<PAGE>
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 June 30, 1995 Commission File Number 0-16637
BROAD NATIONAL BANCORPORATION
---------------------------------------------------------------------------
(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
---------------------------------------------------------------------------
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 July 31, 1995:
Common Stock, $1.00 par value - 3,001,133
1
<PAGE>
BROAD NATIONAL BANCORPORATION
Index to Form 10-Q Financial Information
For the Three Months and Six Months Ended June 30, 1995
---------------------------------------------------------
PAGE
----
PART 1 - FINANCIAL INFORMATION 3
------------------------------
Consolidated Statements of Condition
as of June 30, 1995 and December 31, 1994 4
Consolidated Statements of Income for the
Three Month and Six Month Periods Ended
June 30, 1995 and 1994 5
Consolidated Statements of Cash Flows for the Six
Month Periods Ended June 30, 1995 and 1994 7
Notes to Consolidated Financial Statements 8
Management's Discussion and Analysis of Financial
Condition and Results of Operations 10
PART 2 - OTHER INFORMATION 20
--------------------------
Items 1 to 5 Not Applicable or Negative
Item 6 20
Signatures 21
Exhibit I - Computation of Net Income
per Common Share 22
Exhibit II - Independent Auditor's Review Report of Interim
Financial Information 23
2
<PAGE>
BROAD NATIONAL BANCORPORATION
PART 1 - FINANCIAL INFORMATION
The following consolidated financial statements of Broad National Bancorporation
as of June 30, 1995 and December 31, 1994 as well as the three month and six
month periods ended June 30, 1995 and 1994 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, 1994.
The results of operations for the periods presented are not necessarily an
indication of the results which can be expected for 1995.
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 23 for their report on this limited review.
3
<PAGE>
BROAD NATIONAL BANCORPORATION
CONSOLIDATED STATEMENTS OF CONDITION
(IN THOUSANDS)
<TABLE>
<CAPTION>
<S> <C> <C>
JUNE 30 DECEMBER 31,
1995 1994
-------- ------------
(Unaudited)
ASSETS
------
CASH AND DUE FROM BANKS $ 23,261 $ 24,485
FEDERAL FUNDS SOLD 65,100 13,810
SECURITIES HELD-TO-MATURITY
(aggregate market value $86,541)
and $84,188, respectively) 87,633 89,789
SECURITIES AVAILABLE-FOR-SALE 23,601 21,144
LOANS, Net of unearned income & deferred loan fees 262,275 267,048
LESS -
Allowance for possible loan losses 7,434 7,602
------------------------------------------------------- -------- --------
NET LOANS 254,841 259,446
------------------------------------------------------- -------- --------
PREMISES AND EQUIPMENT, net 9,506 9,526
ACCRUED INTEREST RECEIVABLE 2,859 2,860
OTHER ASSETS 7,226 7,570
------------------------------------------------------- -------- --------
TOTAL ASSETS $474,027 $428,630
------------------------------------------------------- -------- --------
LIABILITIES AND SHAREHOLDERS' EQUITY
DEPOSITS
Non-interest bearing demand $ 97,988 $100,289
Savings and interest bearing demand 231,091 215,789
Time deposits less than $100,000 84,979 61,567
Time deposits of $100,000 or more 20,605 13,821
------------------------------------------------------- -------- --------
Total Deposits 434,663 391,466
SHORT-TERM BORROWINGS 1,405 177
ACCRUED TAXES, INTEREST AND OTHER LIABILITIES 5,587 6,721
------------------------------------------------------- -------- --------
TOTAL LIABILITIES 441,655 398,364
------------------------------------------------------- -------- --------
SHAREHOLDERS' EQUITY:
Preferred stock-1985 class, $10 par value,
authorized and outstanding 17,124
(preference on liquidation of $651) 171 171
8 1/2% Cumulative Convertible Preferred Stock-1992
class, $1 par value, authorized 690,000 shares,
outstanding 648,875 shares at 6/30/95
and 653,375 shares at 12/31/94
(preference on liquidation of $6,489) 649 653
Common stock, $1 par value, authorized
5,500,000; outstanding 2,891,181 shares at 6/30/95
and 2,882,592 shares at 12/31/94 2,891 2,883
Capital surplus 23,208 23,213
Retained earnings 5,506 4,062
Unrealized loss on securities available for sale, net ( 53) ( 716)
------------------------------------------------------- -------- --------
TOTAL SHAREHOLDERS' EQUITY 32,372 30,266
------------------------------------------------------- -------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $474,027 $428,630
------------------------------------------------------- -------- --------
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
BROAD NATIONAL BANCORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS)
<TABLE>
<CAPTION>
3 MONTH PERIOD ENDED 6 MONTH PERIOD ENDED
------------------------- ----------------------
JUNE 30 JUNE 30
1995 1994 1995 1994
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
INTEREST INCOME
Interest and fees on loans $6,124 $5,354 $12,217 $10,761
Interest and dividends on investments -
Taxable 1,630 1,407 3,276 2,598
Exempt from federal income taxes 3 5 12 11
Interest on federal funds sold 643 537 894 848
------------------------------------------------- ------ ------ ------- -------
TOTAL INTEREST INCOME 8,400 7,303 16,399 14,218
------------------------------------------------- ------ ------ ------- -------
INTEREST EXPENSE:
Interest on savings & interest bearing
demand deposits 1,323 1,270 2,487 2,482
Interest on time certificates of
deposit of $100,000 or more 270 88 484 209
Interest on other time deposits 1,005 484 1,652 967
Interest on short-term borrowings 14 3 131 4
------------------------------------------------- ------ ------ ------- -------
TOTAL INTEREST EXPENSE 2,612 1,845 4,754 3,662
------------------------------------------------- ------ ------ ------- -------
NET INTEREST INCOME 5,788 5,458 11,645 10,556
------------------------------------------------- ------ ------ ------- -------
PROVISION FOR POSSIBLE LOAN LOSSES 120 100 220 200
------------------------------------------------- ------ ------ ------- -------
INTEREST INCOME AFTER PROVISION FOR
POSSIBLE LOAN LOSSES 5,668 5,358 11,425 10,356
------------------------------------------------- ------ ------ ------- -------
NON-INTEREST INCOME
Service charges on deposit accounts 872 895 1,686 1,680
Other income 228 192 424 347
Gain (loss) on sale of loans held for sale 3 (95) 6 (307)
Loss on sale of securities available-for-sale 0 (48) 0 (48)
------------------------------------------------- ------ ------ ------- -------
TOTAL NON-INTEREST INCOME 1,103 944 2,116 1,672
------------------------------------------------- ------ ------ ------- -------
NON-INTEREST EXPENSES:
Salaries and wages 1,971 1,767 3,943 3,595
Employee benefits 572 563 1,133 1,090
Occupancy expense 492 530 964 1,026
Furniture and equipment expense 353 343 665 668
Data processing fees 277 292 555 611
Legal fees 124 315 250 (240)
Professional fees 228 206 413 431
Postage, delivery and communication 160 166 313 315
FDIC and OCC assessments 248 287 496 573
Other real estate expense 5 28 24 90
Other expenses 655 796 1,360 1,363
------------------------------------------------- ------ ------ ------- -------
TOTAL NON-INTEREST EXPENSES 5,085 5,293 10,116 9,522
------------------------------------------------- ------ ------ ------- -------
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE>
BROAD NATIONAL BANCORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS)
<TABLE>
<CAPTION>
3 MONTH PERIOD ENDED 6 MONTH PERIOD ENDED
JUNE 30 JUNE 30
1995 1994 1995 1994
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
INCOME BEFORE INCOME TAXES 1,686 1,009 3,425 2,506
PROVISION FOR INCOME TAXES 713 11 1,444 665
--------------------------------------------- ---------- ---------- ---------- ----------
NET INCOME $ 973 $ 998 $ 1,981 $ 1,841
NET INCOME APPLICABLE TO COMMON STOCK $ 820 $ 843 $ 1,674 $ 1,532
AVERAGE NUMBER OF COMMON SHARES
OUTSTANDING (1)
PRIMARY 2,924,790 2,875,593 2,913,660 2,876,037
ASSUMING FULL DILUTION 4,294,734 4,243,019 4,292,163 4,243,019
NET INCOME PER COMMON SHARE (1)
PRIMARY EARNINGS PER COMMON SHARE $ 0.28 $ 0.29 $ 0.57 $ 0.53
FULLY DILUTED EARNINGS PER COMMON SHARE $ 0.22 $ 0.24 $ 0.46 $ 0.44
</TABLE>
(1) 1994 PER COMMON SHARE DATA HAS BEEN RESTATED TO REFLECT THE 5% STOCK
DIVIDEND DISTRIBUTED IN DECEMBER 1994.
See accompanying notes to consolidated financial statements.
6
<PAGE>
BROAD NATIONAL BANCORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTH PERIOD ENDED JUNE 30
1995 1994
--------- ---------
(Unaudited)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 1,981 $ 1,841
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 581 638
Amortization of securities premium net 107 490
Amortization of deferred points and fees
and deferral of loan origination costs (232) (145)
Provision for possible loan losses 220 200
Deferred tax benefit 61 189
Decrease in accrued taxes
interest, and other liabilities (1,134) (1,927)
(Gain) Loss on sale of loans held for sale (6) 307
Loss on sale of securities available for sale 0 48
Loss on sale of other real estate owned 9 0
Write down of other real estate owned 0 89
( Increase) decrease in accrued interest receivable 1 (427)
Other Net (437) 1,719
-------------------------------------------------------------- ------- --------
Net cash provided by operating activities $ 1,151 $ 3,022
-------------------------------------------------------------- ------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from the sale of other real estate owned $ 166 $ 235
Net (increase) decrease in loan balances 4,269 (6,006)
Proceeds from sale of loans held for sale 663 13,678
Proceeds from maturities of securities
held-to-maturity 3,512 12,525
Proceeds from the sale of securities available-for-sale 0 6,665
Proceeds from maturities of securities
available-for-sale 538 3,528
Purchase of securities available for sale (2,015) (2,026)
Purchase of securities held-to-maturity (1,546) (29,370)
Capital expenditures (561) (644)
-------------------------------------------------------------- ------- --------
Net cash provided by (used in) investing activities $ 5,026 $ (1,415)
-------------------------------------------------------------- ------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net (decrease) increase in certificates of deposit $30,196 $ (2,782)
Net increase in demand deposit, savings
and interest bearing demand accounts 13,001 38,190
Net increase in short-term borrowings 1,228 115
Dividends paid (536) (418)
-------------------------------------------------------------- ------- --------
Net cash provided by financing activities 43,889 $ 35,105
-------------------------------------------------------------- ------- --------
NET INCREASE IN CASH AND CASH EQUIVALENTS $50,066 $ 36,712
CASH AND CASH EQUIVALENTS, beginning of period 38,295 62,342
-------------------------------------------------------------- ------- --------
CASH AND CASH EQUIVALENTS, end of period $88,361 $ 99,054
-------------------------------------------------------------- ------- --------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for
Interest $ 4,079 $ 3,701
Taxes $ 1,687 $ 1,046
-------------------------------------------------------------- ------- --------
See accompanying notes to consolidated financial statements.
</TABLE>
7
<PAGE>
BROAD NATIONAL BANCORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1995
(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.
All 1994 share and per share amounts have been restated to reflect the 5%
stock dividend distributed in December 1994.
(3) Legal Fees
Legal fees for the 6 months ended June 30, 1994 include a one-time recovery
of $875,000 of legal expenses in conjunction with a previously announced
settlement of claims made under the Company's insurance policy for
reimbursement of losses and expenses arising from alleged loan
irregularities discovered in February 1991.
8
<PAGE>
BROAD NATIONAL BANCORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1995
(Unaudited)
(4) Accounting by Creditors for the Impairment of a Loan
Effective January 1, 1995 the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 114, "Accounting by Creditors for
Impairment of a Loan" and its subsequent amendment SFAS No. 118,
"Accounting by Creditors for Impairment of a Loan - Income Recognition and
Disclosures." Adoption of SFAS No. 114, as amended, prescribes the
recognition criteria for loan impairment and the measurement methods for
certain impaired loans and loans whose terms are modified in troubled debt
restructurings and amends SFAS No. 5, "Accounting for Contingencies," and
SFAS No. 15, "Accounting by Debtors and Creditors for Troubled Debt
Restructurings."
SFAS No. 114, as amended, addresses the accounting for impaired loans and
specifies how allowance for credit losses related to these impaired loans
should be determined. SFAS No. 114 sets forth measurement methods for
estimating the portion of total loans attributable to impaired loans. It
does not address the overall adequacy of the allowance for loan losses, but
focuses instead on the allowance for estimated credit losses on impaired
loans. It is the Company's responsibility to ensure that the overall
allowance for loan losses is adequate to cover all estimated credit losses
in the loan portfolio. At June 30, 1995, SFAS No. 114 impaired loans
totaled $4,063,000 and the related allowance for loan losses was $624,000.
The June 30, 1995 impaired loans consisted of non-accrual loans and loans
internally classified as substandard or below and in each instance above an
established dollar threshold. All loans below the established dollar
threshold are considered homogeneous and are considered in the Bank's
normal credit evaluation process. The average recorded investment in
impaired loans for the first six months of 1995 was $3,943,000. Since the
Company sufficiently evaluates the adequacy of the allowance for loan
losses, the impact of adopting SFAS No. 114, as amended, did not have an
effect on the allowance for loan losses or the existing income recognition
and charge-off policies for non-performing loans.
(6) Reclassification -
Certain amounts in the consolidated financial statements presented for
prior periods have been reclassified to conform with the 1995 presentation.
9
<PAGE>
BROAD NATIONAL BANCORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
THREE AND SIX MONTHS ENDED JUNE 30, 1995
----------------------------------------
SUMMARY
-------
The Company reported second quarter 1995 net income of $973,000 or $0.22 per
fully diluted common share. This compares to $998,000 or $0.24 per fully
diluted common share for the second quarter of 1994, which included a $400,000
tax benefit resulting from a valuation allowance adjustment relative to the
company's deferred tax asset.
For the first six months of 1995, the Company reported net income of $1,981,000
or $0.46 per fully diluted common share, compared to net income of $1,841,000 or
$0.44 per fully diluted common share for the first half of 1994. In addition to
the $400,000 tax benefit, net income for the first six months of 1994 also
included a one time recovery of $875,000 ($578,000 tax effected) of legal
expenses in conjunction with a previously announced insurance settlement.
The Company's annualized return on average assets and annualized return on
average shareholder's equity were .89% and 12.58%, respectively, for the first
six months of 1995 compared to annualized returns of .82% and 13.26%,
respectively, for the same 1994 period.
10
<PAGE>
BROAD NATIONAL BANCORPORATION
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
<PAGE>
NET INTEREST INCOME
Six Months Ended June 30
(Dollars in Thousands)
<TABLE>
<CAPTION>
1995 1994
-------- --------
Average Interest Average Average Interest Average
Balance and Fees Rate (4) Balance and Fees Rate (4)
-------- -------- --------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Federal Funds Sold $30,102 $ 894 5.91% $47,468 $ 848 3.55%
------- ------ ---- ------- ------ ----
Investment Securities
U.S. Treasury 22,558 680 6.03% 20,952 465 4.44%
U. S. Government Agencies 85,567 2,561 5.99% 80,821 2,108 5.22%
States and political subdivisions (1 ) 1,556 48 6.17% 1,009 28 5.55%
Other Bonds 373 11 5.90% 388 13 6.70%
------- ------ ---- ------- ------ ----
Total Investment Securities 110,054 3,300 6.00%(2) 103,170 2,614 5.07%(2)
------- ------ ----- ------- ------ -----
Loans
Mortgage 135,181 6,131 9.07% 124,949 5,542 8.87%
Installment 35,350 1,709 9.75% 37,507 1,493 8.03%
Commercial 96,100 4,327 9.08% 98,800 3,676 7.50%
State and political subdivisions (1) 1,182 74 12.52% 1,319 75 11.37%
------- ------ ----- ------- ------ -----
Total Loans 267,813 12,241 9.22% 262,575 10,786 8.28%
------- ------ ----- ------- ------ -----
Total interest earning assets 407,969 $16,435 8.12%(2) 413,213 $14,248 6.95%(2)
-------- ------- ----- ------- ------- ----
Less - Allowance for possible loan losses 7,528 11,356
All other assets 46,853 44,906
-------- ---------
Total Assets $447,294 $446,763
-------- ---------
LIABILITIES AND SHAREHOLDERS' EQUITY
Time Deposits
Savings and interest bearing
demand deposits $221,170 $2,487 2.27% $247,090 $2,482 2.03%
Certificate of Deposits
Under $100,000 71,310 1,652 4.67% 64,583 967 3.02%
Over $100,000 19,365 484 5.04% 12,940 209 3.26%
-------- ------ ---- -------- ----- ----
Total Time Deposits 311,845 4,623 2.99 324,613 3,658 2.27%
Short term borrowings 4,612 131 5.65% 383 4 2.08%
-------- ------ ---- -------- ----- ----
Total Interest Bearing Liabilities 316,457 $4,754 3.03% 324,996 $3,662 2.27%
-------- ------ ---- ------- ------ ----
Other liabilities 6,094 4,029
Demand deposits 93,000 89,952
Shareholders' equity 31,743 27,786
------- -------
Total liabilities and
shareholders' equity $447,294 $446,763
-------- --------
NET INTEREST INCOME; NET INTEREST SPREAD $11,681 5.09% 10,586 4.68%
NET INTEREST MARGIN 5.77%(3) 5.17%(3)
</TABLE>
12
<PAGE>
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 six
months ended June 30, 1995 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.
<TABLE>
<CAPTION>
Increase (Decrease) Due to a
Change in the
----------------------------------------
Average Balance Average Rate Total
---------------- ------------ -------
(Dollars in Thousands)
<S> <C> <C> <C>
Interest Earned on:
Loans $ 288 $1,167 $1,455
Investment securities 182 504 686
Federal funds sold (384) 430 46
----- ------ ------
Total interest income $ 86 $2,101 $2,187
----- ------ ------
Interest paid on:
Savings and interest
bearing demand deposits $(277) $ 282 $ 5
Certificates of deposit:
Under $100,000 94 591 685
Over $100,000 132 143 275
Short term borrowings 109 18 127
----- ------ ------
Total Interest expense $ 58 $1,034 $1,092
----- ------ ------
Change in net interest income $ 28 $1,067 $1,095
Percent increase in net interest ---- ------ ------
income over the prior period 10.34%
------
</TABLE>
Total tax equivalent interest income of $16,435,000 for the first six months of
1995 represents an increase of $2,187,000 or 15.3% over total tax equivalent
interest income of $14,248,000 for the first six months of 1994. This
improvement is primarily due to an increase of 117 basis points in the average
rate earned on interest earning assets which in turn is the result of a rising
interest rate environment. The average rates earned on federal funds sold,
investment securities and loans during the first half of 1995 were 236 basis
points, 93 basis points and 94 basis points, respectively, higher than the year-
ago period. These increased average rates resulted in an increase of $2,101,000
in total interest income for the first half of 1995 as compared to the first
half of 1994. Total average interest earning assets for the first six months of
1995 were $5,244,000 or 1.3% lower than the comparable 1994 period, however, the
decline was represented by relatively lower yielding federal funds sold, which
average balance for the first half of 1995 was $17,366,000 lower than for the
first half of 1994. This decrease was partially offset by increased average
balances of investment securities and loans of $6,884,000 and $5,238,000
respectively. Overall, the increase in average balances of investment securities
and loans for the first half of 1995 as compared to the year-ago period
contributed to an increase of $86,000 in total interest income.
13
<PAGE>
Total interest expense of $2,612,000 for the second quarter of 1995 was $470,000
or 21.9% higher than first quarter 1995 interest expense, and total interest
expense of $4,754,000 for the first six months of 1995 was $1,092,000 or 29.8%
higher than the comparable prior year period. The increase in interest expense
is primarily due to the increase in the average rates paid on deposits, and to a
lesser extent due to the change in the mix of interest bearing liabilities. The
average rate paid for interest bearing liabilities during the first six months
of 1995 was 76 basis points higher than the year-ago period, with the largest
increase in rates reflected in certificates of deposit and short-term
borrowings, which rates were 72 basis points and 357 basis points, respectively,
higher than the comparable prior year period. Additionally, increases in the
average balances of relatively higher cost certificates of deposit and short-
term borrowings contributed to an additional $58,000 increase in total interest
expense for the first six months of 1995 as compared to the similar 1994 period.
Tax equivalent net interest income for the first six months of 1995 increased by
$1,095,000 over the first six months of 1994, and the net interest margin for
the first half of 1995 was 60 basis points higher than the year-ago period.
This increase is primarily attributable to the fact that yields on interest
earning assets increased more quickly and to a greater degree than rates paid on
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
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 $120,000 for the second quarter of 1995
and $220,000 for the first six months of 1995, compared to $100,000 and
$200,000, respectively, for the comparable 1994 periods. Actual net loan
charge-offs for the first six months of 1995 were $388,000 or 0.28% (annualized)
of average total loans, as compared to net loan charge-offs of $3,031,000 or
2.4% (annualized) of average total loans for the comparable 1994 period. 1994
charge-offs included approximately $2,696,000 related to the sale of $5,654,000
of troubled loans during the second quarter of 1994, and 1994 recoveries
included $500,000 received in conjunction with a previously announced insurance
settlement.
NON-INTEREST INCOME AND NON-INTEREST EXPENSES
---------------------------------------------
Total non-interest income of $2,116,000 for the first half of 1995 was $444,000
or 26.6% higher than the year-ago period. $77,000 of this increase is
attributable to other income, and rental income represents the most significant
increase in the other income category. The remainder of the improvement is
attributable to the fact that non-interest income for the first half of 1994 was
negatively impacted as the result of losses of $307,000 on the sale of loans
held for sale and $48,000 on the sale of securities available for sale.
Total non-interest expense of $10,116,000 for the first six months of 1995 were
$594,000 or 6.2% higher than the comparable 1994 period. The largest component
of this increase is legal fees, which are $490,000 higher than the year ago
period. 1994 legal fees included the $875,000 recovery of legal expenses
received in conjunction with the previously announced settlement of claims made
under the Company's insurance policy.
14
<PAGE>
In an effort to reduce salary and benefits expense in future periods, during the
third quarter of 1995, management has offered an early retirement program to
selected employees who meet the criteria of the program. Management will record
a one-time charge, which could approximate $200,000, during the third quarter of
1995 as a result of this early retirement program.
FINANCIAL CONDITION
-------------------
Loans
Total loans, net of unearned income and deferred loan fees, of $262,275,000 at
June 30, 1995 represent a decrease of $4,773,000 or 1.8% from the December 31,
1994 balance of $267,048,000. The most significant components of the decline in
loan balances were a reduction of approximately $8,700,000 in commercial loans
which was partially offset by a $4,800,000 increase in commercial mortgages.
The overall decline in loan balances is primarily attributable to the absence of
qualified loan demand. For the first six months of 1995, average loans of
$267,813,000 represented approximately 65.6% of total average interest-earning
assets, as compared to approximately 63.5% of total average interest-earning
assets for the 1994 six month period.
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.
<TABLE>
<CAPTION>
Six Months Six Months
Ended Ended
June 30, 1995 June 30,1994
-------------- -------------
(Dollars In Thousands)
<S> <C> <C>
Balance, beginning of period $ 7,602 $ 11,252
Provision charged to operations 220 200
Loans charged off (1,284) (3,706)
Recoveries of charged-off loans 896 675
-------- --------
Balance, end of period $ 7,434 $ 8,421
-------- --------
Average gross loans outstanding
during period..................... $267,813 $262,575
-------- --------
Total gross loans at period end.... $262,275 $255,033
-------- --------
Net loans charged-off $ 388 $ 3,031
-------- --------
Ratio of net loans charged-off to
average loans outstanding
during period (Annualized)...... 0.28% 2.4%
----- -----
Allowance for possible loan losses as
a percentage of total gross loans.. 2.83% 3.3%
----- -----
</TABLE>
The amount of allowance applicable to non-classified loans was $3,740,000 and
$4,621,000 at June 30, 1995 and December 31, 1994, respectively.
15
<PAGE>
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.
The following table reflects the components of non-performing assets at June 30,
1995 and December 31, 1994:
<TABLE>
<CAPTION>
June 30, 1995 December 31, 1994
-------------- ------------------
(Dollars In Thousands)
<S> <C> <C>
Past due 90 days or more:
Mortgage....................... $ 1,136 $ 1,388
Commercial..................... 3,316 714
Installment.................... 41 23
------- -------
Total....................... $ 4,493 $ 2,125
------- -------
Non-accrual loans:
Mortgage....................... $ 3,964 $ 4,357
Commercial..................... 1,994 3,222
Installment.................... 1 2
------- -------
Total....................... $ 5,959 $ 7,581
------- -------
Total non-performing loans....... $10,452 $ 9,706
Restructured loans (excluding
amounts classified as
non-performing loans) $ 5,263 $ 5,445
Other real estate owned,
net of reserve................. 717 400
------- -------
Total non-performing assets. $16,432 $15,551
------- -------
Non-performing loans as a
percent of total gross loans 3.99% 3.63%
------- -------
Non-performing loans as a
percent of total assets....... 2.20% 2.26%
------- -------
Non-performing assets as a
percent of loans and other
real estate owned.............. 6.25% 5.81%
------- -------
Allowance for possible loan
losses......................... $ 7,434 $ 7,602
------- -------
Allowance for possible loan
losses as a percent of
non-performing loans........... 71.13% 78.32%
------- -------
</TABLE>
In addition to the non-performing and restructured loans as of June 30, 1995,
the Company had classified an additional $5,578,000 as substandard loans. A
loan loss reserve has been allocated to such loans in accordance with the
Company's policies.
16
<PAGE>
The level of non-performing loans and assets is heavily dependent upon local
economic conditions. The June 30, 1995 total non-performing assets of
$16,432,000 represents an increase of $881,000 or 5.7% over the total at
December 31, 1994. There can be no assurance that non-performing assets will
not continue to increase.
Investment Securities and Federal Funds Sold
Federal funds sold of $65,100,000 at June 30, 1995 represent an increase of
$51,290,000 over the balance at December 31, 1994. Average Federal Funds sold
of $30,102,000 during the first six months of 1995 represented 7.4% of total
average interest earning assets, as compared to 11.5% during the first six
months of 1994.
Total average investment securities of $110,054,000 for the first six months of
1995 represent 27% of total average interest-earning assets, as compared to 25%
for the comparable 1994 period.
Total investment securities, which include securities classified as held-to-
maturity and available-for-sale, of $111,234,000 at June 30, 1995 were
relatively unchanged from December 31, 1994. There were no sales of securities
available-for-sale during the first six months of 1995. During the first six
months of 1994 the Company incurred a loss of $48,000 on the sale of
approximately $6,700,000 of securities available-for-sale.
Deposits
The June 30, 1995 total deposit balance of $434,663,000 represents an increase
of $43,197,000 or 11% over total deposits of $391,466,000 at December 31, 1994.
The major portion of this increase is represented by time deposits which were
$30,196,000 or 40% higher at June 30,1995 than at December 31, 1994. This
increase resulted primarily from the bank's effort during the second quarter of
1995 to offer more competitive rates in order to increase its deposit base and
reduce its short-term borrowings which it had relied upon during the first
quarter of 1995.
Short Term Borrowings
Short term borrowings represent federal funds purchased and securities sold
under agreements to repurchase. The majority of these instruments have terms
ranging from one to thirty days. These balances increased $1,228,000 to
$1,405,000 at June 30, 1995 from the December 31, 1994 balance of $177,000.
Additionally, the average balance of short term borrowings was $4,612,000 during
the first six months of 1995, as the bank drew down certain of its lines of
credit to supplement its liquidity management program during the first quarter
of 1995. This resulted in an increase of $127,000 in interest expense for the
first half of 1995 as compared to the prior year period.
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
17
<PAGE>
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.
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 June 30, 1995 and December 31, 1994.
<TABLE>
<CAPTION>
June 30, 1995 December 31, 1994
-------------- ------------------
<S> <C> <C>
Cash and cash equivalents
and securities maturing in
one year to total assets 20.9% 9.2%
Net loans to total deposits 58.6% 66.3%
</TABLE>
To assist in the management of its liquidity, the bank has available $4,000,000
in lines of credit for federal funds and $20,000,000 in lines of credit for
repurchase agreements. As discussed under "SHORT TERM BORROWINGS", the bank
drew down certain lines of credit during the first quarter of 1995. However,
none of these lines were in use during the second quarter of 1995.
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, 1994, retained earnings of the Bank of $7,165,000
were available for payment of dividends to the parent company without regulatory
approval. Additionally, at June 30, 1995 Bancorporation had $291,000 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.
18
<PAGE>
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 benefit in periods of
rising interest rates, but suffer as rates decrease. Companies that are
liability sensitive (a negative gap) benefit in periods of declining rates, but
suffer as rates increase.
At June 30, 1995 the Company maintained negative sensitivity gaps of 60:1, 55:1
and 55:1 at the cumulative 3 month, 6 month and 12 month periods. The negative
gap would generally indicate that (i) an increase in interest rates would result
in a decrease in net interest income for the Bank as the level of interest paid
on interest-bearing liabilities would increase more quickly than the level of
interest received on earning assets or (ii) a decrease in interest rates should
result in an increase in net interest income for the Bank as the level of
interest paid on interest-bearing liabilities would decrease more quickly than
the level of interest received on earning assets.
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
Total shareholder's equity increased $2,106,000 during the first six months of
1995 as the result of net income of 1,981,000, reduced by dividends of $538,000,
and increased by a net decrease in unrealized securities losses of $663,000.
At June 30, 1995, the Company had total capital equal to 11.49% of risk-based
assets which included tier one capital equal to 10.22% of risk-based assets.
These compare to minimum regulatory capital requirements of 8% and 4%,
respectively. At June 30, 1995, the Company had tier one capital equal to 6.97%
of adjusted total assets. This compares to a minimum regulatory capital
requirement of 4% to 5%.
At June 30, 1995, the Bank had total capital equal to 11.42% of risk-based
assets, which included tier one capital equal to 10.16% of risk-based assets.
These compare to minimum regulatory capital requirements of 8% and 4%,
respectively. At June 30, 1995, the Company had tier one capital equal to 6.92%
of adjusted total assets. This compares to a minimum regulatory capital
requirement of 4% to 5%.
19
<PAGE>
6. Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibits
Statement 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
June 30, 1995.
20
<PAGE>
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: August 11, 1995 /s/ Donald M. Karp
--------------------
Donald M. Karp
Chairman and CEO
/s/ James Boyle
-----------------
James Boyle
Treasurer
21
<PAGE>
BROAD NATIONAL BANCORPORATION
Computation of Net Income Per Share
(Unaudited)
<TABLE>
<CAPTION>
THREE-MONTH PERIOD SIX-MONTH PERIOD
ENDED JUNE 30 ENDED JUNE 30
1995 1994 (1) 1995 1994 (1)
------------------ ----------------- ---------- -----------
<S> <C> <C> <C> <C>
PRIMARY:
-------
Average number of common
shares outstanding 2,889,501 2,875,166 2,886,930 2,875,166
Assumed exercise of options
outstanding 35,289 407 26,730 871
---------- ---------- ---------- ----------
Average number of common shares and
common share equivalents outstanding 2,924,790 2,875,593 2,913,660 2,876,037
---------- ---------- ---------- ----------
Net Income $ 973,026 $ 997,406 $1,980,984 $1,840,628
Less: Cumulative Preferred Dividends 152,527 154,336 306,966 308,672
---------- ---------- ---------- ----------
Net income available to common shareholders $ 820,499 $ 843,070 $1,674,018 $1,531,956
---------- ---------- ---------- ----------
Primary earnings per common share $0.28 $0.29 $0 .57 $0.53
========== ========== ========== ==========
FULLY DILUTED:
--------------
Average number of common shares of
outstanding 2,889,501 2,875,166 2,886,930 2,875,166
Assumed exercise of options outstanding 55,278 1,738 55,278 1,738
Assumed conversion of preferred shares 1,349,955 1,366,115 1,349,955 1,366,115
---------- ---------- ---------- ----------
Adjusted average number of common shares 4,294,734 4,243,019 4,292,163 4,243,019
---------- ---------- ---------- ----------
Net Income $ 973,026 $ 997,406 $1,980,984 $1,840,628
---------- ---------- ---------- ----------
Fully diluted earnings per common share $0.22 $0.24 $0.46 $0.44
========== ========== ========== ==========
</TABLE>
(1) 1994 Per Common Share Data have been restated to reflect the 5% stock
dividend distributed in December 1994.
22
<PAGE>
Independent Auditors' 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 June 30,
1995, and the related consolidated condensed statements of income and cash flows
for the three-month and six-month periods ended June 30, 1995 and 1994. 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, 1994, and the related consolidated statements of income, shareholders'
equity, and cash flows for the year then ended (not presented herein); and in
our report dated January 30, 1995, 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, 1994, 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
August 11, 1995
23
