<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 30,1996 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, 1996:
Common Stock, $1.00 par value - 4,252,191
1
<PAGE>
BROAD NATIONAL BANCORPORATION
Index to Form 10-Q Financial Information
For the Three Months and Six Months Ended June 30,1996
---------------------------------------------------------
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PART 1 - FINANCIAL INFORMATION 3
- ------------------------------
Consolidated Statements of Condition
as of June 30, 1996 and December 31, 1995 4
Consolidated Statements of Income for the
Three Month and Six Month Periods Ended June 30, 1996
and 1995 5
Consolidated Statements of Cash Flows for the Six
Month Periods Ended June 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 20
- --------------------------
Items 1 to 5 Not Applicable or Negative
Item 6 20
Signatures 21
Exhibit 1 - Computation of Net Income
per Common Share 22
Exhibit 2 - Independent Auditor's Review Report of Interim
Financial Information 24
Exhibit 27 - Financial Data Schedule 25
</TABLE>
2
<PAGE>
BROAD NATIONAL BANCORPORATION
PART 1 - FINANCIAL INFORMATION
The following consolidated financial statements of Broad National Bancorporation
as of June 30, 1996 and December 31, 1995 as well as the three month and six
month periods ended June 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
<PAGE>
BROAD NATIONAL BANCORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CONDITION
(IN THOUSANDS)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1996 1995
----------- ------------
(Unaudited)
<S> <C> <C>
ASSETS
- ------
CASH AND DUE FROM BANKS $ 34,624 $ 25,810
FEDERAL FUNDS SOLD 33,850 61,300
SECURITIES HELD-TO-MATURITY
(aggregate market value $79,941)
and $59,948, respectively) 81,811 60,266
SECURITIES AVAILABLE-FOR-SALE 59,439 55,946
LOANS, Net of unearned income & deferred loan fees 280,882 267,130
LESS -
Allowance for possible loan losses 7,804 7,402
- ----------------------------------------------------------------------------------------
NET LOANS 273,078 259,728
- ----------------------------------------------------------------------------------------
PREMISES AND EQUIPMENT, net 9,300 9,418
ACCRUED INTEREST RECEIVABLE 3,354 2,819
OTHER ASSETS 6,016 5,898
- ----------------------------------------------------------------------------------------
TOTAL ASSETS $501,472 $481,185
- ----------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
DEPOSITS
Non-interest bearing demand $ 95,102 $102,207
Savings and interest bearing demand 229,332 220,058
Time deposits less than $100,000 85,649 86,509
Time deposits of $100,000 or more 48,328 20,907
- ----------------------------------------------------------------------------------------
Total Deposits 458,411 429,681
SHORT-TERM BORROWINGS 1,000 782
ACCRUED TAXES, INTEREST AND OTHER LIABILITIES 6,571 16,193
- ----------------------------------------------------------------------------------------
TOTAL LIABILITIES 465,982 446,656
- ----------------------------------------------------------------------------------------
SHAREHOLDERS' EQUITY:
Preferred stock-1985 class, $10 par value,
authorized and outstanding 0 shares at 6/30/96
and 17,124 shares at 12/31/95 0 171
8 1/2% Cumulative Convertible Preferred Stock-1992
class, $1 par value, authorized and
outstanding 0 shares at 6/30/96
and 562,553 shares at 12/31/95 0 563
Common stock, $1 par value, authorized
5,500,000; outstanding 4,252,191 shares at 6/30/96
and 3,059,203 shares at 12/31/95 4,252 3,059
Capital surplus 22,737 23,145
Retained earnings 8,874 7,307
Unrealized (loss) gain on securities available-for-sale, net (373) 284
- ----------------------------------------------------------------------------------------
TOTAL SHAREHOLDERS' EQUITY 35,490 34,529
- ----------------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $501,472 $481,185
- ----------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
BROAD NATIONAL BANCORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS)
<TABLE>
<CAPTION>
3 MONTH PERIOD ENDED 6 MONTH PERIOD ENDED
-------------------- --------------------
JUNE 30 JUNE 30
1996 1995 1996 1995
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
INTEREST INCOME
Interest and fees on loans $6,074 $6,124 $11,863 $12,217
Interest and dividends on investments -
Taxable 2,098 1,630 3,887 3,276
Exempt from federal income taxes 13 3 30 12
Interest on federal funds sold 289 643 798 894
- ------------------------------------------------------------------------------------------------------
TOTAL INTEREST INCOME 8,474 8,400 16,578 16,399
- ------------------------------------------------------------------------------------------------------
INTEREST EXPENSE:
Interest on savings & interest bearing
demand deposits 1,250 1,323 2,449 2,487
Interest on time certificates of
deposit of $100,000 or more 396 270 680 484
Interest on other time deposits 997 1,005 2,109 1,652
Interest on short-term borrowings 15 14 33 131
- ------------------------------------------------------------------------------------------------------
TOTAL INTEREST EXPENSE 2,658 2,612 5,271 4,754
- ------------------------------------------------------------------------------------------------------
NET INTEREST INCOME 5,816 5,788 11,307 11,645
- ------------------------------------------------------------------------------------------------------
PROVISION FOR POSSIBLE LOAN LOSSES 225 120 450 220
- ------------------------------------------------------------------------------------------------------
INTEREST INCOME AFTER PROVISION FOR
POSSIBLE LOAN LOSSES 5,591 5,668 10,857 11,425
- ------------------------------------------------------------------------------------------------------
NON-INTEREST INCOME
Service charges on deposit accounts 1,122 872 1,977 1,686
Other income 231 228 448 424
Gain on sale of loans held for sale 0 3 0 6
Loss on sale of securities available-for-sale (47) 0 (47) 0
- ------------------------------------------------------------------------------------------------------
TOTAL NON-INTEREST INCOME 1,306 1,103 2,378 2,116
- ------------------------------------------------------------------------------------------------------
NON-INTEREST EXPENSES:
Salaries and wages 2,042 1,971 4,073 3,943
Employee benefits 624 572 1,158 1,133
Occupancy expense 450 492 924 964
Furniture and equipment expense 274 353 564 665
Data processing fees 255 277 523 555
Legal fees 193 124 388 250
Professional fees 324 228 465 413
Postage, delivery and communication 165 160 329 313
FDIC and OCC assessments 27 248 55 496
Other real estate expense 104 5 113 24
Other expenses 618 655 1,184 1,360
- ------------------------------------------------------------------------------------------------------
TOTAL NON-INTEREST EXPENSES 5,076 5,085 9,776 10,116
- ------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE>
BROAD NATIONAL BANCORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS)
<TABLE>
<CAPTION>
3 MONTH PERIOD ENDED 6 MONTH PERIOD ENDED
JUNE 30 JUNE 30
1996 1995 1996 1995
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
INCOME BEFORE INCOME TAXES 1,821 1,686 3,459 3,425
PROVISION FOR INCOME TAXES 694 713 1,295 1,444
- ------------------------------------------------------------------------------------------------------
NET INCOME $1,127 $973 $2,164 $1,981
- ------------------------------------------------------------------------------------------------------
NET INCOME APPLICABLE TO COMMON STOCK $1,127 $820 $2,164 $1,674
- ------------------------------------------------------------------------------------------------------
AVERAGE NUMBER OF COMMON SHARES
OUTSTANDING
PRIMARY 4,314,948 2,924,790 4,119,222 2,913,660
ASSUMING FULL DILUTION 4,324,793 4,294,734 4,319,334 4,292,163
- ------------------------------------------------------------------------------------------------------
NET INCOME PER COMMON SHARE
PRIMARY EARNINGS PER COMMON SHARE $0.26 $0.28 $0.53 $0.57
FULLY DILUTED EARNINGS PER COMMON SHARE $0.26 $0.22 $0.50 $0.46
</TABLE>
See accompanying notes to consolidated financial statements.
6
<PAGE>
BROAD NATIONAL BANCORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTH PERIOD ENDED JUNE 30
1996 1995
-------- -------
(Unaudited)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 2,164 $ 1,981
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 567 581
Amortization of securities premium net (387) 107
Amortization of deferred points and fees
and deferral of loan origination costs (156) (232)
Provision for possible loan losses 450 220
Deferred tax (benefit) expense (371) 61
Decrease in accrued taxes
interest, and other liabilities (9,622) (1,134)
Gain on sale of loans held for sale 0 (6)
Loss on sale of securities available-for-sale 47 0
Loss on sale of other real estate owned 96 9
(Increase) decrease in accrued interest receivable (535) 1
Other Net 557 (437)
- -----------------------------------------------------------------------------------
Net cash (used in) provided by operating activities $ (7,190) $ 1,151
- -----------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from the sale of other real estate owned $ 292 $ 166
Net (increase) decrease in loan balances (13,194) 4,269
Proceeds from sale of loans held for sale 0 663
Proceeds from maturities of securities
held-to-maturity 4,707 3,512
Proceeds from maturities of securities
available-for-sale 10,448 538
Proceeds from the sale of securities
available-for-sale 14,703 0
Purchase of securities held-to-maturity (26,479) (1,546)
Purchase of securities available-for-sale (29,878) (2,015)
Capital expenditures (449) (561)
- -----------------------------------------------------------------------------------
Net cash (used in) provided by investing activities $(39,850) $ 5,026
- -----------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in certificates of deposit $ 26,561 $30,196
Net increase in demand deposit, savings
and interest bearing demand accounts 2,169 13,001
Net increase in short-term borrowings 218 1,228
Issuance of common stock 98 0
Redemption of preferred stock (47) 0
Dividends paid (595) (536)
- -----------------------------------------------------------------------------------
Net cash provided by financing activities 28,404 $43,889
- -----------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS $(18,636) $50,066
CASH AND CASH EQUIVALENTS, beginning of period 87,110 38,295
- -----------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS, end of period $ 68,474 $88,361
- -----------------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for
Interest $ 5,752 $ 4,079
Taxes $ 1,639 $ 1,687
- -----------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
7
<PAGE>
BROAD NATIONAL BANCORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 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
<PAGE>
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) Reclassification -
Certain amounts in the consolidated financial statements presented for
prior periods have been reclassified to conform with the 1996 presentation.
9
<PAGE>
BROAD NATIONAL BANCORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 1996
- --------------------------------
SUMMARY
-------
The Company reported net income of $1,127,000 or $0.26 per fully diluted common
share for the second quarter of 1996 compared to net income of $973,000 or $0.22
per fully diluted common share for the second quarter of 1995.
For the first six months of 1996, the Company reported net income of $2,164,000
or $0.50 per fully diluted common share, compared to net income of $1,981,000 or
$0.46 per fully diluted common share for the first half of 1995.
Total assets of $501,472,000 at June 30,1996 represent an increase of
$20,287,000 or 4.2% from the December 31, 1995 balance of $481,185,000. Loans,
net of unearned income and deferred loan fees, increased $13,752,000 or 5.1% to
$280,882,000 during the first six months of 1996. Total deposits increased
$28,730,000 or 6.7% to $458,411,000 during the first six months of 1996.
Total shareholders' equity increased $961,000 during the first six months of
1996 as the result of net income of $2,164,000 and the proceeds of $98,000 from
the exercise of stock options, offset by dividends declared to shareholders of
$597,000, the redemption of preferred stock of $47,000 and a net decrease of
$657,000 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 .92% and 12.38%, respectively, for the first
six months of 1996, compared to annualized returns of .89% and 12.58%,
respectively, for the comparable 1995 period.
10
<PAGE>
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>
1996 1995
-------- --------
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 $ 30,340 $ 798 5.20% $ 30,102 $ 894 5.91%
--------- -------- -------- -------- -------- --------
Investment Securities
U.S. Treasury 18,065 563 6.23 22,558 680 6.03
U. S. Government Agencies 110,111 3,250 5.90 85,567 2,561 5.99
States and political subdivisions (1) 1,667 51 6.12 1,556 48 6.17
Other Bonds 1,932 67 6.94 373 11 5.90
-------- -------- -------- -------- -------- --------
Total Investment Securities 131,775 3,931 5.97 (2) 110,054 3,300 6.00 (2)
-------- -------- -------- -------- -------- --------
Loans
Mortgage 145,328 6,106 8.40 135,181 6,131 9.07
Installment 35,411 1,647 9.35 35,350 1,709 9.75
Commercial 92,008 4,067 8.89 96,100 4,327 9.08
State and political subdivisions (1) 1,058 65 12.29 1,182 74 12.52
-------- -------- -------- -------- -------- --------
Total Loans 273,805 11,885 8.73 267,813 12,241 9.22
-------- -------- -------- -------- -------- --------
Total interest earning assets 435,920 $ 16,614 7.66% (2) 407,969 $ 16,435 8.12% (2)
-------- -------- -------- -------- -------- --------
Less - Allowance for possible loan losses 7,556 7,528
All other assets 45,975 46,853
-------- --------
Total Assets $474,339 $447,294
-------- --------
LIABILITIES AND SHAREHOLDERS' EQUITY
Time Deposits
Savings and interest bearing
demand deposits $224,661 $ 2,449 2.19% $221,170 $ 2,487 2.27%
Certificate of Deposits
Under $100,000 83,876 2,109 5.06 71,310 1,652 4.67
Over $100,000 27,571 680 4.96 19,365 484 5.04
-------- -------- -------- -------- -------- --------
Total Time Deposits 336,108 5,238 3.13 311,845 4,623 2.99
Short term borrowings 1,301 33 5.02 4,612 131 5.65
-------- -------- -------- -------- -------- --------
Total Interest Bearing Liabilities 337,409 $ 5,271 3.14% 316,457 $ 4,754 3.03%
-------- -------- -------- -------- -------- --------
Other liabilities 7,781 6,094
Demand deposits 93,997 93,000
Shareholders' equity 35,152 31,743
-------- --------
Total liabilities and
shareholders' equity $474,339 $447,294
-------- --------
NET INTEREST INCOME; NET INTEREST SPREAD $ 11,343 4.52% $ 11,681 5.09%
NET INTEREST MARGIN 5.23% (3) 5.77% (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, 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.
<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 $ 275 $ (631) $ (356)
Investment securities 651 (20) 631
Federal funds sold 7 (103) (96)
------ ------ ------
Total interest income $ 933 $ (754) $ 179
------ ------ ------
Interest paid on:
Savings and interest
bearing demand deposits $ 44 $ (82) $ (38)
Certificates of deposit:
Under $100,000 310 147 457
Over $100,000 206 (10) 196
Short term borrowings (84) (14) (98)
------ ------ ------
Total Interest expense $ 476 $ 41 $ 517
------ ------ ------
Change in net interest income $ 457 $ (795) $ (338)
Percent decrease in net interest ------ ------ ------
income over the prior period (2.89)%
------
</TABLE>
Total tax equivalent interest income of $16,614,000 for the first six months of
1996 represents an increase of $179,000 or 1.1% over total tax equivalent
interest income of $16,435,000 for the comparable 1995 period. This improvement
is primarily due to an increase of $27,951,000 in the average balance of total
interest earning assets for the first six months of 1996 as compared to the
first six months of 1995. This increase in average balances is reflected
primarily in total investment securities, which average balance for the first
half of 1996 is $21,721,000 higher than for 1995, and to a lesser extent in
loans, which average balance for the first half of 1996 is $5,992,000 higher
than for 1995. The increase in the average balance of interest earning assets
resulted in a $933,000 increase in total tax equivalent interest income.
However, a decline of 46 basis points in the average rate earned on total
interest earning assets resulted in a decrease of $754,000 in total tax
equivalent interest income, offsetting all but $179,000 of the $933,000 increase
in total tax equivalent interest income resulting from the increased average
balance of 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 $5,271,000 for the first six months of 1996 was
$517,000 or 10.9% higher than the comparable prior year period. An increase in
the average balance of interest bearing liabilities, and to a lesser extent, an
13
<PAGE>
increase in the average rate paid on interest bearing liabilities, contributed
to the increase in total interest expense. The average balance of total
interest bearing liabilities for the first six months of 1996 increased
$20,952,000 or 6.6% as compared to 1995, and resulted in an increase of $476,000
in total interest expense. The most significant component of the increase in
total interest expense is represented by certificates of deposit under $100,000,
for which interest expense for the first six months of 1996 was $457,000 higher
than for the first six months of 1995. The average balance of certificates of
deposit under $100,000 was $12,566,000 higher for the first half of 1996 as
compared to the first half of 1995, and contributed $310,000 to the increase in
total interest expense. The average rate paid on these certificates of deposit
during the first six months of 1996 was 39 basis points higher than the
comparable prior year period, contributing $147,000 to the increase in total
interest expense. The increase in the average balance of certificates of
deposit resulted from the bank's efforts, subsequent to the first quarter of
1995, to increase its deposit base and reduce its reliance on borrowed funds,
which borrowed funds balance had been as high as $21,345,000 during the first
quarter of 1995. The increase in the average rate is the result of the need to
pay higher rates in order to attract these additional deposits.
Tax equivalent net interest income for the first six months of 1996 was $338,000
or 2.9% lower than for the first six months of 1995, and the net interest margin
for the first half of 1996 was 54 basis points lower than 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 and
the cost 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 $450,000 for the first six months of 1996
compared to $220,000 for the comparable 1995 period. The increase in the
provision for possible loan losses is attributable to the increase in non-
performing loans during the first six months of 1996. In this regard,
management is continuing to explore alternatives for the possible improvement of
the Bank's asset quality ratios (see Asset Quality). These efforts may result
in further increases to the loan loss provision during the remaining six months
of 1996. Actual net loan charge-offs for the first six months of 1996 were
$48,000 or 0.04% (annualized) of average total loans, as compared to net loan
charge-offs of $388,000 or 0.28% (annualized) of average total loans for the
comparable 1995 period.
NON-INTEREST INCOME AND NON-INTEREST EXPENSES
- ---------------------------------------------
Total non-interest income of $2,378,000 for the first six months of 1996 was
$262,000 or 12.4% higher than the year-ago period. This increase is the result
of service charges on deposit accounts which were $291,000 or 17.3% 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 six 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 six months of 1995.
14
<PAGE>
Total non-interest expense of $9,776,000 for the first six months of 1996 was
$340,000 or 3.4% 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 $441,000 or
88.9% lower than the prior year period as the result of the reduction of the
deposit insurance assessment by the FDIC. The decline of $101,000 or 15.2% in
furniture and equipment expense is primarily attributable to the reduction of
equipmental rental costs resulting from the Company's decision to purchase
rather than lease its personal computer equipment. Other expenses of $1,184,000
for the first half of 1996 are $176,000 or 12.9% lower than the comparable prior
year period primarily due to decline in expenses associated with a data
processing conversion. These expense reductions were partially offset by
increases in legal fees, professional fees and other real estate expense. The
increase of $138,000 or 55.2% in legal fees is primarily the result of increased
legal expenses associated with the Bank's problem loans. The increase of $89,000
in other real estate expense is due to expenses and a loss resulting from the
sale of an OREO property during the second quarter of 1996. The increase in
professional fees is primarily due to an acceptance fee paid to an outside
consulting firm which will manage a reengineering project for 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 last
approximately six months, and the costs associated with this project, estimated
to be $600,000, will be absorbed by the Bank over the remaining six months of
1996. Because of the time lag required to implement the revenue enhancement and
expense reduction recommendations resulting from this project, management does
not believe that any benefits which may be realized from this project during the
next six months will be sufficient to fully offset the costs and any one-time
charges which may be associated with this project during the remainder of 1996.
FINANCIAL CONDITION
- -------------------
Loans
Total loans, net of unearned income and deferred loan fees, of $280,882,000 at
June 30, 1996 represent an increase of $13,752,000 or 5.1% from the December 31,
1995 balance of $267,130,000. The most significant components of the increase in
loan balances were an increase of $7,815,000 or 6.4% in commercial mortgages and
an increase of $2,863,000 or 23.1% in consumer loans. For the first six months
of 1996, average loans of $273,805,000 represented 62.8% of total average
interest earning assets, as compared to 65.6% of total average interest earning
assets for the first six 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
<PAGE>
<TABLE>
<CAPTION>
Six Months Six Months
Ended Ended
June 30,1996 June 30,1995
------------ ------------
(Dollars In Thousands)
<S> <C> <C>
Balance, beginning of period $ 7,402 $ 7,602
Provision charged to operations 450 220
Loans charged off (519) (1,284)
Recoveries of charged-off loans 471 896
-------- --------
Balance, end of period $ 7,804 $ 7,434
-------- --------
Average gross loans outstanding
during period....................... $273,805 $267,813
-------- --------
Total gross loans at period end...... $280,882 $262,275
-------- --------
Net loans charged-off................ $ 48 $ 388
-------- --------
Ratio of net loans charged-off to
average loans outstanding
during period (annualized)....... 0.04% 0.28%
----- ------
Allowance for possible loan losses as
a percentage of total gross loans.. 2.78% 2.83%
----- ------
</TABLE>
The amount of allowance applicable to non-classified loans was $4,244,000 and
$3,778,000 at June 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
<PAGE>
The following table reflects the components of non-performing assets at June 30,
1996 and December 31, 1995:
<TABLE>
<CAPTION>
June 30, 1996 December 31, 1995
-------------- ------------------
(Dollars In Thousands)
<S> <C> <C>
Past due 90 days or more:
Mortgage....................... $ 1,945 $ 1,938
Commercial..................... 1,672 1,167
Installment.................... 19 18
------- -------
Total....................... $ 3,636 $ 3,123
------- -------
Non-accrual loans:
Mortgage....................... $ 6,067 $ 4,042
Commercial..................... 3,998 3,049
Installment.................... 0 0
------- -------
Total....................... $10,065 $ 7,091
------- -------
Total non-performing loans....... $13,701 $10,214
Restructured loans (excluding
amounts classified as
non-performing loans)........... 3,970 5,105
Other real estate owned,
net of reserve................. 689 772
------- -------
Total non-performing assets...... $18,360 $16,091
------- -------
Non-performing loans as a
percent of total gross loans.. 4.88% 3.82%
------- -------
Non-performing loans as a
percent of total assets....... 2.73% 2.12%
------- -------
Non-performing assets as a
percent of loans and other
real estate owned.............. 6.52% 6.00%
------- -------
Allowance for possible loan
losses......................... $ 7,804 $ 7,402
------- -------
Allowance for possible loan
losses as a percent of
non-performing loans........... 56.96% 72.47%
------- -------
</TABLE>
In addition to the non-performing and restructured loans as of June 30, 1996 and
December 31, 1995, the Company had classified an additional $3,397,000 and
$4,932,000, respectively, as substandard loans. A loan loss reserve has been
allocated to such loans in accordance with the Company's policies.
At June 30, 1996, the recorded investment in loans that are considered to be
impaired under SFAS 114 was $10,696,000 for which the related allowance for
credit losses is $309,000. The impaired loan portfolio is primarily collateral
dependent, as defined by SFAS 114. The change in the allowance for impaired
loans during the first six months of 1996 represented a recovery of $461,000.
The average recorded investment in impaired loans during the first six months of
1996 was approximately $8,880,200. For the first six months of 1996, the
Company recognized cash basis interest income on these impaired loans of
$59,000.
17
<PAGE>
The level of non-performing loans and assets is heavily dependent upon local
economic conditions. The June 30, 1996 total non-performing assets of
$18,360,000 represents an increase of $2,269,000 or 14.1% over the total at
December 31, 1995. The increase in non-performing assets is represented
primarily by an increase in non-accrual loans, which in turn is primarily
attributable to loans of a single customer, whose businesses were adversely
affected by the severe winter weather conditions. There can be no assurance
that non-performing assets will not continue to increase.
Management is continuing to explore alternatives for the possible improvement of
the Company's asset quality ratios. These efforts may result in increased loan
chargeoffs and increased provisions for possible loan losses during the
remaining six months of 1996.
Investment Securities and Federal Funds Sold
Federal funds sold of $33,850,000 at June 30, 1996 represent a decrease of
$27,450,000 from the balance at December 31, 1995. Most of this decline is
attributable to the transfer of funds into the investment portfolio. Average
Federal Funds sold of $30,340,000 during the first six months of 1996
represented 7.0% of total average interest earning assets, as compared to 7.4%
during the first six months of 1995.
Total average investment securities of $131,775,000 for the first six months of
1996 represent 30.2% 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 $141,250,000 at June 30, 1996 represent an
increase of $25,038,000 or 21.5% over the balance at December 31, 1995. As
mentioned above, this growth was funded from the transfer of funds from federal
funds sold. During the second quarter 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 six months of 1995.
Deposits
The June 30, 1996 total deposit balance of $458,411,000 represents an increase
of $28,730,000 or 6.7% 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 $27,421,000 higher at June 30, 1996
than at December 31, 1995. $25,000,000 of the $27,421,000 increase is
represented by a single short-term deposit of a municipal depositor. The
Company does not anticipate retaining this $25,000,000 time deposit on a long
term basis.
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 $218,000 to
$1,000,000 at June 30, 1996 from the December 31, 1995 balance of $782,000.
18
<PAGE>
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.
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, 1996 and December 31, 1995.
<TABLE>
<CAPTION>
June 30, 1996 December 31, 1995
-------------- ------------------
<S> <C> <C>
Cash and cash equivalents
and securities maturing in
one year to total assets 13.7% 22.1%
Net loans to total deposits 59.6% 60.4%
</TABLE>
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 six 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 June 30, 1996 Bancorporation had $549,000 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
<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 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 June 30, 1996 the Company maintained negative sensitivity gaps of 75:1, 67:1
and 66:1 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 June 30, 1996, the Company had total capital equal to 12.08% of risk-based
assets which included tier one capital equal to 10.81% of risk-based assets.
These compare to minimum regulatory capital requirements of 8% and 4%,
respectively. At June 30, 1996, the Company had tier one capital equal to 7.30%
of adjusted total assets. This compares to a minimum regulatory capital
requirement of 4% to 5%.
At June 30, 1996, the Bank had total capital equal to 12.03% of risk-based
assets, which included tier one capital equal to 10.76% of risk-based assets.
These compare to minimum regulatory capital requirements of 8% and 4%,
respectively. At June 30, 1996, the Company had tier one capital equal to 7.27%
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
<PAGE>
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
June 30, 1996.
21
<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 12, 1996 /s/ Donald M. Karp
--------------------
Donald M. Karp
Chairman and CEO
/s/ James Boyle
--------------------
James Boyle
Treasurer
22
<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
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
PRIMARY:
--------
Average number of common
shares outstanding 4,230,225 2,889,501 4,041,237 2,886,930
Assumed exercise of options
outstanding 84,723 35,289 77,985 26,730
------ ------ ------ ------
Average number of common shares and
common share equivalents outstanding 4,314,948 2,924,790 4,119,222 2,913,660
--------- --------- --------- ---------
Net Income $1,127,062 $ 973,026 $2,163,712 $1,980,984
Less: Cumulative Preferred Dividends 0 152,527 0 306,966
--------- --------- --------- ---------
Net income available to common shareholders $1,127,062 $ 820,499 $2,163,712 $1,674,018
--------- --------- --------- ---------
Primary earnings per common share $ 0.26 $ 0.28 $ 0.53 $ 0 .57
========= ========= ========= =========
FULLY DILUTED:
- --------------
Average number of common shares of
outstanding 4,230,225 2,889,501 4,041,237 2,886,930
Assumed exercise of options outstanding 84,723 55,278 77,985 55,278
Assumed conversion of preferred shares 9,845 1,349,955 200,112 1,349,955
--------- --------- --------- ---------
Adjusted average number of common shares 4,324,793 4,294,734 4,319,334 4,292,163
--------- --------- --------- ---------
Net Income $1,127,062 $ 973,026 $2,163,712 $1,980,984
Fully diluted earnings per common share $ 0.26 $ 0.22 $ 0.50 $ 0.46
========= ========= ========= =========
</TABLE>
23
<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,
1996, and the related consolidated condensed statements of income, and cash
flows for the three-month and six month periods ended June 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
August 12, 1996
24
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM BROAD
NATIONAL BANCORPORATIONS FORM 10-Q FOR THE QUARTER ENDED JUNE 30,1996 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-30-1996
<CASH> 34,624
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 33,850
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 59,439
<INVESTMENTS-CARRYING> 81,811
<INVESTMENTS-MARKET> 79,941
<LOANS> 280,882
<ALLOWANCE> 7,804
<TOTAL-ASSETS> 501,472
<DEPOSITS> 458,411
<SHORT-TERM> 1,000
<LIABILITIES-OTHER> 6,571
<LONG-TERM> 0
0
0
<COMMON> 4,252
<OTHER-SE> 31,238
<TOTAL-LIABILITIES-AND-EQUITY> 501,472
<INTEREST-LOAN> 11,863
<INTEREST-INVEST> 3,917
<INTEREST-OTHER> 798
<INTEREST-TOTAL> 16,578
<INTEREST-DEPOSIT> 5,238
<INTEREST-EXPENSE> 5,271
<INTEREST-INCOME-NET> 11,307
<LOAN-LOSSES> 450
<SECURITIES-GAINS> (47)
<EXPENSE-OTHER> 9,776
<INCOME-PRETAX> 3,459
<INCOME-PRE-EXTRAORDINARY> 3,459
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,164
<EPS-PRIMARY> 0.53
<EPS-DILUTED> 0.50
<YIELD-ACTUAL> 5.23
<LOANS-NON> 10,065
<LOANS-PAST> 3,636
<LOANS-TROUBLED> 3,970
<LOANS-PROBLEM> 3,397
<ALLOWANCE-OPEN> 7,402
<CHARGE-OFFS> 519
<RECOVERIES> 471
<ALLOWANCE-CLOSE> 7,804
<ALLOWANCE-DOMESTIC> 7,804
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 4,244
</TABLE>
