SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended September 30,1996 Commission File Number 0-16637
BROAD NATIONAL BANCORPORATION
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(Exact name of registrant as specified in its charter)
NEW JERSEY 22-2395057
- ------------------------------ -----------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) identification No.)
905 Broad Street, Newark NJ 07102
- ------------------------------ ------------------
(Address of principal executive offices) (Zip Code)
Registrant telephone number, including area code (201) 624-2300
--------
N/A
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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 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
------ ------
Number of shares outstanding of Broad National Bancorporation class of Common
Stock, as of October 31, 1996:
Common Stock, $1.00 par value - 4,677,188
1
BROAD NATIONAL BANCORPORATION
Index to Form 10-Q Financial Information
For the Three Months and Nine Months Ended September 30,1996
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PAGE
----
PART 1 - FINANCIAL INFORMATION 3
- ------------------------------
Consolidated Statements of Condition
as of September 30, 1996 and December 31, 1995 4
Consolidated Statements of Income for the
Three Month and Nine Month Periods Ended September 30, 1996
and 1995 5
Consolidated Statements of Cash Flows for the Nine
Month Periods Ended September 30, 1996 and 1995 7
Notes to Consolidated Financial Statements 8
Management's Discussion and Analysis of Financial
Condition and Results of Operations 10
PART 2 - OTHER INFORMATION 21
- --------------------------
Items 1 to 5 Not Applicable or Negative
Item 6 21
Signatures 22
Exhibit 1 - Computation of Net Income
per Common Share 23
Exhibit 2 - Independent Auditor's Review Report of Interim
Financial Information 24
Exhibit 27 - Financial Data Schedule 25
2
BROAD NATIONAL BANCORPORATION
PART 1 - FINANCIAL INFORMATION
The following condensed consolidated financial statements of Broad National
Bancorporation as of September 30, 1996 and December 31, 1995 as well as the
three month and nine month periods ended September 30, 1996 and 1995 have been
prepared by Broad National Bancorporation without audit, and reflect all normal,
recurring adjustments and disclosures which are, in the opinion of management,
necessary for a fair statement of results for the interim periods presented.
These statements have been prepared 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 omitted. For further clarification and
understanding, these interim statements should be read in conjunction with the
annual report on Form 10-K of Broad National Bancorporation for the year ended
December 31, 1995.
The results of operations for the periods presented are not necessarily an
indication of the results which can be expected for 1996.
The registrant's independent public accountants, KPMG Peat Marwick LLP, have
performed a limited review of these interim statements in accordance with the
standards for such reviews promulgated by the American Institute of Certified
Public Accountants. See page 24 for their report on this limited review.
3
BROAD NATIONAL BANCORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CONDITION
(IN THOUSANDS)
SEPTEMBER 30, DECEMBER 31,
1996 1995
------------- ------------
(Unaudited)
ASSETS
- ------
CASH AND DUE FROM BANKS $ 24,400 $ 25,810
FEDERAL FUNDS SOLD 73,325 61,300
SECURITIES HELD-TO-MATURITY
(aggregate market value $78,895)
and $59,948, respectively) 80,247 60,266
SECURITIES AVAILABLE-FOR-SALE 58,848 55,946
LOANS, Net of unearned income & deferred loan fees 279,688 267,130
LESS -
Allowance for possible loan losses 8,136 7,402
- ------------------------------------------------------------------------------------------
NET LOANS 271,552 259,728
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PREMISES AND EQUIPMENT, net 9,074 9,418
ACCRUED INTEREST RECEIVABLE 3,196 2,819
OTHER ASSETS 5,711 5,898
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TOTAL ASSETS $526,353 $481,185
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LIABILITIES AND SHAREHOLDERS' EQUITY
DEPOSITS
Non-interest bearing demand $101,286 $102,207
Savings and interest bearing demand 220,656 220,058
Time deposits less than $100,000 84,998 86,509
Time deposits of $100,000 or more 73,755 20,907
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Total Deposits 480,695 429,681
SHORT-TERM BORROWINGS 1,000 782
ACCRUED TAXES, INTEREST AND OTHER LIABILITIES 7,898 16,193
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TOTAL LIABILITIES 489,593 446,656
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SHAREHOLDERS' EQUITY:
Preferred stock-1985 class, $10 par value,
outstanding 0 shares at 9/30/96
and 17,124 shares at 12/31/95 0 171
8 1/2% Cumulative Convertible Preferred Stock-1992
class, $1 par value,
outstanding 0 shares at 9/30/96
and 562,553 shares at 12/31/95 0 563
Common stock, $1 par value, authorized
5,500,000; outstanding 4,677,188 shares at 9/30/96
and 3,059,203 shares at 12/31/95 4,677 3,059
Capital surplus 26,591 23,145
Retained earnings 5,531 7,307
Unrealized (loss)gain on securities available-for-sale, net ( 39) 284
- ------------------------------------------------------------------------------------------
TOTAL SHAREHOLDERS' EQUITY 36,760 34,529
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TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $526,353 $481,185
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See accompanying notes to consolidated financial statements.
4
BROAD NATIONAL BANCORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS)
3 MONTH PERIOD ENDED 9 MONTH PERIOD ENDED
-------------------- --------------------
SEPTEMBER 30 SEPTEMBER 30
1996 1995 1996 1995
(UNAUDITED) (UNAUDITED)
INTEREST INCOME
Interest and fees on loans $6,150 $6,079 $18,013 $18,296
Interest and dividends on investments -
Taxable 2,172 1,684 6,059 4,960
Exempt from federal income taxes 10 27 40 39
Interest on federal funds sold 728 710 1,526 1,604
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TOTAL INTEREST INCOME 9,060 8,500 25,638 24,899
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INTEREST EXPENSE:
Interest on savings & interest bearing
demand deposits 1,226 1,218 3,675 3,705
Interest on time certificates of
deposit of $100,000 or more 851 285 1,531 769
Interest on other time deposits 1,028 1,166 3,137 2,818
Interest on short-term borrowings 13 21 46 152
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TOTAL INTEREST EXPENSE 3,118 2,690 8,389 7,444
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NET INTEREST INCOME 5,942 5,810 17,249 17,455
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PROVISION FOR POSSIBLE LOAN LOSSES 450 120 900 340
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INTEREST INCOME AFTER PROVISION FOR
POSSIBLE LOAN LOSSES 5,492 5,690 16,349 17,115
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NON-INTEREST INCOME
Service charges on deposit accounts 1,451 923 3,428 2,609
Other income 234 243 682 667
Gain on sale of loans held for sale 0 10 0 16
Loss on sale of securities available-for-sale 0 0 (47) 0
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TOTAL NON-INTEREST INCOME 1,685 1,176 4,063 3,292
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NON-INTEREST EXPENSES:
Salaries and wages 2,027 2,057 6,100 6,000
Employee benefits 593 568 1,751 1,701
Occupancy expense 500 518 1,424 1,482
Furniture and equipment expense 261 250 825 915
Data processing fees 271 269 794 824
Legal fees 195 168 583 418
Professional fees 413 167 878 580
Postage, delivery and communication 170 151 499 464
FDIC and OCC assessments 29 2 84 498
Other real estate expense 57 29 170 53
Other expenses 491 511 1,675 1,871
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TOTAL NON-INTEREST EXPENSES 5,007 4,690 14,783 14,806
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See accompanying notes to consolidated financial statements.
5
BROAD NATIONAL BANCORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS)
3 MONTH PERIOD ENDED 9 MONTH PERIOD ENDED
SEPTEMBER 30 SEPTEMBER 30
1996 1995 1996 1995
(UNAUDITED) (UNAUDITED)
INCOME BEFORE INCOME TAXES 2,170 2,176 5,629 5,601
PROVISION FOR INCOME TAXES 908 897 2,203 2,341
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NET INCOME $ 1,262 $ 1,279 $ 3,426 $ 3,260
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NET INCOME APPLICABLE TO COMMON STOCK $ 1,262 $ 1,139 $ 3,426 $ 2,843
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AVERAGE NUMBER OF COMMON SHARES
OUTSTANDING
PRIMARY 4,758,716 3,355,494 4,605,984 3,257,128
ASSUMING FULL DILUTION 4,764,092 4,722,907 4,742,800 4,651,225
- ---------------------------------------------------------------------------------------------
NET INCOME PER COMMON SHARE
PRIMARY EARNINGS PER COMMON SHARE $ 0.26 $ 0.34 $ 0.74 $ 0.87
FULLY DILUTED EARNINGS PER COMMON SHARE $ 0.26 $ 0.27 $ 0.72 $ 0.70
See accompanying notes to consolidated financial statements.
6
BROAD NATIONAL BANCORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
NINE MONTH PERIOD ENDED SEPTEMBER 30
1996 1995
-------- --------
(Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 3,426 $ 3,260
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 914 877
Amortization of securities premium net 551 331
Amortization of deferred points and fees
and deferral of loan origination costs (227) (436)
Provision for possible loan losses 900 340
Deferred tax (benefit) expense (266) 1,231
Decrease in accrued taxes
interest, and other liabilities (8,295) (188)
Gain on sale of loans held for sale 0 (16)
Loss on sale of securities available-for-sale 47 0
Loss on sale of other real estate owned 96 9
Increase in accrued interest receivable (377) (106)
Other Net (668) (175)
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Net cash (used in) provided by operating activities $( 3,899) $ 5,127
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CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from the sale of other real estate owned $ 292 $ 166
Net (increase) decrease in loan balances (11,597) 2,246
Proceeds from sale of loans held for sale 0 1,226
Proceeds from maturities of securities
held-to-maturity 7,927 5,907
Proceeds from maturities of securities
available-for-sale 13,481 1,034
Proceeds from the sale of securities available-for-sale 14,703 0
Purchase of securities held-to-maturity (28,176) (10,461)
Purchase of securities available-for-sale (31,907) (4,009)
Capital expenditures (570) (848)
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Net cash (used in) provided by investing activities $(35,847) $ (4,739)
- -------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in certificates of deposit $ 51,337 $ 31,049
Net (decrease) increase in demand deposit, savings
and interest bearing demand accounts (323) 11,179
Net increase in short-term borrowings 218 1,280
Issuance of common stock 98 0
Redemption of preferred stock (47) 0
Dividends paid (922) (842)
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Net cash provided by financing activities $ 50,361 $ 42,666
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NET INCREASE IN CASH AND CASH EQUIVALENTS $ 10,615 $ 43,054
CASH AND CASH EQUIVALENTS, beginning of period 87,110 38,295
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CASH AND CASH EQUIVALENTS, end of period $ 97,725 $ 81,349
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SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for
Interest $ 8,599 $ 6,453
Taxes $ 2,042 $ 2,894
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See accompanying notes to consolidated financial statements.
7
BROAD NATIONAL BANCORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1996
(Unaudited)
(1) Principles of consolidation -
The consolidated financial statements include the accounts of Broad
National Bancorporation, its wholly owned subsidiary Broad National Bank
and the Bank's wholly owned subsidiaries BNB Investment Corporation, Broad
National Realty Corporation and Bronatoreo, Inc. All intercompany accounts
and transactions have been eliminated.
As used in this report, the term "Company" relates to Broad National
Bancorporation and its subsidiaries on a consolidated basis; the term
"Bancorporation" relates to Broad National Bancorporation (parent company
only); and the term "Bank" relates to Broad National Bank and its
subsidiaries on a consolidated basis.
(2) Net income per share -
Primary net income per common share is computed by dividing net income,
less dividends on preferred stock, by the weighted average number of common
shares outstanding during each period adjusted for stock options. Fully
diluted per common share amounts are computed by dividing net income by the
weighted average number of common shares outstanding adjusted for shares
issuable upon conversion of preferred stock and stock options.
(3) Redemption of Preferred Stock
On January 7, 1996, the Company completed the redemption of its Preferred
Stock - 1985 Class (1985 Preferred Stock). In lieu of redemption, 16,927
shares of 1985 Preferred Stock were converted into 109,916 shares of common
stock. The remaining 197 shares of 1985 Preferred Stock were redeemed at
the price of $38 per share, for a total redemption price of $7,486. Cash
was paid for fractional shares resulting from conversion.
On February 2, 1996, the Company completed the redemption of 250,000 shares
of its Preferred Stock - 1992 Class (1992 Preferred Stock). In lieu of
redemption, 249,683 of the 250,000 shares of 1992 Preferred Stock called
for redemption were converted into 476,601 shares of common stock. The
remaining 317 shares of the 250,000 shares of 1992 Preferred Stock called
for redemption were redeemed at the price of $10.60 per share, for a total
redemption price of $3,360. In addition to those shares which were called
for redemption but converted into common stock in lieu of redemption, on
February 2, 1996 another 244,219 shares of 1992 Preferred Stock were also
converted into 466,148 shares of common stock. Cash was paid for fractional
shares resulting from conversion.
8
On April 8, 1996, the Company completed the redemption of the remaining
68,334 shares of the 1992 Preferred Stock. In lieu of redemption 64,901
shares of 1992 Preferred Stock were converted into 123,867 shares of common
stock. The remaining 3,433 shares of 1992 Preferred Stock were redeemed at
the price of $10.60 per share, for a total redemption price of $36,390.
Cash was paid for fractional shares resulting from conversion.
(4) 10% Stock Dividend -
On September 20, 1996, the Board of Directors of the Company declared a 10%
stock dividend which was distributed October 3, 1996. The effects of this
stock dividend are included in the financial statements as of and for the
three month and nine month periods ended September 30, 1996. Additionally,
all share and per share data for prior periods have been adjusted to
reflect the effect of this stock dividend.
(5) Reclassification -
Certain amounts in the consolidated financial statements presented for
prior periods have been reclassified to conform with the 1996 presentation.
9
BROAD NATIONAL BANCORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1996
- ------------------------------------
SUMMARY
-------
The Company reported net income of $1,262,000 or $0.26 per fully diluted common
share for the third quarter of 1996 compared to net income of $1,279,000 or
$0.27 per fully diluted common share for the third quarter of 1995.
For the first nine months of 1996, the Company reported net income of $3,426,000
or $0.72 per fully diluted common share, compared to net income of $3,260,000 or
$0.70 per fully diluted common share for the first nine months of 1995.
Total assets of $526,353,000 at September 30,1996 represent an increase of
$45,168,000 or 9.4% from the December 31, 1995 balance of $481,185,000. Loans,
net of unearned income and deferred loan fees, increased $12,558,000 or 4.7% to
$279,688,000 during the first nine months of 1996. Total deposits increased
$51,014,000 or 11.9% to $480,695,000 at September 30,1996.
Total shareholders' equity increased $2,231,000 during the first nine months of
1996 as the result of net income of $3,426,000 and the proceeds of $98,000 from
the exercise of stock options, offset by dividends declared to shareholders of
$924,000, the redemption of preferred stock of $47,000 and a net decrease of
$322,000 in the unrealized gain (loss) on securities available-for-sale.
The Company's annualized return on average assets and annualized return on
average shareholders' equity were .94% and 12.85%, respectively, for the first
nine months of 1996, compared to annualized returns of .96% and 13.47%,
respectively, for the comparable 1995 period.
10
RESULTS OF OPERATIONS
- ---------------------
Net Interest Income
- -------------------
Net interest income, the primary source of earnings for the Company, is the
difference between interest and fees earned on loans and other earning assets,
and interest paid on deposits and other interest bearing liabilities. Earning
assets include loans, investment securities and federal funds sold. Interest
bearing liabilities include savings, interest bearing demand and time deposits,
and short-term borrowings.
The table on the following page sets forth the Company's consolidated average
balance of assets, liabilities, and shareholders' equity as well as the amount
of interest income or interest expense and the average rate for each category of
interest-earning assets and interest-bearing liabilities. Non-accrual loans are
included in average loans, and interest on loans includes loan fees which were
not material. Non-taxable income from investment securities and loans is
presented on a tax-equivalent basis assuming a 34% tax rate.
NOTES TO NET INTEREST INCOME TABLE
(1) Interest income for investments in states and political subdivisions
include tax equivalent adjustments at 34% tax rate.
(2) Average rates reflect the tax equivalent adjusted yields on nontaxable
investments and loans.
(3) Represents the difference between interest earned and interest paid,
divided by total interest-earning assets.
(4) Annualized
11
NET INTEREST INCOME
NINE MONTHS ENDED SEPTEMBER 30
(Dollars in Thousands)
1996 1995
-------- --------
Average Interest Average Average Interest Average
Balance and Fees Rate (4) Balance and Fees Rate (4)
-------- -------- -------- -------- -------- --------
ASSETS
Federal Funds Sold $ 38,545 $1,526 5.20% $36,264 $1,604 5.83%
-------- ------ ---- ------- ------ ----
Investment Securities
U.S. Treasury 16,234 756 6.21 23,502 1,062 6.03
U. S. Government Agencies 114,873 5,196 6.03 86,255 3,866 5.98
States and political subdivisions (1) 1,451 65 5.97 1,608 74 6.14
Other Bonds 2,016 101 6.68 547 17 4.14
-------- ------ ---- ------- ------ ----
Total Investment Securities 134,574 6,118 6.06(2) 111,912 5,019 5.98 (2)
------- ----- ---- ------- ------ ----
Loans
Mortgage 164,816 10,623 8.59 154,859 11,129 9.58
Installment 35,773 2,504 9.35 35,394 2,573 9.72
Commercial 74,538 4,829 8.65 74,990 4,521 8.06
State and political subdivisions (1) 995 86 11.52 1,165 111 12.70
------- ------ ----- ------- ------ -----
Total Loans 276,122 18,042 8.73 266,408 18,334 9.20
------- ------- ----- ------- -------- -----
Total interest earning assets 449,241 $ 25,686 7.64%(2) 14,584 $ 24,957 8.05% (2)
------- -------- ------ ------- -------- ------
Less - Allowance for possible loan losses 7,706 7,532
All other assets 45,964 46,853
-------- --------
Total Assets $487,499 $453,905
-------- --------
LIABILITIES AND SHAREHOLDERS' EQUITY
Time Deposits
Savings and interest bearing
demand deposits $223,450 $3,674 2.20% $221,813 $3,705 2.23%
Certificate of Deposits
Under $100,000 83,147 3,138 5.04 75,980 2,818 4.96
Over $100,000 41,468 1,531 4.93 20,145 769 5.10
-------- ------ ------ -------- ------ ----
Total Time Deposits 348,065 8,343 3.20 317,938 7,292 3.07
Short term borrowings 1,200 46 5.03 3,342 152 6.00
-------- ------ ------ -------- ------ ----
Total Interest Bearing Liabilities 349,265 $8,389 3.21% 321,280 $7,444 3.10%
-------- ------ ------ -------- ------ ----
Other liabilities 7,534 6,455
Demand deposits 95,141 93,816
Shareholders' equity 35,559 32,354
-------- --------
Total liabilities and
shareholders' equity $487,499 $453,905
-------- --------
NET INTEREST INCOME; NET INTEREST SPREAD $17,297 4.43% $17,513 4.95%
NET INTEREST MARGIN 5.14% (3) 5.65% (3)
12
Rate/Volume Analysis Of Net Interest Income
- -------------------------------------------
The effect of changes in average balance and rate from the corresponding prior
period on interest income, interest expense and net interest income for the nine
months ended September 30, 1996 is set forth below. The effect of a change in
average balance has been determined by applying the average rate for the earlier
period to the change in average balance for the later period, as compared with
the earlier period. The effect of a change in the average rate has been
determined by applying the average balance for the earlier period to the change
in average rate for the later period, as compared with the earlier period. The
variances attributable to simultaneous balance and rate changes have been
allocated in proportion to the relationship of the dollar amount of change in
each category.
Increase (Decrease) Due to a
Change in the
-----------------------------------------
Average Balance Average Rate Total
---------------- ------------- --------
(Dollars in Thousands)
Interest Earned on:
Loans $ 711 $(1,003) $ (292)
Investment securities 1,030 69 1,099
Federal funds sold 101 (179) (78)
------ ------- -------
Total interest income $1,842 $(1,113) $ 729
------ ------- -------
Interest paid on:
Savings and interest
bearing demand deposits $ 25 $ (56) $ (31)
Certificates of deposit:
Under $100,000 274 46 320
Over $100,000 788 (26) 762
Short term borrowings (86) (20) (106)
------ ------- -------
Total Interest expense $1,001 $ (56) $ 945
------ ------- -------
Change in net interest income $ 841 $(1,057) $ (216)
Percent decrease in net interest ------ ------- -------
income over the prior period (1.23)%
-------
Total tax equivalent interest income of $25,686,000 for the first nine months
1996 represents an increase of $729,000 or 2.9% over total tax equivalent
interest income of $24,957,000 for the comparable 1995 period. This improvement
is primarily due to an increase of $34,657,000 in the average balance of
interest earning assets for the first nine months of 1996 as compared to the
first nine months of 1995. This increase in average balances is reflected
primarily in total investment securities, which average balance for the first
nine months of 1996 is $22,662,000 higher than for 1995 and in total loans,
which average balance for the first nine months of 1996, is $9,714,000 higher
than for 1995. The increase in the average balance of total interest earning
assets contributed an additional $1,842,000 to total tax equivalent interest
income for the first nine months of 1996 as compared to the first nine months of
1995. However, this increase was partially offset by a decrease of $1,113,000
in total tax equivalent interest income for the 1996 period as compared to the
1995 period, resulting from a decline of 41 basis points in the average rate
earned on total interest earning assets. Decreases in the federal funds rate
and the prime rate are the primary reasons for the decline in the average rates
earned on total interest earning assets.
Total interest expense of $8,389,000 for the first nine months of 1996 was
$945,000 or 12.7% higher than the comparable prior year period. An increase in
the average balance of interest bearing liabilities contributed to the increase
13
in total interest expense. The average balance of total interest bearing
liabilities for the first nine months of 1996 increased $27,985,000 or 8.7% as
compared to 1995, and contributed an additional $1,001,000 in total interest
expense for the first 9 months of 1996 as compared to the same period in 1995.
The most significant component of the increase in total interest expense is
represented by certificates of deposit, for which interest expense for the first
nine months of 1996 was $1,082,000 higher than for the first nine months of
1995. The average balance of certificates of deposit over $100,000 was
$21,323,000 higher for the first nine months of 1996 as compared to the first
nine months of 1995, and contributed $788,000 to the increase in total interest
expense. A decline of 17 basis points in the average rate paid on certificates
of deposit over $100,000 offset $26,000 of the increase attributable to the
increase in average balance, resulting in a net increase of $762,000 in total
interest expense attributable to certificates of deposit over $100,000.
Increases in both the average balance and the average rate paid on certificates
of deposit under $100,000 contributed an additional $320,000 to total interest
expense for the first nine months of 1996 as compared to the first nine months
of 1995.
Tax equivalent net interest income for the first nine months of 1996 was
$216,000 or 1.23% lower than for the first nine months of 1995, and the net
interest margin for the first nine months of 1996 was 51 basis points lower than
for the comparable 1995 period. This decline is attributable to the decline in
the average rate earned on interest earning assets, coupled with the increase in
the average balance of interest bearing liabilities.
PROVISION FOR POSSIBLE LOAN LOSSES
- ----------------------------------
In determining the provision for possible loan losses, management considers
historical loan loss experience, changes in composition and volume of the loan
portfolio, the level and composition of non-performing loans, the adequacy of
the allowance for possible loan losses, and prevailing economic conditions. The
provision for possible loan losses was $900,000 for the first nine months of
1996 compared to $340,000 for the comparable 1995 period. For the third quarter
of 1996, the provision was $450,000, an increase of $330,000 over the provision
for the third quarter of 1995. The increase in the provision for possible loan
losses is attributable to the increase in non-performing loans during 1996.
Management anticipates that the provision for possible loan losses for the
fourth quarter of the year will approximate the third quarter provision,
assuming that there is no significant change in asset quality. Actual net loan
charge-offs for the first six months of 1996 were $166,000 or 0.08% (annualized)
of average total loans, as compared to net loan charge-offs of $359,000 or 0.18%
(annualized) of average total loans for the comparable 1995 period.
NON-INTEREST INCOME AND NON-INTEREST EXPENSES
- ---------------------------------------------
Total non-interest income of $4,063,000 for the first nine months of 1996 was
$771,000 or 23.4% higher than the year-ago period. This increase is the result
of service charges on deposit accounts which were $819,000 or 31.4% higher than
the comparable prior year period, primarily due to an increase in the
application of certain deposit fees to the deposit base of accounts. Non-
interest income for the first nine months of 1996 includes a loss of $47,000
from the sale of securities available-for-sale. There were no similar sales,
or gains or losses, during the first nine months of 1995.
14
Total non-interst expense of $14,783,000 for the first nine months of 1996 was
$23,000 lower than the comparable 1995 period. The most significant components
of this decrease are FDIC and OCC assessments, furniture and equipment expenses
and other expenses. FDIC and OCC assessments are $414,000 or 83.1% lower than
the prior year period as the result of the reduction of the deposit insurance
assessment by the FDIC. The decline of $90,000 or 9.8% in furniture and
equipment expense is primarily attributable to the reduction of equipment rental
costs resulting from the Company's decision to purchase rather than lease its
personal computer equipment. Other expenses of $1,675,000 for the first nine
months of 1996 are $196,000, or 10.5% lower than the comparable prior year
period primarily due to the decline in expenses associated with a data
processing conversion, which expenses were incurred in 1995. These expense
reductions were offset by increases in legal fees, professional fees and other
real estate expenses. The increase of $165,000 or 39.5% in legal fees is
primarily the result of increased legal expenses associated with the Bank's
problem loans. The increase of $117,000 in other real estate expense is
primarily attritutable to expenses and a loss resulting from the sale of an OREO
property during the second quarter of 1996. The increase of $298,000 or 51.4%
in professional fees is primarily due to fees paid to an outside consulting firm
which is performing a reengineering project fo the Bank. This project is
designed to enhance non-interest income, reduce non-interest expense and improve
customer service. It is anticipated that this project will continue to the end
of 1996, and the remaining costs and expenses associated with this project will
be absorbed by the Bank during the fourth quarter of 1996.
FINANCIAL CONDITION
- -------------------
Loans
Total loans, net of unearned income and deferred loan fees, of $279,688,000 at
September 30, 1996 represent an increase of $12,558,000 or 4.7% from the
December 31, 1995 balance of $267,130,000. Except for equity credit loans, which
declined by approximately $2,300,000, growth was distributed throughout each
segment of the loan portfolio. Since December 31, 1995, residential mortgages
have increased by $4,000,000, commercial mortgages have increased $4,000,000,
consumer loans have increased $3,600,000 and commercial loans have increased
$3,000,000. For the first nine months of 1996, average loans of $276,122,000
represented 61.4% of total average interest earning assets, as compared to 64.3%
of total average interest earning assets for the first nine months of 1995.
Allowance for Possible Loan Losses
The following table summarizes the activity in the allowance for possible loan
losses for the periods presented. Also presented are certain key ratios
regarding the allowance.
15
Nine Months Nine Months
Ended Ended
September 30,1996 September 30,1995
----------------- -----------------
(Dollars In Thousands)
Balance, beginning of period $ 7,402 $ 7,602
Provision charged to operations 900 340
Loans charged off (945) (1,459)
Recoveries of charged-off loans 779 1,100
-------- --------
Balance, end of period $ 8,136 $ 7,583
-------- --------
Average gross loans outstanding
during period..................... $276,122 $266,408
-------- --------
Total gross loans at period end.... $279,688 $263,338
-------- --------
Net loans charged-off. $ 166 $ 359
-------- --------
Ratio of net loans charged-off to
average loans outstanding
during period (annualized)...... 0.08% 0.18%
---- ----
Allowance for possible loan losses as
a percentage of total gross loans.. 2.91% 2.88%
---- ----
The amount of allowance applicable to non-classified loans was $5,256,000 and
$3,778,000 at September 30, 1996 and December 31, 1995, respectively.
Asset Quality
Non-performing assets consist of (i)non-performing loans, which include non-
accrual loans and loans past due 90 days or more as to interest or principal
payments but not placed on non-accrual status; (ii) loans that have been
renegotiated due to a weakening in the financial position of the borrower
(restructured loans) and (iii) other real estate owned ("OREO"), net of
reserves.
16
The following table reflects the components of non-performing assets at
September 30, 1996 and December 31, 1995:
September 30, 1996 December 31, 1995
------------------- ------------------
(Dollars In Thousands)
Past due 90 days or more:
Mortgage....................... $ 1,660 $ 1,938
Commercial..................... 593 1,167
Installment.................... 25 18
------- -------
Total....................... $ 2,278 $ 3,123
------- -------
Non-accrual loans:
Mortgage....................... $ 3,244 $ 4,042
Commercial..................... 6,584 3,049
Installment.................... 1 0
------- -------
Total....................... $ 9,829 $ 7,091
------- -------
TOTAL NON-PERFORMING LOANS....... $12,107 $10,214
Restructured loans (excluding
amounts classified as
non-performing loans) 3,953 5,105
Other real estate owned,
net of reserve................. 748 772
------- -------
TOTAL NON-PERFORMING ASSETS. $16,808 $16,091
------- -------
Non-performing loans as a
percent of total gross loans 4.33% 3.82%
------- -------
Non-performing loans as a
percent of total assets....... 2.30% 2.12%
------- -------
Non-performing assets as a
percent of loans and other
real estate owned.............. 5.99% 6.00%
------- -------
Allowance for possible loan
losses......................... $ 8,136 $ 7,402
------- -------
Allowance for possible loan
losses as a percent of
non-performing loans........... 67.20% 72.47%
------- -------
In addition to the non-performing and restructured loans as of September 30,
1996 and December 31, 1995, the Company had classified an additional $2,992,000
and $4,932,000, respectively, as substandard loans. A portion of the allowance
for possible loan losses has been allocated to such loans in accordance with the
Company's policies.
At September 30, 1996, the recorded investment in loans that are considered to
be impaired under SFAS 114 was $9,525,000 for which the related allowance for
credit losses is $96,700. The impaired loan portfolio is primarily collateral
dependent, as defined by SFAS 114. The change in the allowance for impaired
loans during the first nine months of 1996 represented a recovery of $673,000.
The average recorded investment in impaired loans during the first nine months
of 1996 was approximately $9,300,000. For the first nine months of 1996, the
Company recognized cash basis interest income on these impaired loans of
$141,000.
17
The level of non-performing loans and assets is heavily dependent upon local
economic conditions. The September 30, 1996 total non-performing assets of
$16,808,000 represents an increase of $717,000 or 4.5% over the total at
December 31, 1995. There can be no assurance that non-performing assets will not
continue to increase. However, management continues to monitor the non-
performing assets.
Investment Securities and Federal Funds Sold
Federal funds sold of $73,325,000 at September 30, 1996 represent an increase of
$12,025,000 from the balance at December 31, 1995. Average Federal Funds sold
of $38,545,000 during the first nine months of 1996 represented 8.6% of total
average interest earning assets, as compared to 8.7% during the first nine
months of 1995.
Total average investment securities of $134,574,000 for the first nine months of
1996 represent 30% of total average interest-earning assets, as compared to
27.0% for the comparable 1995 period.
Total investment securities, which include securities classified as held-to-
maturity and available-for-sale, of $139,095,000 at September 30, 1996 represent
an increase of $22,883,000 or 19.7% over the balance at December 31, 1995.
During the first nine months of 1996, the Company incurred a loss of $47,000 on
the sale of $14,750,000 of securities available-for-sale. The proceeds from the
sale were reinvested in higher yielding securities in an effort to improve the
overall yield of the investment portfolios. There were no sales of securities
available-for-sale during the first nine months of 1995.
Deposits
The September 30, 1996 total deposit balance of $480,695,000 represents an
increase of $51,014,000 or 11.9% over total deposits of $429,681,000 at December
31, 1995. The most significant factor contributing to this increase in total
deposits is time deposits of $100,000 or more, which are $52,848,000 higher at
September 30, 1996 than at December 31, 1995. This increase is represented by
short-term deposits of three municipal depositors. Given the competitive nature
and interest sensitivity of such deposits, the Company is uncertain of its
ability to retain such deposits.
Short Term Borrowings
Short-term borrowings represent securities sold under agreements to repurchase.
The majority of these instruments have terms ranging from one to thirty days.
These balances increased $218,000 to $1,000,000 at September 30, 1996 from the
December 31, 1995 balance of $782,000.
Liquidity of the Bank
The Bank actively monitors its liquidity position to ensure that it has
sufficient funds to provide for cash outflows without incurring losses from the
premature liquidation of assets or the unexpected acquisition of costly
liabilities. The Bank's cash outflows encompass interest paid to depositors and
other creditors, deposit withdrawals, and disbursements to acquire assets and
pay general operating costs. The Bank obtains cash from customers in the form
of interest and principal payments on loans, fees paid for services, and from
new deposits. Investment maturities also provide a source of cash.
18
Many different measurements of liquidity are used in the banking industry. The
ratios of cash and cash equivalents (including federal funds sold) and short-
term securities to total assets and net loans to total deposits are among some
of the more commonly used indicators. These measurements are set forth below as
of September 30, 1996 and December 31, 1995.
September 30, 1996 December 31, 1995
------------------- ------------------
Cash and cash equivalents
and securities maturing in
one year to total assets 18.6% 22.1%
Net loans to total deposits 56.5% 60.4%
To assist in the management of its liquidity, the bank has available $24,000,000
in lines of credit for federal funds. However, none of these lines were in use
during the first nine months of 1996.
In summary, managing the Bank's liquidity position involves a significant degree
of analytical estimation and other objective factors. Although customer demand
for funds, in the form of loans or deposit withdrawals, is largely dependent on
general economic factors outside of the Bank's control, management believes that
its present liquidity structure is adequate to meet such needs.
Liquidity of Bancorporation
Bancorporation's ability to meet its cash requirements, including dividend
payments, is generally dependent upon the declaration and payment of dividends
by the Bank to Bancorporation. Under Federal law, the approval of the
Comptroller of the Currency is required for the payment of dividends in any
calendar year by Broad National Bank to Broad National Bancorporation if the
total of all dividends declared in any calendar year exceeds the net income for
that year combined with the retained net income for the preceding two calendar
years. As of December 31, 1995, retained earnings of the Bank of $6,642,000
were available for payment of dividends to the parent company without regulatory
approval. Additionally, at September 30, 1996 Bancorporation had $238,000 of
cash for the purpose of paying operating costs and dividends. However, a change
in circumstances, such as changes in regulatory requirements or in the Bank's
financial condition, could result in the Bank's inability to pay dividends to
Bancorporation or could result in Bancorporation being required by regulatory
authorities to utilize its funds to increase the Bank's capital. In such event,
Bancorporation may not have sufficient cash for operations or to make dividend
payments and may be required to seek other sources of capital and liquidity, if
available.
19
INTEREST RATE SENSITIVITY
Management of interest rate sensitivity involves matching the maturity and
repricing dates of interest-earning assets with interest-bearing liabilities in
an effort to reduce the impact of fluctuating net interest margins and to
promote consistent growth of net interest income during periods of changing
interest rates.
Interest rate sensitivity is measured as the difference between the volume of
assets and liabilities from the Company's existing portfolio that are subject to
repricing in a future period of time. These differences, known as interest
sensitivity gaps, are usually calculated cumulatively for blocks of time.
Companies that are asset sensitive (a positive gap) have more assets than
liabilities subject to early repricing and these banks generally benefit in
periods of rising interest rates, but generally suffer as rates decrease.
Companies that are liability sensitive (a negative gap) generally benefit in
periods of declining rates, but generally suffer as rates increase.
At September 30, 1996 the Company maintained negative sensitivity gaps of 78:1,
68:1 and 68:1 at the cumulative 3 month, 6 month and 12 month periods.
Management will continue to monitor the interest rate sensitivities of assets
and liabilities in an effort to minimize interest rate exposure and maintain a
relatively stable net interest spread.
Capital Adequacy
At September 30, 1996, the Company had total capital equal to 12.19% of risk-
based assets which included tier one capital equal to 10.92% of risk-based
assets. These compare to minimum regulatory capital requirements of 8% and 4%,
respectively. At September 30, 1996, the Company had tier one capital equal to
7.05% of adjusted total assets. This compares to a minimum regulatory capital
requirement of 4% to 5%.
At September 30, 1996, the Bank had total capital equal to 12.15% of risk-based
assets, which included tier one capital equal to 10.88% of risk-based assets.
These compare to minimum regulatory capital requirements of 8% and 4%,
respectively. At September 30, 1996, the Company had tier one capital equal to
7.02% of adjusted total assets. This compares to a minimum regulatory capital
requirement of 4% to 5%.
* * * *
Except for the historical information contained herein, the matters discussed in
this Form 10-Q are forward looking statements that involve risks and
uncertainties, including risks and uncertainties associated with quarterly
fluctuations in results, the impact of changes in interest rates on the Bank's
net interest income, the quality of the Bank's loans and other assets and the
credit risk associated with lending activities, the fluctuations in the general
economic and real estate climate in the Bank's primary market area of New
Jersey, the impact of competition from other banking institutions and financial
service providers and the increasing consolidation of the banking industry, the
enforcement of federal and state bank regulations and the effect of changes in
such regulations, and other risks and uncertainties detailed from time to time
in the Company's SEC reports. Actual results may vary materially from those
expressed in any forward-looking statements herein.
20
BROAD NATIONAL BANCORPORATION
PART 2 - OTHER INFORMATION
- --------------------------
6. Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibits
Statements re: computation of per share earnings is part of this Form 10-Q
as Exhibit I.
(b) No report on Form 8-K has been filed during the three month period ended
September 30, 1996.
21
BROAD NATIONAL BANCORPORATION
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.
BROAD NATIONAL BANCORPORATION
-----------------------------
(registrant)
Date: November 12, 1996 /s/ Donald M. Karp
--------------------
Donald M. Karp
Chairman and CEO
/s/ James Boyle
--------------------
James Boyle
Treasurer
22
BROAD NATIONAL BANCORPORATION
Computation of Net Income Per Share
(Unaudited)
THREE-MONTH PERIOD NINE-MONTH PERIOD
ENDED SEPTEMBER 30 ENDED SEPTEMBER 30
1996 1995(1) 1996 1995(1)
---- ---- ---- ----
PRIMARY:
-------
Average number of common
shares outstanding 4,677,410 3,283,146 4,522,710 3,211,464
Assumed exercise of options
outstanding 81,306 72,348 83,274 45,664
---------- ---------- ---------- ----------
Average number of common shares and
common share equivalents outstanding 4,758,716 3,355,494 4,605,984 3,257,128
---------- ---------- ---------- ----------
Net Income $1,262,303 $1,279,040 $3,426,015 $3,260,024
Less: Cumulative Preferred Dividends 0 139,097 0 417,291
---------- ---------- ---------- ----------
Net income available to common shareholders $1,262,303 $1,139,043 $3,426,015 $2,842,733
---------- ---------- ---------- ----------
Primary earnings per common share $0.26 $0.34 $0.74 $ 0 .87
========== ========== ========== ==========
FULLY DILUTED:
- --------------
Average number of common shares of
outstanding 4,677,410 3,283,146 4,522,710 3,211,464
Assumed exercise of options outstanding 86,682 87,525 86,682 87,525
Assumed conversion of preferred shares 0 1,352,236 133,408 1,352,236
---------- ---------- ---------- ----------
Adjusted average number of common shares 4,764,092 4,722,907 4,742,800 4,651,225
---------- ---------- ---------- ----------
Net Income $1,262,303 $1,279,040 $3,426,015 $3,260,024
---------- ---------- ---------- ----------
Fully diluted earnings per common share $0.26 $0.27 $0.72 $ 0.70
========== ========== ========== ==========
(1) 1995 Per Common Share Data have been restated to reflect the 10% stock
dividend declared September 20, 1996 and distributed October 3, 1996.
23
Independent Auditors' Review Report
-----------------------------------
The Board of Directors
Broad National Bancorporation:
We have reviewed the accompanying consolidated condensed statement of condition
of Broad National Bancorporation and subsidiaries (the Company) as of September
30, 1996, and the related consolidated condensed statements of income, and cash
flows for the three and nine month periods ended September 30, 1996 and 1995.
These consolidated condensed financial statements are the responsibility of the
Company's management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data and making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in
accordance with generally accepted auditing standards, the objective of which is
the expression of an opinion regarding the financial statements taken as a
whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the accompanying consolidated condensed financial statements referred
to above for them to be in conformity with generally accepted accounting
principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated statement of condition of the Company as of December
31, 1995, and the related consolidated statements of income, changes in
shareholders' equity, and cash flows for the year then ended (not presented
herein); and in our report dated January 18, 1996, except as to Note 14, which
is as of February 2, 1996, we expressed an unqualified opinion on those
consolidated financial statements. In our opinion, the information set forth in
the accompanying consolidated statement of condition as of December 31, 1995, is
fairly presented, in all material respects, in relation to the consolidated
statement of condition from which it has been derived.
/s/ KPMG Peat Marwick LLP
Short Hills, New Jersey
November 12, 1996
24