---------- ---------- ----------
Total interest expense 1,592 1,912 3,341 3,657
---------- ---------- ---------- ----------
Net interest income
before provision for credit losses 1,587 1,512 3,202 3,070
Provision for credit losses 60 75 120 150
---------- ---------- ---------- ----------
Net interest income
after provision for loan losses 1,527 1,437 3,082 2,920
---------- ---------- ---------- ----------
Other operating income
Service fees on deposit accounts 136 169 269 303
Other 56 84 153 139
---------- ---------- ---------- ----------
Total other operating income 192 253 422 442
---------- ---------- ---------- ----------
Other operating expenses
Salaries and employee benefits 560 594 1,103 1,260
Net occupancy expenses 212 233 434 462
Data processing expense 124 98 226 211
Legal expenses 129 105 249 207
Other 334 537 709 948
---------- ---------- ---------- ----------
Total other operating expenses 1,359 1,567 2,721 3,088
---------- ---------- ---------- ----------
Income before income taxes 360 123 783 274
Provision for income taxes 137 298 101
---------- ---------- ---------- ----------
47
Net income $ 223 $ 76 $ 485 $ 173
========== ========== ========== ==========
Per share data:
Net income per share $ 0.05 $ 0.02 $ 0.10 $ 0.04
========== ========== ========== ==========
Dividends per share $ 0.00 $ 0.00 $ 0.00 $ 0.06
========== ========== ========== ==========
Weighted average shares outstanding 4,712,408 4,760,556 4,712,408 4,760,566
========== ========== ========== ==========
The accompanying notes are an integral part of these financial statements.
4
CONTINENTAL BANCORPORATION AND SUBSIDIARY
Consolidated Statement of Cash Flows
(unaudited)
Six Months Ended
----------------
6/30/96 6/30/95
------- -------
(in thousands)
Operating activities:
Net income $ 485 $ 173
Adjustments to reconcile net income to net cash provided by (used in) operating
activities:
Depreciation, amortization and accretion, net 560 352
Provision for loan losses 120 150
Net increase in other assets (444) (1,956)
Increase in other liabilities 281 542
-------- --------
Net cash provided by (used in) operating activities 1,002 (739)
-------- --------
Investing activities:
Purchase of investment securities available-for-sale (16,405) (29,503)
Proceeds from sale of investment securities available-for-sale -- 7,178
Proceeds from maturities of investment securities held-to-maturity 10,312 (904)
Proceeds from maturities of investment securities available-for-sale 12,362 3,505
Net decrease (increase) in loans 9,855 (14)
(Investment in) proceeds from other real estate owned -- --
Capital expenditures (7) (80)
-------- --------
Net cash provided by (used in) investing activities 16,117 (19,818)
-------- --------
Financing activities:
Net increase (decrease) in demand deposits and savings accounts (6,946) (4,118)
Net increase in certificates of deposits 909 15,136
Net borrowings of long term Federal Home Loan Bank advances -- 100
Repayment of long term Federal Home Loan Bank advances (41) (1,017)
Net decrease in short term Federal Home Loan Bank advances (12,900) (14,000)
Securities sold under agreement to repurchase -- 24,749
Dividend on common stock -- (286)
-------- --------
Net cash provided by (used in) financing activities (18,978) 20,564
-------- --------
Net decrease in cash and cash equivalents
(1,859) 7
Cash and cash equivalents at beginning of period 12,872 7,531
-------- --------
Cash and cash equivalents at end of period $ 11,013 $ 7,538
======== ========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 3,341 $ 3,613
======== ========
Income taxes $ 39 $ 129
======== ========
Loans transferred to other real-estate owned $ 390 $ 120
======== ========
The accompanying notes are an integral part of these financial statements.
5
CONTINENTAL BANCORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
For the Six Month Periods Ended
June 30, 1996 and 1995
(unaudited)
1. Basis of Presentation
Continental Bancorporation (the "Corporation") is a one bank holding company and
the parent company of Continental Bank of New Jersey. Other than Continental
Bank of New Jersey, the Corporation has no subsidiaries. All references to the
Bank or the Corporation hereinafter refer to both.
The consolidated statement of condition at June 30, 1996 and statements of
earnings and cash flows for the three and six months ended June 30, 1996 and
1995 are unaudited, but in the opinion of management, all adjustments,
consisting only of normal, recurring adjustments, necessary for a fair
presentation of such results for all periods have been made. The results of
operations for the three and six month periods ended June 30, 1996 are not
necessarily indicative of the results to be expected for the full year.
2. Impaired Loans
On January 1, 1995 the Bank adopted Statement of Financial Accounting Standards
(SFAS) No. 114, "Accounting for Creditors for Impairment of a Loan," as amended
by SFAS No. 118, "Accounting by Creditors for Impairment of a Loan- Income
Recognition and Disclosures." SFAS No. 114 requires that a creditor measure
impairment based on the present value of expected future cash flows discounted
at the loan's effective interest rate, except that as a practical expedient, a
creditor may measure impairment based on a loan's observable market price, or
the fair value of the collateral if the loan is collateral dependent. Regardless
of the measurement method, a creditor must measure impairment based on the fair
value of the collateral when the creditor determines that foreclosure is
probable. SFAS No. 118 allows creditors to use existing methods for recognizing
interest income on impaired loans.
3. Accounting for Stock Based Compensation
The FASB issued a new standard, SFAS No. 123, "Accounting for Stock-Based
Compensation," which contains a fair value-based method for valuing stock-based
compensation that entities may use, which measures compensation cost at the
grant date based on the fair value of the award. Compensation is then recognized
over the service period, which is usually the vesting period. Alternatively, the
standard permits entities to continue accounting for employee stock options and
similar equity instruments under APB Opinion 25, "Accounting for Stock Issued to
Employees." Entities that continue to account for stock options using APB
Opinion 25 are required to make
6
pro forma disclosures of net income and earnings per share, as if the fair
value-based method of accounting defined in SFAS No. 123 had been applied. The
Bank has not determined which method it will follow in the future but
anticipates following APB Opinion 25. The Bank will be required to adopt the new
standard for its year ended December 31, 1996.
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
General
Continental Bancorporation (the "Corporation") is the holding company for
Continental Bank of New Jersey (the "Bank"), which is a New Jersey State
chartered commercial bank.
The Bank's operations are conducted from four offices located in Camden County,
New Jersey. The Bank has regulatory approval to open a fifth office located in
Stratford, New Jersey. The Bank offers a full range of bank services, both
retail and commercial, at its four locations. The Bank's deposits are insured by
the Federal Deposit Insurance Corporation.
Financial Condition
At June 30, 1996, total assets amounted to $173,728,000, a decrease of
$18,035,000, from total assets of $191,763,000, at December 31, 1995. This
decrease was primarily the result of scheduled return of principal in the
security portfolio.
Investments
During the second quarter 1996, investment securities decreased by $10,037,000.
This decrease was primarily the result of scheduled repayment of principal from
fixed rate securities. The investment portfolio at June 30, 1996, consisted of
approximately $21,399,000 in high quality and short duration Mortgage Backed
Securities and $60,210,000 in U.S. Agency securities. All Mortgage Backed
Securities are U.S. Agency issued and therefore, in management's opinion,
represent no credit risk. The Mortgage Backed Securities pay a fixed coupon and
therefore represent interest rate risk but have very short durations and limited
extension risk. The remainder of the investment portfolio primarily consists of
floating Agency securities which represent no credit risk, adjust not less
frequently than quarterly and therefore represent only very limited interest
rate risk.
Proceeds on sales of securities classified as available-for-sale were $0 and
$7,178,000 for the periods ended June 30, 1996 and 1995, respectively. For the
periods ended June 30, 1996 and 1995, there were gross realized gains of $0 and
$21,000, respectively. There were no realized
7
losses for the six month period ended in 1996 or 1995. The Corporation uses the
specific identification method to determine the cost of the securities sold.
The amortized costs, unrealized gains and losses, and fair values of the
Corporation's available-for-sale and held-to-maturity securities are summarized
as follows:
1996
Gross Gross Fair
Amortized unrealized unrealized market
cost gains losses value
--------- ---------- --------- ------
(in thousands)
Available-for-sale securities
U.S. Government agency $ 60,442 $ 168 $ 400 $ 60,210
FHLMC mortgage-backed PAC's 2,292 - 7 2,285
Federal Home Loan Bank stock 6,589 - - 6,589
-------- --------- ---------- --------
69,323 168 407 69,084
-------- --------- ---------- --------
Held-to-maturity securities
Mortgage-backed securities
FHLMC pass-through certificates 5,103 - 123 4,980
FNMA mortgage-backed PACs 9,185 - 82 9,103
FHLMC mortgage-backed PACs 4,826 - 25 4,801
-------- --------- ---------- --------
Total mortgage-backed securities 19,114 - 230 18,884
======== ========= ======== ========
-
$ 88,437 $ 168 $ 637 $ 87,968
========= ========= ======== ========
The maturity distribution of the investment portfolio of the Bank, as of June
30, 1996, is summarized as follows:
Available-for-sale Held-to-maturity
------------------ ----------------
Estimated Estimated
Amortized fair Amortized fair
cost value cost value
---- ----- ---- -----
Due in one year or less $ 1,000 $ 995 $ -- $ --
Due after one year through five years 2,607 2,586 -- --
Due after five years
12,826 12,808 -- --
Due after ten years 44,009 43,821 -- --
------- ------- ------- -------
60,442 60,210 -- --
Mortgage-backed securities 2,292 2,285 19,114 18,884
Federal Home Loan Bank (FHLB) stock 6,589 6,589 -- --
------- ------- ------- -------
$69,323 $69,084 $19,114 $18,884
======= ======= ======= =======
8
Loan Portfolio
The Bank tailors financial services to individuals and businesses within its
marketplace. A substantial portion of the financial services offered consists of
consumer, real estate and commercial loans. The Bank's primary loan policy
objective is to grant and maintain loans which ensure the safety of deposits and
capital, while generating sufficient income to produce a superior rate of return
on capital and assets. Real estate loans generally have a maximum of 80% loan to
appraised value. Other secured loans have a loan to value ratio of between
50-80%. Unsecured loans are approximately 3.69% of total loans at June 30, 1996.
The loan portfolio declined at an annualized rate of 25.37% during the six month
period ended June 30, 1996. This reduction in loan balances was due principally
to scheduled mortgage amortization and sale of real estate projects financed by
the Bank to third parties.
The following table reflects the mix of the loan portfolio at June 30, 1996 and
December 31, 1995:
06/30/96 12/31/95
-------- --------
(in thousands of dollars)
Loans % of Loans % of
----- ---- ----- ----
Total Total
----- -----
Commercial $ 19,910 28.84% $ 25,101 31.74%
Installment 15,601 22.60% 17,678 22.36%
Mortgage 33,532 48.57% 36,294 45.90%
-------- ------- ------- ------
Total gross loans 69,043 100.00% 79,073 100.00%
======= =======
Deferred loan fees
(70) (94)
Unearned discount - (2)
Unamortized premium 100 112
------- -------
69,073 79,089
Allowance for credit losses (1,239) (1,400)
------- -------
Total net loans $67,834 $77,689
======= =======
9
Non Performing Loans
The following table shows the balance, and the effect on interest income, of
non-performing assets in the Bank's loan portfolio, by category, at and for the
period shown below:
6/30/96 12/31/95
------- --------
(in thousands)
Loans past due 90 days still accruing interest:
Commercial $ 6 $ 30
Installment 12 --
Real Estate 67 --
------ ------
Total 85 30
------ ------
Non-accrual loans:
Commercial 120 1,968
Installment -- 1
Real Estate 1,074 452
------ ------
Total 1,194 2,421
------ ------
Troubled Debt Restructured Loans 31 135
------ ------
Total non-performing loans $1,310 $2,586
======= ======
Ratio of non-performing loans to
total period-end loans 1.90% 3.27%
====== =====
Ratio of non-performing assets to
total assets 1.32% 1.78%
====== ======
Six Months Ended Six Month Ended
---------------- ---------------
6/30/96 6/30/95
(in thousands) (in thousands)
(unaudited)
Gross amount of Interest which would have
been recorded at original rate on Non-
accrual and Restructured Loans. $ 53 $ 51
Interest received from customers on Non-
accrual and Restructured Loans. (4) -
--------- --------
Net impact on Interest Income of Non-
accrual Loans. $ 49 $ 51
========= =========
Non accrual loans decreased by $982,000 during the second quarter of 1996. This
decrease in non accrual loans was primarily the result of receiving $659,000 in
payments, $184,000 in charge-offs and transferring two loans to other real
estate in the amount of $287,000, offset in part by transferring four loans,
amounting to $148,000, of additional loans to non-accrual status. At June 30,
1996 and December 31, 1995, other real estate owned was at $989,000 and
$818,000, respectively.
10
The balance of impaired loans was $1,280,000 at June 30, 1996. The Bank has
identified a loan as impaired when it is probable that interest and principal
will not be collected according to the contractual terms of the loan agreement.
The impaired loan balance included $1,194,000 of non-accrual loans. The
allowance for loan loss associated with the $1,280,000 of impaired loans was
$182,000 at June 30, 1996. Total cash collected on impaired loans during the
quarter ended June 30, 1996 was $663,000 of which $659,000 was credited to the
principal balance outstanding on such loans and $4,000 was recognized as
interest income. Interest that would have been accrued on impaired loans during
the quarter was $53,000. Interest income recognized during the quarter was
$4,000. The Bank's policy for interest income recognition on impaired loans is
to recognize income on restructured loans under the accrual method. The Bank
recognizes income on non-accrual loans under the cash basis, when the loans are
both current and the collateral on the loan is sufficient to cover the
outstanding obligation to the Bank; if these factors do not exist, the Bank will
not recognize income.
Allowance for Credit Losses
The analysis of the allowance for credit losses for the periods indicated are as
follows:
At At
6/30/96 12/31/95
------- --------
(in thousands)
Balance, beginning of year $ 1,400 $ 939
Provision charges to operations 120 1,353
------- -------
1,520 2,292
Recoveries of loans previously charged off
Real estate 2 --
Commercial 36 15
Installment 8 3
------- -------
Total recoveries 46 18
Loans charged-off ------- -------
Real estate (26) (311)
Commercial (241) (393)
Installment (60) (206)
------- -------
Total charged-off (327) (910)
------- -------
Net (charged-off) recoveries (281) (892)
------- -------
Balance, at end of year $ 1,239 $ 1,400
======= =======
Ratio of allowance for credit losses to non-
performing loans 94.58% 54.14%
Ratio of allowance for credit losses to non-
performing assets 53.89% 41.13%
Ratio of allowance for credit losses to non-
accrual loans 103.77% 57.83%
The Bank determines the level of its allowance for possible loan losses based
upon a number of factors. The Bank conducts a monthly review of the loan
portfolio to evaluate overall credit
11
quality. This evaluation consists of an analysis of the individual loans and
overall risk characteristics and size of the different loan portfolios, and
takes into consideration current economic and market conditions, the capability
of specific borrowers to repay specific loan obligations as well as current loan
collateral values. The Bank also considers past estimates of possible loan
losses as compared with actual losses. As adjustments become identified, they
are reported in earnings for the period in which they become known.
Deposits
Deposits decreased between December 31, 1995 and June 30, 1996 by $6,037,000.
The mix of the deposit portfolio reflects a decrease of $1,014,000, or 4.04%, in
non-interest bearing demand deposits, a decrease of $5,932,000 or 9.09% in money
market and savings deposit accounts, and an increase of $909,000, or 2.37%, in
time deposits. Management believes that the overall decline in deposit balances
is seasonal in nature. Management believes the shift in deposit mix to
certificates of deposits from savings accounts is a result of the difference
between the rates paid on savings accounts and those on certificates.
Federal Home Loan Bank Advances
The Bank utilizes Federal Home Loan Bank Advances to manage the relative asset
and liability sensitivity characteristics of the Bank's Balance Sheet and
thereby, better manage interest rate risk. Management's asset/liability strategy
is to maximize the Bank's net interest income while minimizing earnings
volatility, which can result from changes in the general level of interest
rates. The Bank implements this strategy by purchasing securities funded with
Fed Funds, Federal Home Loan Bank advances and securities sold under agreement
to repurchase. Decisions on the amount, type, and maturity of a security chosen
for purchase are made after computer simulation modeling of the Bank's net
interest income in various rising, falling and stable interest rate
environments.
At June 30, 1996, outstanding borrowings under the advances totaled $37,139,000.
The weighted average interest rate of the advances at June 30, 1996, was 5.72%.
Substantially all of the advances mature in July 1996. All advances maturing in
July 1996 may be rolled forward as is necessary. The maximum amount of advances
outstanding at any month-end during the second quarter 1996 was $40,152,000.
Liquidity and Capital Resources
Liquidity defines the ability of the Bank to generate funds to support asset
growth, meet deposit withdrawals, maintain reserve requirements and otherwise
operate on an ongoing basis. An important component of a bank's asset and
liability management structure is the level of liquidity which is available to
meet the needs of its customers and requirements of creditors. During the past
three years, the liquidity needs of the Bank were primarily met by cash on hand,
federal funds, deposits and FHLB advances. The Bank invests its funds not
12
needed for operations ("excess liquidity") primarily in daily federal funds sold
and investments securities available for sale.
Other sources of funds result from the maturity and sale of investment and
mortgage-backed securities available for sale and the paydown of loans.
Securities cash outflows represent purchases of securities. Securities available
for sale may be sold for liquidity purposes as necessary. Securities held to
maturity are available for liquidity after such maturity.
The Bank knows of no adverse conditions which would impact the continued short
or long term use of its cash inflows as heretofore described.
The Corporation recognizes the importance of maintaining adequate capital levels
to support sound, profitable growth and to encourage depositor and investor
confidence.
To increase the Bank's capital levels, the Corporation contributed $900,000 to
the capital of the Bank in 1995.
The Corporation and the Bank are required to maintain minimum ratios of Tier 1
and Total capital to "Risk-weighted" assets and a minimum Tier 1 leverage ratio,
as defined by the banking regulators.
The capital ratios of the Corporation and the Bank at selected dates are as
follows:
Regulatory
6/30/96 12/31/95 Requirement
------- -------- -----------
The Corporation
Tier 1 Risk-Based Capital Ratio 13.97% 13.01% 4.00%
Total Risk-Based Capital Ratio 15.22% 15.52% 8.00%
Tier 1 Leverage Capital Ratio 6.43% 6.04% 3.00%-5.00%
The Bank
Tier 1 Risk-Based Capital Ratio 15.19% 13.84% 4.00%
Total Risk-Based Capital Ratio 16.44% 15.09% 8.00%
Tier 1 Leverage Capital Ratio 6.99% 6.48% 3.00%-5.00%
At June 30, 1996, the Bank's actual tier 1, total capital and tier 1 leverage
ratio all exceed minimum regulatory capital requirements as well as the federal
"well capitalized" standard. The Bank is not under any agreement with the
regulatory authorities nor is it aware of any current recommendations by the
regulatory authorities which, if they were implemented, would have a material
effect on liquidity, capital resources or operations of the Company.
Asset and Liability Management
Important to the concept of liquidity is the management of interest-earning
assets and interest-bearing liabilities. An interest rate sensitive asset or
liability is one that, within a defined time
13
period, either matures or experiences interest rate change in line with general
market rates. Interest rate sensitivity measures the relative volatility of a
bank's interest margin resulting from changes in market interest rates. Through
asset and liability management, the Bank seeks to position itself to contend
with changing interest rates.
The following table summarizes repricing intervals for interest-earning assets
and interest-bearing liabilities as of June 30, 1996 and the difference or "gap"
between them on an actual and cumulative basis for the periods indicated. A gap
is considered positive when the amount of interest rate sensitive assets exceeds
the amount of interest rate sensitive liabilities. A gap is considered negative
when the amount of interest rate sensitive liabilities exceeds interest rate
sensitive assets. During a period of falling interest rates, a positive gap
would tend to adversely affect net interest income, while a negative gap would
tend to result in an increase in net interest income. During a period of rising
interest rates, a positive gap would tend to result in an increase in net
interest income while a negative gap would tend to affect net interest income
adversely. To the extent loans presented in this table are on demand basis, they
are categorized as to maturity based upon their stated amortization schedule.
Repricing Time Periods
6/30/96
-------
(in millions of dollars)
0-90 90-365 1-5 Over 5 yrs or
Days Days years rate insensitive Total
---- ---- ----- ---------------- -----
Investment securities
Available for sale 60.2 - - 8.9 69.1
Held to Maturity - 4.8 5.1 9.2 19.1
Loans 24.1 22.3 16.7 4.7 67.9
Fed funds sold 1.5 - - - 1.5
------ ----- ----- ----- -----
Total interest-earning assets 85.8 27.1 21.8 22.8 157.5
------ ----- ----- ----- -----
Interest bearing deposits
70.4 23.0 5.0 - 98.4
Federal Home Loan Bank
Advances 36.0 1.1 37.1
Subordinated debentures - - - 1.1 1.1
Total interest bearing liabilities 106.4 23.0 5.0 2.2 136.6
------ ------ ----- ----- -----
GAP (20.6) 4.1 16.8 20.6 20.9
------- ------ ------ ----- ----
Cumulative GAP Ratio (0.13) 0.03 0.11 0.13
====== ====== ====== =====
Cumulative GAP (20.6) (16.5) 0.3 20.9
====== ====== ====== =====
Cumulative GAP Ratio (0.13) (0.10) 0.00 0.13
====== ====== ====== =====
14
COMPARISON OF SIX MONTHS ENDED
June 30, 1996, and 1995.
Results of Operations
The Corporation recorded net income of $223,000 for the three month period ended
June 30, 1996, compared to $76,000 for the same period in 1995. The Corporation
recorded net income of $485,000 for the six month period ended June 30, 1996,
compared to $173,000 for the same period in 1995, primarily as a result of
improving the Bank's non-interest expense.
Net Interest Income
The table on the following page provides information concerning the balances,
yields and rates on interest-earning assets and interest-bearing liabilities
during the periods indicated. Net interest income before provision for loan
losses for the three month period ended June 30, 1996, increased $75,000 or
4.96% compared to the same period in 1995. This increase was primarily a result
of a decrease in rates paid on Federal Home Loan Bank advances and time
deposits, partially offset by a decrease in yield on interest earning assets.
15
Average Balance and Net Interest Income (in thousands)
Three Months Ended Three Months Ended
6/30/96 6/30/95
------- -------
Average Yield Average Yield
Interest-earning assets:(1) Balance Interest Rate Balance Interest Rate
Real estate loans $ 35,186 805 9.15% $ 35,589 769 8.64%
Commercial Loans 21,904 490 8.95% 28,702 664 9.25%
Consumer loans 15,971 423 10.59% 20,208 557 11.03%
Investment Securities 90,975 1,346 5.92% 91,772 1,345 5.86%
FHLB Stock 6,589 102 6.19% 4,846 78 6.44%
Federal funds sold 951 13 5.47 723 11 6.09%
--------- ----- --------- -----
Total 171,576 3,179 7.41% 181,840 3,424 7.53%
--------- ----- --------- -----
Interest-bearing liabilities:
Deposits:
Money Market and Interest-
bearing demand 41,381 293 2.83% 41,368 346 3.35%
Savings 21,344 161 3.02% 22,667 141 2.49%
Time 40,433 556 5.50% 35,193 496 5.64%
Borrowed funds:
FHLB advances 39,366 552 5.61% 39,507 620 6.28%
Other borrowed funds 1,196 30 10.03% 17,949 309 6.89%
--------- ----- ------- -----
Total 152,031 1,592 4.19% 156,684 1,912 4.88%
======= ===== ======= ======
Excess of interest-earning
assets over interest-
bearing liabilities $ 19,545 $ 25,156
========= ========
Net interest and dividend income $ 1,587 $ 1,512
======== =======
Interest rate spread 3.22% 2.65%
===== =====
Net yield on interest earning
assets 3.70% 3.33%
===== =====
- --------------------------------------------------------------------------------
(1) Non-accrual loan balances are included in average balances.
The net yield on interest earning assets for the three month period ended June
30, 1996 was 3.70%, an increase of 27 basis points from the 3.33% yield at June
30, 1995. The increase in net yield on interest earning assets was primarily the
result of a decrease in rates paid on Federal
16
Home Loan Bank advances and time deposits, partially offset by a decrease in
yield on interest earning assets.
Provision for Credit Loss
During the three months ended June 30, 1996, a provision of $60,000 was made to
the allowance for credit loss. During the six months ended June 30, 1996, a
provision of $120,000 was made to the allowance for credit loss. Management
believes that this provision is adequate considering the level of the allowance
for credit losses, its current analysis of the loan portfolio, and the
anticipated future growth of the loan portfolio.
Other Operating Income
Other operating income decreased $61,000 for the three month period ended June
30, 1996 over the same period in 1995. This increase was primarily due to a
decrease in overdraft charges and to a second quarter slow down of mortgage
origination.
Other operating income decreased $20,000 for the six month period ended June 30,
1996 over the same period in 1995. This increase was primarily due to a decrease
in overdraft charges.
Other Operating Expense
Other operating expenses decreased to $1,359,000 for the three months ended June
30, 1996 a decrease of $208,000 or 13.27% from the $1,567,000 recorded for the
three months ended June 30, 1995. Salaries and employee benefits decreased by
$34,000 primarily as a result of management personnel changes during 1995. Data
processing expense increased by $26,000 primarily due to increased courier
charges. Legal expenses increased by $24,000 primarily a result of collection of
non-performing loans. All other expenses decreased by $203,000 as a result of
greater cost reduction efforts.
Other operating expenses decreased to $2,721,000 for the six months ended June
30, 1996 a decrease of $367,000 or 11.88% from the $3,088,000 recorded for the
six months ended June 30, 1995. Salaries and employee benefits decreased by
$157,000 primarily as a result of management personnel changes during 1995.
Legal expenses increased by $42,000 primarily a result of collection of
non-performing loans. All other expenses decreased by $239,000 as a result of
greater cost reduction efforts.
Income Taxes
The charge for federal and state income taxes is recorded at the current tax
rates applicable to the corporation. Income taxes expensed for the three months
ended June 30, 1996 were $137,000 as compared to $47,000 for the same period in
1995. This change represents improved profitability of the Company in 1996.
17
Income taxes expensed for the six months ended June 30, 1996 were $298,000 as
compared to $101,000 for the same period in 1995. This change represents
improved profitability of the Company in 1996.
Cashflow
During the six months ended June 30, 1996, the principal source of funds for the
Corporation's investing activities were cash inflows resulting from improved
management of non-earning cash balances and scheduled return of principal from
the security portfolio.
Through the funding sources mentioned above, the Bank purchased $16,405,000 of
investment securities during the six months ended June 30, 1996, while
maturities and principal payments totaled $22,674,000.
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) None
(b) No reports on Form 8-K were filed during the second
quarter ended June 30, 1996.
18
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.
CONTINENTAL BANCORPORATION
DATE: August 14, 1996 David F. Dierker (signature)
----------------------------
David F. Dierker, President