<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 September 30,1998 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 IRS 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 (973) 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 October 31, 1998:
Common Stock, $1.00 par value - 4,665,869
<PAGE>
BROAD NATIONAL BANCORPORATION
Index to Form 10-Q Financial Information
For the Three Months and Nine Months Ended September 30,1998
----------------------------------------------------
PAGE
----
PART 1 - FINANCIAL INFORMATION 3
- ------------------------------
Consolidated Statements of Condition
as of September 30, 1998 and December 31, 1997 4
Consolidated Statements of Income for the
Three Month and Nine Month Periods Ended September 30, 1998
and 1997 5
Consolidated Statements of Cash Flows for the Nine
Month Periods Ended September 30, 1998 and 1997 7
Notes to Consolidated Financial Statements 8
Management's Discussion and Analysis of Financial
Condition and Results of Operations 10
PART 2 - OTHER INFORMATION 24
- --------------------------
Items 1 to 5 Not Applicable or Negative
Item 6 24
Signatures 25
Exhibit 1 - Computation of Net Income per Common Share 26
Exhibit 2 - Independent Auditor's Review Report of Interim
Financial Information 27
Exhibit 27 - Financial Data Schedule 28
2
<PAGE>
BROAD NATIONAL BANCORPORATION
PART 1 - FINANCIAL INFORMATION
The following consolidated financial statements of Broad National Bancorporation
as of September 30, 1998 and December 31, 1997 as well as the three month and
nine month periods ended September 30, 1998 and 1997 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, 1997.
The results of operations for the periods presented are not necessarily an
indication of the results which can be expected for 1998.
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 27 for their report on this limited review.
3
<PAGE>
BROAD NATIONAL BANCORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CONDITION
(IN THOUSANDS)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1997
---- ----
(Unaudited)
<S> <C> <C>
ASSETS
- ------
CASH AND DUE FROM BANKS $ 19,551 $ 21,933
FEDERAL FUNDS SOLD 11,955 37,300
------ ------
CASH AND CASH EQUIVALENTS 31,506 59,233
SECURITIES HELD-TO-MATURITY
(aggregate market value $39,546 and $65,203, respectively) 39,075 65,330
SECURITIES AVAILABLE-FOR-SALE 188,769 141,077
LOANS, Net of deferred loan fees 348,689 322,528
LESS -
Allowance for possible loan losses 7,925 6,974
- -------------------------------------------------------------------------------------------------------------------------
NET LOANS 340,764 315,554
- ------------------------------------------------------------------------------------------------------------------------
PREMISES AND EQUIPMENT, net 10,122 8,991
ACCRUED INTEREST RECEIVABLE 4,603 4,020
OTHER ASSETS 7,437 7,464
- -------------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $622,276 $601,669
- -------------------------------------------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
- ------------------------------------
DEPOSITS
Non-interest bearing demand $108,125 $103,054
Savings, money market and interest bearing demand 231,756 230,467
Time deposits less than $100,000 108,937 94,017
Time deposits of $100,000 or more 92,172 90,700
- -------------------------------------------------------------------------------------------------------------------------
TOTAL DEPOSITS 540,990 518,238
SHORT-TERM BORROWING 13,775 13,000
LONG-TERM DEBT 0 9,000
COMPANY-OBLIGATED MANDATORILY REDEEMABLE CUMULATIVE
TRUST PREFERRED SECURITIES OF A SUBSIDIARY TRUST HOLDING 11,500 11,500
SOLELY JUNIOR SUBORDINATED DEBENTURES OF BANCORPORATION
ACCRUED TAXES, INTEREST AND OTHER LIABILITIES 11,880 10,700
- -------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 578,145 562,438
- -------------------------------------------------------------------------------------------------------------------------
SHAREHOLDERS' EQUITY:
Common stock, $1 par value, authorized 10,000,000 shares; issued 4,960,869
shares at 9/30/98 and 4,948,921 shares at 12/31/97 4,961 4,949
Capital surplus 31,033 30,996
Retained earnings 11,273 7,153
Common Stock in treasury at cost; 267,000 shares at 9/30/98 and 242,000
shares at 12/31/97 (4,582) (4,111)
Accumulated other comprehensive income 1,446 244
- -------------------------------------------------------------------------------------------------------------------------
TOTAL SHAREHOLDERS' EQUITY 44,131 39,231
- -------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $622,276 $601,669
- -------------------------------------------------------------------------------------------------------------------------
</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 9 MONTH PERIOD ENDED
------------------------ --------------------------
SEPTEMBER 30 SEPTEMBER 30
1998 1997 1998 1997
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
INTEREST INCOME:
Interest and fees on loans $ 7,845 $ 6,974 $ 22,457 $ 20,004
Interest on securities held - to - maturity
Taxable 613 1,253 2,293 4,095
Tax exempt 16 17 51 43
Interest on securities available - for -sale 2,859 1,467 7,737 3,820
Interest on federal funds sold 440 705 1,621 2,149
- ----------------------------------------------------------------------------------------------------------------------------
TOTAL INTEREST INCOME 11,773 10,416 34,159 30,111
- ----------------------------------------------------------------------------------------------------------------------------
INTEREST EXPENSE:
Interest on savings, money market & interest
bearing demand deposits 1,278 1,208 3,645 3,539
Interest on time certificates of
deposit of $100,000 or more 1,357 1,256 4,276 3,880
Interest on other time deposits 1,471 1,309 4,220 3,632
Interest on short-term borrowings 209 30 604 63
Interest on long-term debt 31 19 231 19
Interest on 9.5% Cumulative Trust Preferred Securities 273 273 819 273
- ----------------------------------------------------------------------------------------------------------------------------
TOTAL INTEREST EXPENSE 4,619 4,095 13,795 11,406
- ----------------------------------------------------------------------------------------------------------------------------
NET INTEREST INCOME 7,154 6,321 20,364 18,705
- ----------------------------------------------------------------------------------------------------------------------------
PROVISION FOR POSSIBLE LOAN LOSSES 225 450 750 1,350
- ----------------------------------------------------------------------------------------------------------------------------
NET INTEREST INCOME AFTER PROVISION FOR
POSSIBLE LOAN LOSSES 6,929 5,871 19,614 17,355
- ----------------------------------------------------------------------------------------------------------------------------
NON-INTEREST INCOME
Service charges on deposit accounts 1,558 1,401 4,466 4,487
Other income 409 257 1,108 790
Gain on sale of loans held for sale 0 3 2 3
Gain (loss) on sale of securities available-for-sale (19) (3) 26 54
- ----------------------------------------------------------------------------------------------------------------------------
TOTAL NON-INTEREST INCOME 1,948 1,658 5,602 5,334
- ----------------------------------------------------------------------------------------------------------------------------
NON-INTEREST EXPENSES:
Salaries and wages 2,515 1,995 7,328 6,027
Employee benefits 558 547 1,692 1,784
Occupancy expense 573 516 1,595 1,506
Furniture and equipment expense 363 325 1,047 840
Data processing fees 259 266 718 831
Legal fees 95 195 408 582
Professional fees 157 188 491 656
Postage, delivery and communication 221 187 586 513
FDIC and OCC assessments 49 45 145 134
Other real estate expense (income) 33 (38) 77 (82)
Other expenses 735 600 2,096 1,781
- ----------------------------------------------------------------------------------------------------------------------------
TOTAL NON-INTEREST EXPENSES 5,558 4,826 16,183 14,572
- ----------------------------------------------------------------------------------------------------------------------------
</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 9 MONTH PERIOD ENDED
---------------------------- -------------------------------
SEPTEMBER 30 SEPTEMBER 30
1998 1997 1998 1997
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
INCOME BEFORE INCOME TAXES 3,319 2,703 9,033 8,117
PROVISION FOR INCOME TAXES 1,216 1,208 3,313 3,302
- ----------------------------------------------------------------------------------------------------------------------------------
NET INCOME $ 2,103 $ 1,495 $ 5,720 $ 4,815
- ----------------------------------------------------------------------------------------------------------------------------------
AVERAGE NUMBER OF COMMON SHARES
OUTSTANDING (1)
BASIC 4,704,228 4,735,736 (1) 4,706,896 4,821,180 (1)
DILUTED 4,904,261 4,950,961 (1) 4,910,080 5,008,119 (1)
- ----------------------------------------------------------------------------------------------------------------------------------
NET INCOME PER COMMON SHARE (2)
BASIC $0.45 $0.32 (1) $1.22 $1.00 (1)
DILUTED $0.43 $0.30 (1) $1.16 $0.96 (1)
</TABLE>
See accompanying notes to consolidated financial statements.
- ----------------------
(1) 1997 share and per share amounts have been restated to reflect the effect
of the 5% stock dividend declared December
18, 1997.
6
<PAGE>
BROAD NATIONAL BANCORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTH PERIOD ENDED SEPTEMBER 30
1998 1997
(Unaudited)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 5,720 $ 4,815
Adjustments to reconcile net income to net cash
provided by (used in ) operating activities:
Depreciation and amortization 1,100 989
Amortization of securities premium net 569 508
Amortization of deferred points and fees
and deferral of loan origination costs (212) (304)
Provision for possible loan losses 750 1,350
Deferred tax (benefit) provision (338) 841
Increase (decrease) in accrued taxes
interest, and other liabilities 1,180 (262)
Gain on sale of securities available-for-sale (26) (54)
Gain on sale of loans (2) (3)
Gain on sale of other real estate owned (18) (174)
Increase in accrued interest receivable (583) (824)
Decrease in other assets (229) (2,971)
- ----------------------------------------------------------------------------------------------------------
Net cash provided by operating activities $ 7,911 $ 3,911
- ----------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from the sale of other real estate owned $ 515 $ 721
Net increase in loan balances (26,456) (25,361)
Proceeds from the sale of loans 182 182
Proceeds from maturities of securities held-to-maturity 26,583 19,891
Purchase of securities held-to-maturity (556) (6,716)
Proceeds from maturities of securities available-for-sale 36,570 8,583
Proceeds from the sale of securities available-for-sale 36,804 19,081
Purchase of securities available-for-sale (119,561) (73,728)
Capital expenditures (2,225) (960)
- ----------------------------------------------------------------------------------------------------------
Net cash used in investing activities $ (48,144) $ (58,307)
- ----------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in certificates of deposit $ 16,392 $ 24,191
Net increase (decrease) in demand deposit, savings, money market
and interest bearing demand accounts 6,360 (4,236)
Net increase in short-term borrowings 775 1,706
Dividends paid (1,600) (1,368)
Issuance of 9.5% Cumulative Trust Preferred securities 0 11,500
Increase (decrease) in long-term debt (9,000) 18,000
Issuance of Common Stock 50 13
Purchase of Treasury Stock (471) (4,053)
- ----------------------------------------------------------------------------------------------------------
Net cash provided by financing activities $ 12,506 $ 45,753
- ----------------------------------------------------------------------------------------------------------
NET DECREASE IN CASH AND CASH EQUIVALENTS $ (27,727) $ (8,643)
CASH AND CASH EQUIVALENTS, beginning of period 59,233 76,857
- ----------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS, end of period $ 31,506 $ 68,214
- ----------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for
Interest $ 13,638 $ 11,164
Taxes $ 3,152 $ 4,703
- ----------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
7
<PAGE>
BROAD NATIONAL BANCORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998
(Unaudited)
(1) Principles of consolidation -
The consolidated financial statements include the accounts of Broad
National Bancorporation, its wholly owned subsidiaries, BNB Capital
Trust and Broad National Bank (the ?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 -
Basic earnings per common share is computed by dividing net income by
the weighted average number of common shares outstanding. Diluted
earnings per common share includes any additional common shares as if
all potentially dilutive common shares were issued (e. g. stock
options).
Share and per share amounts for 1997 have been restated to reflect
the 5% stock dividend declared in December 1997.
(3) Company - obligated mandatorily redeemable 9.5% Cumulative Trust
Preferred Securities of a subsidiary trust holding solely junior
subordinated debentures of Bancorporation (9.5% Cumulative Trust
Preferred Securities)
On June 30, 1997, $11.5 million of 9.5% Cumulative Trust Preferred
Securities were issued by BNB Capital Trust, a Delaware statutory
business trust formed and wholly - owned by Bancorporation. The net
proceeds from this issuance were invested in Bancorporation in
exchange for Bancorporation's junior subordinated debentures. The
sole asset of BNB Capital Trust, the obligor on the 9.5% Cumulative
Trust Preferred Securities, is $11,855,670 principal amount of 9.5%
Junior Subordinated Debentures of Bancorporation due June 30, 2027.
Bancorporation has entered into several contractual arrangements for
the purpose of fully and unconditionally supporting BNB Capital
Trust's payment of distributions on, payments on any redemption of,
and any liquidation distribution with respect to, the 9.5% Cumulative
Trust Preferred Securities. These contractual arrangements constitute
a full and unconditional guarantee by Bancorporation of BNB Capital
Trust's obligations under the 9.5% Cumulative Trust Preferred
Securities.
(4) Comprehensive Income
Effective January 1, 1998 the Company adopted Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS
130"). SFAS 130 establishes standards for reporting and display of
comprehensive income and its components (revenues, expenses, gains
and losses) in a full set of general-purpose financial statements.
SFAS 130 requires that all items that are required to be recognized
under accounting standards as components of comprehensive income be
reported in a financial statement that is displayed with the same
prominence as other financial statements. SFAS 130 does not require a
specific format for that financial statement but requires that an
enterprise display an amount representing total
8
<PAGE>
comprehensive income for the period in that financial statement. SFAS
130 requires that an enterprise (a) classify items of other
comprehensive income by their nature in a financial statement and (b)
display the accumulated balance of other comprehensive income
separately from retained earnings and additional paid in capital in
the equity section of a statement of financial position.
The company will display the financial statements required by SFAS
130 effective in its financial statements for December 31, 1998.
For the nine month period ended September 30, 1998 and 1997, the
Company recorded comprehensive income of $6,922,000 and $4,997,000,
respectively, consisting of net income of $5,720,000 and other
comprehensive gains of $1,202,000 for the nine month period ended
September 30, 1998, and net income of $4,815,000 and other
comprehensive gains of $182,000 for the nine month period ended
September 30, 1997. For the three month period ended September 30,
1998 and 1997, the Company recorded comprehensive income of
$3,222,000 and $1,742,000, respectively, consisting of net income of
$2,103,000 and other comprehensive gains of $1,119,000 for the three
month period ended September 30, 1998, and net income of $1,495,000
and other comprehensive gains of $247,000 for the three month period
ended September 30, 1997. In each instance, the comprehensive gains
and losses represent unrealized holding gains and losses on
securities available for sale, net of tax.
(5) Reclassification -
Certain amounts in the consolidated financial statements presented
for prior periods have been reclassified to conform with the 1998
presentation.
9
<PAGE>
BROAD NATIONAL BANCORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
THREE MONTH AND NINE MONTH PERIODS ENDED SEPTEMBER 30, 1998
- -----------------------------------------------------------
SUMMARY
-------
The Company reported net income of $2,103,000 or $0.43 per diluted common share
for the third quarter of 1998 compared to net income of $1,495,000 or $0.30 per
diluted common share for the third quarter of 1997. Basic per share earnings
were $0.45 for the third quarter of 1998 and $0.32 for the third quarter of
1997.
For the first nine months of 1998, the Company reported net income of $5,720,000
or $1.16 per diluted common share, compared to net income of $4,815,000 or $0.96
per diluted common share for the first nine months of 1997. Basic per share
earnings were $1.22 for the first nine months of 1998 and $1.00 for the first
nine months of 1997.
Per share data for 1997 has been restated to reflect the effect of a 5% stock
dividend declared December 18, 1997.
As compared to December 31, 1997, total assets increased $20.6 million or 3.4%
to $622.3 million at September 30, 1998; loans, net of deferred fees, increased
$26.2 million or 8.1% to $348.7 million; deposits increased $22.8 million or
4.4% to $541 million; and shareholders' equity increased $4.9 million or 12.5%
to $44.1 million.
The Company's annualized return on average assets and annualized return on
average shareholders' equity were 1.23% and 18.59%, respectively, for the first
nine months of 1998, compared to annualized returns of 1.16% and 16.40%,
respectively, for the comparable 1997 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, money market, interest bearing demand and
time deposits, and short-term and long-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) Average rates reflect the tax equivalent adjusted yields on nontaxable
investments.
(2) Represents the difference between interest earned and interest paid, divided
by total interest-earning assets.
(3) Annualized
11
<PAGE>
NET INTEREST INCOME
Nine Months Ended September 30, 1998
(Dollars in Thousands)
<TABLE>
<CAPTION>
1998 1997
---- ----
Average Interest Average Average Interest Average
Balance And Fees Rate (3) Balance and Fees Rate (3)
--------- -------- -------- --------- --------- ----------
ASSETS
<S> <C> <C> <C> <C> <C> <C>
Federal Funds Sold $ 38,897 $ 1,621 5.50% $ 52,453 $ 2,149 5.40%
--------- -------- --------- --------
Investment Securities (1)
Securities held - to - maturity 52,242 2,370 6.05% 87,561 4,160 6.33%
Securities available - for - sale 164,074 7,737 6.29% 80,162 3,820 6.35%
--------- -------- --------- --------
Total Investment Securities 216,316 10,107 6.23% (1) 167,723 7,980 6.34% (1)
--------- -------- --------- --------
Loans
Mortgage 194,031 13,043 8.99% 174,875 11,628 8.89%
Installment 53,509 3,459 8.64% 42,400 2,894 9.13%
Commercial 86,398 5,955 9.22% 82,387 5,482 8.90%
--------- -------- --------- --------
Total Loans 333,938 22,457 8.99% 299,662 20,004 8.93%
--------- -------- --------- --------
Total interest earning assets (2) 589,151 $ 34,185 7.76% 519,838 $ 30,133 7.75%
--------- -------- --------- --------
Less - Allowance for possible loan losses 7,102 8,928
All other assets 41,217 43,808
--------- ---------
Total Assets $623,266 $554,718
--------- ---------
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest Bearing Deposits
Savings, money market and interest
bearing demand deposits $226,512 $ 3,645 2.15% $214,033 $ 3,539 2.21%
Time Deposits
Under $100,000 106,680 4,220 5.29% 94,716 3,632 5.13%
Over $100,000 102,359 4,276 5.59% 92,984 3,880 5.58%
--------- -------- --------- --------
Total interest bearing deposits 435,551 12,141 3.73% 401,733 11,051 3.68%
--------- -------- --------- --------
Short term borrowings 13,630 604 5.83% 1,645 63 5.05%
Long term debt 4,949 231 6.16% 429 19 5.84%
9.5% Cumulative Trust Preferred Securities 11,500 819 9.50% 3,840 273 9.50%
--------- -------- --------- --------
Total Interest Bearing Liabilities 465,630 $ 13,795 3.96% 407,647 $ 11,406 3.74%
--------- -------- --------- --------
Other liabilities 11,170 8,782
Demand deposits 105,318 99,035
Shareholders' equity 41,148 39,254
--------- ---------
Total liabilities and shareholders' equity $623,266 $554,718
--------- ---------
NET INTEREST INCOME; NET INTEREST SPREAD $ 20,390 3.80% $ 18,727 4.01%
NET INTEREST MARGIN 4.63% (2) 4.82%(2)
</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 nine
months ended September 30, 1998 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 $ 2,133 $ 320 $ 2,453
Investment securities 2,312 (185) 2,127
Federal funds sold (565) 37 (528)
--------- --------- ---------
Total interest income $ 3,880 $ 172 $ 4,052
--------- --------- ---------
Interest paid on:
Savings, money market and interest
bearing demand deposits $ 203 $ (97) $ 106
Certificates of deposit:
Under $100,000 473 115 588
Over $100,000 $ 392 4 396
Short term borrowings 530 11 541
Long term debt 200 12 212
9.5% Cumulative Trust Preferred Securities 546 0 546
--------- --------- ---------
Total Interest expense $ 2,344 $ 45 $ 2,389
--------- --------- ---------
Change in net interest income $ 1,536 $ 127 $ 1,663
--------- --------- ---------
Percent increase in net interest
income over the prior period 8.88%
---------
</TABLE>
Total tax equivalent interest income of $34,185,000 for the first nine months of
1998 represents an increase of $4,052,000 or 13.45% over total tax equivalent
interest income of $30,133,000 for the comparable 1997 period. This improvement
is primarily due to an increase of $69,313,000 in the average balance of total
interest earning assets for the first nine months of 1998 as compared to the
first nine months of 1997. The average balance of total investment securities
was $48,593,000 higher for the first nine months of 1998 as compared to the
first nine months of 1997, while the average balance of total loans was
$34,276,000 higher. These increases were offset by a decline of $13,556,000 in
the average balance of federal funds sold. The increase in the average balance
of interest earning assets contributed $3,880,000 to the increase of $4,052,000
in total tax equivalent interest income. The average rate earned on interest
earning assets for the first nine months of 1998 was 7.76%, as compared to 7.75%
for the first nine months of 1997.
Total tax equivalent interest income for both the three month and nine month
periods ended September 30 includes non-recurring interest income of
approximately $200,000 resulting from the workout and collection of loans
previously placed on non-accrual status.
13
<PAGE>
Total interest expense of $13,795,000 for the first nine months of 1998 was
$2,389,000 or 20.95% higher than the comparable prior year period. An increase
of $57,983,000 in average total interest bearing liabilities is the primary
reason for this increase, resulting in an additional $2,344,000 of interest
expense for the first nine months of 1998 as compared to the first nine months
of 1997. The average cost of total interest bearing liabilities for the first
nine months of 1998 was 3.96%, an increase of 22 basis points from 3.74% for the
first nine months of 1997. Interest expense for the first nine months of 1998
was $45,000 higher than the comparable 1997 period as a result of this increase
in the cost of total interest bearing liabilities. Increases in time deposits
and short-term borrowings as well as the addition of long-term borrowings
contributed to the increase in total interest expense for the first nine months
of 1998 as compared to the first nine months of 1997.
Tax equivalent net interest income for the first nine months of 1998 was
$20,390,000, an increase of $1,663,000 or 8.88% from $18,727,000 for the
comparable 1997 period, primarily due to the average balance of interest earning
assets increasing more than the average balance of interest bearing liabilities.
The net interest spread on a tax equivalent basis declined 21 basis points to
3.80% for the first nine months of 1998, and the net interest margin, which is
tax equivalent net interest income expressed as a percentage of average interest
earning assets, declined 19 basis points to 4.63% for the first nine months of
1998. This reflects the fact that the growth of interest earning assets outpaced
the growth of net interest income, resulting from the use of higher cost time
deposits and short-term and long-term borrowings to fund the growth of average
interest earning assets.
Tax equivalent net interest income for the three-month period ended September
30, 1998 was $7,162,000 compared to $6,330,000 for the same period in 1997. This
represents an increase of $832,000 or 13.14%. The yield on interest earning
assets was 7.79% for the three-month period ended September 30, 1998, compared
to 7.75% for the same period in 1997, and the cost of interest bearing
liabilities was 3.85% for the three-month period ended September 30, 1998,
compared to 3.84% for the same period in 1997. The net interest margin for the
three-month period ended September 30, 1998 was 4.74%, compared to 4.71% for the
same period in 1997.
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 for the three-month and nine-month periods
ended September 30, 1998 was $225,000 and $750,000, respectively, compared to
$450,000 and $1,350,000 in 1997. In each instance, the decrease in the provision
for possible loan losses from the comparable prior year period is primarily due
to the decline in non-performing loans and the improvement in the Company's
asset quality ratios. The Company recorded a net recovery of loans of $201,000
for the first nine months of 1998 as compared to net loan charge-offs of
$881,000 or 0.39% (annualized) of average total loans for the comparable 1997
period.
NON-INTEREST INCOME AND NON-INTEREST EXPENSES
- ---------------------------------------------
Total non-interest income for the three-month and nine-month periods ended
September 30, 1998 was $1,948,000 and $5,602,000, respectively, as compared to
$1,658,000 and $5,334,000 in 1997.
Total non-interest income for the three months ended September 30, 1998 was
$290,000 higher than the comparable prior year period, primarily due to an
increase of $152,000 in other non-interest income, primarily ATM related fees,
and an increase of $157,000 in services charges on demand deposit accounts.
These increases were partially offset by a net decline of $16,000 from the sale
of securities available-for-sale. The Company recorded a loss of $19,000 from
the sale of securities available-for-sale during the quarter ended September 30,
1998, as compared to a loss of $3,000 for
14
<PAGE>
the quarter ended September 30, 1997.
For the nine months ended September 30, 1998, total non-interest income was
$268,000 higher than the comparable prior year period. Service charges on
deposit accounts were $21,000 lower for 1998 as compared to 1997, while other
non-interest income was $318,000 higher, primarily attributable to ATM related
fees. The company recorded a gain of $26,000 from the sale of securities
available-for-sale during the nine month period ended September 30, 1998, a
decline of $28,000 from the gain of $54,000 recorded during the first nine
months of 1997.
For the three-month period ended September 30, 1998, total non-interest expenses
of $5,558,000 were $732,000 or 15.17% higher than total non-interest expenses of
$4,826,000 for the comparable 1997 period. For the nine- month period ended
September 30, 1998, total non-interest expenses of $16,183,000 were $1,611,000
or 11.06% higher than total non-interest expenses of $14,572,000 for the
nine-month period ended September 30, 1997. In each instance, the primary factor
for the increase is salary expense.
Comparing third quarter 1998 non-interest expenses to the third quarter of 1997,
salary expense was $520,000 or 26.07% higher, attributable to merit increases
and incentive-based compensation programs. Other expenses of $735,000 were
$135,000 higher, primarily attributable to increased contributions expense.
These increases were partially offset by reductions in legal fees and
professional fees.
Comparing the nine-month period ended September 30, 1998 to the same period in
1997, salary expense was $1,301,000 or 21.59% higher, primarily due to merit
increases and incentive-based compensation programs. Furniture and equipment
expense was $207,000 or 24.64% higher, attributable to increased depreciation
expense for computer and telephone systems, as well as increased costs
associated with ATM equipment. Other real estate expense was $159,000 or 194%
higher. Gains from the sale of properties classified as other real estate owned
resulted in the recognition of income of $82,000 for the first nine months of
1997 compared to expenses of $77,000 for the first nine months of 1998. Other
expenses were $315,000 or 17.69% higher, primarily due to increased marketing
and contributions expenses as well as the amortization of expenses associated
with the issuance in June of 1997 of the 9.5% Cumulative Trust Preferred
Securities. These increases were partially offset by reductions in data
processing fees, legal fees and professional fees.
FINANCIAL CONDITION
- -------------------
Loans
Total loans, net of deferred loan fees, were $348,689,000 at September 30, 1998
which represents an increase of $26,161,000 or 8.1% from the December 31, 1997
balance of $322,528,000. The most significant components of the increase in loan
balances were an increase of $16,577,000 or 11.7% in commercial mortgages and an
increase of $19,317,000 or 60.6% in home equity fixed rate loans and adjustable
rate lines of credit. These increases were partially offset by a decline of
$10,532,000 or 11.2% in commercial loans. For the first nine months of 1998,
average loans of $333,938,000 represented 56.7% of total average interest
earning assets, as compared to 57.6% of total average interest earning assets
for the first nine months of 1997.
15
<PAGE>
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>
Nine Months Nine Months
Ended Ended
September 30,1998 September 30,1997
------------------ -----------------
(Dollars In Thousands)
<S> <C> <C>
Balance, beginning of period $ 6,974 $ 8,531
Provision charged to operations 750 1,350
Loans charged off (890) (1,297)
Recoveries of charged-off loans 1,091 416
---------- ----------
Balance, end of period $ 7,925 $ 9,000
---------- ----------
Average gross loans outstanding
during period $333,938 $299,662
---------- ----------
Total gross loans at period end $348,689 $311,899
---------- ----------
Net loans (recovered) charged-off $ (201) $ 881
------------- -----------
Ratio of net loans charged-off to average loans
outstanding during period (annualized) N/A 0.39%
Allowance for possible loan losses as
a percentage of total gross loans 2.27% 2.89%
----- -----
</TABLE>
The amount of allowance applicable to non-classified loans was $6,399,000 and
$4,770,000 at September 30, 1998 and December 31, 1997, 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
September 30, 1998 and December 31, 1997:
<TABLE>
<CAPTION>
September 30, 1998 December 31, 1997
------------------ -----------------
(Dollars In Thousands)
<S> <C> <C>
Past due 90 days or more:
Mortgage ........................................................... $1,035 $ 434
Commercial ......................................................... 175 477
Installment ........................................................ 178 20
------ ------
Total .............................................................. $1,388 $ 931
------ ------
Non-accrual loans:
Mortgage ........................................................... $ 250 $ 652
Commercial ......................................................... 2,370 3,229
Installment ........................................................ 8 10
------ ------
Total .............................................................. $2,628 $3,891
------ ------
Total non-performing loans ............................................. $4,016 $4,822
Restructured loans (excluding amounts classified as non-performing
loans).................................................................. 1,603 1,619
Other real estate owned,
net of reserve........................................................ 275 648
------ ------
Total non-performing assets ............................................ $5,894 $7,089
------ ------
Non-performing loans as a ..............................................
percent of total gross loans 1.15% 1.49%
------ ------
Non-performing loans as a ..............................................
percent of total assets 0.65% 0.80%
------ ------
Non-performing assets as a
percent of loans and other
real estate owned..................................................... 1.69% 2.19%
Allowance for possible loan
losses................................................................ $7,925 $6,974
------ ------
Allowance for possible loan
losses as a percent of
non-performing loans.................................................. 197.34% 144.63%
------- -------
</TABLE>
In addition to the non-performing and restructured loans as of September 30,
1998 and December 31, 1997, the Company had classified an additional $3,859,000
and $4,539,000, respectively, as substandard loans. Substandard loans are
classified according to the Company's internal loan classification system. A
loan loss reserve has been allocated to such loans in accordance with the
Company's policies.
At September 30, 1998, the recorded investment in loans that are considered to
be impaired was $3,973,000 as compared to $7,334,000 at December 31, 1997. The
related allowance for credit losses was $0 as of September 30, 1998 and $0 as of
December 31, 1997. The impaired loan portfolio is primarily collateral
dependent. There was no change in the allowance for impaired loans during the
first nine months of 1998 compared to a recovery of $30,000 during the first
nine months of 1997. The average recorded investment in impaired loans during
the first nine months of 1998 was approximately $5,556,000. For the first nine
months of 1998, the Company recognized cash basis interest income on these
impaired loans of $142,398 compared to $134,447 for the first nine months of
1997.
17
<PAGE>
The level of non-performing loans and assets is heavily dependent upon local
economic conditions. The September 30, 1998 total non-performing assets of
$5,894,000 represents a decrease of $1,195,000 or 16.6% over the total at
December 31, 1997. There can be no assurance that the level of non-performing
assets will not increase in the future.
Investment Securities and Federal Funds Sold
Federal funds sold of $11,955,000 at September 30, 1998, represent a decrease of
$25,345,000 from the balance at December 31, 1997. Average Federal Funds sold of
$38,897,000 during the first nine months of 1998 represented 6.6% of total
average interest earning assets, as compared to 10.1% during the first nine
months of 1997.
Total average investment securities of $216,316,000 for the first nine months of
1998 represent 36.7% of total average interest-earning assets, as compared to
32.3% for the comparable 1997 period.
Total investment securities, which include securities classified as
held-to-maturity and available-for-sale, of $227,844,000 at September 30, 1998
represent an increase of $21,437,000 or 10.4% over the balance at December 31,
1997. During the first nine months of 1998, securities available-for-sale of
$36,804,000 were sold and a net gain of $26,000 was realized as compared to
sales of $19,081,000 and a gain of $54,000 for the first nine months of 1997.
Deposits
The September 30, 1998 total deposit balance of $540,990,000 represents an
increase of $22,752,000 or 4.4% over total deposits of $518,238,000 at December
31, 1997. Most of this increase is attributable to non-interest bearing demand
deposits and time deposits less than $100,000. Non-interest bearing demand
deposits of $108,125,000 at September 30, 1998 represented an increase of
$5,071,000 or 4.9% from the December 31, 1997 balance of $103,054,000. Time
deposits less than $100,000 increased $14,920,000 or 15.9% during the first nine
months of 1998, with most of this growth represented by nine-month and
fifteen-month certificates of deposit.
Short Term Borrowings
Short-term borrowings represent Federal Home Loan Bank (FHLB) advances and
securities sold under agreements to repurchase, which are used to supplement the
Bank's deposit base as a source of funding. The FHLB advances have remaining
maturities of less than one year, while securities sold under agreement to
repurchase generally have terms ranging from one to ninety days.
The average balance of short-term borrowings was $13,630,000 for the first nine
months of 1998 as compared to $1,645,000 for the first nine months of 1997, and
the average cost of short-term borrowings was 5.83% for the first nine months of
1998 as compared to 5.05% for the first nine months of 1997. In each instance,
the increase is primarily attributable to FHLB advances.
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 September 30, 1998 and December 31, 1997.
September 30, 1998 December 31, 1997
Cash and cash equivalents
and securities maturing in
one year to total assets 7.03% 11.3%
Net loans to total deposits 63.0% 60.9%
The change in the liquidity measurements from December 31, 1997 to September 30,
1998 is primarily attributable to management's decision to reduce its Federal
funds sold position and redirect those funds into longer-term, but higher
yielding investment securities and loans.
The Consolidated Statements of Cash Flows present the change in cash from
operating, investing and financing activities. During the first nine months of
1998, cash and cash equivalents decreased by $27,727,000.
Net cash provided by operating activities was $7,911,000 for the first nine
months of 1998, representing primarily the results of operations adjusted for
depreciation, amortization and the provision for possible loan losses, as well
as an increase in accrued taxes, interest and other liabilities.
Net cash used in investing activities was $48,144,000 which was used primarily
to fund growth in the securities portfolio and loans.
Net cash provided by financing activities was $12,506,000, reflecting a net
increase in deposits, partially offset by a decrease of long term debt and
payment of dividends to shareholders.
To assist in the management of its liquidity, the bank has available $26,318,000
in lines of credit for federal funds. However, none of these lines were in use
at September 30, 1998.
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.
19
<PAGE>
Liquidity of Bancorporation
Bancorporation's ability to meet its cash requirements, including interest and
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, 1997, retained earnings of the Bank of $9,765,000 were
available for payment of dividends to the parent company without regulatory
approval. Additionally, at September 30, 1998 Bancorporation had $2,445,000 of
cash for the purpose of paying operating costs, interest 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 interest and dividend payments and may be required to seek other sources of
capital and liquidity, if available.
Capital Adequacy
At September 30, 1998, the Company had total capital equal to 14.36% of
risk-based assets which included tier one capital equal to 13.10% of risk-based
assets. These compare to minimum regulatory capital requirements of 8% and 4%,
respectively. At September 30, 1998, the Company had tier one capital equal to
8.35% of adjusted total assets. This compares to a minimum regulatory capital
requirement of 4% to 5%.
At September 30, 1998, the Bank had total capital equal to 13.48% of risk-based
assets, which included tier one capital equal to 12.22% of risk-based assets.
These compare to minimum regulatory capital requirements of 8% and 4%,
respectively. At September 30, 1998, the Bank had tier one capital equal to
7.79% of adjusted total assets. This compares to a minimum regulatory capital
requirement of 4% to 5%.
Recent Accounting Pronouncements and Other Matters
In February 1998, the FASB issued SFAS No. 132, "Employers' Disclosures About
Pensions and Other Post-retirement Benefits." This statement standardizes the
disclosure requirements for pension and other post- retirement benefits by
requiring additional information that will facilitate financial analysis, and
eliminating certain disclosures that are no longer considered useful. This
statement supercedes SFAS 87, 88, and 106. SFAS 132 is effective for fiscal
years beginning after December 15, 1997 and will be adopted December 31, 1998.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This statement establishes accounting and
reporting standards for derivative instruments, and for hedging activities. SFAS
133 supercedes the disclosure requirements in SFAS 80, 105 and 119 and is
effective for periods after June 15, 1999. The adoption of SFAS No. 133 is not
expected to have a material impact on the financial position or results of
operations of the Company.
In October, 1998, the FASB issued SFAS No. 134 "Accounting for Mortgage-Backed
Securities Retained after the Securitization of Mortgage Loans Held for Sale by
a Mortgage Banking Enterprise". This statement is effective for the first fiscal
quarter beginning after December 15, 1998. Early application is permitted. The
adoption of SFAS No. 134 is not expected to have a material impact on the
financial position or results of operations of the Company.
20
<PAGE>
Year 2000
- ---------
Company State of Readiness
- --------------------------
Awareness Phase
In 1997, the Company conducted a review of its computer systems to determine the
systems that would be affected by the Year 2000 issue. A steering committee
comprised of senior management was formed to ensure that adequate resources are
allocated to this project and to monitor the progress and testing of the Year
2000 transition. This committee provides monthly reports to the Board of
Directors.
Assessment Phase
Management has completed an inventory of all hardware, software, network, ATM,
and other processing systems covering both information technology and
non-information technology systems. Applying the Federal Banking Regulatory
definition of "mission critical" applications, management has identified the
Company's mission critical information technology systems.
Management also evaluated customer and vendor interdependencies and non
information technology systems such as environmental systems dependent on
imbedded micro chips, including security systems, elevators and vaults. Although
not deemed to be mission critical, management will pursue remediation efforts
when necessary.
Renovation Phase
This phase includes code enhancements which are primarily the responsibility of
the Company's third party data processing company ("third party processor").
This third party processor is responsible during the renovation phase for
assuring that any such code enhancements, hardware and software upgrades, system
replacements, vendor certification, and other associated changes which impact
Broad National Bank be completed in a timely and effective manner. The third
party processor intends to achieve Year 2000 compliance through a combination of
replacement and renovation. This phase is scheduled to be completed by December
1998.
Validation Phase
This phase includes independent transactional testing by the company to verify
that the renovations and replacements made by its third party processor during
the renovation phase are year 2000 compliant. The Bank commenced the validation
phase in August, 1998, and is scheduled to complete its remaining transactional
testing by February 28, 1999. This phase also includes testing the software used
to access the Company's wide area network and its third party processor' s
applications. This testing is also scheduled to be completed by February 28,
1999.
Costs of Remediation
- --------------------
Since implementing its review of the Year 2000 issue, the Company's Year 2000
remediation costs have been less than $100,000. Expected future costs relating
to fixing Year 2000 issues, such as modifying and replacing hardware and
software, are not expected to be material to the Company's financial condition
or results of operations.
21
<PAGE>
Risks of Company's Year 2000 Issues
- -----------------------------------
The Company is heavily dependant on its automated systems to process its
customers' transactions in a timely and accurate manner. If the modifications
and/or conversions required for Year 2000 compliance are not made, or are not
completed timely, the Company could be rendered unable to process transactions
for its customers, which, in turn, could have a materially adverse effect on the
Company. However, the Company believes that the Year 2000 compliance will be
achieved in accordance with the schedule outlined above, and the Company does
not anticipate that Year 2000 processing issues will have a material, negative
impact on the Company's business, financial condition, or results of operations.
Contingency Plan
- ----------------
The Company has a formal contingency plan for all "mission critical"
applications.
If after the validation phase, it is determined that an application is incapable
of providing banking services in the Year 2000, the Bank has a formal
contingency plan which provides for conversion to an alternate processing
software. This conversion would take place in March 1999. The Company has
evaluated its contingency plan software and management has deemed it to be an
acceptable replacement.
Acquisition of New Branch
In August, 1998, the Company's wholly owned banking subsidiary, Broad National
Bank, completed the purchase of the operations and approximately $3,487,000 of
deposits of Panasia Bank's branch in Jersey City, New Jersey. Broad National
Bank paid a deposit premium of approximately $181,000 or 5.19% of the deposit
balances assumed in the transaction. The deposit premium is included in the
"Other Assets" category on the Statement of Condition, and is being amortized
over a five year period at the annual rate of approximately $36,200. Neither the
deposit premium nor the amortization of the deposit premium is considered to be
material to the financial position or results of operations of the Company.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
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 risk arises from mismatches (i.e., the interest sensitivity gap)
between the dollar amount of repricing or maturing assets and liabilities, and
is measured in terms of the ratio of the interest sensitivity gap to total
assets. More assets repricing or maturing than liabilities over a given time
period is considered asset sensitive and is reflected as a positive gap, and
more liabilities repricing or maturing than assets over a given time period is
considered liability sensitive and is reflected as a negative gap. An
asset-sensitive position (i.e., a positive gap) will generally enhance earnings
in a rising interest rate environment and will negatively impact earnings in a
falling interest rate environment, while a liability-sensitive position (i.e., a
negative gap) will generally enhance earnings in a falling interest rate
environment and negatively impact earnings in a rising interest rate
environment.
At September 30, 1998 the Company had a one year cumulative negative gap of
21.9%. This negative one year gap position may, as noted above, have a negative
impact on earnings in a rising interest rate environment.
22
<PAGE>
The calculation of these interest sensitivity gap positions involves certain
assumptions as to the repricing period of interest earning assets and interest
bearing liabilities. These gap positions are significantly impacted by
assumptions made as to prepayments of loans and investment securities as well as
to the repricing of deposit accounts. The impact of actual repayments,
repricings and changes in interest rates may differ from the implications
derived from the interest sensitivity gap analysis. Consequently, these static
measurements are best used as early indicators of potential interest rate
exposure.
The Company also uses a simulation model to analyze net interest income
sensitivity to movements in interest rates. The simulation model projects net
interest income based on both an immediate rise or fall of 200 basis points in
interest rates (rate shock) over a twelve month period. Based on information and
assumptions in effect at September 30, 1998, management believes that a 200
basis point rate shock over a twelve month period, up or down, would not
significantly affect the Company's annualized net interest income.
There has been no material change in the Company's market risk exposures since
December 31, 1997.
* * * *
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.
23
<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) Reports on Form 8-K
No report on Form 8-K has been filed during the three month period
ended September 30, 1998.
24
<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: November 12, 1998 /s/ Donald M. Karp
------------------
Donald M. Karp
Chairman and CEO
/s/ James Boyle
------------------
James Boyle
Treasurer
25
<PAGE>
BROAD NATIONAL BANCORPORATION
Computation of Earnings Per Share
(Unaudited)
<TABLE>
<CAPTION>
THREE-MONTH PERIOD NINE-MONTH PERIOD
ENDED SEPTEMBER 30 ENDED SEPTEMBER 30
1998 1997(1) 1998 1997(1)
---- ----- ---- ----
BASIC:
<S> <C> <C> <C> <C>
Net Income available to common
shareholders $2,102,890 $1,494,884 $5,719,941 $4,814,571
---------- ---------- ---------- ----------
Weighted average number of common
shares outstanding 4,704,228 4,735,736 4,706,896 4,821,180
--------- --------- --------- ---------
Basic Earnings Per Common Share $ 0.45 $ 0.32 $ 1.22 $ 1.00
========== ========== ========== ==========
DILUTED:
Net income available to common
shareholders $2,102,890 $1,494,884 $5,719,941 $4,814,571
---------- ---------- ---------- ----------
Weighted average number of common
shares outstanding 4,704,228 4,735,736 4,706,896 4,821,180
--------- --------- --------- ---------
Effects of dilutive securities
Stock options 200,033 215,225 203,184 186,939
------- ------- ------- -------
Adjusted average number of common
shares outstanding 4,904,261 4,950,961 4,910,080 5,008,119
--------- --------- --------- ---------
Diluted Earnings Per Common Share $ 0.43 $ 0.30 $ 1.16 $ 0.96
============== ============== ============== ==============
</TABLE>
- ---------------
/1/ Restated to reflect the effect of the 5% stock dividend declared in December
1997
26
<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 September
30, 1998, and the related consolidated condensed statements of income, and cash
flows for the three-month and nine month periods ended September 30, 1998 and
1997. 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, 1997, 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 15, 1998, 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, 1997, is fairly presented, in all material respects, in relation
to the consolidated statement of condition from which it has been derived.
/s/ KPMG Peat Marwick LLP
Short Hills, New Jersey
November 12, 1998
- ----------------------
27
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
BROAD NATIONAL BANCORPORATION'S FORM 10-Q FOR THE QUARTER ENDED
SEPTEMBER 30, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 19,551
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 11,955
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 188,769
<INVESTMENTS-CARRYING> 39,075
<INVESTMENTS-MARKET> 39,546
<LOANS> 348,689
<ALLOWANCE> 7,925
<TOTAL-ASSETS> 622,276
<DEPOSITS> 540,990
<SHORT-TERM> 13,775
<LIABILITIES-OTHER> 11,880
<LONG-TERM> 0
0
0
<COMMON> 4,961
<OTHER-SE> 39,170
<TOTAL-LIABILITIES-AND-EQUITY> 622,276
<INTEREST-LOAN> 22,457
<INTEREST-INVEST> 10,081
<INTEREST-OTHER> 1,621
<INTEREST-TOTAL> 34,159
<INTEREST-DEPOSIT> 12,141
<INTEREST-EXPENSE> 13,795
<INTEREST-INCOME-NET> 20,364
<LOAN-LOSSES> 750
<SECURITIES-GAINS> 26
<EXPENSE-OTHER> 16,183
<INCOME-PRETAX> 9,033
<INCOME-PRE-EXTRAORDINARY> 9,033
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,720
<EPS-PRIMARY> 1.22
<EPS-DILUTED> 1.16
<YIELD-ACTUAL> 4.63
<LOANS-NON> 2,628
<LOANS-PAST> 1,388
<LOANS-TROUBLED> 1,603
<LOANS-PROBLEM> 3,859
<ALLOWANCE-OPEN> 6,974
<CHARGE-OFFS> 890
<RECOVERIES> 1,091
<ALLOWANCE-CLOSE> 7,925
<ALLOWANCE-DOMESTIC> 7,925
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 6,399
</TABLE>
