UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______________ to ______________.
Commission file number 0-16637
BROAD NATIONAL BANCORPORATION
(Exact name of registrant as specified in its charter)
New Jersey 22-2395057
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
905 Broad Street, Newark, New Jersey 07102
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (973)624-2300
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
Common Stock, par value $1.00 per share
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
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K is not contained herein,
and will not be contained, to the best of registrant's knowledge,
in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the 3,322,060 shares of voting
stock of the Registrant held by non-affiliates of the Registrant
on March 15, 1999, computed by reference to the closing sale
price of such stock as reported on NASDAQ, was approximately
$81,390,000. As of March 15, 1999, there were 4,985,728 shares
of the Registrant's Common Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
None.
<PAGE>
PART I
ITEM 1. BUSINESS.
BUSINESS OF BANCORPORATION
GENERAL
Broad National Bancorporation ("Bancorporation") is a bank
holding company registered under the Bank Holding Company Act of
1956, as amended (the "BHC Act"). Although Bancorporation was
incorporated under the laws of the State of New Jersey on April
7, 1981, it did not engage in any business activity until
February 1, 1983. On that date, it acquired all of the issued
and outstanding capital stock of Broad National Bank, a national
banking association (the "Bank") pursuant to a corporate
reorganization involving an exchange of shares. Bancorporation's
activities currently are limited to ownership of the outstanding
common securities of BNB Capital Trust (the "Issuer Trust"), as
well as the outstanding capital stock of the Bank and to
performing certain services for the Bank. Except as otherwise
provided herein, references herein to "Bancorporation" include
Bancorporation and its consolidated subsidiaries.
Bancorporation's principal executive offices are located at
905 Broad Street, Newark, New Jersey 07102, and its telephone
number is (973) 624-2300.
RECENT DEVELOPMENT
On February 1, 1999, the Company entered into a definitive
agreement with Independence Community Bank Corp. ("Independence")
pursuant to which Independence will acquire the Company in a
transaction valued at $26.50 per share of the Company's common
stock. Upon completion of the acquisition, the Company's wholly
owned subsidiary, Broad National Bank, will merge into
Independence Community Bank, Independence's wholly owned
subsidiary.
Under the terms of the agreement, which was approved
unanimously by both boards of directors, holders of the Company's
common stock will receive cash or shares of Independence common
stock pursuant to an election, proration and allocation procedure
subject to the total consideration being comprised of 50%
Independence common stock and 50% cash. The number of shares of
stock any stockholder of the Company receives will be determined
based upon an exchange ratio designed to produce a value of
$26.50 per share when Independence stock has a market value as
calculated in the agreement of between $12.75 and $17.25. To the
extent that the market value of Independence common stock during
the pricing period exceeds $17.25 or is less than $12.75, the per
share value of the consideration to be received by stockholders
of the Company in the merger, whether in cash or stock, will
increase or decrease, <PAGE> respectively. The transaction has an
aggregate value of approximately $138 million.
The agreement provides for the payment of a termination fee
payable to Independence under certain circumstances. The members
of the Board of Directors, who beneficially own approximately 30%
of the Company have agreed to vote their shares in favor of the
merger.
Consummation of the proposed merger is subject to the
satisfaction of certain conditions, including approval of the
shareholders of Broad and approval of the appropriate regulatory
agencies. Additional information concerning the agreement and
the proposed merger is contained in Bancorporation's Current
Report on Form 8-K filed February 8, 1999, which report is
incorporated herein by reference.
DESCRIPTION OF BUSINESS
BANCORPORATION
Bancorporation is a bank holding company registered under
the BHC Act. Bancorporation's activities currently are limited
to ownership of the outstanding capital stock of the Bank and to
performing certain services for the Bank.
THE ISSUER TRUST
The Issuer Trust is a statutory business trust formed under
Delaware law pursuant to (i) a trust agreement, as amended and
restated, dated as of June 9, 1997, executed by Bancorporation,
as Depositor, Bankers Trust Company, as Property Trustee, and
Bankers Trust (Delaware), as Delaware Trustee, and (ii) the
filing of a Certificate of Trust with the Delaware Secretary of
State on June 9, 1997. The Issuer Trust is wholly owned by
Bancorporation. Bancorporation, while holder of all of the
beneficial interests represented by common securities of the
Issuer Trust (the "Common Securities"), has selected two
individuals who are employees of Bancorporation to serve as
Administrators. The Issuer Trust's business and affairs are
conducted by its Property Trustee, Delaware Trustee, and the two
Administrators. The Issuer Trust exists for the exclusive
purposes of (i) issuing and selling the 9.5% Cumulative Trust
Preferred Securities (the "Preferred Securities") and the Common
Securities, (ii) using the proceeds from the sale of the
Preferred Securities and the Common Securities to acquire the
9.5% Junior Subordinated Debentures (the "Junior Subordinated
Debentures") issued by Bancorporation and (iii) engaging in only
those other activities necessary, advisable or incidental thereto
(such as registering the transfer of the Preferred Securities).
Accordingly, the Junior Subordinated Debentures are the sole
asset of the Issuer Trust and payments under the Junior
Subordinated Debentures are the sole revenue of <PAGE> the Issuer Trust.
Bancorporation has entered into several contractual arrangements
for the purpose of fully and unconditionally supporting the
Issuer Trust's payment of distributions on, payments on any
redemption of, and any liquidation distribution with respect to,
the Preferred Securities. These contractual arrangements
constitute a full and unconditional guarantee by Bancorporation
of the Issuer Trust's obligations under the Preferred Securities.
The Issuer Trust has a term of 31 years, but may terminate
earlier as provided in the Trust Agreement. The principal
executive office of the Issuer Trust is 905 Broad Street, Newark,
New Jersey, 07102 and its telephone number is (973)624-2300. See
"Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations, and Item 8. Financial
Statements and Supplementary Data.
THE BANK
The Bank is a national banking association organized in 1925
under the laws of the United States with offices in Newark
(7 offices), East Orange, Millburn, North Arlington, Livingston,
Perth Amboy, Kearny, Jersey City and Elizabeth (2 offices), New
Jersey. The Bank is a full service commercial bank and offers a
broad range of commercial and retail banking services. It offers
checking accounts, savings accounts, money market accounts and
individual retirement accounts (IRAs), as well as various other
types of time deposits which are insured by the Bank Insurance
Fund ("BIF") administered by the Federal Deposit Insurance
Corporation ("FDIC") to the full extent provided by law. The
Bank also provides typical bank services such as cashiers checks,
United States Savings Bonds and travelers checks. The Bank had
total deposits of $518,238,000 as of December 31, 1997 and of
$575,064,000 as of December 31, 1998. See "Item 7. Management's
Discussion and Analysis of Financial Condition and Results of
Operation."
The Bank originates and services both secured and unsecured
loans which totaled $315,554,000 as of December 31, 1997 and
$351,896,000 as of December 31, 1998, in each case, net of
deferred loan fees and the allowance for possible loan losses.
Commercial lending operations include various types of credit for
the Bank's commercial and industrial customers. The Bank's
installment loan department makes direct loans to individuals.
The Bank's mortgage loan department makes a variety of
residential, industrial, and commercial loans secured by real
estate. See "Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operation."
The Bank also provides agency and custody services for
individuals and institutional accounts. The Bank has trust
powers which permit it to administer trusts and estates, although
the Bank has no trust accounts at this time.
<PAGE>
The Bank currently has fourteen branch banking facilities in
addition to its main location. See "Item 2. Properties."
EMPLOYEES
Bancorporation and the Bank have approximately 210 full-time
employees and 33 part-time employees. Neither Bancorporation nor
the Bank is a party to any collective bargaining agreement and
employee relations are deemed to be satisfactory.
SERVICE AREA AND COMPETITION
The principal market is defined as all of Essex County, the
southern quadrant of Bergen County, the southern quadrant of
Hudson County, the northeast quadrant of Union County and the
northeast quadrant of Middlesex County, New Jersey. This market
area is highly competitive with many banks and financial
institutions vying for the same business. Most of the Bank's
competitors are institutions of far greater size and the Bank's
deposits constitute less than one percent of the commercial bank
deposits in its market area.
The Bank encounters intense competition in local and
national markets from non-banking as well as banking sources in
all of its activities, including many competitors which have
substantially greater resources, name recognition and market
presence than the Bank. As a lender it competes not only with
other banks but also with savings and loan associations, savings
banks, credit unions, finance companies, mortgage companies,
factoring companies, insurance companies, and other financial
institutions, many of which have higher legal lending limits. It
competes for deposits with other banks, savings banks, savings
and loan associations, credit unions, mutual funds, money market
funds, and issuers of commercial paper and other securities.
Such competition is particularly intense from the Bank's Newark,
New Jersey-based competitors. Trends toward the consolidation of
the banking industry may make it more difficult for smaller banks
and financial institutions, such as the Bank, to compete with
large, national and regional banking institutions.
SUPERVISION AND REGULATION
FEDERAL BANK HOLDING COMPANY ACT
GENERAL. Bancorporation is a registered bank holding
company within the meaning of the BHC Act, subject to the
supervision of the Board of Governors of the Federal Reserve
System (the "Federal Reserve Board"). Bancorporation is required
to file with the Federal Reserve Board an annual report and such
other additional information as the Federal Reserve Board may
require pursuant to the BHC Act. Also, the Federal Reserve Board
periodically examines Bancorporation. The Federal Reserve Board
has authority to issue <PAGE> cease and desist orders against bank
holding companies if it determines that their actions represent
unsafe and unsound practices or violations of law. In addition,
the Federal Reserve Board is empowered to impose substantial
civil money penalties for violations of banking statutes and
regulations. Regulation by the Federal Reserve Board is intended
to protect depositors of the Bank, not shareholders of
Bancorporation.
SOURCE OF STRENGTH. Federal Reserve Board policy requires a
bank holding company to serve as a source of financial and
managerial strength to its subsidiary banks. Under this policy,
a bank holding company is expected to stand ready to use its
available resources to provide adequate capital funds to its
subsidiary banks during periods of financial stress or adversity,
and to maintain resources and the capacity to raise capital which
it can commit to its subsidiary banks. It is the Federal Reserve
Board's position that the failure of a bank holding company to
serve as a source of strength to a distressed subsidiary bank is
an unsafe and unsound banking practice. This has become known as
the "source of strength doctrine." It is not clear whether the
source of strength doctrine is legally enforceable by the Federal
Reserve Board.
LIMITATION ON ACQUISITIONS. The BHC Act requires every bank
holding company to obtain the prior approval of the Federal
Reserve Board before (i) taking any action that causes a bank to
become a controlled subsidiary of the bank holding company, (ii)
acquiring direct or indirect ownership or control of voting
shares of any bank or bank holding company, if the acquisition
results in the acquiring bank holding company having control of
more than 5% of the outstanding shares of any class of voting
securities of such bank or holding company and such bank or bank
holding company is not majority-owned by the acquiring bank
holding company prior to the acquisition, (iii) the acquisition
by a bank holding company or any nonbank subsidiary thereof of
all or substantially all of the assets of a bank, or (iv) a
merger or consolidation with another bank holding company.
In determining whether to approve a proposed acquisition,
merger or consolidation, the Federal Reserve Board is required to
take into account the competitive effects of the proposed
acquisition, the convenience and needs of the community to be
served, and the financial and managerial resources and future
prospects of the bank holding companies and banks concerned. If
a proposed acquisition, merger or consolidation might have the
effect in any section of the United States to substantially
lessen competition or to tend to create a monopoly, or if such
proposed acquisition, merger, or consolidation otherwise would be
in restraint of trade, then the Federal Reserve Board may not
approve it unless it finds that the anticompetitive effects are
clearly outweighed in the public interest by the probable effect
of the <PAGE> proposed transaction in meeting the convenience and needs
of the community to be served.
LIMITATION ON CERTAIN ACTIVITIES. The BHC Act also
prohibits a bank holding company, with certain exceptions, from
engaging in, and from acquiring direct or indirect ownership or
control of the voting shares or assets of any company engaged in
any activity other than banking or managing or controlling banks,
and any activity which the Federal Reserve Board determines to be
so closely related to banking, or managing or controlling banks,
as to be a proper incident thereto. In acting on an application
to engage in such an activity, the Federal Reserve Board is
required to weigh the expected benefits to the public, such as
greater convenience, increased competition or gains in
efficiency, against the risks of possible adverse effects, such
as undue concentration of resources, decreased or unfair
competition, conflicts of interest, or unsound banking practices.
This consideration includes an evaluation of the financial and
managerial resources of the applicant, including its
subsidiaries, and any company to be acquired, and the effect of
the proposed transaction on those resources.
To date, the Federal Reserve Board, by regulation, has
determined that, subject to expressed limitations, certain
activities are permissible for bank holding companies and their
subsidiaries and may be engaged in upon notice to the Federal
Reserve Board without prior approval. These permissible
activities include furnishing or providing services for the
internal operations of the bank holding company and its
subsidiaries, operating a safe deposit business, making and
servicing loans, operating an industrial bank, performing certain
trust company functions, acting as an investment or financial
advisor in certain capacities, leasing certain real or personal
property, making certain investments to promote community
development, providing certain data processing services,
performing certain insurance agency and underwriting functions,
owning, controlling and operating a savings association,
providing specified courier services, providing management
consulting advice to nonaffiliated banks and nonbank depository
institutions, selling certain money orders, United States savings
bonds and traveler's checks, performing appraisals of real and
personal property, arranging certain commercial real estate
equity financing, providing certain securities brokerage
services, underwriting and dealing in certain government
obligations and money market instruments, providing foreign
exchange advisory and transactional services, acting as a futures
commission merchant, providing investment advice on financial
futures and options on futures, providing consumer financial
counseling, providing tax planning and preparation services,
providing certain check guaranty services, operating a collection
agency and operating a credit bureau.
<PAGE>
The Federal Reserve Board has also determined that certain
other activities, including real estate brokerage and
syndication, land development, property management, management
consulting, underwriting of life insurance not sold in connection
with a credit transaction, and insurance premium funding are
improper activities for bank holding companies and their
subsidiaries. In the future the Federal Reserve Board may take
additional actions adding and refusing to add particular
activities to the list of activities that the Federal Reserve
Board deems to be so closely related to banking or managing or
controlling banks as to be a proper incident thereto. Certain
bank holding companies and their subsidiaries possess
"grandfather rights" giving them authority to engage in one or
more of the activities which are not generally permissible
because they were engaged in such activities prior to the
adoption of legislation restricting such activities.
Under cross-guaranty provisions of the Federal Deposit
Insurance Act (the "FDIA"), bank subsidiaries of a bank holding
company are liable for any loss incurred (or reasonably
anticipated to be incurred) by the Bank Insurance Fund (the
"BIF"), the federal deposit insurance fund for banks, in
connection with the failure of any other bank subsidiary of the
bank holding company. Liability under such cross-guaranty would
be junior to deposit liabilities and most secured obligations,
but senior to obligations to shareholders and most obligations to
affiliates. The Federal Deposit Insurance Corporation (the
"FDIC") has authority to prospectively waive the cross-guaranty
provision. Currently the Bank is the only bank subsidiary of
Bancorporation.
A bank holding company and its subsidiaries are prohibited
from engaging in certain tie-in arrangements in connection with
the extension of credit or the lease or sale of any property or
the furnishing of services. Subsidiary banks of a bank holding
company are also subject to certain restrictions imposed by the
Federal Reserve Act on any extensions of credit to the bank
holding company or any of its subsidiaries, or investment in the
stock or other securities thereof, and on the taking of such
stocks or securities as collateral for loans.
REGULATORY CAPITAL REQUIREMENTS. The Federal Reserve Board
has promulgated "capital adequacy guidelines" for use in its
examination and supervision of bank holding companies. A holding
company's ability to pay dividends and expand its business
through the acquisition of new banking subsidiaries can be
restricted if its capital falls below levels established by these
guidelines. In addition, holding companies whose capital falls
below specified levels can be required to implement a plan to
increase capital.
The Federal Reserve Board's capital adequacy guidelines
provide for the following types of capital: Tier 1 capital (also
referred to as core capital), Tier 2 capital (also referred to as
supplementary capital), Tier 3 capital (consisting of short-term
<PAGE>
subordinated debt that meets certain conditions and used only in
the measure of market risk, as discussed below) and Total
capital. A bank holding company's Tier 1 capital generally
includes the following elements: common shareholders' equity
(excluding unrealized gain (loss) on securities available-for-
sale), qualifying noncumulative perpetual preferred stock and
related surplus, qualifying cumulative perpetual preferred stock
and related surplus (limited to a maximum of 25% of Tier 1
capital elements) and minority interests in the equity accounts
of consolidated subsidiaries. Goodwill is generally excluded
from Tier 1 capital. Most intangible assets also are deducted
from Tier 1 capital. A bank holding company's Tier 2 capital
generally includes allowances for loan and lease losses (limited
to 1.25% of risk-weighted assets), most perpetual preferred stock
and any related surplus (noncumulative and cumulative, without
percentage limits), certain hybrid capital instruments, perpetual
debt and mandatory convertible debt securities, and certain
intermediate-term preferred stock and intermediate-term
subordinated debt instruments (to a maximum of 50% of Tier 1
capital excluding goodwill, but phased-out as the instrument
matures). The maximum amount of supplementary capital that
qualifies as Tier 2 capital is limited to 100% of Tier 1 capital
(net of goodwill). For purposes of calculating the total
risk-based capital ratio, Total capital generally includes Tier 1
capital, plus qualifying Tier 2 capital, minus investments in
unconsolidated subsidiaries, reciprocal holdings of bank holding
company capital securities, certain deferred tax assets and other
deductions as determined by the Federal Reserve Board.
The Federal Reserve Board recently issued a regulation
effective on October 1, 1998 that increases the amount of
intangible assets which may be included in Tier 1 capital. Under
the regulation, mortgage servicing rights ("MSRs"), non-mortgage
servicing assets ("NMSAs") and purchased credit card
relationships ("PCCRs") would be included in Tier 1 capital to
the extent that, in the aggregate, they do not exceed 100% of
Tier 1 capital and, to the further extent that PCCRs and NMSAs,
in the aggregate, do not exceed 25% of Tier 1 capital. MSRs and
PCCRs in excess of these limits, as well as core deposit
intangibles ("CDI") and all other identified intangible assets,
must be deducted in determining Tier 1 capital. As of December
31, 1998, Bancorporation did not have MSRs, PCCRs, NMSAs or CDIs
but did have other identified intangible assets in the amount of
$165,800, representing goodwill arising from the purchase of
certain assets and the assumption of certain liabilities from the
Jersey City office of Panasia Bank in August 1998.
The Federal Reserve Board issued a press release on October
21, 1996 stating that it would treat trust preferred securities
as part of Tier 1 capital for bank holding companies subject to
the following conditions: (1) the instrument must provide for a
minimum five-year consecutive deferral period on distributions to
preferred <PAGE> shareholders; (2) the underlying intercompany loan must
be subordinated to all other debt and have the longest feasible
maturity; (3) these securities together with other cumulative
preferred stock issued by a bank holding company can only
constitute 25 percent of the holding company's Tier 1 capital;
and (4) prior Federal Reserve approval is required before the
preferred security may be redeemed. The $11,500,000 of preferred
securities issued by Bancorporation meet these requirements.
Effective October 1, 1998, the Federal Reserve Board amended
its capital adequacy guidelines to permit bank holding companies
to include as part of Tier 2 capital up to 45 percent of the
pretax net unrealized holding gains on available-for-sale equity
securities.
The Federal Reserve Board's capital adequacy guidelines
require a bank holding company to satisfy a Tier 1 Leverage
Ratio, a total risk-based capital ratio and a Tier 1 risk-based
capital ratio. Under the Tier 1 Leverage Ratio capital
guideline, a bank holding company must have and maintain Tier 1
capital in an amount equal to at least 3.0% of its average total
consolidated assets. In general, average total consolidated
assets means the quarterly average total assets (net of the
allowance for loan and lease losses) reported on a bank holding
company's Consolidated Financial Statements (FR Y-9C Report),
minus goodwill and any other intangible assets or investments in
subsidiaries which are deducted from Tier 1 capital. The 3.0%
minimum Tier 1 Leverage Ratio is considered the absolute minimum
amount of Tier 1 capital which the most highly rated bank holding
companies (those rated composite 1 under the BOPEC rating system
for bank holding companies) or those bank holding companies that
have implemented the risk-based capital market risk measure set
forth in the Federal Reserve Board's capital adequacy guidelines
are required to maintain. All other bank holding companies must
maintain a minimum Tier 1 Leverage Ratio of 4.0%.
Under the Federal Reserve Board's capital adequacy
guidelines, a bank holding company must have and maintain a ratio
of Total capital to risk-weighted assets of 8.00%, and a ratio of
Tier 1 capital to risk-weighted assets of 4.00%. The amount of a
bank holding company's risk-weighted assets is determined by
multiplying the balance sheet amount of each of the bank holding
company's consolidated assets by a specified risk-weight factor
of 0%, 20%, 50% or 100%, in accordance with the relative risk
level of the asset. In determining risk-weighted assets, off-
balance sheet items, such as standby letters of credit, are
converted to an on-balance sheet credit equivalent amount by
multiplying the face amount of the off-balance sheet item by a
credit conversion factor of 0%, 20%, 50% or 100%, in accordance
with the probability that the off-balance sheet item will become
a credit extended by the bank holding company. In general,
intangible assets and other <PAGE> assets which are deducted in
determining Tier 1 capital and Total capital must also be
excluded from risk-weighted assets.
The Federal Reserve Board has proposed to permit portions of
claims (including repurchase agreements) collateralized by cash
on deposit with the lending institution or by securities issued
or guaranteed by the U.S. Treasury, U.S. government agencies, or
the central governments in other OECD countries to be eligible
for a zero percent risk weight. The effect of this proposal is
to allow banks and bank holding companies to hold less capital
for these types of collateralized transactions.
Under the Federal Reserve Board's market risk rules, an
institution with significant trading activities must measure and
hold capital for exposure to general market risk arising from
fluctuations in interest rates, equity prices, foreign exchange
rates and commodity prices and exposure to specific risk
associated with debt and equity positions in the trading
portfolio. This regulation applies to any bank holding company
(i) whose trading activity equals 10% or more of its total assets
or (ii) whose trading activity equals $1 billion or more.
General market risk refers to changes in the market value of on-
balance sheet assets and off-balance sheet items resulting from
broad market movements. Specific risk refers to changes in the
market value of individual positions due to factors other than
broad market movements and includes such risks as the credit risk
of an instrument's issuer. Under the Federal Reserve Board's
rules, an institution must measure its general market risk using
its internal risk measurement model to calculate a "value-at-
risk" based capital charge. An institution must also measure its
specific risk either through a valid internal model or by a so-
called standardized approach. The standardized approach for the
measurement of specific risk uses a risk-weighing process
developed by the Federal Reserve which categorizes individual
instruments and then assesses a fixed capital charge. Until
September, 1997, an institution that used an internal model to
measure specific risk, rather than the standardized approach, was
required to hold capital for specific risk at least equal to 50
percent of the specific risk charge calculated when using the
standardized approach (the minimum specific risk charge). If
that portion of an institution's "value-at-risk" capital charge
which was attributable to specific risk did not equal the minimum
specific risk charge, the institution was subject to additional
charges to make up for such difference. As of September, 1997,
the Federal Reserve has eliminated the use of the minimum
specific risk charge and consequently, the need for a dual
calculation if an institution uses its internal model to measure
specific risk. Therefore, an institution using a valid internal
model to measure specific risk may use the "value-at-risk"
measures generated by its model without being required to compare
the model-generated risk charge to the minimum specific risk
charge as calculated under the standardized approach.
<PAGE>
The regulation supplements the existing credit risk-based
capital standards by requiring an affected institution to adjust
its risk-based capital ratio to reflect market risk. In
measuring market risk, institutions may use Tier 3 capital to
meet the market risk capital requirements. Tier 3 capital is
subordinated debt that is unsecured, fully paid up, has an
original maturity of at least two years, is not redeemable before
maturity without the prior approval of the institution's
supervisor, is subject to a lock-in clause that prevents the
issuer from repaying the debt even at maturity if the issuer's
capital ratio is, or with repayment, would become, less than the
minimum 8% risk-based capital ratio, and does not contain and is
not covered by any covenants, terms or restrictions that may be
inconsistent with safe and sound banking practices.
On December 31, 1998, Bancorporation was in compliance with
all of the Federal Reserve Board's capital guidelines. On such
date, Bancorporation had a Tier 1 Leverage Ratio of 8.22%
(compared with a requirement of 4% to 5%), and a ratio of total
capital to risk-weighted assets of 14.06% (compared with a
requirement of 8%) and a ratio of Tier 1 capital to risk-weighted
assets of 12.80% (compared with a requirement of 4%). The
capital ratios include the preferred securities which are 21.1%
of the Tier 1 capital. There can be no assurance, however, that
Bancorporation will remain in compliance with regulatory capital
requirements. For additional information on Bancorporation
capital, see "Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations-- Financial
Condition--Shareholders' Equity."
LIMITATION ON INCURRED DEBT. Bancorporation currently has
no plans to incur any additional indebtedness. If Bancorporation
determines to do so in the future, it will be subject to the
general statutory and regulatory restrictions.
INTERSTATE BANKING AND BRANCHING. Under the Riegle-Neal
Interstate Banking and Branching Efficiency Act of 1994 (the
"Riegle-Neal Act"), bank holding companies may acquire the stock
or substantially all of the assets of banks located in any state
regardless of whether such transaction is prohibited under the
laws of any state. The Federal Reserve Board, however, may not
approve an interstate acquisition if as a result of the
acquisition the bank holding company would control more than 10%
of the total amount of insured deposits in the United States or
would control more than 30% of the insured deposits in the home
state of the acquired bank. The 30% of insured deposits state
limit does not apply if the acquisition is the initial entry into
a state by a bank holding company or if the home state waives
such limit.
Under the Riegle-Neal Act, individual states may restrict
interstate acquisitions in two ways. First, a state may prohibit
an out-of-state bank holding company from acquiring a bank
located in the state unless the target bank has been in existence
for a <PAGE> specified minimum period of time (not to exceed five
years). Second, a state may establish limits on the total amount
of insured deposits within the state which are controlled by a
single bank holding company (a "deposit cap"), provided that such
deposit limit does not discriminate against out-of-state bank
holding companies.
The Riegle-Neal Act now permits affiliated banks in
different states to act as agents for each other for purposes of
receiving deposits, renewing time deposits, closing loans,
servicing loans and receiving payments on loans and other
obligations. A bank acting as an agent for an affiliated bank is
not considered a branch of the affiliated bank.
Beginning on June 1, 1997, the Riegle-Neal Act authorized
interstate branching by a merger of banks with different home
states which results in a single bank with branches in both
states. The Riegle-Neal Act gave states the right to "opt out"
and prohibit interstate mergers by passing legislation before
June 1, 1997 that expressly prohibits all merger transactions
with out-of-state banks. The Riegle-Neal Act also gave states
the right to "opt in" and authorize early interstate mergers by
passing legislation that expressly permits interstate merger
transactions with all out-of-state banks. The Riegle-Neal Act
authorized banks to establish and operate a de novo branch in a
state (other than the bank's home state) only if the host state
"opts in" to authorize de novo interstate banking by passing
legislation that expressly permits all out-of-state banks to
establish de novo branches in the state. As of June 1, 1997,
approximately 44 states acted on the Riegle-Neal Act. Only two
states, Texas and Montana, opted out. The states of New Jersey,
New York, Connecticut, Pennsylvania, Delaware and Maryland opted
into the Riegle-Neal Act, and of those states, Connecticut,
Pennsylvania, and Maryland permit de novo interstate branching
for banks located in any state which enacts a reciprocal statute.
Effective October 10, 1997, the Riegle-Neal Act prohibits
any bank from establishing or acquiring a branch or branches
outside its home state primarily for the purpose of deposit
production. An interstate branch must reasonably help meet the
credit needs of the communities served as determined by a loan-
to-deposit ratio screen. The FDIC and other banking agencies,
under the final rule, will determine a bank's total loan-to-
deposit ratio for all branches opened in a particular state one
year or more after the bank has established an interstate branch.
If the ratio is 50 percent of the average loan-to-deposit ratio
for all banks headquartered in that state, the banking regulators
will try to determine whether the branches are making a
"reasonable" effort to meet the needs of the community served in
that state by using six mitigating factors. The agencies may
impose sanctions on institutions found not to meet the community
credit needs. The regulators may require the bank to close
branches in the state where it has a low loan-to deposit ratio,
and may prohibit the bank from opening any new branches <PAGE> unless
the institution assures the agencies that it will attempt to meet
those credit needs.
STATE BRANCHING LIMITATIONS
In general, New Jersey law permits a bank, with prior
regulatory approval, to establish a full branch office, a
mini-branch office or a communications terminal branch office
anywhere in the State. Furthermore, no bank shall establish a
full branch office unless its capital shall equal or exceed the
minimum capital established by the commissioner by regulation.
FEDERAL BANK REGULATION
GENERAL. As a national bank, the Bank is subject to
regulation and examination primarily by the Office of the
Comptroller of the Currency (the "OCC"). The Bank is also
regulated by the Federal Reserve Board and the FDIC. Regulation
by these agencies is designed to protect depositors of the Bank
rather than shareholders of Bancorporation. The OCC has the
authority to issue cease and desist orders if it determines that
activities of the Bank represent unsafe and unsound banking
practices or violations of law. In addition, the OCC is
empowered to impose substantial civil money penalties for
violations of banking statutes and regulations.
REGULATORY CAPITAL REQUIREMENTS. The OCC has adopted
minimum capital requirements applicable to national banks which
are substantially similar to the capital adequacy guidelines
established by the Federal Reserve Board for bank holding
companies. There are, however, technical differences in the
methodologies used to calculate the capital ratios.
On December 31, 1998, the Bank was in compliance with all of
the OCC's minimum capital requirements. On such date, the Bank
had a Tier 1 Leverage Ratio of 7.75% (compared with a requirement
for the Bank of 4% to 5%), and a ratio of Total capital to
risk-weighted assets of 13.32% (compared with a requirement of
8%), and a ratio of Tier 1 capital to risk-weighted assets of
12.06% (compared with a requirement of 4%).
CLASSIFICATION OF BANKS. Federal banking laws classify
financial institutions in one of the following five categories,
depending upon the amount of their capital: well-capitalized,
adequately capitalized, undercapitalized, significantly
undercapitalized or critically undercapitalized. Under OCC
regulations, a bank is deemed to be (i) "well capitalized" if it
has a total risk-based capital ratio of 10% or greater, a Tier 1
risk-based capital ratio of 6% or greater and a Tier 1 leverage
ratio of 5% or greater (and is not subject to any order or
written directive specifying any higher capital ratio), (ii)
"adequately capitalized" if it has a total risk-based capital
ratio of 8% or <PAGE> greater, a Tier 1 risk-based capital ratio of 4%
or greater and a Tier 1 leverage ratio of 4% or greater (or a
Tier 1 leverage ratio of 3% or greater, if the bank has a CAMEL
rating of 1), (iii) "undercapitalized" if it has a total
risk-based capital ratio that is less than 8%, a Tier 1
risk-based capital ratio that is less than 4% or a Tier 1
leverage ratio that is less than 4% (or a Tier 1 leverage ratio
that is less than 3%, if the bank has a CAMEL rating of 1), (iv)
"significantly undercapitalized" if it has a total risk-based
capital ratio that is less than 6%, a Tier 1 risk based capital
ratio that is less than 3% or a Tier 1 leverage ratio that is
less than 3%, and (v) "critically undercapitalized" if it has a
Tier 1 leverage ratio that is equal to or less than 2%. Federal
banking laws require the federal regulatory agencies to take
prompt corrective action against undercapitalized financial
institutions. Under OCC regulations, the Bank was a well
capitalized institution as of December 31, 1998.
DEPOSIT INSURANCE AND ASSESSMENTS. The deposits of the Bank
are insured by the BIF administered by the FDIC, in general, to a
maximum of $100,000 per insured depositor. Under the FDIA and
FDIC regulations, the Bank is required to pay semi-annual
assessments to the FDIC for deposit insurance. The FDIC has
adopted a risk-based assessment system. Under the risk-based
assessment system, BIF members pay varying assessment rates
depending upon the level of the institution's capital and the
degree of supervisory concern over the institution. The
assessment rates are set by the FDIC semiannually. The FDIC's
assessment rates range from zero (0) cents to 27 cents per $100
of insured deposits. Institutions qualifying for the $0
assessment rate are no longer required to pay the minimum deposit
premium payment of $2,000 annually. As of January 1, 1999, the
Bank's assessment rate was zero cents per $100 of insured
deposits. The FDIC has authority to increase the annual
assessment rate if it determines that a higher assessment rate is
necessary to increase BIF's reserve ratio. There is no cap on
the annual assessment rate which the FDIC may impose.
In addition to any assessments that may be imposed by the
FDIC as described above, the Deposit Insurance Funds Act of 1996
provides for the imposition of annual assessments by the
Financing Corporation on Savings Association Insurance Fund-
assessable ("SAIF-assessable") deposits and BIF-assessable
deposits. Generally speaking, until December 31, 1999, the
assessment rate imposed by Financing Corporation with respect to
BIF-assessable deposits will be at a rate equal to one-fifth
(1/5) of the assessment rate for SAIF-assessable deposits. As
of January 1, 1999, the annual assessment rate for BIF-assessable
deposits was 1.22 basis points of assessable deposits and the
annual assessment rate for SAIF-assessable deposits was 6.10
basis points of assessable deposits. As of January 1, 1999, the
Bank only had BIF-assessable deposits, and its annual assessment
rate was 1.22 basis points. Beginning on January 1, 2000, BIF-
assessable deposits and SAIF-assessable deposits will be assessed
by Financing Corporation <PAGE> at the same rate. This is likely to
result in the Bank receiving an increased annual assessment from
Financing Corporation.
INTEREST RATES. The rate of interest a bank may charge on
certain classes of loans is limited by state and federal law. At
certain times in the past, these limitations, in conjunction with
national monetary and fiscal policies that affect the interest
rates paid by banks on deposits and borrowings, have resulted in
reductions of net interest margins on certain classes of loans.
Such circumstances may recur in the future, although the trend of
recent federal and state legislation has been to eliminate
restrictions on the rates of interest which may be charged on
some types of loans and to allow maximum rates on other types of
loans to be determined by market factors.
LOANS TO ONE BORROWER. In addition to limiting the rate of
interest chargeable by banks on certain loans, federal law
imposes additional restrictions on a national bank's lending
activities. Under federal law the maximum amount that a national
bank may lend to one borrower (and certain related interests of
such borrower) generally is limited to 15% of the bank's
unimpaired capital and unimpaired surplus, plus an additional 10%
for loans fully secured by readily marketable collateral. There
are certain exceptions to the general rule including loans fully
secured by government securities or deposit accounts in the bank.
As of December 31, 1998, the Bank's lending limit under this
regulation was approximately $8,957,100, and its current largest
loan to one borrower (aggregate loans to the borrower and its
related entities) was approximately $5,430,000.
PAYMENT OF DIVIDENDS. The National Bank Act restricts the
payment of dividends by a national bank as follows: (i) no
dividends may be paid if the bank has no undivided profits or
retained earnings then on hand; (ii) until the surplus fund of
the bank is equal to its capital stock, no dividends may be
declared unless there has been carried to the surplus fund not
less than one-tenth of the bank's net profits of the preceding
half-year period in the case of quarterly or semiannual
dividends, or not less than one-tenth of the net profits of the
preceding two consecutive half-year periods in the case of annual
dividends; and (iii) the approval of the OCC is required if
dividends declared by the bank in any year would exceed the total
of net profits for that year combined with retained net profits
for the preceding two years, less any required transfers to
surplus.
As of December 31, 1998, retained earnings of the Bank of
$12,695,000 were available for payment of dividends to
Bancorporation without regulatory approval. For additional
information on the Bank's capital, see "Item 7. Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Financial Condition--Shareholders' Equity."
<PAGE>
COMMUNITY REINVESTMENT ACT. On May 4, 1995, the Federal
Reserve Board, the FDIC and the OCC adopted regulations relating
to the Community Reinvestment Act (the "CRA"). The purpose of
the CRA regulations is to establish the framework and criteria by
which the bank regulatory agencies assess an institution's record
of helping to meet the credit needs of its community, including
low- and moderate-income neighborhoods, and to provide that the
agencies' assessment shall be taken into account in reviewing
certain applications. The regulations seek to emphasize an
institution's performance rather than the process, to promote
consistency in evaluation of institutions, and to eliminate
unnecessary reporting burdens. The regulations replace the
previous twelve assessment factors for large banks with three
tests: (i) a lending test, (ii) a service test, and (iii) an
investment test. While documentation requirements have been
substantially reduced, the safe harbors from CRA protest have
also been eliminated.
OTHER REGULATORY LIMITATIONS. Bancorporation and the Bank
are "affiliates" within the meaning of the Federal Reserve Act.
As such, the amount of loans or extensions of credit which the
Bank may make to Bancorporation or to third parties secured by
securities or obligations of Bancorporation are substantially
limited by the Federal Reserve Act and the FDIA. Such acts
further restrict the range of permissible transactions between a
bank and an affiliated company. A bank and its subsidiaries may
engage in certain transactions, including loans and purchases of
assets, with an affiliated company only if the terms and
conditions of the transaction, including credit standards, are
substantially the same as, or at least as favorable to the bank
as, those prevailing at the time for comparable transactions with
non-affiliated companies or, in the absence of comparable
transactions, on terms and conditions that would be offered to
non-affiliated companies.
The Bank is also authorized to invest in a service
corporation that can offer the same services as the banking
related services that bank holding companies are authorized to
provide. However, prior regulatory approval must generally be
obtained prior to making such an investment or performing such
services.
BANKING ACTIVITIES. The investments and activities of the
Bank are subject to substantial regulation by the OCC, the
Federal Reserve Board and the FDIC, including without limitation
investments in subsidiaries, investments for their own account
(including limitations on investments in junk bonds and equity
securities), investments in loans, loans to officers, directors
and affiliates, security requirements, truth-in-lending,
community reinvestment, the types of interest bearing deposit
accounts which they can offer, trust department operations,
brokered deposits, audit requirements, issuance of securities,
branching and mergers and acquisitions.
<PAGE>
YEAR 2000 SAFETY AND SOUNDNESS STANDARDS. On October 15,
1998, the Federal Reserve Board, the FDIC and the OCC adopted
guidelines which establish the minimum safety and soundness
standards for banks with respect to the Year 2000 readiness of
their computer systems. The guidelines require that each bank,
in writing, (i) identify all internal and external mission-
critical computer systems that are not Year 2000 ready; (ii)
establish the priorities for accomplishing work and allocating
resources to renovating internal mission-critical systems; (iii)
identify the resource requirements and individuals assigned to
the Year 2000 project on internal mission critical systems; (iv)
establish reasonable deadlines for commencing and completing the
renovation of such internal mission-critical systems; (v) develop
and adopt a project plan that addresses the bank's Year 2000
renovation, testing, contingency planning, and management
oversight process; and (vi) develop a due diligence process to
monitor and evaluate the efforts of external third party
suppliers to achieve Year 2000 readiness. Each bank must
substantially complete the testing of the renovation of all
internal mission-critical systems by December 31, 1998. The
guidelines also require that each bank determine the ability of
external third party suppliers to renovate external mission-
critical systems that are not Year 2000 ready and to complete the
renovation in sufficient time to substantially complete the
testing of all external mission-critical systems by March 31,
1999. Furthermore, the guidelines require that each bank must
complete the testing of all mission-critical systems by June 30,
1999.
For additional information on the Bank's Year 2000
readiness, see "Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations--Year 2000."
MONETARY POLICY AND ECONOMIC CONDITIONS. The principal
sources of funds essential to the business of banks and bank
holding companies are deposits, shareholders' equity, and
borrowed funds. The availability of these various sources of
funds and other potential sources such as preferred stock or
commercial paper and the extent to which they are utilized depend
on many factors, the most important of which are the monetary
policies of the Federal Reserve Board and the relative costs of
different types of funds.
An important function of the Federal Reserve Board is to
regulate the national supply of bank credit in order to combat
recession and curb inflationary pressures. Among the instruments
of monetary policy used by the Federal Reserve Board to implement
these objectives are open market operations in U.S. Government
securities, changes in the discount rate on bank borrowings, and
changes in reserve requirements against bank deposits.
The Bank is subject to regulations issued by the Federal
Reserve Board which require depository institutions to maintain
<PAGE>
non-interest-bearing reserves against their transaction accounts
and non-personal time deposits. These regulations currently
require depository institutions to maintain reserves equal to 3%
of transaction accounts up to $46.5 million plus 10% (subject to
adjustment by the Federal Reserve Board between 8% and 14%) of
the total over $46.5 million. In addition, reserves, subject to
adjustment by the Federal Reserve Board between 0% and 9%, must
be maintained on non-personal time deposits. This reserve
percentage is currently 0%. Depository institutions may
designate and exempt up to $4.9 million of reservable liabilities
from the above reserve requirements. Because these reserves must
generally be maintained in cash or non-interest-bearing accounts,
the effect of the reserve requirements is to increase the cost of
funds to depository institutions. As of December 31, 1998, the
Bank was required to maintain a reserve balance of $1.9 million.
Substantially all of the restrictions on the maximum
interest rates banks are permitted to pay on deposits have been
removed, although banks are still prohibited from paying interest
on demand deposits. Consequently, banks and thrift organizations
are substantially free to pay interest at any rate. Deregulation
has increased competition among such institutions for attracting
deposits and has resulted in an overall increase in such
institutions' cost of funds.
The monetary policies of the Federal Reserve Board have had
a significant effect on the operating results of commercial banks
in the past and are expected to continue to do so in the future.
In view of continuing changes in regulations affecting commercial
banks and other actions and proposed actions by the Federal
government and its monetary and fiscal authorities, including
proposed changes in the structure of banking in the United States
and general economic conditions, no prediction can be made as to
future changes in interest rates, credit availability, deposit
levels, loan demand, or the overall performance of banks
generally and of the Bank and Bancorporation in particular.
The references in the foregoing discussion to various
aspects of statutes and regulations are merely summaries which do
not purport to be complete and which are qualified in their
entirety by reference to the actual statutes and regulations.
Item 2. Properties.
The main offices of both the Bank and Bancorporation are
located at 905 Broad Street, Newark, New Jersey 07102. The
building, which is owned by the Bank, is a two-story structure
constructed in 1960. It has approximately 18,000 square feet of
usable office space, which currently are used for the Bank's
operations. A wholly-owned subsidiary of the Bank owns the
five-story (approximately 45,000 square feet) Western Union
Building at 909 Broad Street in Newark, New Jersey, adjacent to
<PAGE>
the Bank's main office. Approximately 81% of this building is
used by the Bank and the remaining 19% of the building is leased
to nonaffiliated companies.
The Bank currently has fifteen full service branch banking
facilities as described below in addition to its main location:
Approximate Expiration
Location Square Feet Date of Lease
PruPlaza Banking Center 5,092 December 31,
745 Broad Street 2003 (5)
Newark, New Jersey
Ironbound Banking Center 4,100 February 28,
7 Wheeler Point Road 2004
Newark, New Jersey
North Newark Banking Center 3,500 December 31,
466 Bloomfield Avenue 2002 (1)
Newark, New Jersey
Millburn Banking Center 2,600 March 31,
225 Millburn Avenue 2001 (1)
Millburn, New Jersey
Jersey City Banking Center 3,000 September 30,
348 Central Avenue 2006 (1)
Jersey City, New Jersey
North Arlington Banking Center 1,700 March 31,
65 River Road 2003 (6)
North Arlington, New Jersey
Jackson Street Banking Center 10,900 Owned
123-133 Jackson Street
Newark, New Jersey
Bayway Banking Center 3,700 April 30,
1000 South Elmora Avenue 2006 (2)
Elizabeth, New Jersey
Livingston Banking Center 3,450 November 30,
30 W. Mt. Pleasant Avenue 2001 (3)
Livingston, New Jersey
Perth Amboy Banking Center 3,400 August 31,
Convery Plaza, Route 35 2002 (5)
Perth Amboy, New Jersey
<PAGE>
Maple Court Banking Center 4,248 July 16,
243 Chestnut Street 2007
Newark, New Jersey
East Orange 6,070 Owned
Banking Center
554 Central Avenue
East Orange, New Jersey
Elizabeth Banking Center 3,190 Owned
826 Elizabeth Avenue
Elizabeth, New Jersey
Kearny Banking Center 700 March 31,
180 Schuyler Ave. 2000 (5)
Kearny, New Jersey
East Ferry Office 800 November 30,
290 Ferry Street 2000 (2)
Newark, New Jersey
_______________________
/1/ The Bank has the option to extend the term of the lease for
one additional five year period.
/2/ The Bank has the option to extend the term of the lease for
up to four additional five year periods.
/3/ The Bank has the option to extend the term of the lease for
up to one additional five year period and one additional ten
year period.
/4/ The Bank has the option to extend the term of the lease for
two additional one year periods.
/5/ The Bank has the option to extend the term of the lease for
two additional five year periods.
/6/ The Bank has the option to extend the term of the lease for
three additional five year periods.
The Bank offers automated teller service facilities at most
of its banking centers, as well as at the Gateway business
complex, 100 Mulberry Street, Newark, New Jersey and at the
Newark International Airport.
The Bank also owns an 18,000 square foot building located at
465 Bloomfield Avenue, Bloomfield, New Jersey. Under a lease
agreement dated August 1993 between the Bank and EDS, all of the
<PAGE>
space in the Bloomfield Avenue building is being leased to EDS, a
company that provides data processing services, related
professional services, information processing and related
outsourcing services to the Bank and other financial
institutions.
In June of 1998, a subsidiary of the Bank purchased the land
and building at 901 Broad Street, which property is adjacent to
the Bank's main banking center location at 905 Broad Street.
During 1999, the building will be demolished. The land,
consisting of approximately 8,100 square feet, will be improved
to provide parking for customers of the main banking center.
Additionally, the Bank plans to install a drive-in to provide
drive-thru service for the customers of the main banking center.
During 1999, the Bank plans to open a new full-service
banking center in Linden, New Jersey, and another full-service
banking center in West Orange, New Jersey.
Bancorporation neither owns nor leases any property.
ITEM 3. LEGAL PROCEEDINGS.
Neither Bancorporation nor the Bank is involved in any
material pending legal proceedings, other than routine litigation
incidental to their respective businesses.
ITEM 4. SUBMISSION OF MATTERS OF TO A VOTE OF SECURITY HOLDERS.
No matter was submitted to a vote of Bancorporation's
shareholders during the fourth quarter of the year ended
December 31, 1998.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELTED
SHAREHOLDER MATTERS
Shares of the Common Stock of Bancorporation have been
traded under the symbol BNBC on the NASDAQ National Market System
since June 2, 1988, and in the over-the-counter market prior to
this date. The following table sets forth the range of high and
low closing sale price quotations per share for Bancorporation's
Common Stock as reported by NASDAQ, together with cash dividends
per share paid on Bancorporation's Common Stock, during the
periods indicated.
The market price information does not include retail
markups, markdowns or commissions, but is based on actual
transactions.
<PAGE>
Bancorporation High* Low* Dividend*
1998 1st Quarter $22.381 $18.333 $.10
2nd Quarter 24.286 19.881 .10
3rd Quarter 23.929 15.238 .11
4th Quarter 20.298 15.000 .12
1997 1st Quarter $15.476 $10.238 $.10
2nd Quarter 16.786 13.333 .10
3rd Quarter 19.286 15.595 .10
4th Quarter 23.333 14.881 .11
____________
* The market prices and dividends have been restated to give
effect to the 5% stock dividend declared December 17, 1998
and distributed January 7, 1999, and the 5% stock dividend
which was declared December 18, 1997 and distributed
January 6, 1998.
As of February 15, 1999, there were 4,985,728 shares of
Bancorporation's Common Stock outstanding and approximately 900
holders of record of such stock.
ITEM 6. SELECTED FINANCIAL DATA.
The following table sets forth certain historical financial
data with respect to Bancorporation on a consolidated basis. The
information contained in this table should be read in conjunction
with Bancorporation's historical Consolidated Financial
Statements and related notes thereto included elsewhere in this
Report.
<PAGE>
December 31,
1998 1997 1996 1995 1994
(Dollars in thousands)
SELECTED CONSOLIDATED STATEMENTS OF CONDITION INFORMATION
Total assets $684,793 $601,669 $533,615 $481,185 $428,630
Loans, gross 360,389 322,752 287,364 267,419 267,422
Securities held-to-maturity 32,949 65,330 90,170 60,266 89,789
Securities available-
for-sale 231,828 141,077 69,044 55,946 21,144
Total deposits 575,064 518,238 485,073 429,681 391,466
Short-term borrowings 40,651 13,000 1,000 782 177
Long-term debt 0 9,000 0 0 0
9.5% Cumulative Trust
Preferred Securities 11,500 11,500 0 0 0
Shareholders' equity 44,689 39,231 38,358 34,529 30,266
CONSOLIDATED STATEMENTS OF INCOME INFORMATION
Interest income $45,795 $40,855 $35,162 $33,398 $29,795
Interest expense 18,467 15,930 11,818 10,082 7,464
Net interest income 27,328 24,925 23,344 23,316 22,331
Provision for possible loan
losses 975 1,800 1,350 720 450
Net interest income after
provision for possible loan
losses 26,353 23,125 21,994 22,596 21,881
Non-interest income 7,544 7,117 6,556 4,491 3,649
Non-interest expense 21,540 19,549 19,849 19,536 20,073
Provision for income taxes 4,310 4,282 3,428 3,131 768
Net income $ 8,047 $ 6,411 $ 5,273 $ 4,420 $ 4,689
Per Share Data (1)
Net income per common share
Basic $1.63 $1.28 $1.05 $1.08 $1.17
Diluted $1.56 $1.23 $1.01 $0.85 $0.91
Cash dividends per common
share $0.42 $0.35 $0.26 $0.15 $0.14
Book value per common share 9.09 7.93 7.45 6.71 6.49
Dividend payout ratio 27.26% 27.16% 24.54% 26.58% 24.05%
Weighted average number of common
shares outstanding
(in thousands):
Basic 4,935 5,027 5,028 3,577 3,488
Diluted 5,162 5,204 5,248 5,207 5,141
FINANCIAL RATIOS
Return on average assets 1.28% 1.13% 1.05% 0.97% 1.04%
Return on average
shareholders' equity 19.20 16.33 14.58 13.52 16.16
Average equity to average
assets 6.64 6.94 7.20 7.14 6.44
Earnings to fixed
charges /2/ 1.41 1.56 1.74 1.71 1.68
Net interest margin 4.59 4.70 5.05 5.59 5.41
Net interest spread 3.77 3.89 4.33 4.88 4.92
ASSET QUALITY RATIOS
Non-performing loans as a %
of gross loans 0.58% 1.49% 3.39% 3.82% 3.63%
Non-performing loans as a %
of total assets 0.30 0.80 1.82 2.12 2.26
Allowance for possible loan
losses as a % of gross
loans 2.29 2.16 2.97 2.77 2.84
Allowance for possible loan
losses as a % of non-
performing Loans 396.06 144.63 87.65 72.47 78.32
Net (recoveries)chargeoffs as
a % of average gross loans (.09) 1.10 0.08 0.35 1.56
Non-performing assets as a %
of loans and OREO 1.69 2.19 5.03 6.00 5.81
CAPITAL RATIOS
Leverage capital 8.22% 8.19% 6.92% 7.17% 7.00%
Tier 1 capital to total
risk-weighted assets 12.80 13.16 11.17 10.58 9.96
Total capital to total
risk-weighted assets 14.06 14.41 12.44 11.85 11.22
1) Share and per share amounts have been adjusted to reflect all prior
stock dividends.
2) The ratio of earnings to fixed charges is computed by dividing the sum
of income before taxes, fixed charges and preferred stock dividends by
the sum of fixed charges and preferred stock dividends. Fixed charges
represent interest expense and payment of debt.
<PAGE>
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations.
STATEMENTS MADE IN THIS REPORT THAT ARE NOT HISTORICAL IN NATURE,
OR THAT STATE THE COMPANY'S, OR MANAGEMENT'S INTENTIONS, HOPES,
BELIEFS, EXPECTATIONS, OR PREDICTIONS OF THE FUTURE, ARE
"FORWARD-LOOKING STATEMENTS" WITHIN THE MEANING OF SECTION 21E OF
THE SECURITIES AND EXCHANGE ACT OF 1934, AS AMENDED, AND INVOLVE
RISKS AND UNCERTAINTIES. IT IS IMPORTANT TO NOTE THAT ACTUAL
RESULTS COULD DIFFER MATERIALLY FROM THOSE EXPRESSED IN SUCH
FORWARD-LOOKING STATEMENTS. FACTORS THAT COULD CAUSE OR
CONTRIBUTE TO SUCH DIFFERENCES INCLUDE, BUT ARE NOT LIMITED TO,
THOSE DISCUSSED BELOW UNDER THE CAPTION "FACTORS THAT MAY AFFECT
FUTURE RESULTS OF OPERATIONS, FINANCIAL CONDITION OR BUSINESS,"
AS WELL AS THOSE DISCUSSED ELSEWHERE IN BANCORPORATION'S REPORTS
FILED WITH THE SECURITIES AND EXCHANGE COMMISSION.
The following discussion and analysis is intended to provide
information about the financial condition and results of
operations of Broad National Bancorporation and its subsidiaries
on a consolidated basis and should be read in conjunction with
the Consolidated Financial Statements and their related notes.
As used in the following discussion, the term "Company" refers to
Broad National Bancorporation and its subsidiaries on a
consolidated basis; the term "Bank" refers to Broad National Bank
and its subsidiaries on a consolidated basis; and the term
"Bancorporation" refers to Broad National Bancorporation on a
parent company only basis. When necessary, reclassifications
have been made to prior years' data throughout the following
discussion and analysis for purposes of comparability with 1998
data.
SUMMARY
The Company recorded net income of $8,047,000 or diluted per
share earnings of $1.56 in 1998, compared to net income of
$6,411,000 or diluted per share earnings of $1.23 in 1997, and
net income of $5,273,000 or diluted per share earnings of $1.01
in 1996.
The per-share data for 1997 and 1996 have been restated to
reflect the effects of the 5% stock dividend declared December
17, 1998 and distributed January 7, 1999, as well as all prior
stock dividends.
The increase in net income for 1998 is attributable
primarily to an increase in net interest income and a reduction
in the provision for possible loan losses, and to a lesser
extent, an increase in non-interest income.
An improvement in net interest income and non-interest
income as well as a decrease in non interest expense contributed
to the increase in net income for 1997 as compared to 1996.
<PAGE>
The Company's return on average assets was 1.28% for 1998,
1.13% for 1997 and 1.05% for 1996. The Company's return on
average shareholders' equity was 19.20% for 1998, 16.33% for 1997
and 14.58% for 1996.
The Company's total assets increased $83,124,000 or 13.8% in
1998 following an increase of $68,054,000 or 12.8% in 1997.
Total deposits increased $56,826,000 or 11.0% in 1998 following
an increase of $33,165,000 or 6.8% in 1997. Total loans, net of
the allowance for possible loan losses and unearned income,
increased $36,342,000 or 11.5% in 1998 following growth of
$36,969,000 or 13.3% in 1997.
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, short-term borrowings, long-term debt and 9.5%
Cumulative Trust Preferred Securities.
The following table shows 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.
Nontaxable income from investment securities and loans is
presented on a tax-equivalent basis assuming a 34% tax rate.
<TABLE>
NET INTEREST INCOME
(Dollars in Thousands)
<CAPTION>
1998 1997 1996
Average Interest Average Average Interest Average Average Interest Average
Balance and Fees Rate/2/ Balance and Fees Rate/2/ Balance And Fees Rate/2/
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Federal
funds
sold $ 34,269 $ 1,876 5.47% $ 51,321 $ 2,813 5.48% $ 48,201 $ 2,567 5.33%
Investment
securities/1/
Securities
held-to-
maturity 48,240 2,907 6.03 82,241 5,243 6.38 75,403 4,745 6.29
Securities
available-for
-sale/4/ 175,436 10,945 6.24 93,135 5,894 6.33 61,948 3,689 5.95
Total
Investment
Securities 223,676 13,852 6.19/1/ 175,376 11,137 6.35/1/ 137,351 8,434 6.14/1/
<PAGE>
Loans
MORTGAGE 239,590 20,961 8.75 208,228 18,315 8.80 186,717 16,188 8.67
Installment 12,964 1,281 9.88 12,310 1,249 10.15 15,083 1,460 9.68
Commercial 85,813 7,856 9.15 83,687 7,370 8.81 75,459 6,485 8.59
States and
political
subdivisions/1/ - - 0.00 5 1 12.48 756 88 11.64
Total Loans 338,367 30,098 8.90 304,230 26,935 8.85 278,015 24,221 8.71
Total Interest
Earning Assets 596,312 $45,826 7.69% 530,927 $40,885 7.70% 463,567 $35,222 7.60%
Less - Allowance
for possible loan
losses 7,343 8,599 7,869
All other
assets 41,827 43,683 46,517
Total Assets $630,796 $566,011 $502,215
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest Bearing Deposits
Savings, money
market and
interest
bearing
demand
deposits $229,022 $ 4,883 2.13% $214,666 $ 4,756 2.22% $222,912 $ 4,899 2.20%
Time deposits
Under $100,000 108,797 5,737 5.27 96,429 4,990 5.17 84,077 4,222 5.02
Over $100,000 101,087 5,546 5.49 93,127 5,182 5.56 52,891 2,639 4.99
Total Interest
Bearing
Deposits 438,906 16,166 3.68 404,222 14,928 3.69 359,880 11,760 3.27
Short term
borrowings 16,665 977 5.87 4,885 281 5.75 1,149 58 5.05
Long term debt 3,701 231 6.24 2,752 175 6.36 0 0 0
9.5% Cumulative
Trust Preferred
Securities 11,500 1,093 9.50 5,750 546 9.50 0 0 0
Total Interest
Bearing
Liabilities 470,772 $18,467 3.92% 417,609 $15,930 3.81% 361,029 $11,818 3.27%
Other
liabilities 11,280 9,085 7,831
Demand
deposits 106,840 100,055 97,197
Shareholders'
equity 41,904 39,262 36,158
Total Liabilities
and Shareholders'
Equity $630,796 $566,011 $502,215
NET INTEREST INCOME $27,359 $24,955 $23,404
NET INTEREST SPREAD 3.77%/3/ 3.89%/3/ 4.33%/3/
NET INTEREST MARGIN 4.59% 4.70% 5.05%
/1/ Interest income for investments in states and political subdivisions includes tax-equivalent
adjustments at a 34% rate.
/2/ Average rates reflect the tax-equivalent adjusted yields on non-taxable investments and loans.
/3/ Represents the difference between interest earned and interest paid, divided by total interest-earning
assets.
/4/ Securities available-for-sale are presented at amortized cost.
</TABLE
<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 years ended December 31, 1998 and
1997 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.
1998 Compared with 1997 1997 Compared with 1996
Increase (Decrease) Increase (Decrease)
Due to a change in Due to a change in
Average Average Average Average
Balance Rate Total Balance Rate Total
(Dollars in thousands)
Interest earned on:
Loans $ 2,606 $ 557 $ 3,163 $ 2,316 $ 398 $ 2,714
Investment securities 3,067 (352) 2,715 2,415 288 2,703
Federal funds sold (932) (5) (937) 164 82 246
Total interest income 4,741 200 4,941 4,895 768 5,663
Interest paid on:
Savings, money market
and interest bearing
demand deposits 315 (188) 127 (246) 103 (143)
Time deposits:
Under $100,000 652 95 747 642 126 768
Over $100,000 443 (79) 364 2,242 301 2,543
Short-term borrowings 687 9 696 222 1 223
Long-term debt 61 (5) 56 175 0 175
9.5% Cumulative Trust
Preferred Securities 547 - 547 546 0 546
Total interest expense 2,705 (168) 2,537 3,581 531 4,112
Change in net interest
income $2,036 $368 $ 2,404 $ 1,314 $ 237 $1,551
Percent increase in net
interest income over
the prior period 9.63% 6.63%
Total tax equivalent interest income of $45,826,000 for 1998
represents an increase of $4,941,000 or 12.1% over tax equivalent
interest income of $40,885,000 for 1997. This improvement is
<PAGE>
primarily due to an increase of $65,385,000 in the average
balance of total interest earning assets for 1998 as compared to
1997. The average balance of total investment securities was
$48,300,000 higher for 1998 than for 1997, while the average
balance of total loans was $34,137,000 higher for 1998 than for
1997. These increases were partially offset by a decline of
$17,052,000 in the average balance of federal funds sold. The
increase in the average balance of interest earning assets
contributed $4,741,000 to the total increase of $4,941,000 in tax
equivalent interest income for 1998 as compared to 1997. The
additional increase of $200,000 in tax equivalent interest income
is due to an increase in the average rate earned on interest
earning assets, and in particular, loans. The additional
interest income attributable to the average rate earned on loans
is primarily the result of the collection of $475,000 of non-
recurring interest income, which interest income represents cash
in excess of the principal balance collected from the workout of
loans previously placed on non-accrual status or previously
charged off. The average tax equivalent yield for total average
interest earning assets was 7.69% for 1998, compared to 7.70% for
1997.
Total interest expense of $18,467,000 for 1998 was
$2,537,000 or 15.9% higher than 1997. An increase of $53,163,000
in total interest bearing liabilities is the primary reason for
this increase, resulting in an additional $2,705,000 of interest
expense for 1998 as compared to 1997. The average cost of
interest bearing liabilities for 1998 was 3.92%, an increase of
11 basis points from 3.81% in 1997.
Tax equivalent net interest income for 1998 was $27,359,000,
an increase of $2,404,000 or 9.63% from $24,955,000 for 1997.
This increase is 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 12 basis points to 3.77%, and the net
interest margin, which is tax equivalent net interest income
expressed as a percentage of average interest earning assets,
declined 11 basis points to 4.59% for 1998, compared to 4.70% for
1997. This reflects the fact that the growth of interest earning
assets outpaced the growth of net interest income, resulting from
the use of higher costing time deposits and short-term and long-
term borrowings to fund the growth of average interest earning
assets.
Total tax equivalent interest income of $40,885,000 for 1997
represented an increase of $5,663,000 or 16.1% over total tax
equivalent interest income of $35,222,000 for 1996. This
improvement was primarily due to an increase of $67,360,000 in
the average balance of interest earning assets for 1997 as
compared to 1996. The average balance of total investment
securities was $38,025,000 higher for 1997 than for 1996, while
the average balance of total loans was $26,215,000 higher for
1997 than for 1996. The increase in the average balance of
interest earning <PAGE> assets contributed an additional $4,895,000 to
total tax equivalent interest income for 1997 as compared to
1996. An increase in the average rate earned on interest earning
assets contributed an additional $768,000 to total tax equivalent
interest income for 1997 as compared to 1996. The average tax
equivalent yield for total average interest earning assets was
7.70% for 1997 as compared to 7.60% for 1996, an increase of 10
basis points.
Total interest expense of $15,930,000 for 1997 was
$4,112,000 or 34.8% higher than 1996. An increase of $56,580,000
in total interest-bearing liabilities is the primary reason for
this increase, resulting in an additional $3,581,000 of interest
expense for 1997 as compared to 1996. 1997 interest expense
increased an additional $531,000 due to an increase in cost of
total interest-bearing liabilities. The average cost of
interest-bearing liabilities was 3.81%, an increase of 54 basis
points from 3.27% in 1996. The funding of asset growth through
an increase in relatively higher costing time deposits as well as
the addition of higher costing short-term and long-term
borrowings contributed to the increase in the cost of interest-
bearing liabilities for 1997.
Tax equivalent net interest income for 1997 was $24,955,000,
an increase of $1,551,000 or 6.63% from $23,404,000 for 1996,
primarily due to the average balance of total interest earning
assets increasing more than the average balance of total interest
bearing liabilities. However, the net interest spread on a tax
equivalent basis declined 44 basis points to 3.89% for 1997
compared to 4.33% for 1996, and the net interest margin, which is
tax equivalent net interest income expressed as a percentage of
average interest earning assets, declined 35 basis points to
4.70% for 1997 compared to 5.05% for 1996. This reflects the
fact that the growth on interest earning assets outpaced the
growth in net interest income, resulting from the use of higher
costing time deposits as well as short-term and long-term
borrowings to fund the growth of average interest earning assets.
PROVISION FOR POSSIBLE LOAN LOSSES
In determining the provision for possible loan losses,
management considers historical loan loss experience, changes in
composition and volume of the portfolio, the level and
composition of non-performing loans, the adequacy of the
allowance for possible loan losses, and prevailing economic
conditions. The provision for possible loan losses was $975,000,
$1,800,000 and $1,350,000 for 1998, 1997 and 1996, respectively.
The decrease in the provision for possible loan losses during
1998 was primarily due to the decline in non-performing loans and
the improvement in the Company's asset quality. The increase in
the provision for possible loan losses during 1997 was primarily
due to the increase in loans outstanding, as well as the increase
in net loan charge-offs.
<PAGE>
Actual net loan (recoveries)charge-offs were $(297,000) or
(.09%) of average total loans, $3,357,000 or 1.10% of average
total loans and $221,000 or .08% of average total loans for 1998,
1997, and 1996 respectively.
NON-INTEREST INCOME AND NON-INTEREST EXPENSES
Total non-interest income of $7,544,000 for 1998 was
$427,000 or 6.0% higher than 1997. Within the non-interest
income category , other income of $1,467,000 was $379,000 or
34.8% higher in 1998 as compared to 1997. This other income
category represents the most significant reason for the increase
in non-interest income. Included in this other income category
are ATM related fees, which were $243,000 or 90.3% higher in 1998
than 1997. During 1998, five additional ATMs were added to the
Bank's network of ATMs. These additional ATMs were a significant
factor contributing to the increase in ATM related fees.
In addition to the increase in other income, service charges
on deposit accounts were $109,000, or 1.8%, higher for 1998 than
for 1997. The improvements in other income and service charges
were partially offset by a decline of $61,000 in gains recognized
from the sale of securities available for sale. The Company
recorded gains of $23,000 from the sale of securities available
for sale during 1998, as compared to gains of $84,000 realized
during 1997.
Total non-interest income of $7,117,000 for 1997 was
$561,000 or 8.6% higher than 1996. Service charges on deposit
accounts increased $575,000 or 10.7% to $5,945,000 for 1997,
primarily due to an increase in non-sufficient funds fees from
demand deposit accounts. Other non-interest income was $143,000
or 11.6% lower for 1997 as compared to 1996, while gains of
$84,000 from the sale of securities available for sale recognized
in 1997 represented an improvement of $129,000 over the loss of
$45,000 recorded in 1996.
Total non-interest expenses of $21,540,000 for 1998 were
$1,991,000 or 10.2% higher than 1997.
Salaries and wages were $1,540,000 or 19.3% higher for 1998
as compared to 1997, primarily due to incentive-based
compensation programs, as well as merit increases.
Occupancy expense of $2,206,000 for 1998 was $197,000 or
9.8% higher than 1997. Contributing to this increase was 1998
rent expense which was $95,000 or 16.5% higher than 1997, due
mostly to the opening of two new leased branch facilities during
1998.
Furniture and equipment expenses were $236,000 or 20.2%
higher for 1998 as compared to 1997. ATM related expenses were
$118,000 higher for 1998 than 1997, due primarily to the addition
of five new ATMs during 1998. Depreciation expenses associated
with <PAGE> computer hardware and software were $61,000 higher for 1998
than for 1997.
The increase of $103,000 or 14.3% in postage, delivery and
communication expenses is primarily attributable to increased
telephone expenses, which were $73,000 higher for 1998 than for
1997. The Bank assumed direct responsibility from its data
processor for the management of its data communication lines
during 1998, incurring additional telephone expenses for these
data lines. At the same time, the Bank was able to achieve
savings in its data processing fees.
During 1998 the Bank recorded other real estate expenses of
$110,000. This represents a change of $329,000 from income of
$219,000 recorded in 1997. Gains from the sale of properties
classified as other real estate owned resulted in the recognition
of income during 1997.
Other expenses of $1,835,000 for 1998 were $79,000 or 4.5%
higher than 1997, primarily due to increased contributions
expenses, as well as the full year amortization of expenses
associated with the issuance in June of 1997 of the 9.5%
Cumulative Trust Preferred Securities.
The increases noted above were partially offset by decreases
in data processing fees, legal fees and professional fees.
Total non-interest expenses of $19,549,000 for 1997 were
$300,000 or 1.5% lower than 1996. Reductions in employee benefits
and other real estate expenses, offset to a certain extent by an
increase in other expenses, were the primary reasons for the
decrease in non-interest expenses.
Salaries increased $104,000 or 1.3% in 1997 to $8,000,000
primarily as the result of incentive salary programs. Employee
benefits expense was $2,094,000 for 1997, a reduction of $392,000
or 15.8% from 1996. This decrease is the result of a decline in
hospital and medical insurance claims.
The improvement in other real estate expenses for 1997 as
compared to 1996 is attributable to gains of $343,000 from the
sales in 1997 of properties classified as other real estate
owned.
Other non-interest expenses increased $345,000, or 24.5%, in
1997, reflecting increased costs associated with employee
training programs and temporary help, as well as expenses
associated with the issuance in 1997 of the 9.5% Cumulative Trust
Preferred Securities.
<PAGE>
INCOME TAXES
The effective tax rates for 1998, 1997 and 1996 were 34.9%,
40.0% and 39.4%, respectively. The decrease in the effective tax
rate to 34.9% for 1998 was primarily due to a reduction of the
Company's deferred tax valuation allowance of $270,000, as well
as lower state income taxes.
The net change in the total valuation allowance for 1998 was
primarily the result of the Company's continued strong earnings
performance. There was no change in the total valuation allowance
for 1997 and 1996.
FINANCIAL CONDITION
LOANS
Total loans of $360,389,000 at December 31, 1998 increased
$37,637,000 or 11.7% from the December 31, 1997 balance of
$322,752,000. The most significant growth occurred in the
residential and commercial mortgage categories, which were
$26,699,000 and $16,556,000, respectively, higher in 1998 than in
1997. The growth in the residential mortgages is primarily
attributable to the Bank's home equity credit products, which are
included in the residential mortgage category. The introduction
of the Millennium Home Equity Credit Line and the addition of a
20-year fixed rate home equity loan were major factors
contributing to the growth of the home equity products. Home
equity credit balances were $22,458,000 higher in 1998 than in
1997, including an increase of $3,897,000 in the variable rate
line of credit product and an $18,561,000 increase in the fixed
rate equity credit loan product. Average loans totaled
$338,367,000 for 1998, an increase of $34,137,000 or 11.2%
compared to an average of $304,230,000 for 1997. For 1998,
average loans represented 56.7% of total interest earning assets,
compared to 57.3% of total interest earning assets for 1997.
The following table shows the classification of loans by
major category, at December 31, for each of the past five years.
<PAGE>
December 31,
1998 1997 1996 1995 1994
(Dollars in Thousands)
Real estate loans:
Construction $ 11,322 $ 10,844 $ 5,990 $ 4,097 $ 3,913
Mortgage
Residential 105,353 78,654 72,791 62,168 63,646
Commercial 158,020 141,464 126,050 122,346 114,901
Commercial loans 76,103 82,524 73,171 68,479 76,465
Installment loans 8,856 8,576 8,341 9,641 7,496
Other loans 735 690 1,021 688 1,001
Total gross loans $360,389 $322,752 $287,364 $267,419 $267,422
Real estate loans include construction mortgages,
residential mortgages (including home equity loans and lines of
credit), and commercial mortgages.
Construction loans are predominately floating rate loans and
the term thereof generally does not exceed one year. The
majority of the Bank's construction loans consist of loans
secured by single - or multi- family dwellings located in the
Bank's primary market area.
Residential mortgage loans include mortgages for the
purchase or refinancing of residential properties and are secured
by first liens on those properties. This category also includes
home equity loans and lines of credit which are secured by either
a first or second lien on real estate.
Commercial mortgages include mortgages on owner occupied
buildings and investment properties, secured by first mortgages
on these properties. Amortization is generally based on terms of
15 years or less, and most loans have interest rate reset terms
of five years or less.
Commercial loans primarily represent loans to commercial
borrowers for working capital and other short-term needs and term
loans for the acquisition of assets. The terms of such loans
generally range from one to five years.
Installment loans are granted primarily to individuals on an
installment basis, may be secured by liens on personally held
assets or may be unsecured, and include auto loans, home
improvement loans, student loans, revolving credit plans and
personal loans.
<PAGE>
The following table summarizes the contractual maturities of
certain loan categories at December 31, 1998.
Within 1-5 Over
One Year Years 5 Years Total
(Dollars in Thousands)
Real estate loans:
Construction $ 661 $ 10,661 $ 0 $ 11,322
Mortgage 26,337 13,169 223,867 263,373
Commercial loans 35,768 31,203 9,132 76,103
The table below presents the breakdown of loans with fixed and
variable rates at December 31, 1998 for loans with a term of
greater than one year in the following categories:
Fixed Variable
Interest Rates Interest Rates
(Dollars in Thousands)
Real estate loans:
Mortgage $ 110,091 $ 126,945
Commercial loans 16,941 23,394
The Company's loan portfolio is varied, with no undue
concentration in any single industry, although most of the loans
in the Company's loan portfolio have been made to borrowers in
New Jersey, and are secured by real estate in New Jersey.
Accordingly, as with most financial institutions in this
market area, the ultimate collectibility of a substantial portion
of the Company's loan portfolio is susceptible to changes in New
Jersey's market conditions. A substantial portion of the
Company's home equity loan portfolio (which is included in real
estate mortgages in the table above) and a substantial portion of
its commercial loan portfolio have interest rates that reprice
with changes in the prime rate.
ALLOWANCE FOR POSSIBLE LOAN LOSSES
The allowance for possible loan losses is maintained at an
amount considered adequate by management and the Board of
Directors to provide for potential credit losses based upon a
periodic evaluation of the risk characteristics of the loan
portfolio.
Management and the Board of Directors of the Company review
the allowance for possible loan losses on a regular basis.
Management and the Board evaluate a number of factors in
determining the appropriate level of the allowance for possible
loan losses. Weakening credits are evaluated individually and
factors such as the creditworthiness of the borrower, the
adequacy <PAGE> of underlying collateral and the probable impact of
business and economic conditions upon the borrower are examined.
The review process also takes into consideration the
possibility that there may be losses in the loan portfolio which
cannot currently be identified, and the degree of risk inherent
in the composition of the loan portfolio. The volume of
non-performing and other classified loans and their relationship
to the loan portfolio, as well as historical charge-off
experience, are also examined.
The following table summarizes the activity in the allowance
for possible loan losses over each of the past five years. Also
presented are certain key ratios regarding the allowance.
</TABLE>
<TABLE>
December 31,
1998 1997 1996 1995 1994
(Dollars in Thousands)
<CAPTION>
<S> <C> <C> <C> <C> <C>
Average loans outstanding
during the year $338,367 $304,230 $278,015 $266,095 $262,053
Total gross loans at period end $360,389 $322,752 $287,364 $267,419 $267,422
Allowance, beginning of the year $ 6,974 $ 8,531 $ 7,402 $ 7,602 $ 11,252
Loans charged-off during the year:
Commercial 780 2,370 569 1,952 2,184
Mortgage 146 1,403 520 80 2,809
Installment 145 185 175 91 148
Total loans charged-off during
the year 1,071 3,958 1,264 2,123 5,141
Recoveries during the year:
Commercial 762 369 804 1,005 890
Mortgage 455 132 104 142 10
Installment 151 100 135 56 141
Total recoveries during
the year 1,368 601 1,043 1,203 1,041
Net loans(recovered)charged-off
during the year (297) 3,357 221 920 4,100
Provision charged to operations 975 1,800 1,350 720 450
Allowance, end of the year $ 8,246 $ 6,974 $ 8,531 $ 7,402 $ 7,602
Ratio of net loans (recovered)
charged-off to
average loans outstanding
during the year (0.09%) 1.10% 0.08% 0.35% 1.56%
Allowance for possible loan
losses as a percentage of
total gross loans 2.29% 2.16% 2.97% 2.77% 2.84%
</TABLE>
The following table reflects the allowance for possible loan losses by
category as of December 31, for each of the past five years:
<TABLE>
December 31,
1998 1997 1996 1995 1994
<CAPTION>
Percent Percent Percent Percent Percent
of Loans of Loans of Loans of Loans of Loans
Dollar to Total Dollar to Total Dollar to Total Dollar to Total Dollar to Total
Amount Loans Amount Loans Amount Loans Amount Loans Amount Loans
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Real estate loans:
Construction $ 93 3% $ 57 3% $ 30 2% $ 163 2% $ 163 2%
Mortgage 1,615 73 1,257 68 1,880 69 1,765 68 1,984 66
Commercial loans 6,182 21 5,340 26 6,303 26 5,052 26 5,147 29
Installment loans 197 3 182 3 171 3 271 4 308 3
Other 159 * 138 * 147 * 151 * 0 *
Total $8,246 100% $6,974 100% $8,531 100% $7,402 100% $7,602 100%
* Less than 1.0%
</TABLE>
<PAGE>
During 1998, total loans charged off decreased $2,887,000 or
72.9% as compared to an increase of $2,694,000 or 213% to
$3,958,000 for 1997. Of the total 1997 charge-offs of
$3,958,000, $1,926,000 represented loans that had been classified
and reported as non-accrual loans at or prior to December 31,
1996. An additional $1,798,000 represented the loan of a single
borrower. This loan had previously been restructured and was
being reported by the Company as a restructured loan and a non-
performing asset. This loan was performing in accordance with
its restructured terms until October of 1997, at which time the
Company noted a significant deterioration in the financial
condition of the borrower sufficient to create doubt as to the
collectibility of the remaining outstanding loan balance and
resulting in the loan being charged off.
The allowance for possible loan losses includes an
allocation for all loans classified as special mention,
substandard, doubtful or loss (See "Asset Quality" below for
definitions of such classifications). After allocating the
allowance for classified loans, an allocation is made for all
non-classified loans. The allocation for non-classified loans is
made by loan category, based upon the historical loss experience
for each loan category as well as perceived risk of loss for each
loan category. The amount of the allowance applicable to
non-classified loans was $6,937,000 and $4,770,000 at December
31, 1998 and December 31, 1997, respectively. Since these
factors are subject to change, the allocation of the allowance
for possible loan losses should not be interpreted as an
indication that such amounts or proportions will continue or
indicate future trends.
The specific amount of the allowance in any particular
category may be reallocated in the future to reflect current
conditions. Accordingly, the Company considers the entire
reserve to be available to absorb losses in any category.
ASSET QUALITY
Various degrees of credit risk are associated with
substantially all investing activities. Management believes that
the lending function, however, carries the greatest risk of loss.
The Bank's credit due diligence begins at the time a
borrower and the Bank begin to discuss the origination of a loan.
Documentation including a borrower's credit history, materials
establishing the value and liquidity of potential collateral, the
purpose of the loan, the source and timing of the repayment of
the loan and other factors are analyzed before a loan is
submitted for approval.
The Company attempts to minimize overall credit risk through
loan diversification. The Company's loan portfolio is varied,
with no undue concentration in any single industry, although most
of the <PAGE> loans in the Company's loan portfolio have been made to
borrowers in New Jersey.
Individual loan officers are assigned to monitor
non-installment and non-residential mortgage loans and are
responsible for the periodic updating of their reviews of such
loans. Loan officers are actively encouraged to identify
potential deteriorating loan situations through a self-reporting
system.
Installment and residential mortgage loans are primarily
monitored through an analysis of their payment status.
Classified loan reports are prepared and reviewed regularly.
Classified loans are placed into one of several categories,
depending upon the condition of the borrower and the strength and
amount of collateral.
Classifications consist of "special mention loans," defined
as loans with only modest deficiencies in documentation and with
potentially weakening credit features; "substandard loans,"
defined as loans that have a well-defined credit weakness;
"doubtful loans," defined as loans that have a significantly
higher probability of loss than substandard loans; and "loss"
loans which are charged-off when they are deemed uncollectible.
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 restructured due to
a weakening in the financial position of the borrower
(restructured loans) and (iii) other real estate owned ("OREO"),
net of reserves.
The following table reflects the components of
non-performing assets at December 31, for each of the past five
years:
<PAGE>
December 31,
1998 1997 1996 1995 1994
(Dollars in Thousands)
Past due, 90 days or more:
Mortgage $ 1,132 $ 434 $ 1,068 $ 1,938 $ 1,388
Commercial 159 477 247 1,167 714
Installment 75 20 34 18 23
Total past due
90 days or
more $ 1,366 $ 931 $ 1,349 $ 3,123 $ 2,125
Non-accrual loans:
Mortgage $ 697 $ 652 $ 2,800 $ 4,042 $ 4,357
Commercial 11 3,229 5,584 3,049 3,222
Installment 8 10 0 0 2
Total non-accrual
loans $ 716 $ 3,891 $ 8,384 $ 7,091 $ 7,581
Total non-
performing
loans $ 2,082 $ 4,822 $ 9,733 $10,214 $ 9,706
Restructured
loans
(excluding
amounts
classified as
non-performing
loans) 3,701 1,619 3,934 5,105 5,445
Other real estate
owned, net 293 648 841 772 400
Total non-performing
assets $ 6,076 $ 7,089 $14,508 $16,091 $15,551
Non-performing
loans as a
percent of
total gross
loans 0.58% 1.49% 3.39% 3.82% 3.63%
Non-performing
loans as a
percent of
total assets 0.30% 0.80% 1.82% 2.12% 2.26%
Non-performing
assets as a
percent of loans
and other real
estate owned 1.69% 2.19% 5.03% 6.00% 5.81%
Allowance for
possible loan
losses $ 8,246 $ 6,974 $ 8,531 $ 7,402 $ 7,602
Allowance for
possible loan
losses as a
percent of non-
performing
loans 396.06% 144.63% 87.65% 72.47% 78.32%
During 1998, non-performing loans declined $2,740,000 or
56.8% to $2,082,000, primarily as the result of a decrease of
$3,175,000 in non-accruing loans. The major component of this
reduction was a single loan of $2,370,000 for which the bank was
able to arrange for a substitution of debtors. This loan was
removed from non-accrual status, but has been categorized as a
restructured loan to provide for a period of satisfactory
performance by the new debtor before the loan is removed from
non-performing assets. This loan is currently performing in
accordance with its terms.
The increase in restructured loans during 1998 is
attributable to the loan described above.
During 1997 non-performing loans decreased $4,911,000 or 50%
to $4,822,000. The major components of this reduction were
chargeoffs of $1,926,000, payments received of $931,000,
transfers to other real estate owned in the amount of $212,000
and loans totaling $1,629,000 returned to accrual status.
<PAGE>
The decline of $2,315,000 in restructured loans during 1997
was primarily due to the chargeoff of a single loan in the amount
of $1,798,000, as previously discussed under Allowance for
Possible Loan Losses.
It is the Company's general policy to discontinue the
accrual of interest and reverse previously accrued but unpaid
interest as to a particular loan when interest or principal is
more than 90 days past due on such loan or other circumstances
indicate that full collection is questionable, unless the loan is
adequately secured and in the process of collection. Income on
non-accrual loans is recognized only in the period in which it is
collected.
In addition to the non-performing and restructured loans as
of December 31, 1998 and 1997, the Company had classified an
additional $3,425,000 and $4,539,000, respectively, as
substandard loans. A loan loss reserve has been allocated to
such loans in accordance with the Company's policies.
In the course of resolving non-performing loans, the Bank
may restructure the contractual terms of its loans with its
borrowers. If, prior to such restructuring, the loan was
classified as non-accrual, it is the Bank's policy to continue to
carry these restructured loans on non-accrual status for a period
of time (typically six months) before management considers their
return to accrual status. At December 31, 1998, two loans
totaling $3,701,000 were categorized as restructured. These
loans are currently performing in accordance with their modified
terms.
At December 31, 1998 and 1997, the recorded investment in
loans that are considered to be impaired was $4,526,000 and
$7,334,000, respectively. The related allowance for credit
losses was $0 at December 31, 1998, and $0 at December 31, 1997.
The impaired loan portfolio is primarily collateral dependent.
The average investment in impaired loans during the years ended
December 31, 1998 and 1997 was approximately $5,350,000 and
$9,334,000, respectively. For the years ended December 31, 1998
and 1997, the Company recognized cash basis interest income on
these impaired loans of $234,176 and $344,000, respectively.
The level of non-performing assets is heavily dependent upon
local economic conditions. The December 31, 1998 total
non-performing assets of $6,076,000 represents a decrease of
$1,013,000 or 14.3% from December 31, 1997. There can be no
assurance that the level of the Company's non-performing assets
will not increase in the future.
INVESTMENT SECURITIES AND FEDERAL FUNDS SOLD
The Company invests a portion of its available funds in
short-term and longer-term instruments, including federal funds
sold and investment securities.
<PAGE>
Federal funds sold are used primarily for daily cash
management purposes. Average federal funds sold of $34,269,000
for 1998 represented 5.7% of total average interest earning
assets, as compared to 9.7% for 1997.
Investment securities include obligations of the U.S.
Government or its agencies, obligations of states and political
subdivisions, Federal Reserve Bank stock and debt securities.
The Company's investment securities portfolio is used to
collateralize certain of the Bank's lines of credit and public
and fiduciary deposits. It also provides liquidity through
proceeds from scheduled maturities. The majority of the
Company's investment securities carry fixed interest rates.
The Company does not have trading securities. It classifies
its securities holdings between held-to-maturity and
available-for-sale. The accounting standard provides a different
accounting treatment for each category. Management determines
the appropriate classification of securities at the time of
purchase.
If management has the positive intent and the Company has
the ability at the time of purchase to hold securities until
maturity, they are classified as held-to-maturity securities.
Such securities are stated at amortized cost, adjusted for
unamortized purchase premiums and discounts.
Securities in the available-for-sale category are those for
which the Company does not have the positive intent and ability
to hold to maturity. Available-for-sale securities are reported
at fair value. Any unrealized appreciation or depreciation in
the available-for-sale securities, net of tax effects, is
included in accumulated other comprehensive income, which is a
separate component of shareholders' equity. At December 31, 1998
and 1997, the Company reported net accumulated other
comprehensive income of $717,000 and $244,000, respectively, in
the Shareholders' Equity section of the Consolidated Statement of
Condition.
Total investment securities, which includes securities
classified as held-to-maturity, and available-for-sale, of
$264,777,000 at December 31, 1998 represent an increase of
$58,370,000 or 28.3% over the balance at December 31, 1997. Much
of this growth was funded with short-term borrowings, in
particular, Federal Home Loan Bank advances, as well as the
redirection of funds out of Federal Funds Sold and into the
investment portfolio.
At December 31, 1998, securities held-to-maturity of
$32,949,000 represented 12.4% of the total investment securities
portfolio, as compared to 31.7% at December 31, 1997. Securities
available-for-sale of $231,828,000 at December 31, 1998
represented 87.6% of the total investment securities portfolio,
as compared to 68.3% at December 31, 1997. This shift in the
composition of the <PAGE> securities portfolio is intended to give
management the ability to actively manage a larger percentage of
the overall portfolio. While proceeds from the maturities and
cash flows of securities held-to-maturity amounted to $33,475,000
during 1998, only $1,375,000 was reinvested into the held-to-
maturity portfolio. The remaining proceeds were used to purchase
securities for the available-for-sale portfolio. Total average
investment securities of $223,676,000 for 1998 represented 37.5%
of 1998 total average interest earning assets, up from 33.0% of
total average interest earning assets for 1997.
The table below presents the amortized cost and total
estimated fair values of securities held-to-maturity as of year
end for each of the past five years:
December 31,
1998 1997 1996 1995 1994
(Dollars in Thousands)
U.S. Treasury
Notes $ 0 $ 0 $ 0 $ 0 $11,795
U.S. Government
Agencies 1,000 13,149 33,862 11,055 3,080
Mortgage-backed
securities 27,237 47,869 52,946 46,108 73,204
States and
political
subdivisions 1,527 1,683 1,182 1,875 1,336
Other 3,185 2,629 2,180 1,228 374
Amortized cost $32,949 $65,330 $90,170 $60,266 $89,789
Estimated fair
value $33,083 $65,203 $89,482 $59,948 $84,188
Maturities and weighted average yields of securities
held-to-maturity at December 31, 1998 segregated by contractual
maturity, are illustrated below. Expected maturities will differ
from contractual maturities because borrowers may have the right
to call or prepay obligations with or without call or prepayment
penalties.
<TABLE>
Maturing
After One After Five
Within But Within But Within After
One Year Five Years Ten Years Ten Years Total
<CAPTION>
Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Government
Agencies $ - -% $ 1,000 6.00% $ - - % $ - -% $ 1,000 6.00%
Mortgage-backed
securities 3,233 4.32 15,461 5.78 6,321 6.65% 2,222 6.73 27,237 5.88
States and
political
subdivisions/1/ 256 6.19 1,271 6.12 - - - - 1,527 6.13
Other - - - - - - 3,185 6.02 3,185 6.02
Total amortized
cost $3,489 4.45% $17,732 5.82% $6,321 6.65% $5,407 6.32% $32,949 5.90%
/1/ The weighted average yields have been computed based on a tax-equivalent basis, assuming a 34% income
tax rate.
</TABLE>
<PAGE>
The table below presents the amortized cost and total
estimated fair values of securities available-for-sale as of year
end for each of the past five years.
December 31,
1998 1997 1996 1995 1994
(Dollars in Thousands)
U.S. Treasury
Notes $ 12,528 $ 12,499 $12,513 $14,745 $10,932
U.S. Government
Agencies 48,237 32,967 1,000 1,000 0
Mortgage-backed
securities 168,163 93,537 55,309 39,774 11,297
States and
political
subdivisions 420 325 0 0 0
Other 1,376 1,377 0 0 0
Amortized cost $230,724 $140,705 $68,822 $55,519 $22,229
Estimated fair
value $231,828 $141,077 $69,044 $55,946 $21,144
Maturities and weighted average yields of securities
available-for-sale at December 31, 1998, segregated by
contractual maturity, are illustrated below. Expected maturities
will differ from contractual maturities because borrowers may
have the right to call or prepay obligations with or without call
or prepayment penalties.
<TABLE>
Maturing
After One After Five
Within But Within But Within After
One Year Five Years Ten Years Ten Years Total
<CAPTION>
Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Treasury
Notes $5,941 5.18% $ 6,587 6.20% $ - - % $ - -% $12,528 5.72%
U.S. Government
Agencies - - 11,504 6.25 36,733 6.55 - - 48,237 6.48%
Mortgage-backed
securities 356 6.03 6,993 6.41 23,916 6.28 136,898 6.40 168,163 6.38
States and
political
subdivisions/1/ - - - - 170 6.40 250 6.82 420 6.65
Other - - - - - - 1,376 6.90 1,376 6.90
Total amortized
cost $6,297 5.23% $25,084 6.29% $60,819 6.45% $138,524 6.41% $230,724 6.36%
</TABLE>
Realized gains (losses) from the sale of securities
available-for-sale were $23,000, $84,000, and ($45,000) for 1998,
1997, and 1996, respectively.
DEPOSITS
The Bank's deposit base is its primary source of funds. The
Bank offers a broad range of deposit products, including
non-interest bearing demand deposits, savings, money market and
interest bearing demand accounts, and certificates of deposit.
The December 31, 1998 total deposit balance of $575,064,000
represents an increase of $56,826,000 or 11.0% from the
December 31, 1997 balance of $518,238,000. The most significant
components of this increase were savings, money market and
interest bearing demand accounts, which were $22,506,000 higher
at December 31, 1998 than at December 31, 1997, and time deposits
<PAGE>
less than $100,000, which were $18,928,000 higher at December 31,
1998 than at December 31, 1997.
Average total deposits were $545,746,000 for 1998, an
increase of $41,469,000 or 8.2% over average total deposits of
$504,277,000 for 1997.
Average non-interest bearing demand deposits were
$106,840,000 for 1998, an increase of $6,785,000 or 6.8% over the
prior year. Most of this increase is reflected in business
demand deposit accounts, which, on average, were $5,700,000
higher for 1998 than for 1997.
Average savings, money market and interest bearing demand
accounts increased $14,356,000 or 6.7% during 1998 compared to a
decline of $8,246,000 or 3.7% during 1997. For 1998 as compared
to 1997, on average, interest bearing demand accounts increased
$7,049,000, savings accounts increased $3,702,000 and money
market accounts increased $3,605,000. The average cost of
savings, money market and interest bearing demand accounts was
2.13% for 1998, as compared to 2.22% for 1997.
Time deposits under $100,000 averaged $108,797,000 for 1998,
an increase of $12,368,000 or 12.8% over 1997. Most of this
growth is reflected in time deposits with maturities of 9 months
and 15 months. The average cost of time deposits under $100,000
was 5.27% for 1998, and increase of 10 basis points from the
average cost of 5.17% for 1997.
The average balance of time deposits of $100,000 or more
increased $7,960,000 or 8.5% to $101,087,000 for 1998. The
majority of these deposits, which usually bear maturities from 30
to 90 days, were from municipal government units within markets
served by the bank, and served as alternatives to other sources
of borrowed funds. The average cost of time deposits over
$100,000 was 5.49% for 1998, a decrease of 7 basis points from
the average cost of 5.56% for 1997.
Total interest bearing deposits represented 93.2% of total
interest bearing liabilities for 1998, as compared to 96.8% for
1997. This decrease in relatively lower costing liabilities
contributed to the overall increase in the cost of interest
bearing liabilities for 1998.
<PAGE>
The following table shows a breakdown of the average
balances and average rates paid on the following deposit
categories for each of the past three years:
Year Ended December 31,
1998 1997 1996
Average Average Average Average Average Average
Balance Rate Balance Rate Balance Rate
(Dollars in Thousands)
Non-interest
bearing demand
deposits $106,840 0.00% $100,055 0.00% $ 97,197 0.00%
Savings, money
market and
interest
bearing
demand
deposits 229,022 2.13 214,666 2.22 222,912 2.20
Time deposits 209,884 5.38 189,556 5.37 136,968 5.01
Total average
deposits $545,746 2.96% $504,277 2.96% $457,077 2.57%
The following is a breakdown of the maturity of time
certificates of deposit and other time deposits in excess of
$100,000 as of December 31, 1998 and December 31, 1997,
respectively:
1998 1997
(Dollars in Thousands)
Under three months $79,978 $77,157
Three to six months 4,977 7,524
Six to twelve months 9,064 5,422
Over twelve months 861 597
Total $94,880 $90,700
Short-Term Borrowings
Short-term borrowings represent Federal Home Loan Bank
(FHLB) advances, Federal funds purchased 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 the
securities sold under agreements to repurchase generally have
terms ranging from one to 30 days. These balances increased
$27,651,000 during 1998, primarily due to the Federal Home Loan
Bank advances, which advances were used to fund the purchase of
investment securities available-for-sale. The average balance of
short-term borrowings increased to $16,665,000 for 1998 and the
average cost of short-term borrowings increased to 5.87%, both
increases attributable primarily to the Federal Home Loan Bank
advances.
Short-term borrowings at December 31 consisted of the
following:
<PAGE>
1998 1997
(Dollars in Thousands)
Securities sold under agreements
to repurchase $ 1,451 $ 1,000
Federal Home Loan Bank advances 36,600 12,000
Federal funds purchased 2,600 -
Total $40,651 $13,000
Information regarding the levels of short-term borrowings
for each of the past three years is as follows:
December 31,
1998 1997 1996
(Dollars in Thousands)
Balance, end of year $40,651 $13,000 $1,000
Maximum outstanding during
the year at any month end $40,651 $13,000 $1,282
Average interest rate, end of
year 5.52% 5.88% 4.95%
Average outstanding during the
year $16,665 $ 4,885 $1,149
Average interest rate for the year 5.87% 5.75% 5.05%
The average amounts outstanding were computed from daily
averages and the average interest rates for the period were
computed by dividing the respective interest expense by the
average balance outstanding.
LONG TERM DEBT
The Company had no long term debt outstanding at
December 31, 1998. Long term debt of $9,000,000 at December 31,
1997 represented Federal Home Loan Bank advances with remaining
maturities of greater than one year. This debt represented a
series of nine $1,000,000 advances with interest rates ranging
from 6.16% to 6.28%, and maturities from January 29, 1999 to
September 30, 1999. The advances are secured by residential
mortgages and securities under a blanket collateral agreement.
Company-Obligated Mandatorily Redeemable Cumulative Trust
Preferred Securities of a Subsidiary Trust Holding Solely Junior
Subordinated Debentures of the Company (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
<PAGE>
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.
The proceeds were used by Bancorporation to fund stock
repurchases and for general corporate purposes as well as to meet
debt service obligations pursuant to the junior subordinated
debentures. Additionally, some of the proceeds have been
invested in both long-term and short-term securities with yields
substantially less than the cost of the 9.5% Cumulative Trust
Preferred Securities. The cost of the 9.5% Cumulative Trust
Preferred Securities has contributed to the increase in the cost
of funds and a reduction of the net interest margin during 1998.
The $11,500,000 of 9.5% Cumulative Trust Preferred Securities
qualified as regulatory Tier 1 Capital at December 31, 1998.
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 December 31, 1998 and 1997.
<PAGE>
Dec. 31, 1998 Dec. 31, 1997
Cash and cash equivalents and
securities maturing in one year
to total assets 8.1% 11.3%
Loans to total deposits 61.2% 62.2%
The Consolidated Statements of Cash Flows present the change
in cash from operating, investing and financing activities.
During 1998, cash and cash equivalents decreased by $13,440,000,
primarily to fund growth in the loan and securities portfolios.
Net cash provided by operating activities was $11,173,000
for 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 $97,029,000, which
was used primarily to fund the growth in the loan and the
securities portfolio.
Net cash provided by financing activities was $72,416,000,
reflecting increases in deposits and short-term borrowings,
partially offset by the payment of dividends to shareholders and
payments on long-term debt.
To assist in the management of its liquidity, the Bank had
available $29,165,000 in lines of credit for overnight borrowing
with correspondent banks and the Federal Home Loan Bank. At
December 31, 1998, the Bank borrowed $2,600,000 under these lines
of credit in the form of federal funds purchased.
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
<PAGE>
the net income for that year combined with the retained net
income for the preceding two calendar years. As of December 31,
1998, retained earnings of the Bank of $12,695,000 are available
for payment of dividends to the parent company without regulatory
approval.
Additionally, at December 31, 1998, Bancorporation had
available $2,425,000 of cash and interest bearing balances with
banks for the purpose of paying future dividends, interest and
operating costs. However, a change in circumstances, such as
changes in regulatory requirements or in the Bank's financial
condition, 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 or dividend
payments and may be required to seek other sources of capital and
liquidity, if available.
MARKET RISK
The Company does not have assets held for trading purposes,
and does not currently use derivatives to manage market risk.
Market risk is the risk of loss from changes in market
prices and rates. The Company's market risk arises primarily
from interest rate risk inherent in its lending and deposit
taking activities. Interest rate risk can be defined as the
exposure of the Company's net interest income to adverse
movements in interest rates.
The Company's interest rate risk management is the
responsibility of the Company's Asset/Liability Committee. Tools
used by the Asset/Liability Committee to monitor interest rate
risk include the GAP report and an interest rate shock simulation
report (See "Interest Rate Sensitivity").
The table below represents in tabular form the contractual
balances of the Company's on balance sheet financial instruments,
categorized by expected maturity dates, and the instruments fair
values at December 31, 1998. Expected maturities are contractual
maturities adjusted for repayments, and, where prepayment
information is available, prepayments of principal.
The Company uses certain assumptions to estimate fair values
and expected maturities.
Expected maturities for loans reflect contractual maturities
adjusted for projected scheduled repayments. Investment
securities reflect contractual maturities adjusted for
prepayments, which prepayments reflect the prepayment speeds
since the issuance of the security. Deposits, other than time
deposits, reflect decay rates based upon industry accepted
<PAGE>
assumptions. Time deposits, short term borrowings, long term
debt and 9.5% Cumulative Trust Preferred Securities reflect
contractual maturities.
The fair value of Federal funds sold approximates book value
due to the short maturity. The fair value of investment
securities is based on quotations from security dealers. The
fair value of loans are estimated using the discounted value of
future cash flows expected to be received using estimated market
discount rates. The fair value of savings, money market and
interest bearing demand accounts is the amount payable upon
demand. The fair value of time deposits is based upon the
discounted value of contractual cash flows, which is estimated
using current rates offered for deposits of similar remaining
terms. The fair value of short - term borrowings and long - term
debt is estimated by discounting the cash flows through maturity
based upon current rates offered for similar instruments with
similar maturities. The fair value of the 9.5% Cumulative Trust
Preferred Securities is estimated by discounting the cash flows
through maturity based upon current rates for similar Trust
Preferred Securities.
<PAGE>
<TABLE>
TABLE OF MARKET RISK SENSITIVE INSTRUMENTS
Expected Maturity/Principal Repayments as of December 31, 1998
(Dollars in Thousands)
<CAPTION>
1999 2000 2001 2002 2003 Beyond Total Fair Value
INTEREST SENSITIVE ASSETS
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Investment
securities $ 72,550 $ 43,613 $ 26,425 $ 18,904 $ 21,476 $ 80,705 $ 263,673 $ 264,911
Weighted
average
interest
rate 6.59% 6.56% 6.68% 6.77% 6.63% 6.81% 6.72% 6.75%
Fixed
loans 59,471 24,624 18,280 14,106 13,791 41,716 171,988 171,058
Weighted
average
interest
rate 9.01% 9.11% 9.13% 8.40% 8.63% 7.71% 8.34% 7.70%
Variable
loans 51,341 31,529 25,338 21,944 21,903 36,346 188,401 189,675
Weighted
average
interest
rate 8.85% 9.13% 9.07% 9.21% 8.90% 8.30% 8.38% 7.33%
INTEREST SENSITIVE LIABILITIES
Savings,
money
market
and
interest
bearing
demand
deposits 92,957 40,004 40,004 40,004 40,004 0 252,973 254,537
Weighted
average
interest
rate 2.30% 2.30% 2.30% 2.30% 2.30% 0.00% 2.30% 2.02%
Time
deposits 196,521 9,447 1,011 223 623 0 207,825 208,810
Weighted
average
interest
rate 4.86% 5.25% 5.37% 5.73% 5.73% 0.00% 4.90% 4.51%
Short-term
borrowings 40,651 -- -- -- -- -- 40,651 40,781
Weighted
average
interest
rate 5.45% -- -- -- -- -- 5.45% 5.12%
9.5%
Cumulative
Trust
Preferred
Securities -- -- -- -- -- 11,500 11,500 12,735
Weighted
average
interest
rate -- -- -- -- -- 9.50% 9.50% 7.59%
</TABLE>
<PAGE>
Because of assumptions used to estimate fair values and
expected maturities, actual future changes in fair value could
differ from those reflected in the table.
INTEREST RATE SENSITIVITY
Management of interest rate sensitivity involves matching
the maturity and repricing dates of interest earning assets with
those of interest bearing liabilities in an effort to reduce the
impact of fluctuating net interest rates on net interest margins
and to promote consistent growth of net interest income during
periods of changing interest rates.
The Company's Asset/Liability Committee (the "Committee")
meets regularly to establish, communicate, coordinate and control
asset/liability management procedures. The purpose of the
Committee is to monitor the volume and mix of the Company's
interest sensitive assets and liabilities consistent with the
Company's overall liquidity, capital, growth, risk and
profitability goals.
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 rate 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. Fluctuations in interest rates are not predictable
or controllable.
The table below indicates as of December 31, 1998 the time
period in which interest earning assets and interest bearing
liabilities are scheduled to mature or reprice in accordance with
their contractual terms.
<PAGE>
<TABLE>
After After
Six One
Three After Three Through Through After
Months Through Six Twelve Five Five
Or Less Months Months Years Years Total
(Dollars in thousands)
INTEREST SENSITIVE ASSETS
<S> <C> <C> <C> <C> <C> <C>
Investment securities $ 2,999 $ 0 $ 7,845 $ 173,044 $ 80,889 $264,777
Loans 106,778 15,417 28,944 144,418 64,832 360,389
Total interest sensitive
assets $ 109,777 $ 15,417 $ 36,789 $ 317,462 $145,721 $625,166
INTEREST SENSITIVE LIABILITIES
Savings, money market
and interest bearing
demand deposits $ 23,239 $ 23,239 $ 46,479 $160,016 $ 0 $252,973
Time deposits 116,903 35,103 44,515 11,304 0 207,825
Short-term borrowings 12,751 20,100 7,800 0 0 40,651
9.5% Cumulative Trust
Preferred Securities 0 0 0 0 11,500 11,500
Total interest
sensitive
liabilities $ 152,893 $ 78,442 $ 98,794 $171,320 $ 11,500 $512,949
Sensitivity gap $(43,116) $ (63,025) $ (62,005) $146,142 $ 134,221 $112,217
Gap as a percentage
of total assets -6.30% -9.20% -9.05% 21.34% 19.60%
Cumulative sensitivity
gap $(43,116) $(106,141) $ (168,146) $(22,004) $ 112,217
Cumulative gap as a
percentage of total
assets -6.30% -15.50% -24.55% -3.21% 16.39%
Cumulative sensitivity
ratio 71.80% 54.12% 49.07% 95.61% 121.88%
</TABLE>
At December 31, 1998, the Company had a one year cumulative
negative gap of 24.6%. This negative one year gap position may,
as noted above, have a negative impact on earnings in a rising
interest rate environment.
This interest sensitivity table is not a complete picture of
the possible effect of interest rate changes on net interest
income for various reasons, among them: the table represents a
one-day position; variations occur daily as the Company adjusts
its interest sensitivity throughout the year; changes in the
general level of interest rates will not affect all categories of
assets and liabilities equally or simultaneously; and the
repricing distribution of interest sensitive assets may not be
indicative of the liquidity of those assets. Additionally, 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
the prepayments of loans and investment securities as well as to
the repricing of deposit accounts. The significant assumptions
used in the above table include: fixed rate loans reflect
contractual maturities adjusted for projected scheduled
repayments; investment securities reflect contractual maturities
adjusted for prepayments on mortgage backed securities, which
prepayments reflect the prepayment speeds since the issuance of
the security; deposits, other than time <PAGE> deposits, reflect decay
rates based upon industry accepted assumptions; and time
deposits, short-term borrowings and long term debt reflect
contractual maturities. The impact of actual repayments,
repricings and changes in interest rates may differ from that
indicated in the table above. Consequently, these static
measurements are best used as early indicators of potential
interest rate exposure.
The Company also uses simulation modeling techniques which
apply alternative interest rate scenarios to forecasts of future
business activity. The results of such simulation modeling
techniques may differ from the implications derived from the
interest sensitivity gap analysis, and the use of such simulation
modeling techniques provides further assistance to management in
its efforts to achieve earnings growth in varying interest rate
environments.
The Company currently does not use derivatives to manage
interest rate risk.
SHAREHOLDERS' EQUITY
Shareholders' equity of $44,689,000 at December 31, 1998
was $5,458,000 or 13.9% higher as compared to December 31, 1997.
The ratio of average total equity to average total assets was
6.6% for 1998 compared to 6.9% for 1997. Book value per common
share increased to $9.09 at December 31, 1998 from $7.93 at
December 31, 1997.
During 1998, the Company purchased an additional 54,500
shares of treasury stock at a cost of $978,000.
The Company and its bank subsidiary are subject to various
regulatory capital requirements. Capital adequacy for the
Company is measured against guidelines established by the Federal
Reserve Board.
The Bank is subject to generally similar capital
requirements adopted by the OCC.
For information on regulatory capital, see Note 15 of the
Notes to the Consolidated Financial Statements.
REGULATORY MATTERS
In November of 1998, the Bank, through its Board of
Directors, entered into a Formal Agreement with the OCC whereby
the Bank has agreed to further develop its written programs and
its system of internal controls to ensure compliance with the
Bank Secrecy Act, the "Know-Your-Customer" guidelines and the
regulations of the Office of Foreign Assets Control.
<PAGE>
The provisions of the Formal Agreement will continue until
excepted, waived or terminated by the OCC.
The Bank's Board of Directors has agreed to comply with
provisions of the Formal Agreement. The Bank's Board of
Directors will file periodic reports with the OCC as part of its
compliance with this Formal Agreement.
RECENT ACCOUNTING PRONOUNCEMENTS AND OTHER MATTERS
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 supersedes the
disclosure requirements in SFAS 80, 105 and 119 and is effective
for fiscal periods beginning after June 15, 1999. The adoption
of SFAS N0. 133 is not expected to have a material impact on the
financial position or results of operations of the Company.
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 to be
limited to those applications supported by the Company's third
party data processing company ("third party processor").
Management has evaluated non information technology ("Non
IT") systems such as environmental systems dependent on imbedded
micro chips, including security systems, elevators and vaults.
With the exception of the security and telecommunication systems,
none of the Company's other Non IT systems were determined to be
dependent on imbedded micro chip technology.
<PAGE>
In 1998, management conducted a mailing to third party
vendors to determine their Year 2000 state of readiness. After
receiving a response rate of 50%, the Company restricted its
mailing to those third party relationships considered to pose a
significant risk. This limited the review to the Company's major
utilities and telecommunications companies. These parties have
indicated that they will be Year 2000 ready by June 30, 1999.
The Company has recently completed a review of its major
loan customers' Year 2000 state of readiness. This review was
conducted for all existing customers with loan commitments
exceeding $250,000. This review has also become part of the
Company's underwriting for all new loans.
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 the Company are 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 has been completed.
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 March 31, 1999. Originally, the Company
expected to have this transactional testing completed 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 scheduled to be
completed by March 31, 1999. Originally, the Company expected to
have this access testing 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 approximately
$118,000. Expected future costs relating to fixing Year 2000
issues, such as modifying and replacing hardware and software,
are not expected to exceed $200,000.
<PAGE>
RISKS OF COMPANY'S YEAR 2000 ISSUES
Management believes that its efforts to address its Year
2000 issues are adequate, and that Year 2000 compliance will be
achieved in accordance with the schedule outlined above.
However, 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.
Additionally, major customers may experience Year 2000
related problems which may adversely affect their ability to
repay their loans. While the Company is assessing the Year 2000
readiness of certain borrowers, it cannot currently know whether
its borrowers will be Year 2000 compliant. Consequently, the
Company may experience increases in its problem loans and loan
charge-offs in future years. However, such losses cannot be
quantified and the potential impact of such losses cannot be
determined at the present time.
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 the second quarter of 1999. The
Company has evaluated its contingency plan software and
management has deemed it to be an acceptable replacement.
SUBSEQUENT EVENT
On February 1, 1999, the Company entered into a definitive
agreement with Independence Community Bank Corp. ("Independence")
pursuant to which Independence will acquire the Company in a
transaction valued at $26.50 per share of the Company's common
stock. Upon completion of the acquisition, the Company's wholly
owned subsidiary, Broad National Bank, will merge into
Independence Community Bank, Independence's wholly owned
subsidiary.
Under the terms of the agreement, which was approved
unanimously by both boards of directors, holders of the Company's
common stock will receive cash or shares of Independence common
stock pursuant to an election, proration and allocation procedure
subject to the total consideration being comprised of 50%
Independence common stock and 50% cash. The number of shares of
<PAGE>
stock any stockholder of the Company receives will be determined
based upon an exchange ratio designed to produce a value of
$26.50 per share when Independence stock has a market value as
calculated in the agreement of between $12.75 and $17.25. To the
extent that the market value of Independence common stock during
the pricing period exceeds $17.25 or is less than $12.75, the per
share value of the consideration to be received by stockholders
of the Company in the merger, whether in cash or stock, will
increase or decrease, respectively. The transaction has an
aggregate value of approximately $138 million.
The agreement provides for the payment of a termination fee
payable to Independence under certain circumstances. The members
of the Board of Directors, who beneficially own approximately 30%
of the Company, have agreed to vote their shares in favor of the
merger.
FORWARD LOOKING STATEMENTS
Statements made in this report that are not historical in
nature, or that state the Company's, or management's intentions,
hopes, beliefs, expectations, or predictions of the future, are
"forward-looking statements" within the meaning of section 21e of
the Securities and Exchange Act of 1934, as amended, and 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.
FACTORS THAT MAY AFFECT FUTURE RESULTS OF OPERATIONS, FINANCIAL
CONDITION OR BUSINESS
In order to take advantage of the safe harbor provisions for
forward-looking statements contained in Section 27A of the
Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended, added to those Acts
by the Private Securities Litigation Reform Act of 1995,
Bancorporation is hereby identifying important risks and
uncertainties that could affect Bancorporation's actual results
of operations, financial condition or business and could cause
Bancorporation's actual results of operations, financial
condition or business to differ materially from its historical
results of <PAGE> operations, financial condition or business, or the
results of operations, financial condition or business
contemplated by forward-looking statements made herein or
elsewhere orally or in writing, by, or on behalf of,
Bancorporation. Factors that could cause or contribute to such
differences include, but are not limited to, those factors
described below.
ECONOMIC CONDITIONS IN BANCORPORATION'S PRIMARY MARKET AREA
The profitability of Bancorporation is dependent on the
profitability of its subsidiary, Broad National Bank, which is a
national banking association operating in New Jersey. The Bank's
financial condition is affected by fluctuations in the economic
conditions prevailing in that portion of New Jersey in which the
Bank's banking operations are located. Accordingly, the
financial conditions of both the Bank and Bancorporation would
be adversely affected by deterioration in the general economic
and real estate climate in the State of New Jersey. The Bank's
business is also subject to fluctuations in interest rates,
national and local economic conditions, monetary and regulatory
policies and consumer and institutional confidence in the Bank.
The fluctuations are neither predictable nor controllable and may
have materially adverse consequences upon the operations and
financial condition of the Bank and Bancorporation in the future
even if other favorable events occur.
IMPORTANCE OF NET INTEREST INCOME AND SUSCEPTIBILITY TO CHANGES
IN INTEREST RATES
The primary source of earnings for the Bank and
Bancorporation is net interest income, which is the difference
between interest and fees earned on loans and other interest-
earning assets, and the interest paid on deposits and other
interest-bearing liabilities. There may be a difference between
the amount of interest-earning assets scheduled to reprice in any
given period and the amount of interest-bearing liabilities
scheduled to reprice over the same time. Any difference can
create a lag between the time it takes the rate the bank earns
interest to respond to market fluctuations and the time it takes
the rate the bank incurs interest costs to respond to market
fluctuations, and vice-versa. Because of these "interest
sensitivity gaps," the amount of net interest income may be
affected by fluctuations in the interest rate.
ASSET QUALITY AND LENDING RISKS
Success in the banking industry largely depends on the
quality of loans and other assets. The Bank's loan officers are
actively encouraged to identify deteriorating loans. Loans are
also monitored and categorized through an analysis of their
payment status. The Bank's failure to timely and accurately
monitor the quality of its loans and other assets could have a
materially adverse effect on the operations and financial
condition of the <PAGE> Bank and Bancorporation. There is a degree of
credit risk associated with any lending activity. Bancorporation
attempts to minimize its credit risk through loan
diversification. Although Bancorporation's loan portfolio is
varied, with no undue concentration in any one industry,
substantially all of the loans in the portfolio have been made to
borrowers in New Jersey. Therefore, the loan portfolio is
susceptible to factors affecting the New Jersey area and the
level of non-performing assets is heavily dependent upon local
conditions. See "Economic Conditions in Bancorporation's Primary
Market Area." There can be no assurance that the level of
Bancorporation's non-performing assets will not increase above
current levels. High levels of non-performing assets could have
a materially adverse effect on the operations and financial
condition of the Bank and Bancorporation.
PROVISIONS FOR POSSIBLE LOAN LOSSES
Bancorporation makes a provision for possible loan losses
based upon management's analysis of potential losses in the loan
portfolio and consideration of prevailing economic conditions.
Bancorporation may need to increase the provision for loan losses
through additional provisions in the future if the financial
condition of any of its borrowers deteriorates or if real estate
values decline. See "Asset Quality and Lending Risks."
Furthermore, various regulatory agencies, as an integral part of
their examination process, periodically review Bancorporation's
loan portfolio, provision for loan losses, in-substance
foreclosed loans, and real estate acquired by foreclosure. Such
agencies may require, and in the past have required,
Bancorporation to recognize additions to the provision for loan
losses based on their judgments of information available to them
at the time of the examination. Any additional provisions for
possible loan losses, whether required as a result of regulatory
review or initiated by Bancorporation itself, may materially
alter the financial outlook of the Bank and Bancorporation.
COMPETITION IN BANCORPORATION'S MARKET AREA
Vigorous competition exists in all major areas where
Bancorporation and the Bank presently engage in business. The
Bank faces intense competition in local and national markets from
other major banking institutions. The Bank is in direct
competition with some larger institutions that have substantially
greater resources, better name recognition, stronger market
presence, and the ability to offer a wider range of services.
Competition from larger institutions is especially prevalent due
to the accelerated pace of bank mergers in the New Jersey area.
The long-term impact of such mergers and consolidations on the
New Jersey market area is uncertain. The Bank may face even more
intense competition because of the proliferation of bank mergers.
An increase in the intensity of competition from other banks in
the New Jersey market could have a <PAGE> materially adverse impact on
the operations and financial condition of the Bank and
Bancorporation.
In addition to the competition from rival banking companies,
the Bank faces competition from non-bank institutions including:
finance companies; mortgage lenders; small loan companies; credit
unions; insurance companies; and a variety of other financial
service and advisory companies. The stock market, mutual funds,
and other non-federally insured investments also compete with the
Bank for customer deposits. The Bank may face more intense
competition from these and other non-banking industries and
investments in the future. A failure of the Bank to be
competitive could have a materially adverse effect on the Bank
and Bancorporation.
REGULATION
Banks and bank holding companies such as Bancorporation are
subject to regulation by both federal and state bank regulatory
agencies. The regulations, which are designed to protect
borrowers and promote certain social policies, include
limitations on the operations of banks and bank holding
companies, such as minimum capital requirements and restrictions
on dividend payments. These regulations are not necessarily
designed to maximize the profitability of banking institutions.
Future changes in the banking laws and regulations could have a
materially adverse effect on the operations and financial
condition of the Bank and Bancorporation.
IMPORTANCE OF EXECUTIVE OFFICERS
The success of the Bank and Bancorporation has been largely
dependant on the efforts of Donald Karp, John Dorman and the
other executive officers. These individuals are expected to
continue to perform their services. However, the loss of the
services of Donald Karp, John Dorman, or any of the other key
executive officers could have a materially adverse effect on the
Bank and Bancorporation.
YEAR 2000 COMPLIANCE
The Company's Year 2000 steering committee has been
designated to monitor the progress and testing of the action plan
for Year 2000 compliance, with the objective of ensuring that all
computerized systems and software programs are capable of
functioning in the next century. The incremental cost of
ensuring that its computer systems are Year 2000 compliant is not
anticipated to be material to the Company's business, financial
condition or results of operations. However, if such
modifications and conversions are not made, or are not completed
timely, the Year 2000 issue could have a materially adverse
effect on the Bank and the Company.
<PAGE>
ADDITIONAL FACTORS
Additional risks and uncertainties that may affect the
future results of operations, financial condition or business of
the Bank and Bancorporation include, but are not limited to: (i)
the ability to keep pace with technological change including
developing and implementing technological advances timely and
cost-effectively in order to provide better service and remain
competitive; (ii) adverse publicity, news coverage by the media,
or negative reports by brokerage firms, industry and financial
analysts regarding the Bank or Bancorporation; and (iii) changes
in accounting policies and practices.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK.
MARKET RISK
The Company does not have assets held for trading purposes,
and does not currently use derivatives to manage market risk.
Market risk is the risk of loss from changes in market
prices and rates. The Company's market risk arises primarily
from interest rate risk inherent in its lending and deposit
taking activities. Interest rate risk can be defined as the
exposure of the Company's net interest income to adverse
movements in interest rates.
The Company's interest rate risk management is the
responsibility of the Company's Asset/Liability Committee. Tools
used by the Asset/Liability Committee to monitor interest rate
risk include the GAP report and an interest rate shock simulation
report (See "Interest Rate Sensitivity").
The table below represents in tabular form the contractual
balances of the Company's on balance sheet financial instruments,
categorized by expected maturity dates, and the instruments' fair
values at December 31, 1998. Expected maturities are contractual
maturities adjusted for repayments, and, where prepayment
information is available, prepayments of principal.
The Company uses certain assumptions to estimate fair values
and expected maturities.
Expected maturities for loans reflect contractual maturities
adjusted for projected scheduled repayments. Investment
securities reflect contractual maturities adjusted for
prepayments, which prepayments reflect the prepayment speeds
since the issuance of the security. Deposits, other than time
deposits, reflect decay rates based upon industry accepted
assumptions. Time deposits, short term borrowings, long term
debt and 9.5% Cumulative Trust Preferred Securities reflect
contractual maturities.
<PAGE>
The fair value of federal funds sold approximates book value
due to the short maturity. The fair value of investment
securities is based on quotations from security dealers. The
fair value of loans are estimated using the discounted value of
future cash flows expected to be received using estimated market
discount rates. The fair value of savings, money market and
interest bearing demand accounts is the amount payable upon
demand. The fair value of time deposits is based upon the
discounted value of contractual cash flows, which is estimated
using current rates offered for deposits of similar remaining
terms. The fair value of short-term borrowings and long-term
debt is estimated by discounting the cash flows through maturity
based upon current rates offered for similar instruments with
similar maturities. The fair value of the 9.5% Cumulative Trust
Preferred Securities is estimated by discounting the cash flows
through maturity based upon current rates for similar Trust
Preferred Securities.
<PAGE>
<TABLE>
TABLE OF MARKET RISK SENSITIVE INSTRUMENTS
Expected Maturity/Principal Repayments as of December 31, 1998
(Dollars in Thousands)
1999 2000 2001 2002 2003 Beyond Total Fair Value
INTEREST SENSITIVE ASSETS
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Investment
securities 72,550 43,613 26,425 18,904 21,476 80,705 263,673 264,911
Weighted
average
interest
rate 6.59% 6.56% 6.68% 6.77% 6.63% 6.81% 6.72% 6.75%
Fixed loans 59,471 24,624 18,280 14,106 13,791 41,716 171,988 171,058
Weighted
average
interest
rate 9.01% 9.11% 9.13% 8.40% 8.63% 7.71% 8.34% 7.70%
Variable
loans 51,341 31,529 25,338 21,944 21,903 36,346 188,401 189,675
Weighted
average
interest
rate 8.85% 9.13% 9.07% 9.21% 8.90% 8.30% 8.38% 7.33%
INTEREST SENSITIVE LIABILITIES
Savings,
money
market and
interest
bearing
demand
deposits 92,957 40,004 40,004 40,004 40,004 0 252,973 254,537
Weighted
average
interest
rate 2.30% 2.30% 2.30% 2.30% 2.30% 0.00 2.30% 2.02%
Time
deposits 196,521 9,447 1,011 223 623 0 207,825 208,810
Weighted
average
interest
rate 4.86% 5.25% 5.37% 5.73% 5.73% 0.00% 4.90% 4.51%
Short-term
borrowings 40,651 0 0 0 0 0 40,651 40,781
Weighted
average
interest
rate 5.45% 0.00 0.00 0.00 0.00 0.00 5.45% 5.12%
9.5% Cumulative
Trust Preferred
Securities -- -- -- -- -- 11,500 11,500 12,735
Weighted
average
interest
rate -- -- -- -- -- 9.50% 9.50% 7.59%
</TABLE>
<PAGE>
Because of assumptions used to estimate fair values and
expected maturities, actual future changes in fair value could
differ from those reflected in the table.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
BROAD NATIONAL BANCORPORATION AND SUBSIDIARIES
Index to Consolidated Financial Statements
Page
Independent Auditors' Report as of December 31, 1998
and 1997 and for the years ended December 31, 1998,
1997 and 1996 67
Consolidated Statements of Condition as of December 31,
1998 and 1997 68
Consolidated Statements of Income for each of the years
ended December 31, 1998, 1997 and 1996 69
Consolidated Statements of Changes in Shareholders' Equity
for the years ended December 31, 1998, 1997 and 1996 70
Consolidated Statements of Cash Flows for each of the
years ended December 31, 1998, 1997 and 1996 71
Notes to Consolidated Financial Statements 72
All schedules are omitted because they are not applicable, or not
required, or because the required information is included in the
financial statements or the notes thereto.
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Shareholders and Board of Directors of
Broad National Bancorporation:
We have audited the accompanying consolidated statements of
condition of Broad National Bancorporation and subsidiaries as of
December 31, 1998 and 1997 and the related consolidated
statements of income, changes in shareholders' equity, and cash
flows for each of the years in the three-year period ended
December 31, 1998. These consolidated financial statements are
the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally
accepted auditing standards. Those standards require that we
plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements
referred to above present fairly, in all material respects, the
financial position of Broad National Bancorporation and
subsidiaries as of December 31, 1998 and 1997, and the results of
their operations and their cash flows for each of the years in
the three-year period ended December 31, 1998 in conformity with
generally accepted accounting principles.
/s/ KPMG LLP
Short Hills, New Jersey
January 21, 1999
<PAGE>
Broad National Bancorporation and Subsidiaries
CONSOLIDATED STATEMENTS OF CONDITION
December 31, 1998 and 1997
(Dollars in thousands, except share amounts)
1998 1997
ASSETS
CASH AND DUE FROM BANKS (Note 12) $ 45,793 $ 21,933
FEDERAL FUNDS SOLD 0 37,300
CASH AND CASH EQUIVALENTS 45,793 59,233
SECURITIES HELD-TO-MATURITY
(aggregate market value $33,083 and $65,203,
respectively) (Note 2) 32,949 65,330
SECURITIES AVAILABLE-FOR-SALE (Note 2) 231,828 141,077
LOANS, net of deferred loan fees
(Note 3) 360,142 322,528
LESS Allowance for possible loan losses
(Note 4) 8,246 6,974
NET LOANS 351,896 315,554
PREMISES AND EQUIPMENT, net (Note 5) 9,862 8,991
ACCRUED INTEREST RECEIVABLE 4,227 4,020
OTHER ASSETS (Note 6) 8,238 7,464
TOTAL ASSETS $684,793 $601,669
LIABILITIES AND SHAREHOLDERS' EQUITY
DEPOSITS
Non-interest bearing demand $114,266 $103,054
Savings, money market and interest
bearing demand 252,973 230,467
Time deposits less than $100,000 112,945 94,017
Time deposits of $100,000 or more 94,880 90,700
TOTAL DEPOSITS 575,064 518,238
SHORT-TERM BORROWINGS (Note 9) 40,651 13,000
LONG-TERM DEBT (Note 10) 0 9,000
COMPANY-OBLIGATED MANDATORILY REDEEMABLE CUMULATIVE
TRUST PREFERRED SECURITIES OF A SUBSIDIARY TRUST
HOLDING SOLELY JUNIOR SUBORDINATED DEBENTURES OF
BANCORPORATION (Note 11) 11,500 11,500
ACCRUED TAXES, INTEREST AND OTHER LIABILITIES
(Note 7) 12,889 10,700
TOTAL LIABILITIES 640,104 562,438
COMMITMENTS AND CONTINGENCIES (Notes 2, 3 and 12)
SHAREHOLDERS' EQUITY (Notes 13, 14 and 15)
Common stock, $1 par value, authorized 10,000,000
shares in 1998 and 1997, issued:
1998, 5,212,519 shares; 1997,
4,948,921 shares 5,213 4,949
Capital surplus 35,131 30,996
Retained earnings 8,717 7,153
Common stock in treasury, at cost: 296,500
shares in 1998 and 242,000 shares
in 1997 (5,089) (4,111)
Accumulated other comprehensive income 717 244
TOTAL SHAREHOLDERS' EQUITY 44,689 39,231
TOTAL LIABILITIES AND SHAREHOLDERS'
EQUITY $684,793 $601,669
The accompanying notes to the consolidated financial statements are an
integral part of these statements.
<PAGE>
Broad National Bancorporation and Subsidiaries
CONSOLIDATED STATEMENTS OF INCOME
For the years ended December 31, 1998, 1997 and 1996 (In thousands, except per
share amounts)
1998 1997 1996
INTEREST INCOME
Interest and fees on loans (
Note 3) $30,098 $26,935 $24,190
Interest on securities held-to-
maturity
Taxable 2,813 5,152 4,667
Tax exempt 63 61 49
Interest on securities
available-for-sale 10,945 5,894 3,689
Interest on federal funds sold 1,876 2,813 2,567
TOTAL INTEREST INCOME 45,795 40,855 35,162
INTEREST EXPENSE
Interest on savings and interest bearing
demand deposits 4,883 4,756 4,899
Interest on time certificates of
deposit of $100,000 or more 5,546 5,182 2,639
Interest on other time deposits 5,737 4,990 4,222
Interest on short-term borrowings 977 281 58
Interest on 9.5% Cumulative Trust
Preferred Securities 1,093 546 0
Interest on long-term debt 231 175 0
TOTAL INTEREST EXPENSE 18,467 15,930 11,818
NET INTEREST INCOME 27,328 24,925 23,344
PROVISION FOR POSSIBLE LOAN LOSSES
(Note 4) 975 1,800 1,350
NET INTEREST INCOME AFTER PROVISION FOR
POSSIBLE LOAN LOSSES 26,353 23,125 21,994
NON-INTEREST INCOME
Service charges on deposit
accounts 6,054 5,945 5,370
Other income 1,467 1,088 1,231
Gain (loss) on sale of securities
available-for-sale (Note 2) 23 84 (45)
TOTAL NON-INTEREST INCOME 7,544 7,117 6,556
NON-INTEREST EXPENSES
Salaries and wages 9,540 8,000 7,896
Employee benefits (Note 7) 2,202 2,094 2,486
Occupancy expense (Note 12) 2,206 2,009 1,923
Furniture and equipment expense 1,403 1,167 1,090
Advertising 673 589 406
Data processing fees 961 1,083 1,070
Legal fees 555 747 858
Professional fees 720 1,133 1,307
Insurance 316 287 413
Postage, delivery and communication 824 721 675
FDIC and OCC assessments 195 182 112
Other real estate expense (income) 110 (219) 202
Other expenses 1,835 1,756 1,411
TOTAL NON-INTEREST EXPENSES 21,540 19,549 19,849
INCOME BEFORE INCOME TAXES $12,357 $10,693 $ 8,701
PROVISION FOR INCOME TAXES (Note 6) 4,310 4,282 3,428
NET INCOME $ 8,047 $ 6,411 $ 5,273
AVERAGE NUMBER OF COMMON SHARES
OUTSTANDING (Note 13)
BASIC 4,935 5,027 5,028
DILUTED 5,162 5,204 5,248
EARNINGS PER COMMON SHARE (Note 13)
BASIC $1.63 $1.28 $1.05
DILUTED $1.56 $1.23 $1.01
The accompanying notes to the consolidated financial statements are an
integral part of these statements.
<PAGE>
<TABLE>
Broad National Bancorporation and Subsidiaries
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
For the years ended December 31, 1998, 1997, and 1996
(In thousands, except per share amounts)
<CAPTION> Accumulated
Number of Other
Common Preferred Preferred Common Capital Retained Treasury Comprehensive
Shares Stock-1985 Stock-1992 Stock Surplus Earnings Stock Income Total
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE,
DECEMBER 31, 1995 3,059 $171 $563 $3,059 $23,145 $7,307 - $ 284 $34,529
COMPREHENSIVE INCOME
NET INCOME 1996 - - - - - 5,273 - - 5,273
UNREALIZED HOLDING LOSSES ON SECURITIES
(NET OF TAX BENEFIT
OF $82) - - - - - - - (168)
LESS: RECLASSIFICATION ADJUSTMENT
FOR LOSSES INCLUDED IN
NET INCOME (NET OF TAX
BENEFIT OF $15) - - - - - - - (30)
NET UNREALIZED HOLDING LOSSES
ON SECURITIES ARISING DURING
THE PERIOD (NET OF TAX
BENEFIT OF $67) - - - - - - - (138) (138)
TOTAL COMPREHENSIVE
INCOME - - - - - - - - 5,135
REDEMPTION OF 1985
PREFERRED STOCK - (2) - - (6) - - - (8)
CONVERSION OF 1985
PREFERRED STOCK 110 (169) - 110 59 - - - -
REDEMPTION OF 1992
PREFERRED STOCK - - (4) - (35) (5) - - (44)
CONVERSION OF 1992
PREFERRED STOCK 1,067 - (559) 1,067 (508) - - - -
EXERCISE OF STOCK
OPTION 16 - - 16 82 - - - 98
EFFECT OF 10% STOCK
DIVIDEND 425 - - 425 3,852 (4,277) - - -
CASH DIVIDENDS DECLARED
COMMON STOCK - $0.27
PER SHARE - - - - - (1,294) - - (1,294)
PURCHASE OF TREASURY
STOCK - - - - - - (58) - (58)
BALANCE, DECEMBER 31,
1996 4,677 0 0 4,677 26,589 7,004 (58) 146 38,358
COMPREHENSIVE INCOME
NET INCOME 1997 - - - - - 6,411 - - 6,411
UNREALIZED HOLDING
GAINS ON SECURITIES
(NET OF TAX OF $81) - - - - - - - 153 -
LESS: RECLASSIFICATION
ADJUSTMENT FOR GAINS
INCLUDED IN NET INCOME
(NET OF TAX OF $29) - - - - - - - 55
NET UNREALIZED HOLDING
GAINS ON SECURITIES
ARISING DURING THE PERIOD
(NET OF TAX OF $52) - - - - - - - 98 98
TOTAL COMPREHENSIVE
INCOME - - - - - - - - 6,509
EXERCISE OF STOCK
OPTIONS 48 - - 48 260 - - - 308
EFFECT OF 5% STOCK
DIVIDEND 224 - - 224 4,147 (4,371) - - -
CASH DIVIDENDS DECLARED
COMMON STOCK - $0.41
PER SHARE - - - - - (1,891) - - (1,891)
PURCHASE OF TREASURY
STOCK - - - - - - (4,053) - (4,053)
BALANCE, DECEMBER 31,
1997 4,949 0 0 4,949 30,996 7,153 (4,111) 244 39,231
COMPREHENSIVE INCOME
NET INCOME 1998 8,047 8,047
UNREALIZED HOLDING
GAINS ON SECURITIES
(NET OF TAX OF $267) - - - - - - - 488
LESS: RECLASSIFICATION
ADJUSTMENT FOR GAINS
INCLUDED IN NET INCOME
(NET OF TAX OF $8) - - - - - - - 15
NET UNREALIZED HOLDING
GAINS ON SECURITIES
ARISING DURING THE PERIOD
(NET OF TAX OF $259) - - - - - - - 473 473
TOTAL COMPREHENSIVE
INCOME - - - - - - - - 8,520
EXERCISE OF STOCK
OPTIONS 30 - - 30 81 - - - 111
EFFECT OF 5% STOCK
DIVIDEND 234 234 4,054 (4,288) -
CASH DIVIDENDS DECLARED
COMMON STOCK -
$0.46 PER SHARE - - - - - (2,195) - - (2,195)
PURCHASE OF TREASURY
STOCK - - - - - - (978) - (978)
BALANCE, DECEMBER 31,
1998 5,213 $ 0 $ 0 $5,213 $35,131 $8,717 $(5,089) $ 717 $44,689
The accompanying notes to the consolidated financial statements are an integral part of these statements.
</TABLE>
<PAGE>
Broad National Bancorporation and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended December 31, 1998, 1997 and 1996
(In thousands)
1998 1997 1996
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 8,047 $ 6,411 $ 5,273
Adjustments to reconcile net income to
net cash provided by (used in)
operating activities:
Depreciation and amortization 1,328 1,329 1,229
Amortization of securities premium,
net 790 655 709
Amortization of deferred points and fees
and deferral of loan origination
costs (306) (393) (297)
Provision for possible loan losses 975 1,800 1,350
Deferred tax benefit (1,580) (198) (393)
Increase (decrease) in accrued taxes,
interest, and other liabilities 2,459 1,515 (7,009)
(Gain) loss on sale of securities
available-for-sale (23) (84) 45
Gain on sale of loans (2) (3) 0
(Gain) loss on the sale of other
real estate owned (18) (343) 96
Increase in accrued interest
receivable (207) (669) (532)
Other assets, net (290) (1,301) (746)
Net cash provided by (used in)
operating activities $ 11,173 $ 8,719 $ (275)
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from the sale of other
real estate owned $ 1,057 $ 890 $ 292
Net increase in loan balances (37,669) (38,558) (19,909)
Proceeds from the sale of loans 182 181 0
Proceeds from the maturities of
securities held-to-maturity 33,475 31,211 14,745
Purchase of securities held-to-
maturity (1,375) (6,716) (44,986)
Proceeds from the maturities of
securities available-for-sale 62,984 15,814 15,795
Proceeds from the sale of securities
available-for-sale 38,892 25,910 17,103
Purchase of securities
available-for-sale (192,376) (113,824) (46,623)
Capital expenditures (2,199) (1,432) (699)
Net cash used in investing
activities $(97,029) $(86,524) $(64,282)
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in time deposits $ 23,108 $ 17,839 $ 59,462
Net increase (decrease) in demand
deposits, savings, money market
and interest bearing demand
deposits 33,718 15,328 (4,070)
Net increase in short term
borrowings 27,651 12,000 218
Dividends paid (2,194) (1,741) (1,294)
Issuance of 9.5% Cumulative Trust
Preferred Securities 0 11,500 0
(Decrease) increase in long-
term debt (9,000) 9,000 0
Issuance of Common Stock 111 308 98
Redemption of Preferred Stock 0 0 (52)
Purchase of Treasury Stock (978) (4,053) (58)
Net cash provided by financing
activities $ 72,416 $ 60,181 $ 54,304
NET DECREASE IN CASH AND CASH
EQUIVALENTS (13,440) (17,624) (10,253)
CASH AND CASH EQUIVALENTS,
beginning of year 59,233 76,857 87,110
CASH AND CASH EQUIVALENTS,
end of year $ 45,793 $59,233 $76,857
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the year for
Interest $ 18,229 $15,412 $11,939
Income taxes 3,873 5,551 2,847
NONCASH OPERATING ACTIVITIES
Transfer of loans to other
real estate owned $ 0 $ 311 $ 458
The accompanying notes to the consolidated financial statements are an
integral part of these statements.
<PAGE>
Broad National Bancorporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998
Note 1: summary of significant accounting policies
The more significant accounting policies not described
elsewhere in these notes are as follows:
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts
of Broad National Bancorporation (the Company), 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.
All intercompany accounts and transactions have been eliminated.
BASIS OF FINANCIAL STATEMENT PRESENTATION
In preparing the consolidated financial statements,
management is required to make estimates and assumptions that
affect the reported amounts of assets and liabilities as of the
date of the statements of condition and results of operations for
the periods indicated. Actual results could differ significantly
from those estimates.
Material estimates that are particularly susceptible to
significant change in the near-term relate to the determination
of the allowance for possible loan losses and the valuation of
other real estate owned. In connection with the determination of
these allowances, management generally obtains independent
appraisals.
While management uses available information to recognize
losses on loans and other real estate owned, future additions may
be necessary based on changes in economic conditions. In
addition, various regulatory agencies, as an integral part of
their examination process, periodically review the Company's
allowance for possible losses on loans, and valuation of other
real estate owned. Such agencies may require the Company to
recognize additions to the allowance or changes in valuation
based on their judgments of information available to them at the
time of their examination.
A substantial portion of the Company's loans are secured by
real estate in New Jersey. Accordingly, as with most financial
institutions in this market area, the ultimate collectibility of
a substantial portion of the Company's loan portfolio is
susceptible to changes in New Jersey's market conditions.
FEDERAL HOME LOAN BANK OF NEW YORK (FHLBNY) STOCK
The Bank, as a member of the FHLBNY, is required to hold
shares of capital stock of FHLBNY, which are carried at cost,
based upon a specified formula.
<PAGE>
INVESTMENT SECURITIES
The Company does not have trading securities, but does
differentiate
between held-to-maturity securities and available-for-sale
securities. Management determines the appropriate classification
of securities at the time of purchase.
If management has the positive intent and the Company has
the ability at the time of purchase to hold securities until
maturity, they are classified as held-to-maturity securities.
Such securities are stated at amortized cost, adjusted for
unamortized purchase premiums and discounts utilizing the level
yield method.
Securities in the available-for-sale category are those for
which the Company does not have the positive intent and ability
to hold to maturity. Available-for-sale securities are reported
at fair value. Any unrealized appreciation or depreciation in
the available-for-sale securities, net of tax effects, is
reported as a component of other comprehensive income in the
Consolidated Statements of Changes in Shareholders' Equity.
Realized gains or losses on the sale of securities available-
for-sale are recognized using the specific identification method.
LOANS AND LOAN FEES
Loans are stated at their principal amount outstanding, net
of deferred loan fees and costs.
Non-refundable fees and costs associated with originating or
acquiring loans are deferred and amortized over the expected
remaining life of the related loans by use of a method which
approximates the level yield method.
It is the policy of the Bank to discontinue the accrual of
interest and reverse previously accrued but unpaid interest where
interest or principal is more than 90 days past due or when other
circumstances indicate that collection is questionable, unless
the loans are adequately secured and in the process of
collection. Income on these loans is recognized only in the
period in which it is collected. A loan is returned to accrual
status when it is brought current as to principal and interest
and its future collectibility is assured.
ALLOWANCE FOR POSSIBLE LOAN LOSSES
The allowance for possible loan losses is maintained at a
level considered adequate to provide for potential loan losses.
The allowance is increased by provisions charged to expense and
reduced by net charge-offs. The level of the allowance is based
upon management's evaluation of potential losses in the loan
portfolio, after consideration of prevailing economic conditions.
The Bank has identified the population of impaired loans to
be non-accrual loans and loans internally classified as
substandard or below and in each instance above an established
dollar threshold. The value of an impaired loan is measured based
upon the present value of expected future cash flows discounted
at the loan's effective interest rate, or the fair value of the
collateral if the loan is collateral dependent. Smaller balance
homogeneous loans that are <PAGE> collectively evaluated for impairment,
such as residential mortgage loans and installment loans, are
specifically excluded from impaired loans. The impaired loan
portfolio is primarily collateral dependent. Impaired loans are
assessed to determine that each loan's carrying value is not in
excess of the fair value of the related collateral or the present
value of expected future cash flows.
OTHER REAL ESTATE OWNED
Other real estate owned is composed of foreclosed properties
where the Bank has received title. Such properties are carried
at the lower of cost or fair value less estimated cost to sell.
The fair value of such assets is determined based upon
independent appraisals and other relevant factors. Operating
expenses, and gains or losses from the sale of other real estate
owned are charged or credited to other real estate expense.
Other real estate owned is included in "Other Assets" in the
Consolidated Statements of Condition.
PREMISES AND EQUIPMENT
These assets are stated at cost less accumulated
depreciation and amortization, which are computed primarily using
the straight-line method over the estimated useful lives of the
assets. Gains or losses on dispositions are reflected in current
operations. Maintenance and repairs are charged to expense as
incurred.
INCOME TAXES
Bancorporation and the Bank file a consolidated federal
income tax return. State income tax returns are filed on a
separate basis.
The Company accounts for income taxes using the asset and
liability method. Temporary differences between the basis of
assets and liabilities for financial reporting and tax purposes
are measured as of the balance sheet date. Deferred tax
liabilities or recognizable deferred tax assets are calculated on
such differences, using current statutory rates which result in
future taxable or deductible amounts. The effect on deferred
taxes of a change in tax rates is recognized in income in the
period that includes the enactment date.
EARNINGS PER SHARE
Basic EPS is computed by dividing income available to common
shareholders by the weighted-average number of common shares
outstanding. Diluted EPS includes any additional common shares
as if all potentially dilutive common shares were issued (e.g.
stock options).
All share and per share amounts have been restated to
reflect the 5% stock dividend declared in December 1998 and
distributed in January 1999 and the 5% stock dividend distributed
in January 1998.
<PAGE>
STOCK COMPENSATION PLANS
The Bank accounts for its stock option plans in accordance
with the provisions of Accounting Principles Board (APB) Opinion
No. 25, "Accounting for Stock Issued to Employees," and related
interpretations. As such, compensation expense is recorded on
the date of grant only if the current market price of the
underlying stock exceeds the exercise price. The Bank provides
the fair market disclosures required by Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" (SFAS 123).
STATEMENT OF CASH FLOWS
For purposes of reporting cash flows, cash and cash
equivalents include cash on hand, non-interest bearing amounts
due from banks, and federal funds sold.
COMPREHENSIVE INCOME
Statement of Financial Accounting Standards No. 130,
Reporting Comprehensive Income ("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
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 Bank adopted
SFAS 130 in 1998 and has included the required disclosures in the
Consolidated Statements of Changes in Shareholders' Equity.
PENSION PLANS
In February 1998, the FASB issued SFAS No. 132, "Employers'
Disclosures about Pensions and Other Postretirement Benefits".
SFAS 132 revises employers' disclosures about pension and other
postretirement benefit plans. It does not change the measurement
or recognition of those plans. The Company has adopted SFAS 132
and has made the required disclosures, including restatement of
prior periods presented in the accompanying Notes to the
Consolidated Financial Statements.
RECENT ACCOUNTING PRONOUNCEMENTS
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 supersedes the
disclosure requirements in SFAS 80, 105 and 119 and is effective
for fiscal periods beginning 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.
RECLASSIFICATIONS
Certain amounts in the consolidated financial statements
presented for prior periods have been reclassified to conform
with the 1998 presentation.
<PAGE>
NOTE 2: INVESTMENT SECURITIES
The amortized cost, gross unrealized gains and losses and
estimated fair values of securities held-to-maturity are as
follows (in thousands):
<TABLE>
December 31,
1998 1997
Gross Gross Estimated Gross Gross Estimated
Amortized Unrealized Unrealized Fair Amortized Unrealized Unrealized Fair
Cost Gains Losses Value Cost Gains Losses Value
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Government Agencies $ 1,000 $ 1 $ - $ 1,001 $13,149 $ 1 $ (39) $13,111
Mortgage-Backed Securities 27,237 157 (33) 27,361 47,869 131 (233) 47,767
States and Political
Subdivisions 1,527 12 (3) 1,536 1,683 13 - 1,696
Other Bonds 29 - - 29 30 - - 30
Total Debt Securities $ 29,793 $ 170 $ (36) $ 29,927 $62,731 $ 145 $ (272) $62,604
FRB and FHLB Stock 3,156 - - 3,156 2,599 - - 2,599
Total Securities
Held-to-Maturity $ 32,949 $ 170 $ (36) $ 33,083 $65,330 $ 145 $ (272) $65,203
</TABLE>
The amortized cost and estimated fair value of securities
held-to-maturity at December 31, 1998, by contractual maturity,
are shown below. Expected maturities will differ from
contractual maturities because borrowers may have the right to
call or prepay obligations with or without call or prepayment
penalties.
Estimated
Amortized Fair
Cost Value
(Dollars in Thousands)
Due in one year or less $ 3,489 $ 3,498
Due in one year through five years 17,732 17,788
Due after five years through ten years 6,321 6,353
Due after ten years 2,251 2,288
Total Debt Securities $29,793 $29,927
FRB and FHLB Stock 3,156 3,156
Total Securities
Held-to-Maturity $32,949 $33,083
<PAGE>
<TABLE>
The amortized cost, gross unrealized gains and losses and estimated fair values of securities available-for-sale
are as follows (in thousands):
December 31,
1998 1997
Gross Gross Estimated Gross Gross Estimated
Amortized Unrealized Unrealized Fair Amortized Unrealized Unrealized Fair
Cost Gains Losses Value Cost Gains Losses Value
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Treasury Notes $ 12,528 $ 161 $ - $ 12,689 $ 12,499 $ 120 $ - $ 12,619
U.S. Government Agencies 48,237 236 - 48,473 32,967 39 (63) 32,943
Mortgage-Backed Securities 168,163 890 (201) 168,852 93,537 428 (154) 93,811
States and Political
Subdivisions 420 15 - 435 325 10 - 335
Other 1,376 3 - 1,379 1,377 - (8) 1,369
Total Securities
Available-for-Sale $230,724 $1,305 $ (201) $231,828 $140,705 $ 597 $ (225) $141,077
</TABLE>
The amortized cost and estimated fair value of securities
available-for-sale at December 31, 1998, by contractual maturity,
are shown below. Expected maturities will differ from
contractual maturities because borrowers may have the right to
call or prepay obligations with or without call or prepayment
penalties.
Estimated
Amortized Fair
Cost Value
(Dollars in Thousands)
Due in one year or less $ 6,297 $ 6,320
Due in one year through five years 25,084 25,344
Due after five years through ten years 60,819 61,065
Due after ten years 138,524 139,099
Total Securities
Available-for-Sale $230,724 $231,828
Gross realized gains (losses) from the sale of securities
available-for-sale were $167,000 and ($144,000) during 1998,
$149,000 and ($65,000) during 1997 and $52,000 and ($97,000)
during 1996.
At December 31, 1998 and 1997, securities having a book
value of $81,529,000 and $53,199,000 respectively, were pledged
to secure lines of credit, letters of credit, public deposits and
for other purposes as required by law.
<PAGE>
NOTE 3: LOANS
Loans are summarized as follows:
December 31,
1998 1997
(Dollars in Thousands)
Real estate loans
Construction $ 11,322 $ 10,844
Secured conventional
Residential 105,353 78,654
Non-residential 158,020 141,464
Commercial and industrial loans 76,103 82,524
Loans for individuals
Automobile 3,030 2,743
Revolving credit 299 290
Other installment loans 5,527 5,543
All other loans 735 690
Total loans $360,389 $322,752
Less deferred loan fees (247) (224)
Total loans net of deferred
loan fees $360,142 $322,528
Non-performing loans and non-performing assets include the
following:
December 31,
1998 1997
(Dollars in Thousands)
Non-accrual loans $ 716 $ 3,891
Accruing loans past due
90 days or more 1,366 931
Total non-performing loans $ 2,082 $ 4,822
Restructured loans (excluding amounts
classified as non-performing loans) 3,701 1,619
Other real estate owned, net 293 648
Total non-performing assets $ 6,076 $ 7,089
If the non-accrual loans had continued to accrue interest in
accordance with their original contract terms, interest income
would have increased approximately $54,102, $387,284 and $710,500
in 1998, 1997 and 1996, respectively.
At December 31, 1998 and 1997, the recorded investment in
impaired loans was $4,526,000 and $7,334,000, respectively. The
related allowance for credit losses was $0 at December 31, 1998
and 1997. The impaired loan portfolio is primarily collateral
dependent. The average recorded investment in impaired loans
during the years ended December 31, 1998 and 1997 was
approximately $5,350,000 and $9,334,000, respectively. For the
years ended December 31, 1998, 1997 and 1996 the Company
recognized cash basis interest income on these impaired loans of
$234,176, $344,000 and $265,500, respectively.
All loans to directors, executive officers, significant
shareholders and their related interests are current as to
principal and interest payments at December 31, 1998. The
following summarizes the activity for related party loans for the
year ended December 31, 1998 (in thousands):
<PAGE>
Balance, beginning of year $1,863
Additions 5,043
Payments 1,657
Balance, end of year $5,249
The Bank is party to financial instruments with
off-balance-sheet risk in the normal course of business to meet
the financial needs of its customers. These financial
instruments include commercial and standby letters of credit and
unused lines of credit and involve, to varying degrees, elements
of credit risk in excess of the amount recognized in the
statements of condition. The contract or notional amounts of
these instruments express the extent of involvement the Bank has
in each class of financial instruments. The Bank's exposure to
credit loss from non-performance by the other party to the above
mentioned financial instruments is represented by the contractual
amount of those instruments. The Bank uses the same credit
policies in making commitments and conditional obligations as it
does for on-balance-sheet instruments.
The Company's loan portfolio is varied, with no undue
concentration in any single industry, although most of the loans
in the Company's loan portfolio have been made to borrowers in
New Jersey, and are secured by real estate in New Jersey.
Accordingly, as with most financial institutions in this market
area, the ultimate collectibility of a substantial portion of the
Company's loan portfolio is susceptible to changes in New
Jersey's market conditions.
Unless otherwise noted, the Bank does not require collateral
or other security to support financial instruments with
off-balance-sheet credit risk.
Financial Instruments Whose Contract Contract or
Amounts Represent Credit Risk Notional Amount
at December 31, 1998
Commercial and standby letters of credit $ 2,340
Outstanding loan commitments-fixed rate $13,663
Outstanding loan commitments-variable rate $60,567
Commercial and standby letters of credit are conditional
commitments issued by the Bank guaranteeing performance by a
customer to a third party. Outstanding loan commitments
represent the unused portion of loan commitments available to
individuals and companies as long as there is no violation of any
condition established in the contract. Outstanding loan
commitments generally have a fixed expiration date of one year or
less, except for home equity lines of credit commitments which
generally have an expiration date of 15 years. The Bank
evaluates each customer's credit worthiness on a case-by-case
basis. The amount of collateral obtained, if deemed necessary by
the Bank upon extension of credit, is based upon management's
credit evaluation of the customer. Various types of collateral
may be held, including property and marketable securities.
The credit risk involved in these financial instruments is
essentially the same as that involved in extending loan
facilities to customers.
<PAGE>
NOTE 4: ALLOWANCE FOR POSSIBLE LOAN LOSSES
The allowance for possible loan losses is based upon
estimates, and ultimate losses may vary from the current
estimates. These estimates are reviewed periodically and, as
adjustments become necessary, they are reported in earnings in
the periods in which they become known.
The following summarizes the activity in the allowance for
possible loan losses (in thousands):
Year Ended December 31,
1998 1997 1996
Balance, beginning of year $ 6,974 $ 8,531 $ 7,402
Provisions Charged to operations 975 1,800 1,350
Loans charged-off (1,071) (3,958) (1,264)
Recoveries of charged-off loans 1,368 601 1,043
Balance, end of year $ 8,246 $ 6,974 $ 8,531
The allowance for loan losses for Federal income tax
purposes was $1,344,000 at December 31, 1998, $2,352,000 at
December 31, 1997 and $3,024,000 at December 31, 1996.
NOTE 5: PREMISES AND EQUIPMENT, NET
The detail of premises and equipment is as follows (in
thousands):
December 31,
1998 1997
Land $ 2,090 $ 1,309
Building 8,625 8,653
Furniture and equipment 9,675 8,718
Leasehold improvements 4,750 4,203
$25,140 $22,883
Less-Accumulated depreciation
and amortization 15,278 13,892
$ 9,862 $ 8,991
<PAGE>
NOTE 6: INCOME TAXES
The provision for income tax expense comprises the following
components (in thousands):
Year Ended December 31,
1998 1997 1996
Federal
Current tax expense $5,695 $3,637 $3,125
Deferred tax benefit (1,540) (168) (335)
State
Current tax expense 195 843 696
Deferred tax benefit (40) (30) (58)
$4,310 $4,282 $3,428
Deferred tax expense (benefit) of $259,000, $52,000 and
$(67,000) has been provided through the accumulated other
comprehensive income section of shareholders' equity to reflect
unrealized gains (losses) on available-for-sale securities for
the years ended December 31, 1998, 1997 and 1996, respectively.
The following is a reconciliation of the Federal income tax
expense as reported with the statutory Federal tax on income
before income taxes (in thousands):
Year Ended December 31,
1998 1997 1996
Tax at statutory rate $4,325 $3,636 $2,958
Tax exempt interest income (21) (14) (15)
State income taxes, net of
Federal tax benefit 101 537 421
Contributions and other 49 39 31
Valuation allowance (270) 0 (160)
Other, net 126 84 193
Total $4,310 $4,282 $3,428
Effective tax rate 34.9% 40.0% 39.4%
The tax effects of temporary differences that give rise to
significant portions of the deferred tax assets and deferred tax
liabilities are as follows (in thousands):
<PAGE>
December 31,
1998 1997
Deferred tax assets:
Allowance for possible loan losses $2,756 $1,858
Non-accrual loan interest 1,317 1,382
Allowance for losses on OREO 26 38
Pension expense 748 583
Premises and equipment, principally
due to differences in depreciation 1,063 914
Deferred compensation 504 0
Other 114 329
Total deferred tax assets 6,528 5,104
Valuation allowance 0 (270)
Total gross deferred tax assets $6,528 $4,834
Deferred tax liabilities:
Deferred fee income $ 114 $ 19
Investment securities, principally
due to accretion of discounts 47 28
Unrealized gain-securities
available-for-sale 387 128
Total gross deferred tax liabilities $ 548 $ 175
Net deferred tax assets $5,980 $4,659
Management has projected that the Company will generate
sufficient future taxable income to utilize the net deferred tax
assets. There can be no assurance, however, that the Company
will generate any earnings or any specific level of continuing
earnings.
The valuation allowance for deferred tax assets as of
December 31, 1998 and 1997 was $0 and $270,000, respectively. The
net change in the total valuation allowance for 1998 was a
decrease of $270,000, which was primarily the result of the
Company's continued strong earnings performance. There was no
change in the valuation allowance for 1997 or 1996.
NOTE 7: BENEFITS PLANS
PENSION PLAN:
The Bank has a noncontributory defined benefit pension plan
which covers substantially all employees. The Company makes
annual contributions to the plan equal to the amount accrued for
pension expense if deductible for tax purposes.
<PAGE>
The following table sets forth the plan's changes in benefit
obligation, changes in plan assets and funded status and amounts
recognized in the Company's consolidated financial statements (in
thousands):
December 31,
Change in Benefit Obligation 1998 1997
Benefit obligation at beginning
of the year $ 5,227 $ 4,874
Service cost 601 529
Interest cost 385 313
Actuarial loss/(gain) 316 (365)
Benefits paid (30) (124)
Benefit obligation at end of year $ 6,499 $ 5,227
Change in Plan Assets
Fair value of plan assets at
beginning of year $ 4,985 $ 4,141
Actual return on plan assets 582 724
Employer contributions 185 244
Benefits paid (30) (124)
Fair value of plan assets at
end of year $ 5,722 $ 4,985
Funded Status $ (777) $ (242)
Unrecognized transition asset
being amortized over 15 years (97) (122)
Unrecognized prior service cost 169 190
Unrecognized net actuarial gain (805) (952)
Accrued benefit cost $ (1,510) $ (1,126)
Net pension cost for 1998, 1997 and 1996 included the
following components (in thousands):
Year Ended December 31,
1998 1997 1996
Service cost $ 601 $ 529 $543
Interest cost 385 313 289
Expected return on plan assets (409) (347) (306)
Amortization of unrecognized
transition asset (24) (24) (24)
Recognized prior service cost 21 21 21
Recognized settlement gain (5) (8) 0
Net pension cost $ 569 $ 484 $ 523
Weighted average assumptions
Year Ended December 31,
1998 1997 1996
Weighted average discount rate 7.0% 7.0% 7.0%
Weighted average expected
long term rate of return
on plan assets 8.0% 8.0% 8.0%
Weighted average rate of
compensation increase 5.0% 5.0% 5.0%
Mortality table GA-83 UP-1984 UP-1984
Unisex Unisex Unisex
<PAGE>
Effective in 1995, the Bank established a non-qualified
deferred compensation plan for certain officers. All benefits
provided under this plan are unfunded. As of December 31, 1998
and 1997, approximately $363,000 and $246,000, respectively, was
included in accrued expense for this plan. For the years ended
December 31, 1998, 1997 and 1996, expenses related to this plan
were $117,000, $80,000 and $66,000, respectively.
401K PLAN:
The Bank sponsors a 401k Plan which provides several tax
deferred investment opportunities to salaried employees of the
Bank who have satisfied the service requirements of the Plan.
The Plan allows eligible employees to make periodic contributions
of certain percentages of their salary, subject to the Internal
Revenue Code limits on maximum annual contributions. The Bank
matches part of these contributions. The Bank's matching
contribution expense was $142,800, $114,600 and $62,300 for 1998,
1997, and 1996, respectively.
NOTE 8: STOCK COMPENSATION PLANS:
At December 31, 1998, the Company had five stock based
compensation plans, which are described below. The Company
applies APB Opinion No. 25 and related interpretations in
accounting for its plans. Accordingly, no compensation cost is
recognized for its stock option plans. Had compensation cost for
the Company's five stock -based compensation plans been
determined consistent with SFAS No. 123, the Company's net income
and earnings per share would have been reduced to the proforma
amounts indicated below (in thousands, except per share amounts):
1998 1997 1996
Net income As reported $8,047 $6,411 $5,273
Pro forma $7,638 $6,150 $5,152
Basic earnings As reported $1.63 $1.28 $1.05
per share Pro forma $1.55 $1.22 $1.02
Diluted earnings As reported $1.56 $1.23 $1.01
per share Pro forma $1.48 $1.18 $0.98
The fair value of each option grant is estimated on the date
of grant using the Black-Scholes option-pricing model with the
following weighted-average assumptions used for grants in 1998,
1997 and 1996, respectively; dividend yield of 1.9 percent, 1.7
percent and 2.4 percent; expected volatility of 47 percent, 45
percent and 45 percent; risk-free interest rates of 5.7 percent,
7.0 percent and 6.7 percent for the 1993 and 1996 Non-Statutory
Plan options, 4.7 percent, 5.9 percent and 6.3 percent for the
1993 and 1996 Incentive Plan options; and expected lives of 8
years for all periods for the 1993 and 1996 Non-Statutory Plan
options; and 7 years for all periods for the 1993 and 1996
Incentive Plan options. The effects of applying SFAS 123 on the
pro forma net income may not be representative of the effects on
the pro forma net income for future years.
<PAGE>
STOCK OPTION PLANS:
The Company has five option plans. The 1986 Incentive Stock
Option Plan expired April 16, 1996. No additional options are
available for granting under this plan. The options issued and
outstanding prior to April 16, 1996 remain available for exercise
until their expiration dates.
Under the 1993 Broad National Incentive Stock Option Plan
(1993 Incentive Plan), the Company may grant options to its
management personnel for up to 254,677 shares of common stock.
Under the 1993 Broad National Directors Non-Statutory Stock
Option Plan (1993 Non-Statutory Plan), the Company may grant
options to its directors for up to 95,504 shares of common stock.
Under the 1996 Broad National Bancorporation Incentive Stock
Option Plan (1996 Incentive Plan), the Company may grant options
to its management personnel for up to 220,500 shares of common
stock.
Under the 1996 Broad National Directors Non-Statutory Stock
Option Plan (1996 Non-Statutory Plan), the Company may grant
options to its directors for up to 82,687 shares of common stock.
Under all plans, the exercise price of each option is no
less than the market price of the Company's stock on the date of
grant, and an option's maximum term is ten years.
Options granted under the 1993 and 1996 Non-Statutory Plans
vest at the expiration of two years from the granting date.
Vesting under the 1993 and the 1996 Incentive Plans is
subject to the authority of the committee which administers these
plans, and all options granted to date under these plans vest 40%
at the end of the second year and 20% each year over the next
three years.
A summary of the status of the Company's stock option plans
as of December 31, 1996, 1997 and 1998, and changes during the
years ended on those dates is presented below:
<PAGE>
Shares under Weighted-Average
Option Exercise Price
Outstanding at
December 31, 1995 348,091 $ 6.20
Exercised in 1996 (19,953) 4.92
Granted in 1996 85,057 11.03
Expired unexercised in 1996 ( 8,370) 6.25
Outstanding at
December 31, 1996 404,825 7.29
Exercised in 1997 (53,996) 6.12
Granted in 1997 93,817 18.73
Expired unexercised in 1997 ( 7,863) 7.89
Outstanding at
December 31, 1997 436,783 9.88
Exercised in 1998 (37,557) 5.83
Granted in 1998 97,100 19.74
Expired unexercised in 1998 ( 54) 9.08
Outstanding at
December 31, 1998 496,272 $12.11
Weighted-average fair value 1998 1997 1996
of options granted during the
year $8.98 $9.22 $5.30
<TABLE>
The following table summarizes information about stock options outstanding at
December 31, 1998:
Options Outstanding Options Exercisable
<CAPTION>
<S> <C> <C> <C> <C> <C>
Range
Of Number Weighted-avg. Number
Exercise Outstanding Remaining Weighted-avg. Exercisable Weighted-avg.
Prices at 12/31/98 Contractual Life Exercise Price at 12/31/98 Exercise Price
$ 5.30-$ 6.39 147,122 5.1 years $ 5.55 133,538 $ 5.53
7.83- 8.97 82,711 5.9 8.11 49,358 8.15
11.00- 14.00 94,264 7.2 11.78 27,727 11.17
19.25- 21.48 172,175 9.1 19.82 0 0
$ 5.30-$21.48 496,272 7.0 $12.11 210,623 $ 6.89
</TABLE>
NOTE 9: SHORT-TERM BORROWINGS
Short-term borrowings at December 31, 1998 and 1997
consisted of the following (in thousands):
1998 1997
Securities sold under agreements
to repurchase $ 1,451 $ 1,000
Federal Home Loan Bank advances 36,600 12,000
Federal funds purchased 2,600 0
$40,651 $13,000
<PAGE>
Details with respect to short-term borrowings are as follows
(in thousands):
December 31,
1998 1997
Balance, end of year $40,651 $13,000
Maximum outstanding during the year
at any month end $40,651 $13,000
Average interest rate, end of year 5.52% 5.88%
Average outstanding during the year $16,665 $ 4,885
Average interest rate for the year 5.87% 5.75%
The average amounts outstanding were computed primarily from
daily averages. The average interest rate for the year and at
the end of the year were computed by dividing the respective
interest expenses by the average balances outstanding.
The Bank has available $29,165,000 in lines of credit for
overnight borrowing with correspondent banks. At December 31,
1998, the Bank borrowed $2,600,000 under these lines of credit in
the form of federal funds purchased.
NOTE 10: LONG-TERM DEBT
The Company had no long term debt outstanding at December
31, 1998. Long-term debt of $9,000,000 at December 31, 1997
represented Federal Home Loan Bank Advances with remaining
maturities of greater than one year. This debt represented a
series of nine $1,000,000 advances with interest rates ranging
from 6.16% to 6.28% and maturities from January 29, 1999 to
September 30, 1999. The advances are secured by residential
mortgages and securities under a blanket collateral agreement.
NOTE 11: COMPANY-OBLIGATED MANDATORILY REDEEMABLE 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.
<PAGE>
Cash distributions on both the 9.5% Cumulative Trust
Preferred Securities and the 9.5% Junior Subordinated Debentures
are payable quarterly in arrears on the last day of March, June,
September and December of each year.
The 9.5% Cumulative Trust Preferred Securities are subject
to mandatory redemption (i) in whole, but not in part, upon
repayment of the Junior Subordinated Debentures at Stated
Maturity or, at the option of Bancorporation, their earlier
redemption in whole upon the occurrence of certain changes in the
tax treatment or capital treatment of the 9.5% Cumulative Trust
Preferred Securities, or a change in the law so that BNB Capital
Trust would be considered an investment company and (ii) in whole
or in part at any time on or after June 30, 2002
contemporaneously with the optional redemption by Bancorporation
of the Junior Subordinated Debentures in whole or part. The
Junior Subordinated Debentures are redeemable prior to maturity
at the option of the Bancorporation (i) on or after June 30,
2002, in whole at any time or in part from time to time, or (ii)
in whole, but not in part, at any time within 90 days following
the occurrence and continuation of certain changes in the tax
treatment or capital treatment of the 9.5% Cumulative Trust
Preferred Securities, or a change in the law so that BNB Capital
Trust would be considered an investment company. The ability of
the Bancorporation to exercise its rights to redeem the Junior
Subordinated Debentures or to cause the redemption of the
Preferred Securities prior to the Stated Maturity may be subject
to prior regulatory approval by the Board of Governors of the
Federal Reserve System (the "Federal Reserve"), if then required
under applicable Federal Reserve capital guidelines or policies.
NOTE 12: COMMITMENTS AND CONTINGENCIES
In the ordinary course of business, the Company and the Bank
may be a party to outstanding legal proceedings and claims. In
its judgement, management does not believe that the Company's
consolidated financial position or results of operations will be
materially affected by any of these present proceedings.
Cash balances reserved to meet the requirements of the bank
regulatory authorities amounted to $1,859,000 at December 31,
1998.
The Bank has lease commitments on certain of its branches
expiring at various dates through 2007. Rental expense on these
leases charged to operations amounted to $672,000, $577,000 and
$544,000 for the years ended December 31, 1998, 1997, and 1996
respectively. The minimum annual rentals under the terms of the
leases as of December 31, 1998 were as follows:
1999 $677,000
2000 $623,000
2001 $427,000
2002 $278,000
2003 $189,000
Thereafter $453,000
<PAGE>
NOTE 13: EARNINGS PER SHARE
The following reconciles the income available to common
shareholders (numerator) and the weighted average common stock
outstanding (denominator) for both basic and diluted earnings per
share for 1998, 1997 and 1996(in thousands):
1998 1997 1996
Net Income available to common
shareholders-Basic and Diluted $8,047 $6,411 $5,273
Weighted Average
common shares outstanding-Basic 4,935 5,027 5,028
Effect of Dilutive Securities
Stock options 192 177 98
Convertible preferred stock - - 122
Contingently issuable shares 35 - -
Weighted Average
common shares outstanding
- Diluted 5,162 5,204 5,248
NOTE 14: SHAREHOLDERS' EQUITY
STOCK DIVIDENDS:
On December 17, 1998, the Board of Directors of the Company
declared a 5% stock dividend which was distributed January 7,
1999.
On December 18, 1997, the Board of Directors of the Company
declared a 5% stock dividend which was distributed January 6,
1998.
All per share data included in the accompanying financial
statements and notes thereto reflect the retroactive effect of
these stock dividends.
PREFERRED STOCK 1992 CLASS:
On April 8, 1996, the Company completed the redemption of
the 1992 Preferred Stock. As a result of the redemption
programs, 3,750 shares of 1992 Preferred Stock were redeemed at
the price of $10.60 per share, for a total redemption price of
$43,750. In lieu of redemption, 558,803 shares of 1992 Preferred
Stock were converted into 1,066,616 shares of common stock. Cash
was paid for fractional shares resulting from conversion.
PREFERRED STOCK 1985 CLASS:
The redemption of the 1985 Preferred Stock was completed on
January 7, 1996 and 197 shares of the 1985 Preferred Stock were
redeemed at a price of $38 per share, for a total redemption
price of $7,486. In lieu of redemption, 16,927 shares of the
1985 Preferred Stock were converted into 109,916 shares of common
stock. Cash was paid for fractional shares resulting from
conversion.
<PAGE>
STOCK BUYBACK PROGRAM:
On November 21, 1996, the Board of Directors of the Company
authorized the repurchase of up to 100,000 of its outstanding
common shares. Additionally, on June 19, 1997, the Board of
Directors of the Company authorized the purchase, through open
market transactions, of up to an additional $4,000,000 market
value of the Company's common stock. These repurchases will be
made from time to time in the open market, subject to prevailing
conditions and in a manner to avoid disrupting the market.
Purchasing activities may be discontinued and resumed at any
time, as market conditions warrant. The repurchased shares will
be held in treasury and may be used by the Company for general
corporate purposes including stock-based employee benefit plans
and stock dividends.
At December 31, 1998 and 1997, the Company had repurchased
296,500 and 242,000, respectively, shares of common stock.
NOTE 15: REGULATORY MATTERS
Capital adequacy for the Company is measured against
regulations established by the Federal Reserve Board (FRB). The
Bank is subject to generally similar capital regulations adopted
by the Office of the Comptroller of the Currency (the OCC).
These regulations require the Company and the Bank to maintain
minimum levels of regulatory capital. Under the regulations in
effect at December 31, 1998, the Company and the Bank were
required to maintain (i) a minimum leverage ratio of Tier 1
capital to total adjusted assets of 4.0%, and (ii) minimum ratios
of Tier 1 and total capital to risk-weighted assets of 4.0% and
8.0%, respectively.
Under its prompt corrective action regulations, the FDIC is
required to take certain supervisory actions ( and may take
additional discretionary actions) with respect to an
undercapitalized institution. Such actions could have a direct
material effect on the institution's financial statements. The
regulations establish a framework for the classification of
financial institutions into five categories: well capitalized,
adequately capitalized,
undercapitalized, significantly undercapitalized, and critically
undercapital-ized. Generally, an institution is considered well
capitalized if it has a leverage(Tier 1) capital ratio of at
least 5.0%; a Tier 1 risk-based capital ratio of at least 6.0%;
and a total risk-based capital ratio of at least 10.0%.
The foregoing capital ratios are based in part on specific
quantitative measures of assets, liabilities and certain off-
balance sheet items as calculated under regulatory accounting
practices. Capital amounts and classifications are also subject
to qualitative judgments by the FRB, the OCC and the FDIC about
capital components, risk weightings and other factors.
Management believes that, as of December 31, 1998, the
Company and the Bank meet all capital adequacy requirements to
which they are subject. Further, the most recent FDIC
notification categorized the Bank as a well-capitalized
institution under the prompt corrective action regulations.
There have been no conditions or events since that notification
that management believes have changed the Bank's capital
classification.
<PAGE>
The following is a summary of the Company's and the Bank's
actual capital amounts and ratios as of December 31, 1998 and
1997, compared to the regulatory minimum capital adequacy
requirements and the regulatory requirements for classification
as a well-capitalized institution:
Regulatory Requirements
Minimum Capital For Classification
Company Actual Adequacy As Well Capitalized
Amount Ratio Amount Ratio Amount Ratio
(Dollars in Thousands)
December 31, 1998
Leverage (Tier 1)
capital $54,606 8.22% $26,579 4.00% $33,223 5.00%
Risk-based capital
Tier 1 $54,606 12.80% $17,068 4.00% $25,602 6.00%
Total $59,976 14.06% $34,135 8.00% $42,669 10.00%
December 31, 1997
Leverage (Tier 1)
capital $49,787 8.19% $24,318 4.00% $30,397 5.00%
Risk-based capital
Tier 1 $49,787 13.16% $15,138 4.00% $22,706 6.00%
Total $54,545 14.41% $30,276 8.00% $37,844 10.00%
Regulatory Requirements
Minimum Capital For Classification
Company Actual Adequacy As Well Capitalized
Amount Ratio Amount Ratio Amount Ratio
(Dollars in Thousands)
December 31, 1998
Leverage (Tier 1)
capital $51,467 7.75% $26,579 4.00% $33,223 5.00%
Risk-based capital
Tier 1 $51,467 12.06% $17,068 4.00% $25,602 6.00%
Total $56,837 13.32% $34,135 8.00% $42,669 10.00%
December 31, 1997
Leverage (Tier 1)
capital $44,544 7.33% $24,318 4.00% $30,397 5.00%
Risk-based capital
Tier 1 $44,544 11.77% $15,138 4.00% $22,706 6.00%
Total $49,302 13.03% $30,276 8.00% $37,844 10.00%
In November of 1998, the Bank, through its Board of
Directors, entered into a Formal Agreement with the OCC whereby
the Bank has agreed to further develop its written programs and
its system of internal controls to ensure compliance with the
Bank Secrecy Act, the "Know-Your-Customer" guidelines and the
regulations of the Office of Foreign Assets Control.
The provisions of the Formal Agreement will continue until
excepted, waived or terminated by the OCC.
The Bank's Board of Directors has agreed to comply with
provisions of the Formal Agreement. The Bank's Board of
Directors will file periodic reports with the OCC as part of its
compliance with this Formal Agreement.
<PAGE>
NOTE 16: FAIR VALUES OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107,
"Disclosures About Fair Value of Financial Instruments" ("SFAS
107") requires that the Company disclose estimated fair values
for its financial instruments whether or not recognized in the
Statement of Financial Condition.
Limitations: The fair value estimates made at December 31,
1998 and 1997 were based on pertinent market data and relevant
information on the financial instrument at that time. These
estimates do not reflect any premium or discount that could
result from offering for sale at one time the entire portion of
the financial instruments. Because no market exists for a
portion of the financial instruments, fair value estimates may be
based on judgments regarding future expected loss experience,
current economic conditions, risk characteristics of various
financial instruments, and other factors. These estimates are
subjective in nature and involve uncertainties and matters of
significant judgment and therefore cannot be determined with
precision. Changes in assumptions could significantly affect the
estimates.
Fair value estimates are based on existing on-and-off
balance sheet financial instruments without attempting to
estimate the value of anticipated future business and the value
of assets and liabilities that are not considered financial
instruments. In addition, the tax implications related to the
realization of the unrealized gains and losses can have a
significant effect on fair value estimates and have not been
considered in many of the estimates.
Fair value estimates, methods and assumptions are set forth
below for the Company's financial instruments (in thousands):
At December 31,
1998 1997
Estimated Estimated
Carrying Fair Carrying Fair
Amount Value Amount Value
Financial Assets
Cash and short-term
investments $ 45,793 $ 45,793 $ 59,233 $ 59,233
Securities held-to-
maturity 32,949 33,083 65,330 65,203
Securities available-for-
sale 231,828 231,828 141,077 141,077
Loans, net 351,896 352,487 315,554 317,828
Financial Liabilities
Deposits 575,064 577,613 518,238 519,241
Short-term borrowings 40,651 40,781 13,000 13,037
Long-term debt 0 0 9,000 9,065
9.5% Cumulative Trust
Preferred Securities $ 11,500 $ 12,735 $ 11,500 $ 12,269
The following methods and assumptions were used to estimate
the fair value of each class of financial instrument:
<PAGE>
Cash and Short-term Investments
The carrying amount approximates fair value.
Investment Securities
The fair values are based on quoted market prices obtained
from outside sources.
Loans
The fair value of the loan portfolio was estimated using the
discounted value of the future cash flows expected to be received
using a market discount rate. For loans that have short-term
maturities or that reprice to market rates, the carrying value
was used as an estimate of fair value.
Deposit Liabilities
The fair value of deposits is equal to the amount payable on
demand at the reporting dates except for the fair value of fixed
maturity certificates of deposit which were estimated by
discounting the value of the future cash flows expected to be
paid on deposits.
Long term debt
The fair value is estimated by discounting the cash flows
through maturity based upon current rates offered by the FHLB for
advances with similar maturities.
9.5% Cumulative Trust Preferred Securities
The fair value is estimated by discounting the cash flows
through maturity based upon current rates for similar Trust
Preferred Securities.
Short term borrowings
The fair value is estimated by discounting the cash flows
through maturity based upon current rates offered for similar
instruments with similar maturities.
Commitments to extend credit and letters of credit
The fair market value of unearned fees associated with
financial instruments with off-balance sheet risk at December 31,
1998 approximates the fees received. Amount is not material.
<PAGE>
NOTE 17: CONDENSED FINANCIAL INFORMATION OF BANCORPORATION
(PARENT COMPANY ONLY)
Condensed Statements of Condition (in thousands):
December 31,
1998 1997
Assets
Cash, principally on deposit with
subsidiary bank $ 2,425 $ 5,212
Investment in subsidiaries 53,407 45,844
Other assets 1,381 637
Total Assets $57,213 $51,693
Liabilities and Shareholders' Equity
Subordinated debentures $11,856 $11,856
Other liabilities 668 606
Shareholders' equity 44,689 39,231
Total Liabilities and Shareholders'
Equity $57,213 $51,693
Condensed Statements of Income for the years ended December 31, 1998,
1997 and 1996 (in thousands):
December 31,
1998 1997 1996
Income
Dividends received from banking
subsidiary $1,260 $1,455 $1,230
Interest income from subsidiaries 181 98 0
1,441 1,553 1,230
Expenses
Interest on subordinated debentures 1,126 563 0
Salaries and related benefits 39 39 39
Other 219 145 78
1,384 747 117
Income before equity in undistributed
income of subsidiaries 57 806 1,113
Equity in undistributed income
of subsidiaries 7,990 5,605 4,160
Net income $8,047 $6,411 $5,273
Condensed Statements of Cash Flows for the years ended December 31,
1998, 1997 and 1996 (in thousands):
<PAGE>
December 31,
1998 1997 1996
Cash flows from operating activities
Net income $ 8,047 $ 6,411 $ 5,273
Less-
Equity in undistributed income of
subsidiaries (7,990) (5,605) (4,160)
Increase in other liabilities 61 122 56
Decrease (increase) in other assets 158 (263) 0
Other, net (2) (151) 601
Net cash provided by operating activities $ 274 $ 514 $ 1,770
Cash flows from investing activities
Investments in and advances to
subsidiaries $ 0 $ (356) $ 0
Net cash used in investing activities $ 0 $ (356) $ 0
Cash flows from financing activities
Redemption of preferred stock $ 0 $ 0 $ (52)
Proceeds from issuance of subordinated
debentures 0 11,856 0
Capital contribution to bank subsidiary 0 (2,000) 0
Proceeds from issuance of common stock 111 308 98
Dividends to shareholders (2,194) (1,741) (1,294)
Purchase of treasury stock (978) (4,053) (58)
Net cash (used in) provided by
financing activities $(3,061) $ 4,370 $(1,306)
Net(decrease)increase in cash and
cash equivalents (2,787) 4,528 464
Cash and cash equivalents-
beginning of year 5,212 684 220
Cash and cash equivalents-end of year $ 2,425 $ 5,212 $ 684
NOTE 18: SELECTED QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
The following quarterly financial information for the two
years ended December 31, 1998 and 1997, is unaudited. However,
in the opinion of management all adjustments, which include only
normal recurring adjustments necessary to present fairly the
results of operations for the periods, are reflected. Results of
operations for these three-month periods are not necessarily
indicative of the results for the entire year or any other
interim period (in thousands, except per share amounts):
<PAGE>
1998
March June September December
Interest income $10,978 $11,407 $11,773 $11,637
Interest expense 4,474 4,701 4,619 4,673
Provision for possible
loan losses 300 225 225 225
Non-interest income 1,859 1,795 1,948 1,942
Non-interest expenses 5,208 5,417 5,558 5,357
Net income 1,805 1,812 2,103 2,327
Net income per common
share:
Basic earnings per
common share $0.37 $0.36 $0.43 $0.47
Diluted earnings per
common share $0.35 $0.35 $0.41 $0.45
1997
March June September December
Interest income $ 9,682 $10,013 $10,416 $10,744
Interest expense 3,521 3,790 4,095 4,524
Provision for possible
loan losses 450 450 450 450
Non-interest income 1,893 1,783 1,658 1,783
Non-interest expenses 4,690 5,056 4,826 4,977
Net income 1,661 1,659 1,495 1,596
Net income per
common share:
Basic earnings per
common share $0.32 $0.32 $0.30 $0.32
Diluted earnings
per common share $0.31 $0.31 $0.29 $0.31
NOTE 19: SUBSEQUENT EVENT (UNAUDITED)
On February 1, 1999, the Company entered into a definitive
agreement with Independence Community Bank Corp. ("Independence")
pursuant to which Independence will acquire the Company in a
transaction valued at $26.50 per share of the Company's common
stock. Upon completion of the acquisition, the Company's wholly
owned subsidiary, Broad National Bank, will merge into
Independence Community Bank, Independence's wholly owned
subsidiary.
Under the terms of the agreement, which was approved
unanimously by both boards of directors, holders of the Company's
common stock will receive cash or shares of Independence common
stock pursuant to an election, proration and allocation procedure
subject to the total consideration being comprised of 50%
Independence common stock and 50% cash. The number of shares of
stock any stockholder of the Company receives will be determined
based upon an exchange ratio designed to produce a value of
$26.50 per share when Independence stock has a market value as
calculated in the agreement of between $12.75 and $17.25. To the
extent that the market value of Independence common stock during
the pricing period exceeds $17.25 or is less than $12.75, the per
share value of the consideration to be received by stockholders
of the Company in the merger, <PAGE> whether in cash or stock, will
increase or decrease, respectively. The transaction has an
aggregate value of approximately $138 million.
The agreement provides for the payment of a termination fee
payable to Independence under certain circumstances. The members
of the Board of Directors, who beneficially own approximately 30%
of the Company have agreed to vote their shares in favor of the
merger.
ITEM 9. CHANGES IN AND DISAGREEMENTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
EXECUTIVE OFFICERS
Executive officers of Bancorporation and of the Bank
are elected annually and serve until their successors are elected
and qualified at the next annual meeting of the directors of the
respective corporations. The following table sets forth
information with respect to the executive officers of
Bancorporation and of the Bank.
Position with
Bancorporation
and Bank and Year Principal
Name Age First Elected Occupation /1/
Donald M. Karp 62 Chairman of Position with
the Board of Bancorporation
Bancorporation (1985) and the Bank/2/
and the Bank (1985);
Chief Executive Officer
of Bancorporation (1991)
and the Bank (1991);
Vice Chairman of the
Board of Bancorporation
(1981-1985) and the
Bank (1978-1985);
Director (1972)
John A. Dorman 60 President of Position with
Bancorporation (1992) Bancorporation
and the Bank (1992); and the Bank
Director (1992)
<PAGE>
Fred S. Campo 49 Senior Vice President Position with
of the Bank (1986); Bancorporation
Secretary of and the Bank
Bancorporation (1982)
and the Bank (1991)
Fred Perry, Jr. 69 Senior Vice Position with
President of the Bank
the Bank (1978)
Peter Kenny 53 First Vice Position with
President of the Bank
the Bank (1991);
Senior Vice
President of the
Bank (1992)
James Boyle 48 Treasurer of Position with
Bancorporation; Bancorporation
Vice President and and the Bank
Comptroller of the
Bank (1988); Senior
Vice President of the
Bank (1992)
Ellen Rogoff 49 First Vice President Position with
of the Bank (1993); the Bank /3/
Senior Vice President
of the Bank (1994)
Ronald E. Schwarz 44 Senior Vice President Position with
of the Bank (1997) the Bank/4/
___________________
/1/ Unless otherwise indicated, each of the persons listed has been employed
in the indicated principal occupation during the last five years.
/2/ Mrs. Donald M. Karp is the niece of Stanley J. Lesnik and the daughter
of Harriet M. Alpert, a principal shareholder of Bancorporation.
/3/ For the three years prior to joining the Bank, Ms. Rogoff was Manager of
Human Resources for Bristol Myers. For at least two years prior to
joining Bristol Myers, Ms. Rogoff was Manager of Human Resources for
Action Tungsram.
<PAGE>
/4/ Prior to joining the Bank, from June of 1995 to April of 1997, Mr.
Schwarz was Senior Vice President, Regional President Bergen/Passaic
Counties for Hudson United Bank (successor to Urban National Bank).
From 1992 to June of 1995, Mr. Schwarz was Senior Vice President,
Director of Retail Banking for Urban National Bank.
There are no arrangements or understandings between any of
the executive officers or any other persons pursuant to which any
of the executive officers have been selected to their respective
positions.
DIRECTORS
The Company's Board of Directors currently consists of
twelve directors. Directors are elected to serve for a one-year
term expiring at the Annual Meeting of Shareholders for the
following year and until their respective successors are duly
elected and qualified or until their respective earlier
resignation or removal. The Board of Directors presently
consists of Licinio Cruz, John A. Dorman, Arthur Fischman, John
J. Iannuzzi, Donald M. Karp, James J. Lazarus, Edward J. Lenihan,
Stanley J. Lesnik, Catherine McFarland, Louis J. Owen, A. Harold
Schwartz and Hubert Williams. The following table sets forth
certain information with respect to each member of the Board of
Directors.
Position with
Bancorporation
and the Bank Principal
Name Age (Year First Elected) Occupation /1/
Licinio Cruz 56 Director (1977) Vice President and
Treasurer, Cruz
Construction Corp.
(general
construction)
John A. Dorman 60 President of Position with
Bancorporation (1992) Bancorporation and
and the Bank (1992) the Bank /2/
Director (1992)
<PAGE>
Arthur Fischman 73 Director (1978) Consultant
John J. Iannuzzi 61 Director (1988) President, 187
Corporation T/A
Gateway East (real
estate management)
Donald M. Karp 62 Chairman of the Board Position with
of Bancorporation (1985) Bancorporation and
and the Bank (1985); the Bank /3/
Chief Executive Officer
of Bancorporation (1991)
and the Bank (1991);
Vice Chairman of the
Board of Bancorporation
(1981-1985) and the Bank
(1978-1985); Director (1972)
James J. Lazarus 61 Director (1980) President, L&R
Manufacturing Company
(manufacturer of
ultrasonic cleaning
equipment and
chemicals)
Edward J.
Lenihan 82 Director (1977) Consultant /4/
Stanley J.
Lesnik 80 Director (1970); Consultant /3/
Chairman of the Board
(1974-1985); Chairman
of Executive Committee
(1985-1995); Chairman
Emeritus of the Executive
Committee (1996)
Catherine
McFarland 58 Director (1993) Executive Officer and
Secretary, Victoria
Foundation, Inc.
(private charitable
foundation)/5/
Louis J. Owen 75 Director (1976); Consultant
Chairman of Executive
Committee (1996)
<PAGE>
A. Harold
Schwartz 74 Director (1980) President, New Jersey
Tanning Co. Inc.
(tanning bovine
leathers)
Hubert Williams 59 Director (1988) President, Police
Foundation (private
not-for-profit
organization)
________________
/1/ Unless otherwise indicated, each of the persons listed has been employed
in the indicated principal occupation during the last five years.
/2/ Prior to joining Bancorporation and the Bank, Mr. Dorman was an
executive vice president of Chemical Bank New Jersey where he managed
the Statewide Commercial Lending division. For the two years prior to
the merger in 1989 of Horizon Bank Corp. and Chemical Bank, Mr. Dorman
served as President and Chief Executive Officer of Chemical New Jersey
Corporation, Chemical Banking Corporation's loan production office in
New Jersey.
/3/ Mrs. Donald M. Karp is the niece of Stanley J. Lesnik and the daughter
of Harriet M. Alpert, a principal shareholder of Bancorporation.
/4/ Mr. Lenihan presently is a consultant to planning and economic and
development groups.
/5/ Ms. McFarland has served as executive officer and secretary of Victoria
Foundation, Inc. since 1989, and as its program officer and assistant
secretary from 1971 to 1989.
There is no arrangement or understanding between any
director and any other person pursuant to which such director was
selected as a director.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1943
requires Bancorporation's directors and executive officers, and
persons who own more than 10% of a class of Bancorporation's
equity securities, to file with the Securities and Exchange
Commission initial reports of ownership and reports of changes in
ownership in Bancorporation common stock and other equity
securities. Securities and Exchange Commission regulations
require directors, executive officers and greater than 10%
shareholders to furnish Bancorporation with copies of all Section
16(a) reports they file.
To Bancorporation's knowledge, based solely on review of the
copies of such reports furnished to Bancorporation and written
representations that no other reports were required, during the
year ended December 31, 1998, all <PAGE> Section 16(a) filing
requirements applicable to its directors, executive officers,
greater than 10% shareholders were complied with.
ITEM 11. EXECUTIVE COMPENSATION.
EXECUTIVE COMPENSATION AND OTHER INFORMATION
EXECUTIVE COMPENSATION
The following table sets forth for the years ended
December 31, 1998, 1997 and 1996, respectively, the compensation
of the Company's chief executive officer and of each of the
Company's four other most highly compensated executive officers
for 1998 for services to the Company and its subsidiaries in all
capacities:
<TABLE>
SUMMARY COMPENSATION TABLE
Long Term Compensation
Annual Compensation Awards Payouts
<CAPTION>
Other Securities
Annual Restricted Underlying All Other
Name and Compen- Stock Options/ LTIP Compen-
Principal Position Year Salary Bonus/1/ sation/2/ Award(s) SARs Payouts/3/ sation/4/
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Donald M. Karp 1998 $227,500 $130,631 $91,171 $-- 16,000 $297,958 $17,615
Chairman of the Board, 1997 218,500 136,600 88,447 -- 16,000 -- 17,365
Chief Executive Officer 1996 209,000 96,400 37,687 -- 15,500 -- 14,805
and Director of
Bancorporation and the
Bank
John A. Dorman 1998 $176,500 $84,456 $25,517 $ -- 11,000 $231,660 $18,695
President, Chief 1997 169,500 72,200 20,191 -- 11,000 -- 18,445
Operation Officer 1996 162,500 62,400 14,251 -- 10,500 -- 15,885
and Director of
Bancorporation and
the Bank
Fred Perry, Jr./5/ 1998 $106,000 $44,000 $ 0 $-- 6,000 $ 96,804 $13,263
Senior Vice President 1997 102,000 32,000 0 -- 5,000 -- 13,147
of the Bank 1996 97,000 37,800 0 -- 5,000 -- 10,731
Peter Kenny/5/ 1998 $106,000 $44,000 $ 0 $-- 6,000 $ 94,798 $10,488
Senior Vice President 1997 100,000 36,900 0 -- 5,000 -- 10,238
of the Bank 1996 95,000 34,200 0 -- 5,000 -- 7,167
James Boyle 1998 $100,000 $42,000 $ 0 $-- 6,000 $ 89,819 $ 6,523
Treasurer of 1997 93,000 32,000 0 -- 5,000 -- 5,418
Bancorporation, 1996 90,000 24,800 0 -- 5,000 -- 4,923
Senior Vice
President of
the Bank
_________________
/1/ Reflects bonus earned for 1998, 1997 and 1996, respectively. The 1997 bonus of $136,600 for Mr. Karp includes a
special award of $25,000 which was granted to Mr. Karp in recognition of his outstanding leadership in elevating
the stature and presence of the Bank in the community and for the overall performance of the Bank.
<PAGE>
/2/ Excludes perquisites and other benefits, unless the aggregate amount of such compensation is the lesser of either
$50,000 or 10% of the total of annual salary and bonus reported for the named executive officer. Amounts reflected
for Messrs. Karp and Dorman represent supplemental contributions of employee pension retirement benefits contributed
through the Bank's Non-Qualified Deferred Compensation Plan.
/3/ LTIP Payouts for 1998 represent payments made pursuant to the Bank's Long Term Capital Accumulation Plan. The awards
were earned in 1998, the end of the three year performance period, and paid out in 1999. The awards were paid in a
combination of cash and Bancorporation Common Stock. The compensation value of the common stock portion of the award
is based upon a per-share value of $24.1875, which represents the fair value of Bancorporation's common stock at the
date of issuance. The components of the award for each of the individuals listed in the Summary Compensation Table
is as follows: for Mr. Karp, cash of $64,790 and 9,640 shares of stock with a total value of $233,168; for Mr. Dorman,
cash of $50,375 and 7,495 shares of stock with a total value of $181,285; for Mr. Perry, cash of $21,049 and 3,132
shares of stock with a total value of $75,755; for Mr. Kenny, cash of $20,615 and 3,067 shares of stock with a total
value of $74,183; and, for Mr. Boyle, cash of $19,530 and 2,906 shares of stock with a total value of $70,289.
/4/ All Other Compensation includes matching contributions made by the Company for the accounts of Messrs. Karp, Dorman,
Perry, Jr., Kenny and Boyle, respectively, under the Company's 401(k) Plan, and the premiums on life insurance
policies for such persons. Matching contributions made by the Company under the Company's 401(k) Plan for 1998,
1997 and 1996 were $5,000, $4,750 and $2,190, respectively, for Mr. Karp; $5,000, $4,750 and $2,190, respectively,
for Mr. Dorman; $4,240, $4,124 and $1,708, respectively, for Mr. Perry, Jr.; $5,000, $4,750 and $1,679, respectively,
for Mr. Kenny; and $2,500, $1,395 and $900, respectively, for Mr. Boyle. The premiums on life insurance policies
paid by the Company for 1998, 1997 and 1996 were $12,615, $12,615 and $12,615, respectively, for Mr. Karp; $13,695,
$13,695 and $13,695, respectively, for Mr. Dorman; $9,023, $9,023 and $9,023, respectively, for Mr. Perry Jr.;
$5,488, $5,488 and $5,488, respectively, for Mr. Kenny; and $4,023, $4,023 and $4,023, respectively, for Mr. Boyle.
/5/ Messrs. Perry, Jr. and Kenny are not officers of Bancorporation, but are included among the five most highly paid
executive officers because each is a key policy making member of management of the Bank.
</TABLE>
Option/SAR Grants
The following table sets forth information with respect to
each officer named in the Summary Compensation Table under
"Executive Compensation" concerning grants of stock options and
stock appreciation rights ("SARs") during 1998.
OPTION/SAR GRANTS IN LAST FISCAL YEAR/1/
Number of % of Total
Securities Options/SARs
Underlying Granted to Grant
Options/ Employees Exercise or Date
SARs in Fiscal Base Price Expiration Present
Name Granted (#) Year ($/Share) Date/2/ Value ($)
Donald M. 15,000 17.3% $21.18 December 17, $107,700/4/
Karp/3/ 2003
1,000 1.2% $21.75 April 16, $ 10,630/5/
2008
John A. 10,000 11.6% $19.25 December 17, $ 90,800/4/
Dorman/3/ 2008
1,000 1.2% $21.75 April 16, $ 10,630/5/
2008
Fred Perry,
Jr./3/ 6,000 6.9% $19.25 December 17, $ 54,480/4/
2008
Peter Kenny/3/ 6,000 6.9% $19.25 December 17, $ 54,480/4/
2008
James Boyle/3/ 6,000 6.9% $19.25 December 17, $54,480/4/
2008
___________________
/1/ No stock appreciation rights were granted by the Company during 1998.
The grants of stock options in the table were made on April 16, 1998 and
December 17, 1998.
/2/ The stock options are subject to early termination if the person to whom
they are granted dies, ceases to be employed by the Company or any of
its subsidiaries, or is unable to perform his duties for six months as
the result of such person's physical or mental incapacity.
/3/ The time at which the option may be exercised is prescribed at the time
such option is granted, and may be accelerated if the Company is not the
surviving corporation of any merger, consolidation, reorganization or
acquisition by another corporation or if a "change of control" occurs
with respect to the Company.
/4/ The dollar value of the stock options has been determined as of December
17, 1998 using the Black-Scholes option pricing model, based on the
assumptions that (a) the options were granted on that date, (b) the
closing price for the shares of Common Stock underlying the options on
the grant date was $19.25 per share, (c) the period during which the
options are exercisable is ten years from the grant date (five years in
the case of options for 15,000 shares granted to Mr. Karp), (d) the
option exercise price is $19.25 ($21.18 in the case of options for
15,000 shares granted to Mr. Karp), (e) the dividend yield for 1998 is
1.9%, (f) the expected lives of the options is eight years (five years
in the case of options for 15,000 shares granted to Mr. Karp), (g) the
"risk free" interest rate on U.S. Treasury Strips is a 4.69% yield in
eight years from the grant date (November 2006) (4.49% yield in five
years from the grant date (November 2003)), and (h) the price volatility
for the shares of Common Stock underlying the options is 47% (based on
the fluctuation in weekly closing stock prices from December 30, 1991 to
December 31, 1998).
/5/ The dollar value of the stock options has been determined as of April
16, 1998 using the Black-Scholes option pricing model, based on the
assumptions that (a) the options were granted on that date, (b) the
closing price for the shares of Common Stock underlying the options on
the grant date was $21.75 per share, (c) the period during <PAGE> which the
options are exercisable is ten years from the grant date, (d) the option
exercise price is $21.75, (e) the dividend yield for 1998 is 1.9%, (f)
the expected lives of the options is eight years, (g) the "risk free"
interest rate on U.S. Treasury Strips is a 5.72% yield in eight years
from the grant date (April, 2006), and (h) the price volatility for the
shares of Common Stock underlying the options is 47% (based on the
fluctuation in weekly closing stock prices from December 30, 1991 to
March 31, 1998).
Option/SAR Exercises and Holdings
The following table sets forth information with respect to
each officer named in the Summary Compensation Table under
"Executive Compensation" concerning the exercise of options and
stock appreciation rights ("SARs") during 1998 and unexercised
options and SARs held as of December 31, 1998.
<TABLE>
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR
AND DECEMBER 31, 1998 OPTION/SAR VALUES(1)
<CAPTION>
Number of
Securities Value of
Underlying Unexercised
Unexercised In-the-Money
Shares Options/SARs at Options/SARs at
Acquired Value December 31, 1998(#)/3/ December 31, 1998($)4/
Name on Exercise(#) Realized($/2/ Exercisable Unexercisable Exercisable Unexercisable
<S> <C> <C> <C> <C> <C> <C>
Donald M.
Karp 12,128 $141,725 25,784 61,887 $338,181 $288,197
John A.
Dorman 5,000 $ 62,171 32,678 36,544 430,401 172,600
Fred Perry,
Jr. 5,765 $ 76,458 9,225 18,195 113,279 83,745
Peter Kenny 1,000 $ 11,684 13,635 18,195 177,236 83,745
James Boyle 0 $ 0 15,787 18,195 208,876 83,745
___________________
(1) No stock appreciation rights were granted by the Company during 1998.
(2) Value is calculated by determining the difference between the option exercise price and the last
reported sale price of the Company's Common Stock on the date of exercise.
(3) The shares of the Company's Common Stock underlying unexercised options at December 31, 1998 includes
shares issuable upon the exercise of options granted on December 16, 1993, September 19, 1994,
December 15, 1994, April 20, 1995, December 21, 1995, April 18, 1996, December 19, 1996, April 17,
1997, December 18, 1997, April 16, 1998 and December 17, 1998.
(4) As of December 31, 1998, the last reported sale price of the Company's Common Stock, which was
reported on the NASDAQ National Market System on December 31, 1998, was $20.00 per share. Value is
calculated by determining the difference between the option exercise price and $20.00, multiplied by
the number of shares of Common Stock underlying the options.
</TABLE>
<PAGE>
EMPLOYMENT AGREEMENTS
Donald M. Karp. On December 31, 1998, Bancorporation
entered into an employment agreement with Donald M. Karp. The
agreement has an initial five-year term which expires on December
31, 2003, subject to automatic extensions of one additional
calendar month upon the expiration of each calendar month, so
that at all times the agreement shall have a term of sixty
months, until such time as the Board of Directors notifies Mr.
Karp that the term of employment shall expire not later than five
years from the date of such notice. The agreement provides for an
annualized base salary of $250,000, which base salary was
increased from the previous $227,500 level, effective January 1,
1999, by action of the Board of Directors as contemplated by the
agreement. During the period of this Agreement, Mr. Karp's base
salary may not be decreased below $250,000 without the written
consent of Mr. Karp. In addition to base salary, the agreement
also provides Mr. Karp with the use of a motor vehicle and such
bonuses or other incentive compensation plans, fringe benefits
and insurance benefits as are established for executive officers
of the Bank.
Mr. Karp's employment with Bancorporation is subject to
early termination in the event of Mr. Karp's death or physical or
mental disability. If Mr. Karp's employment is terminated
because of his physical or mental disability, he will be entitled
to receive one year's base salary, less amounts paid to him under
any other disability program or policy maintained by
Bancorporation, payable in twelve monthly installments. In
addition, Bancorporation will maintain life and health insurance
benefits for Mr. Karp at least equivalent to those he had at the
date of termination. If Mr. Karp's employment is terminated
because of his death, Mr. Karp's beneficiaries, or his estate,
will receive a payment equal to one year's base salary.
Bancorporation may terminate Mr. Karp's employment at any
time with or without cause, with "cause" being defined as
improper action by Mr. Karp which results in his removal from
office by direction of a regulatory agency for Bancorporation or
the Bank, willful misconduct by Mr. Karp which causes material
injury to Bancorporation, or conviction of a crime, habitual
drunkenness, drug abuse, or excessive absenteeism. If Mr. Karp's
employment is terminated by Bancorporation for reasons other than
for cause, Mr. Karp will be entitled to receive a severance
payment equal to the aggregate amount of future base salary and
bonus payments he would have received (calculated at the highest
rates payable at any time under this agreement or within the then
immediately preceding two year period) had he continued in the
employ of Bancorporation for the remainder of the then existing
term of the agreement. In addition, Bancorporation will maintain
life and health insurance benefits for Mr. Karp at least
equivalent to those he had at the date of termination, and Mr.
Karp's retirement benefits will be supplemented to provide him
with a total benefit approximating the <PAGE> benefits he would have
received under all qualified retirement plans in which he
participates if he had continued in the employ of Bancorporation
for the remaining term of this agreement (or until his
retirement) and been fully vested. Mr. Karp would also be given
the use (or corresponding value) of a motor vehicle for 24 months
following the date of termination. Mr. Karp will have no right
to receive further compensation or other benefits if his
employment is terminated for cause.
Mr. Karp may terminate his employment with Bancorporation
and remain entitled to receive specified benefits (i) in the
event of default or breach by Bancorporation, or (ii) for good
reason (as defined). If Mr. Karp terminates the agreement for
any of the above reasons, he will be entitled to receive a
severance payment equal to the aggregate amount of future base
salary and bonus or other incentive compensation payments he
would have received (calculated at the highest rates payable at
any time under this agreement or within the then immediately
preceding two year period) had he continued in the employ of
Bancorporation for the then existing term of the agreement. In
addition, Bancorporation will maintain life and health insurance
benefits, including premium payments for a $500,000 split dollar
life insurance policy until such policy is fully paid, for
Mr. Karp at least equivalent to those he had at the date of
termination, and Mr. Karp's retirement benefits will be
supplemented to provide him with a total benefit approximating
the benefits he would have received under all qualified
retirement plans in which he participates if he had continued in
the employ of Bancorporation for the remaining term of this
agreement (or until his retirement) and been fully vested.
Mr. Karp would also receive, in a single lump sum payment, an
amount with respect to any non-qualified deferred compensation
plan or non-qualified retirement plan equal to 5 times the
maximum amount credited to Mr. Karp's account under any such plan
which is in the nature of a defined contribution or individual
account plan during any calendar year prior to Mr. Karp's
termination, or the lump sum value of the maximum benefit accrued
by Mr. Karp under any such plan which is in the nature of a
defined benefit plan. Mr. Karp would also be given the use (or
corresponding value) of a motor vehicle for 24 months following
the date of termination. Mr. Karp will have no right to receive
further compensation or other benefits if Mr. Karp voluntarily
resigns his employment for reasons other than those outlined
above.
John A. Dorman. On December 31, 1998, Bancorporation
entered into an employment agreement with John A. Dorman. The
agreement has an initial three-year term which expires on
December 31, 2001. If there is a "change in control" (as defined
below) and Mr. Dorman does not choose to terminate the agreement,
the term automatically will be extended for an additional 24
months. The agreement provides for an annualized base salary of
$190,000, which base salary was increased from the previous
$176,500 level, <PAGE> effective January 1, 1999, by action of the Board
of Directors as contemplated by the agreement. During the term
of this Agreement, Mr. Dorman's base salary may not be decreased
below $190,000 without the written consent of Mr. Dorman. In
addition to base salary, the agreement also provides Mr. Dorman
with the use of a motor vehicle and such bonuses, fringe benefits
and insurance benefits as are established for executive officers
of the Bank.
Mr. Dorman's employment with Bancorporation is subject to
early termination in the event of Mr. Dorman's death or physical
or mental disability. If Mr. Dorman's employment is terminated
because of his physical or mental disability, he will be entitled
to receive one year's base salary, less amounts paid to him under
any other disability program or policy maintained by
Bancorporation, payable in twelve monthly installments. In
addition, Bancorporation will maintain life and health insurance
benefits for Mr. Dorman at least equivalent to those he had at
the date of termination. If Mr. Dorman's employment is
terminated because of his death, Mr. Dorman's beneficiaries, or
his estate, will receive a payment equal to three month's base
salary.
Bancorporation may terminate Mr. Dorman's employment at any
time with or without cause, with "cause" being defined as the
failure by Mr. Dorman to perform his duties under the agreement,
willful misconduct by Mr. Dorman which causes material injury to
Bancorporation, or conviction of a crime, habitual drunkenness,
drug abuse, or excessive absenteeism. If Mr. Dorman's employment
is terminated by Bancorporation for reasons other than for cause,
Mr. Dorman will be entitled to receive a severance payment equal
to the aggregate amount of future base salary he would have
received (calculated at the highest rate of base salary and bonus
paid within the then immediately preceding two year period) had
he continued in the employ of Bancorporation for the remainder of
the then existing term of the agreement plus 24 months; provided,
however, that the aggregate severance payment shall not exceed an
amount equal to the future base salary and bonus payments
Mr. Dorman would have received if he continued in the employ of
Bancorporation for 36 months. In addition, Bancorporation will
maintain life and health insurance benefits for Mr. Dorman at
least equivalent to those he had at the date of termination, and
Mr. Dorman's retirement benefits will be supplemented to provide
him with a total benefit approximating the benefits he would have
received under all qualified retirement plans in which he
participates if he had continued in the employ of Bancorporation
for at least 60 consecutive months in the absence of early
termination (or until his retirement) and been fully vested. Mr.
Dorman would also be given the use (or corresponding value) of a
motor vehicle for 24 months following the date of termination.
Mr. Dorman will have no right to receive further compensation or
other benefits if his employment is terminated for cause.
<PAGE>
Mr. Dorman may terminate his employment with Bancorporation
and remain entitled to receive specified benefits (i) in the
event of default or breach by Bancorporation, (ii) for good
reason (as defined), or (iii) after a "change in control". A
"change in control" generally is defined to take place when (a) a
person or group (other than Bancorporation or Mr. Karp) acquires
more than 20% of the combined voting power (whether through stock
ownership, proxies or otherwise) of Bancorporation's voting
securities or the ability to control the election of a majority
of the Board of Directors, (b) the Karp/Lesnik family sells or
disposes to non-family members 50% or more of Bancorporation
voting securities owned by such family as of the date Mr. Dorman
first became employed by Bancorporation, (c) a merger involving
Bancorporation or the Bank occurs following which a majority of
the voting securities of the surviving corporation is held by
persons who were not previously shareholders of Bancorporation,
or (d) a sale or transfer of all or substantially all of the
assets of Bancorporation or the Bank occurs. If Mr. Dorman
terminates the agreement for any of the above reasons, he will be
entitled to receive a severance payment equal to the aggregate
amount of future base salary and bonus payments he would have
received (calculated at the highest rates payable within the then
immediately preceding two year period) had he continued in the
employ of Bancorporation for the remainder of the then existing
term of the agreement plus 24 months; provided, however, that the
aggregate severance payment shall not exceed an amount equal to
the future base salary and bonus payments Mr. Dorman would have
received if he continued in the employ of Bancorporation for 36
months. In addition, Bancorporation will maintain life and
health insurance benefits for Mr. Dorman at least equivalent to
those he had at the date of termination, and Mr. Dorman's
retirement benefits will be supplemented to provide him with a
total benefit approximating the benefits he would have received
under all qualified retirement plans in which he participates if
he had continued in the employ of Bancorporation for at least 60
months in the absence of early termination (or until his
retirement) and been fully vested. Mr. Dorman would also be
given the use (or corresponding value) of a motor vehicle for 24
months following the date of termination. Mr. Dorman will have
no right to receive further compensation or other benefits if Mr.
Dorman voluntarily resigns his employment for reasons other than
those outlined above.
Stanley J. Lesnik. On January 1, 1998, Bancorporation
entered into a consultant agreement with Stanley J. Lesnik. The
agreement has an initial three-year term which expires on
December 31, 2000. The agreement is extended automatically for
one additional year on each December 31 during the term of the
agreement. If there is a "change in control", the term
automatically will be extended to a date ending three years from
the effective date of such change of control. A "change in
control" generally is defined to take place when a merger
involving Bancorporation or sale of substantially all of
<PAGE>
Bancorporation occurs following which a majority of the voting
securities of the surviving or acquiring corporation is held by
persons other than those who held a majority of the voting
securities of Bancorporation. The agreement provides that
Mr. Lesnik is to be compensated for his services as a special
consultant at the rate of $110,000 a year. At the Board of
Directors meeting on December 17, 1998, the Board voted to
increase the amount of compensation provided to Mr. Lesnik for
his services under the consultant agreement to $115,000 a year.
Mr. Lesnik has agreed that if elected, he would serve as a member
of the Board of Directors and of the Executive Committee at no
additional compensation. In addition to compensation as a
consultant, the agreement also provides Mr. Lesnik with the use
of a motor vehicle and such medical and dental insurance benefits
as are established for other personnel of Bancorporation and the
Bank.
Mr. Lesnik's agreement with Bancorporation is subject to
early termination in the event of Mr. Lesnik's death or physical
or mental disability. If the agreement is terminated because of
his physical or mental disability, or if Mr. Lesnik shall retire
from his position as a consultant, he will be entitled to receive
50% of the compensation that would otherwise be payable to him
for the remainder of the term of the agreement, less amounts paid
to him under any other disability program or policy maintained by
Bancorporation. In addition, Bancorporation will maintain
medical insurance benefits for Mr. Lesnik and his wife at least
equivalent to those in effect at the date of termination. If Mr.
Lesnik retires or becomes disabled following a change in control,
in lieu of the 50% of compensation that would otherwise be
payable during the remaining term of the agreement, Mr. Lesnik
will be entitled to receive 85% of such compensation. If Mr.
Lesnik's employment is terminated because of his death, Mr.
Lesnik's widow, or his legal representative, will receive the
compensation that would otherwise be payable to Mr. Lesnik for a
period of 90 days after his death.
If Mr. Lesnik should fail on a continuing basis to perform
consulting services in accordance with the agreement, the Board
of Directors may place Mr. Lesnik in retirement and thereafter he
shall receive only the compensation that would be payable under
the agreement upon his retirement. If Mr. Lesnik engages in
competition against the Bank, then Bancorporation will not be
required to make any further payments under the agreement.
CHANGE OF CONTROL AGREEMENTS.
On September 2, 1997, the Bank and Bancorporation entered
into change of control agreements with six executive officers,
including Messrs. Boyle, Kenny and Perry. The agreements
continued in effect through December 31, 1998; provided, however,
that commencing on January 1, 1999 and each succeeding January 1
thereafter, the term of the agreements automatically are extended
<PAGE>
for one additional year, unless the Bank gives notice no later
than September 30 of the preceding year that it does not wish to
extend the Agreements. To date, the Bank has not given such
notice.
If, within three years after a change in control (as defined
below) of the Bank, the Bank terminates the executive's
employment other than by reason of the executive's death,
disability, retirement, or for cause (as defined) or if the
executive terminates his employment for good reason (as defined),
the Bank will pay the executive a monthly salary for a period of
twelve months at a rate of pay equal to the highest periodic rate
of base pay paid to the executive during the twelve-month period
immediately prior to the executive's termination. Additionally,
the executive's retirement benefits will be supplemented to
provide the executive with a total benefit approximating the
benefits the executive would have received under all retirement
plans in which the executive participates if the executive
continued in the employ of the Bank for twelve months following
the date of termination (or until retirement, if earlier) and
been fully vested.
A "change in control" generally is defined to take place
when (a) a person or group (other than a Karp family member)
becomes the beneficial owner, directly or indirectly, of 35% or
more of the combined voting power of the Bank's or
Bancorporation's outstanding securities, (b) during any period of
two consecutive years during the term of the change of control
agreement, individuals who were Directors of the Board as of the
commencement date for the change of control agreement cease to
represent a majority of the Board of Directors, (c) a merger,
consolidation or similar transaction involving the Bank or
Bancorporation occurs following which at least 33 1/3% of the
combined voting power of the voting securities of the surviving
corporation is held by persons who were not previously
shareholders of the Bank or Bancorporation, or (d) a liquidation,
sale or disposition of all or substantially all of the assets of
the Bank or Bancorporation occurs.
COMPENSATION PURSUANT TO PLANS
RETIREMENT PLAN. All regular full-time employees and part-
time employees of Bancorporation and the Bank who have attained
the age of 20 years and six months and who have worked at least
1,000 hours during a 12-month period are eligible for membership
in the Bank's pension plan on the January 1st following the
completion of six months' service. The pension plan provides for
a specified annual pension payable upon retirement.
The basis of calculation of benefits under the Plan is the
average of the total compensation paid or accrued during the
highest ten consecutive calendar years of service prior to the
Normal Retirement Date (as defined below). The amount of annual
<PAGE>
pension pursuant to the plan will be 65% of compensation up to
the Covered Compensation (as defined in the plan) plus 87.5% of
the excess, prorated for less than 35 years of credited service.
Normal Retirement Date is the date of the participant's 65th
birthday. Early retirement may be taken after the participant
reaches 50 years of age provided the participant has five years
of vested service.
The following table illustrates estimated annual benefits
payable to a participant upon reaching normal retirement age in
1999 for specified final average compensation and years of
benefit service classifications. These plan benefits are in
addition to Social Security benefits.
Estimated Annual Benefit for Representative
Final Average Years of Benefit Service
Compensation 15 20 25 30 35
$ 25,000 $ 6,964 $ 9,286 $11,607 $ 13,929 $ 16,250
50,000 15,748 20,998 26,247 31,497 36,746
75,000 25,123 33,498 41,872 50,247 58,621
100,000 34,498 45,998 57,497 68,997 80,496
125,000 43,873 58,498 73,122 87,747 102,371
150,000 53,248 70,998 88,747 106,497 124,246
160,000 56,998 75,998 94,997 113,997 132,996
Regulations of the Internal Revenue Service provide that the
maximum benefit permitted to be paid under a defined benefit plan
in 1999 is $130,000 to participants with ten or more years of
participation. The minimum annual pension for a participant
shall be the accrued retirement pension under the retirement plan
as of December 31, 1988. Benefits under the pension plan are
payable in a variety of ways, and in each case benefits are
computed by the actuarial method.
As of January 1, 1999, the estimated credited years of
service under the retirement plan for each of the individuals
named in the summary compensation table is as follows: Mr. Karp,
17 years; Mr. Dorman, 6 years; Mr. Perry, 24 years; Mr. Kenny, 7
years; and Mr. Boyle, 10 years.
INCENTIVE COMPENSATION PLANS. The Bank provides short-term
and longer-term incentive bonus programs for its officers. Each
of the participants in the incentive bonus programs are assigned
to one of three bonus tiers, which assignments are made primarily
according to job category. Tier one consists of the Chief
Executive Officer and the President, tier two consists of seven
senior officers of the Bank, and tier three consists of the
remaining officers of the Bank (82 officers in 1998). For 1998,
$2,005,010 was paid under the Bank's incentive bonus programs.
The following information is provided regarding the Bank's
incentive bonus programs:
<PAGE>
Management Incentive Plan. The Bank has established a
Management Incentive Plan (the "Incentive Plan") providing annual
awards to participants for the achievement of corporate,
functional area or departmental and individual performance
objectives. Threshold, target and maximum levels of awards are
established at the beginning of each year, and no awards are paid
if the threshold is not met. Each participant's target bonus is
expressed as a percentage of his or her base salary, dependent on
responsibility and function. The target award is 45% of base
salary in the case of the Chief Executive Officer, and ranges
from 25% to 37.5% of base salary in the case of the President and
senior officers. The target bonus for tier three participants is
6% of base salary. Earned awards may range from 0% to 150% of
the target award. All awards are paid in cash, and the
participants must be actively employed at the end of the plan
year to be eligible to receive an award. For 1998, a total of
$908,562 was paid among all participants in the Incentive Plan,
including $215,087 to tier one participants, $263,000 to tier two
participants and $430,475 to tier three participants. Bonuses
paid to executive officers under the Incentive Plan for 1998 are
detailed in the Summary Compensation Table under the heading
"Executive Compensation" above.
Long-Term Capital Accumulation Plan. The Bank has
established a Long-Term Capital Accumulation Plan (the "Capital
Accumulation Plan") providing bonus awards to participants for
the achievement of corporate objectives relating to the Bank's
growth and profitability. Participation in the Capital
Accumulation Plan is limited to officers in tiers one and two of
the Bank's incentive bonus program. Awards under the plan are
specified at the beginning of each of three consecutive three-
year performance periods and earned at the end of each such
period if the performance objectives set by the Plan
Administrators at the beginning of the performance period are
achieved. The achievement of performance objectives is measured
against increases in shareholder value over each performance
period (as indicated by return on equity and the Bank's
efficiency ratio). The awards for each performance period that
tier one and tier two participants are eligible to receive will
be equal to 100% and 70%, respectively, of the participant's base
salary in effect at the beginning of the performance period.
Payment of any awards will be made 60% in Bancorporation common
stock and 40% in cash. The aggregate number of shares of the
Company that may be awarded under the Capital Accumulation Plan
is limited to 400,000 shares. The Company has registered 100,000
of these shares on Form S-8 under the Securities Act of 1933 and
any applicable state securities laws. The initial performance
period commenced January 1, 1996 and concluded December 31, 1998.
The second performance period commenced January 1, 1999 and will
conclude December 31, 2001. No awards were paid out under the
Capital Accumulation Plan during 1998, although awards of
$1,096,448 were paid in January 1999 with respect to the initial
performance period. Awards paid to executive officers under the
Capital <PAGE> Accumulation Plan in January 1999 for 1998 are detailed
in the Summary Compensation Table under the heading "Executive
Compensation" above.
STOCK OPTION PLANS. Bancorporation currently has five stock
option plans: (1) the Incentive Stock Option Plan (the "1987 ISO
Plan"); (2) the 1993 Broad National Incentive Stock Option Plan
(the "1993 ISO Plan"); (3) the 1993 Broad National Directors Non-
Statutory Stock Option Plan (the "1993 Directors Plan); (4) the
1996 Broad National Bancorporation Incentive Stock Option Plan
(the "1996 ISO Plan"); and (5) the 1996 Broad National
Bancorporation Directors Non-Statutory Stock Option Plan (the
"1996 Directors Plan).
The 1987 ISO Plan expired April 16, 1996, although the
outstanding options under the Plan remain in effect. Options
exercisable with respect to 1,681 shares (subject to adjustment
for any change in the capital structure of Bancorporation) that
were granted prior to April 16, 1996 remain outstanding and
exercisable until their expiration dates. No additional options
may be granted under this Plan.
No options were granted under the 1987 ISO Plan in 1998.
During 1998, 8,441 options were exercised under the 1987 ISO
Plan.
Under the 1996 ISO Plan and the 1993 ISO Plan, options may
be granted for a maximum of 220,500 shares and 254,677 shares,
respectively (subject to adjustment for any change in the capital
structure of Bancorporation), of Common Stock to employees of
Bancorporation or its subsidiaries. Grants of options under both
the 1996 ISO Plan and the 1993 ISO Plan may be made only to
employees who possess no more than 10% of the combined voting
power of all classes of stock of Bancorporation, unless the
option exercise price is at least 110% of the stock's market
value and the option expires five years from the date of grant.
The aggregate fair market value of shares of Common Stock for
which an employee may be granted options under the 1996 ISO Plan
and the 1993 ISO Plan in any calendar year has no limit.
However, the aggregate fair market value (determined at the time
the options are granted) of shares of Common Stock with respect
to which incentive stock options are exercisable for the first
time by such individual during any calendar year under either ISO
Plan (and under any other plan of the employer corporation, its
parent or its subsidiaries) cannot exceed $100,000. To the
extent such fair market value exceeds $100,000 during any
calendar year, amounts in excess of $100,000 are treated as non-
qualified stock options.
The 1996 ISO Plan and the 1993 ISO Plan are administered by
a committee of Bancorporation's Board of Directors composed of
non-employee directors who advise the Board in matters such as
selection of the individuals to whom options shall be granted,
determination of the number of shares and share price under each
option, and other similar questions of plan administration.
<PAGE>
Options are granted to those participants who, in the sole
discretion of the committee, have made material contributions in
the past, or are expected to make material contributions in the
future, to the success of Bancorporation and its subsidiaries.
The option exercise period for options granted under the 1996 ISO
Plan and the 1993 ISO Plan is established by the committee, and
the maximum period during which an option is exercisable is ten
years from the date that it is granted. An option may be
exercised upon payment in full of the option exercise price in
cash or in other shares of Common Stock. The exercise price for
purchase of shares under an option granted under the 1996 ISO
Plan and the 1993 ISO Plan is determined by the committee, but
cannot be less than 100% of the fair market value of the shares
on the date the option is granted.
At the December 17, 1998 meeting of the Board of Directors,
the Board approved the grant of options under the 1996 ISO Plan
to individuals named in the summary compensation table as
follows: Mr. Karp, 15,000 options; Mr. Dorman, 10,000 options;
Mr. Perry, Jr., 6,000 options; Mr. Kenny, 6,000 options; and
Mr. Boyle, 6,000 options. No options were granted under the 1993
ISO Plan in 1998. No options were exercised under the 1996 ISO
Plan in 1998. During 1998, 27,430 options were exercised under
the 1993 ISO Plan.
Under the 1996 Directors Plan and the 1993 Directors Plan,
options may be granted for a maximum of 82,687 shares and 95,504
shares, respectively (subject to adjustment for any change in the
capital structure of Bancorporation), of Common Stock to
directors of Bancorporation. The 1996 Directors Plan provides
for the automatic grants of options to purchase shares of Common
Stock to directors of Bancorporation serving as such on the date
of each annual meeting of the Board held following the annual
meeting of shareholders. The 1993 Directors Plan provides for
the automatic grants of options to purchase shares of Common
Stock to directors of Bancorporation serving as such on the date
the 1993 Directors Plan was adopted by the Board of Directors and
for directors of Bancorporation serving as such on the date of
each annual meeting of the Board held following the annual
meeting of shareholders. The number of options granted to each
director of Bancorporation serving as such on the date the 1993
Directors Plan was adopted by the Board of Directors was
determined on the basis of the respective director's length of
service on Bancorporation's Board of Directors in accordance with
a schedule provided in the 1993 Directors Plan. Both the 1996
Directors Plan and the 1993 Directors Plan provides for the grant
of options to purchase 500 shares of Common Stock to each person
serving as a director of Bancorporation on the date of each
annual meeting of the Board of Directors held following the
annual meeting of Bancorporation's shareholders (regardless of
whether such person was also serving as a director of
Bancorporation on the date the respective Plan was adopted).
Neither Bancorporation's Board of Directors nor any committee
thereof had or will have any discretion under the 1996 <PAGE> Directors
Plan or the 1993 Directors Plan to determine the selection of the
directors to whom options were granted, the frequency of option
grants, the number of shares of Common Stock subject to an
option, or the terms and conditions of the options.
Each option granted under the 1996 Directors Plan and the
1993 Directors Plan will become exercisable upon the later of (i)
the expiration of two years from the date on which such option
was granted or (ii) the date on which Bancorporation shall have
paid a cash dividend with respect to its Common Stock in each of
two consecutive calendar years during the term of such option.
Subject to the conditions and limitations of the 1996
Directors Plan and the 1993 Directors Plan, the period during
which each option granted under these Plans may be exercised is
ten years from the date on which such option was granted.
The exercise price at which shares of Common Stock may be
purchased under an option granted pursuant to the 1996 Directors
Plan and the 1993 Directors Plan cannot be less than 100% of the
fair market value of such shares on the date that the option was
granted. The fair market value of shares of Common Stock for
purposes of the 1996 Directors Plan and the 1993 Directors Plan
is determined by a fixed formula established by the Plan.
Pursuant to the 1993 Directors Plan, Mr. Karp and Mr. Dorman
each received 525 (adjusted for the 5% stock dividend declared
December 17, 1998) options on April 16, 1998. During 1998, 1,686
options were exercised under the 1993 Directors Plan. Pursuant
to the 1996 Directors Plan, Mr. Karp and Mr. Dorman each received
525 (adjusted for the 5% stock dividend declared December 17,
1998) options on April 16, 1998.
401(K) PLAN. During 1989 the Bank implemented a 401(k) Plan
providing several tax-deferred investment opportunities to
salaried employees of the Bank. Employees are eligible to enter
the plan on the January 1 or July 1 following the date that they
have attained age 20 and one-half years and have completed twelve
months of service. Employees may contribute from 1% to 15% of their
salary, subject to the Internal Revenue Code of 1986, as amended,
limits on maximum annual contributions. The Bank will make a
"matching" contribution equal to 50% of the employee's 401(k)
contribution, subject to a maximum "match" of 4% of the
employee's annual pay. Matching contributions are made only for
participants who are still employed on December 31st and who
completed 1,000 hours of service during the plan year. The
employee's contribution is 100% vested and is distributable at
death, retirement, or termination of employment. In addition,
the plan also provides for early hardship withdrawals and loans.
The Bank's matching contribution is 20% vested after one vesting
year (a calendar year during which the employee completes 1,000
hours of service), plus 20% for each additional vesting year, and
is 100% vested after five vesting years. Employees are
automatically 100% vested if they have <PAGE> attained age 65. Employer
matching contributions for all participants for 1998 totaled
$142,800. Employer matching contributions for 1998 for each of
the individuals named in the Summary Compensation Table under
"Executive Compensation" are as follows: Mr. Karp, $5,000;
Mr. Dorman, $5,000; Mr. Perry, Jr., $4,240; Mr. Kenny, $5,000;
and Mr. Boyle, $2,500.
DEFERRED COMPENSATION PLAN. During 1996 the Bank
implemented a Non-Qualified Deferred Compensation Plan (the
"Deferred Compensation Plan") to provide the Bank's board of
directors, the Chairman/Chief Executive Officer, the
President/Chief Operating Officer and seven senior officers of
the Bank with a means to defer receipt of director fees, salary,
incentive bonuses, and/or other cash compensation to a future
date. A participant may elect in any plan year to defer all or a
portion of his/her compensation in one percent (1%) increments,
whole one thousand dollar amounts, or an amount over a specified
dollar amount. The length of the deferral period will be
specified by the participant and is irrevocable. A participant
also may elect either (i) to have interest accrued on deferred
funds at an interest rate equal to the 90-day treasury bill rate
or a similar type of financial instrument, or (ii) to have
deferred amounts applied to a Rabbi Trust that will invest such
deferred amounts under such investment policy or directive as the
Bank, the participant, and the plan trustee of such Rabbi Trust
shall approve. At the end of the specified deferral period, the
deferred funds will be paid to the participant, his/her estate or
beneficiary in the form of cash in ten annual installments,
unless a lump sum payment was selected on the original election
form. For 1998, the Bank made supplemental contributions of
$91,171 for Mr. Karp and $25,517 for Mr. Dorman pursuant to the
Deferred Compensation Plan. The Administrators of such Plan
determined that such amounts were equal to the amounts that would
have been contributed for the benefit of Messrs. Karp and Dorman
under the Bank's retirement and 40l(k) plans in the absence of
Internal Revenue Code provisions placing a ceiling on the amount
of contributions which may be made for the benefit of any one
participant.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Compensation Committee of the Bank's Board of Directors
(the "Committee") and the Board of Directors of the Bank together
have general responsibility for the establishment, direction and
administration of all aspects of the compensation policies and
programs for Bancorporation's and the Bank's executive officers.
Under an agreement between Bancorporation and the Bank, all
employees of Bancorporation and of the Bank, including persons
who are employees of both Bancorporation and the Bank, are
compensated as such by the Bank. Bancorporation's executive
compensation program is therefore synonymous with that of the
Bank. The Bank's executive compensation program, insofar as it
pertains to the Chairman of the Board and Chief Executive Officer
(the "Chief Executive Officer") and the President and Chief
Operating Officer <PAGE> (the "President"), is administered by the
Committee. During 1998, the Committee was composed of three
independent outside directors (namely, Mr. Schwartz, the
Chairman, Mr. Cruz and Mr. Lazarus), none of whom is an officer
or employee of Bancorporation or the Bank. All decisions by the
Committee relating to the compensation of the Chief Executive
Officer and President are reviewed by, and subject to the
approval of, the full Board of Directors of the Bank. The Bank's
executive compensation program, insofar as it pertains to
executive officers other than the Chief Executive Officer and the
President, is administered by the Chief Executive Officer and the
President. All decisions by the Chief Executive Officer and the
President relating to the compensation of the Bank's executive
officers are reviewed by, and subject to the approval of, the
full Board of Directors of the Bank. Among the members of the
Bank's Board of Directors, Messrs. Karp and Dorman are officers
and employees of the Company and the Bank, and Mr. Lesnik
formerly served as Chairman of the Board of the Company. Mr.
Karp, the Chief Executive Officer, and certain other executive
officers of the Bancorporation and the Bank, may attend meetings
of the Committee and of the Bank's Board of Directors, but are
not present during discussions or deliberations regarding their
own compensation.
None of the members of the Bank's Compensation Committee
were an officer or employee of the Company or any of its
subsidiaries during 1998, and none were formerly an officer of
the Company or any of its subsidiaries. Messrs. Cruz, Lazarus
and Schwartz, and certain corporations and firms in which such
persons have interests, have obtained loans from the Bank. Each
of such loans are believed to have been made to such persons,
corporations or firms in the ordinary course of business, on
substantially the same terms, including interest rates and
collateral, as those prevailing at the time for comparable
transactions with other persons, and did not involve more than
the normal risk of collectibility or present other unfavorable
features.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT.
OWNERSHIP OF BANCORPORATION CAPITAL STOCK
The following table sets forth certain information, as of
February 15, 1999, relating to the beneficial ownership of
Bancorporation's Common Stock by each person known to the Board
of Directors to own beneficially 5% or more of Bancorporation's
stock, by each director of Bancorporation, by each officer named
in the Summary Compensation Table under "Executive Compensation
and Other Information -- Executive Compensation" and by all
directors and officers of Bancorporation as a group. All
information with respect to beneficial ownership has been
furnished by the respective directors, officers or 5% or more
shareholders, as the case may be. Except as otherwise indicated,
<PAGE>
each beneficial owner listed has sole voting and investment power
with respect to the shares of Common Stock reported.
AMOUNT AND NATURE OF PERCENTAGE OF
NAME BENEFICIAL OWNERSHIP/1/ SHARES OUTSTANDING(1/
Harriet M. Alpert /2/ 542,447 10.9
360 East 72nd Street
New York, New York
James Boyle /3/ 18,693 *
Licinio Cruz /4//5/ 25,114 *
John A. Dorman /4//6/ 83,418 1.7
Arthur Fischman /4//7/ 26,508 *
John J. Iannuzzi /4//8/ 16,483 *
Donald M. Karp /4//9/ 1,202,948 24.0
18 Shawnee Road
Short Hills, New Jersey
Peter Kenny /10/ 22,601 *
James J. Lazarus /4//11/ 28,027 *
Edward J. Lenihan /4//12/ 29,836 *
Stanley J. Lesnik /4//13/ 33,264 *
Catherine McFarland /4//14/ 5,607 *
Louis J. Owen /4//15/ 18,486 *
Fred Perry, Jr. /16/ 27,761 *
A. Harold Schwartz /4//17/ 60,724 1.2
Hubert Williams /4//18/ 26,451 *
All directors and officers
as a group (18 persons)/19/ 1,663,668 32.4
___________
* Less than one percent
/1/ Beneficial ownership is determined in accordance with the
rules of the Securities and Exchange Commission which
generally attribute beneficial ownership of securities to
persons who possess sole or shared voting power and/or
investment power with respect to those securities. Unless
otherwise indicated, the persons or entities identified in
this table have sole voting and investment power with
respect <PAGE> to all shares shown as beneficially owned by them.
Percentage ownership calculations are based on 4,985,728
shares of Common Stock outstanding.
/2/ Includes 537,688 shares of Common Stock as to which
Ms. Alpert has shared voting and investment power with
Donald M. Karp; and 4,759 shares of Common Stock
beneficially owned by Ms. Alpert's husband and as to which
Ms. Alpert has power of attorney.
/3/ Treasurer of Bancorporation and Senior Vice President of the
Bank. Includes 15,787 shares of Common Stock subject to
immediately exercisable options.
/4/ Director of Bancorporation and of Bank.
/5/ Includes 13,362 shares of Common Stock held by Mr. Cruz
individually; and 11,752 shares of Common Stock held by him
as custodian for his children.
/6/ Includes 32,678 shares of Common Stock subject to an
immediately exercisable option, 8,101 shares of Common Stock
held by Mr. Dorman jointly with his wife and as to which he
has shared voting and investment power; 26,281 shares of
Common Stock held by Mr. Dorman individually; and 16,358
shares of Common Stock owned by Mr. Dorman's wife.
/7/ Includes 5,216 shares of Common Stock subject to an
immediately exercisable option; 18,713 shares of Common
Stock held by Mr. Fischman individually; and 2,579 shares of
Common Stock beneficially owned by Mr. Fischman's wife and
as to which Mr. Fischman disclaims beneficial ownership.
/8/ Includes 5,669 shares of Common Stock subject to an
immediately exercisable option; 3,735 shares of Common Stock
held by Mr. Iannuzzi jointly with his wife and as to which
Mr. Iannuzzi has shared voting and investment power; 4,149
shares of Common Stock held by Mr. Iannuzzi individually;
182 shares of Common Stock held by him as trustee of a trust
for the benefit of his grandsons; and 2,748 shares of Common
Stock held by Mr. Iannuzzi's wife.
/9/ Includes 25,784 shares of Common Stock subject to
immediately exercisable options. Also includes 309,312
shares of Common Stock held by Mr. Karp individually; 52,949
shares of Common Stock held by Mr. Karp for the benefit of
his children, and 3,158 shares of Common Stock held by
Mr. Karp as agent for Harriet M. Alpert. The number of
shares reported for Mr. Karp also includes 534,530 shares of
Common Stock held by Ms. Alpert, as to which Mr. Karp shares
voting and investment power and 52,538 shares of Common
Stock held by Mr. Karp's wife as Trustee, as to which
Mr. Karp shares voting and investment power. The number of
shares reported for Mr. Karp includes 127,679 shares of
Common Stock owned by Mr. Karp's <PAGE> wife, and 96,998 shares of
common stock held by Mr. Karp's wife as Trustee for
Mr. Karp's children, as to which Mr. Karp disclaims
beneficial ownership.
/10/ Senior Vice President of the Bank. Includes 13,635 shares
of Common Stock subject to an immediately exercisable
option, 7,457 shares of Common Stock held by Mr. Kenny
individually; and 126 shares of Common Stock held by Mr.
Kenny jointly with his minor son and as to which he has
shared voting and investment power. Also includes 1,155
shares of Common Stock held Mr. Kenny's wife and 228 shares
of Common Stock held by Mr. Kenny's wife jointly with his
two minor children, as to which 1,383 shares of Common Stock
Mr. Kenny disclaims beneficial ownership.
/11/ Represents 20,082 shares of Common Stock.
/12/ Includes 8,216 shares of Common Stock subject to an
immediately exercisable option.
/13/ Includes 8,439 shares of Common Stock subject to an
immediately exercisable option; 20,347 shares of Common
Stock held individually by Mr. Lesnik; and 4,478 shares of
Common Stock beneficially owned by Mr. Lesnik's wife, as to
which Mr. Lesnik disclaims beneficial ownership.
/14/ Includes 1,213 shares of Common Stock subject to an
immediately exercisable option; 3,182 shares of Common Stock
held by Ms. McFarland individually; and 1,212 shares of
Common Stock held by Ms. McFarland's husband.
/15/ Mr. Owen has sole voting and investment power with respect
to 12,844 shares of Common Stock held by him individually
and shared voting and investment power with respect to 5,642
shares of Common Stock held jointly with his wife.
/16/ Senior Vice President of the Bank. Shares beneficially
owned by Mr. Perry, Jr. include 9,225 shares of Common Stock
subject to an immediately exercisable option and 18,536
shares of Common Stock held by Mr. Perry, Jr. jointly with
his wife and as to which he has shared voting and investment
power.
/17/ Represents 60,724 shares of Common Stock.
/18/ Includes 5,669 shares of Common Stock subject to an
immediately exercisable option; 6,874 shares of Common Stock
held by Mr. Williams individually; 693 shares of Common
Stock held by him jointly with his wife and as to which he
has shared voting and investment power; 1,507 shares of
Common Stock held by him as trustee for the benefit of his
son; 8,237 shares of Common Stock held by Mr. Williams
jointly with his brother and as to which he has shared
voting and <PAGE> investment power; and 3,471 shares of Common
Stock held by Mr. Williams' wife.
/19/ Includes 148,922 shares of Common Stock subject to
immediately exercisable options.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Pursuant to General Instruction G(2) to Form 10-K, the
information required by this Item is incorporated herein by
reference to the information under the caption "Transactions With
Management and Others" in the Registrant's definitive Proxy
Statement for its 1999 Annual Meeting of Shareholders to be filed
pursuant to Regulation 14A.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
FORM 8-K.
(a) Exhibits and Financial Statement Schedules:
1. The following consolidated financial statements of
the Registrant and subsidiaries and report of the Registrant's
independent auditors included in Item 8 to this report:
Independent Auditors' Report as of December 31,
1998 and 1997 and for the years ended December 31,
1998, 1997 and 1996.
Consolidated Statements of Condition as of
December 31, 1998 and 1997.
Consolidated Statements of Income for each of the
years ended December 31, 1998, 1997 and 1996.
Consolidated Statements of Changes in
Shareholders' Equity for the years ended December 31,
1998, 1997 and 1996.
Consolidated Statements of Cash Flows for each of
the years ended December 31, 1998, 1997 and 1996.
Notes to Consolidated Financial Statements
2. Financial Statement Schedules: All schedules are
omitted because they are not applicable, or not required, or
because the required information is included in the financial
statements or the notes thereto.
<PAGE>
3. Exhibits:
Number Description
3.1 Restated Certificate of Incorporation of the Registrant
as amended through and including June 29, 1995 (filed
September 18, 1997 as Exhibit 4.2 to the Registrant's
Registration Statement under cover of Form 8-A/A (No.
0-16637) and incorporated herein by reference).
3.1.1 Certificate of Amendment of Certificate of
Incorporation of the Registrant, respecting the
Amendment of ARTICLE THIRD to increase the number of
authorized shares of capital stock (filed September 18,
1997 as Exhibit 4.2.1 to the Registrant's Registration
Statement under cover of Form 8-A/A (No. 0-16637) and
incorporated herein by reference).
3.1.2 Certificate of Amendment of Certificate of
Incorporation of the Registrant, respecting the
Amendment of ARTICLE THIRD to establish certain
limitations with respect to preemptive rights of
shareholders (filed September 18, 1997 as Exhibit 4.2.2
to the Registrant's Registration Statement under cover
of Form 8-A/A (No. 0-16637) and incorporated herein by
reference).
3.2 Bylaws of the Registrant, as amended to date (filed as
Exhibit 3(d) to the Registrant's Form 10-K Report for
the fiscal year ended December 31, 1989 and
incorporated herein by reference).
10.1 Lease between The Prudential Insurance Company of
America and Broad National Bank dated as of December
15, 1988 (filed as Exhibit 3(e) to the Registrant's
Form 10-K Report for the fiscal year ended December 31,
1989 and incorporated herein by reference).
10.1.1 Amendment of Lease between The Prudential Insurance
Company of America and Broad National Bank dated as of
February 7, 1996 (filed as Exhibit 10.1.1 to the
Registrant's Form 10-K Report for the fiscal year ended
December 31, 1995 and incorporated herein by
reference).
10.2 Lease between Third Newark Gateway Urban Renewal
Association and Broad National Bank, dated September 7,
1984 (filed as Exhibit 10(b) to Registration Statement
No. 33-01560 and incorporated herein by reference).
10.3 Lease between O. Navigador Bar, Inc. and Broad National
Bank (filed as Exhibit 10(c) to Amendment No. 1 to
Registration Statement No. 2-78220 and incorporated
herein by reference).
<PAGE>
10.4 Lease between Millburn Common Associates and Broad
National Bank dated June 16, 1976, and Amendment to
such Lease, dated September 10, 1985 (filed as Exhibit
10(d) to Registration Statement No. 33-01560 and
incorporated herein by reference).
10.5 Lease between Cada Holding Corp. and Broad National
Bank dated October 8, 1976 (filed as Exhibit 10(e) to
Amendment No. 1 to Registration Statement No. 2-78220
and incorporated herein by reference).
10.6 Lease between Euro Associates and Broad National Bank
acknowledged by the parties on December 12, 1985 and
December 10, 1985 (filed with Amendment No. 2 to the
Registrant's Registration Statement No. 33-53658 as
Exhibit 10.6 and incorporated herein by reference).
10.7 Workletter Agreement between Euro Associates and Broad
National Bank (filed with Amendment No. 2 to the
Registrant's Registration Statement No. 33-53658 as
Exhibit 10.7 and incorporated herein by reference).
10.8 Lease between 1000 South Elmora Associates and Broad
National Bank dated May 18, 1986 (filed with Amendment
No. 2 to the Registrant's Registration Statement No.
33-53658 as Exhibit 10.8 and incorporated herein by
reference).
10.9 Lease between Convery Associates and Broad National
Bank dated July 1, 1987, and Rider to Lease Agreement,
dated September 1, 1992 (filed with Amendment No. 2 to
the Registrant's Registration Statement No. 33-53658 as
Exhibit 10.10 and incorporated herein by reference).
10.10 Lease Agreement and Amendment between 466 Bloomfield
Avenue Associates, Inc. and Broad National Bank dated
February 9, 1988 (filed as Exhibit 10(l) to the
Registrant's Form 10-K Report for the fiscal year ended
December 31, 1989 and incorporated herein by
reference).
10.11 Lease Agreement between George Zeik and Broad National
Bank dated September 1, 1989 (filed as Exhibit 10(m) to
the Registrant's Form 10-K Report for the fiscal year
ended December 31, 1989 and incorporated herein by
reference).
10.12 Lease between Broad National Realty Corporation and
Broad National Bank dated May 1, 1990 (filed as Exhibit
10(n) to the Registrant's Form 10-K for the fiscal year
ended December 31, 1990 and incorporated by reference
herein).
<PAGE>
10.12.1 Rider to Lease Agreement between Broad National Realty
and Broad National Bank dated December 21, 1993 (filed
as Exhibit 10.13.1 to the Registrant's Form 10-K for
the fiscal year ended December 31, 1993 and
incorporated herein by reference).
10.13 Broad National Bank Employees' Retirement Plan (filed
as Exhibit 10(g) to Registration Statement No. 2-78220
and as Exhibit 10(f) to Amendment No. 1 to Registration
Statement No. 2-78220 and incorporated herein by
reference).*
10.14 Form of Amendment to Sections 2.1 and 3.1(c) of the
Broad National Bank Employees' Retirement Plan (filed
as Exhibit 10(p) to the Registrant's Form 10-K for the
fiscal year ended December 31, 1990 and incorporated by
reference herein).*
10.15 Description of Bonus Plan for Designated Officers and
Employees (appears on page 10 of the Registrant's
definitive proxy statement for its 1991 Annual Meeting
of Shareholders and is incorporated herein by
reference).*
10.16 Incentive Stock Option Plan for certain employees
adopted on March 26, 1987, and amended April 27, 1989
(filed as Exhibit 10.18 to the Registrant's Form 10-K
for the fiscal year ended December 31, 1992 and
incorporated by reference herein).*
10.17 Non-Statutory Stock Option Plan for directors adopted
on March 26, 1987 (filed with Amendment No. 2 to the
Registrant's Registration Statement No. 33-53658 as
Exhibit 10.19 and incorporated herein by reference).*
10.18 Employment Agreement between Donald M. Karp and the
Registrant dated December 31, 1998.*
10.19 Employment Agreement among John A. Dorman, Broad
National Bank and the Registrant, dated December 31,
1998.*
10.20 Consultant Agreement between Stanley J. Lesnik and the
Registrant dated January 1, 1998.*
10.21 Lease between Broad National Bank, landlord, and
Newtrend L.P., tenant, dated August 10, 1993 (filed as
Exhibit 10.22 to the Registrant's Form 10-K for the
fiscal year ended December 31, 1993 and incorporated
herein by reference).
<PAGE>
10.22 Newtrend Service Bureau Agreement between Newtrend,
Inc. and Broad National Bank dated August 10, 1993
(filed as Exhibit 10.23 to the Registrant's Form 10-K
for the fiscal year ended December 31, 1993 and
incorporated herein by reference).
10.23 Newtrend Item Processing Addendum between Newtrend,
Inc. and Broad National Bank dated August 10, 1993
(filed as Exhibit 10.24 to the Registrant's Form 10-K
for the fiscal year ended December 31, 1993 and
incorporated herein by reference).
10.24 1993 Broad National Incentive Stock Option Plan for
certain employees adopted on September 19, 1994 (filed
as Exhibit 10.24 to the Registrant's Form 10-K Report
for the fiscal year ended December 31, 1994 and
incorporated herein by reference).*
10.25 1993 Broad National Directors Non-Statutory Stock
Option Plan for directors adopted on September 19, 1994
(filed as Exhibit 10.25 to the Registrant's Form 10-K
Report for the fiscal year ended December 31, 1994 and
incorporated herein by reference).*
10.26 Lease between Lucky Realty LLC and Broad National Bank
(filed as Exhibit 10.26 to the Registrant's Form 10-K
Report for the fiscal year ended December 31, 1995 and
incorporated herein by reference).
10.27 Lease between A.J. Seabra Supermarkets V, Inc. and
Broad National Bank dated as of April 20, 1995 (filed
as Exhibit 10.27 to the Registrant's Form 10-K Report
for the fiscal year ended December 31, 1995 and
incorporated herein by reference).
10.28 1996 Broad National Bancorporation Incentive Stock
Option Plan for certain employees adopted on December
19, 1996 and subsequently amended on January 16, 1997
(filed as Exhibit 10.28 to the Registrant's Form 10-K
Report for the fiscal year ended December 31, 1996 and
incorporated herein by reference).*
10.29 1996 Broad National Bancorporation Directors Non-
Statutory Stock Option Plan for directors adopted on
December 19, 1996 (filed as Exhibit 10.29 to the
Registrant's Form 10-K Report for the fiscal year ended
December 31, 1996 and incorporated herein by
reference).*
<PAGE>
10.30 Broad National Bank Long-Term Capital Accumulation Plan
for certain employees adopted on October 19, 1995
(filed as Exhibit 10.30 to the Registrant's Form 10-K
Report for the fiscal year ended December 31, 1996 and
incorporated herein by reference).*
10.31 Broad National Bank Deferred Compensation Plan for
certain employees and directors adopted on October 19,
1995 (filed as Exhibit 10.31 to the Registrant's Form
10-K Report for the fiscal year ended December 31, 1996
and incorporated herein by reference).*
10.32 Broad National Bank Management Incentive Plan for
certain employees adopted on October 19, 1995 (filed as
Exhibit 10.32 to the Registrant's Form 10-K Report for
the fiscal year ended December 31, 1996 and
incorporated herein by reference).*
10.33 Form of Change of Control Agreement and Schedule of
Parties Thereto (filed as Exhibit 10.33 to the
Registrant's Form 10-K Report for the fiscal year ended
December 31, 1997 and incorporated herein by
reference).*
10.34 Junior Subordinated Indenture, dated as of June 30,
1997, between Broad National Bancorporation and Bankers
Trust Company (filed as Exhibit 10.34 to the
Registrant's Form 10-K Report for the fiscal year ended
December 31, 1997 and incorporated herein by
reference).
10.35 9.50% Junior Subordinated Debenture, dated as of June
30, 1997, made and given by Broad National
Bancorporation to and for the benefit of BNB Capital
Trust (filed as Exhibit 10.35 to the Registrant's Form
10-K Report for the fiscal year ended December 31, 1997
and incorporated herein by reference).
10.36 Trust Agreement, dated as of June 9, 1997, between
Broad National Bancorporation and Bankers Trust
(Delaware) (filed as Exhibit 10.36 to the Registrant's
Form 10-K Report for the fiscal year ended December 31,
1997 and incorporated herein by reference).
10.37 Amended and Restated Trust Agreement, dated as of June
30, 1997, among Broad National Bancorporation, Bankers
Trust Company and Bankers Trust (Delaware) (filed as
Exhibit 10.37 to the Registrant's Form 10-K Report for
the fiscal year ended December 31, 1997 and
incorporated herein by reference).
<PAGE>
10.38 Form of Certificate Evidencing Preferred Securities
issued by BNB Capital Trust (filed as Exhibit 10.38 to
the Registrant's Form 10-K Report for the fiscal year
ended December 31, 1997 and incorporated herein by
reference).
10.39 Guarantee Agreement, dated as of June 30, 1997, between
Broad National Bancorporation, as Guarantor, and
Bankers Trust Company, as Trustee (filed as Exhibit
10.39 to the Registrant's Form 10-K Report for the
fiscal year ended December 31, 1997 and incorporated
herein by reference).
10.40 Agreement and Plan of Merger, dated as of February 1,
1999, between Independence Community Bank Corp. and
Broad National Bancorporation (filed on February 8,
1999 with the Registrant's Current Report on Form 8-K
as Exhibit 2.1 and incorporated herein by reference).
11 Statement re Computation of Net Income Per Share.
22 List of Subsidiaries (filed with Amendment No. 3 to the
Registrant's Registration Statement No. 33-53658 as
Exhibit 22 and incorporated herein by reference).
24 Consent of KPMG LLP with regard to Bancorporation's
Registration Statement on Form S-8 (Reg. No. 33-28183).
27 Financial Data Schedule.
______________________
* Management contracts or compensatory plans or arrangements
required to be identified by Item 14(a)(3).
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the last
quarter of 1997.
(c) Exhibits
See Exhibits identified above under Item 14(a)(3).
(d) Financial Statement Schedules
See Item 14(a)(2) above.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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
By /s/ Donald M. Karp
Donald M. Karp
Chairman of the Board and
Chief Executive Officer
Dated: March 18, 1999
Pursuant to the requirements of the Securities Exchange
Act of 1934, this report has been signed below by the following
persons on behalf of the registrant and in the capacities and on
the dates indicated:
Signature and Title Date
/s/ Donald M. Karp March 18, 1999
Donald M. Karp, Director, Chairman
of the Board and Chief Executive
Officer (Principal Executive
Officer)
/s/ John A. Dorman March 18, 1999
John A. Dorman, Director,
President and Chief Operating
Officer
/s/ James Boyle March 18, 1999
James Boyle, Treasurer and
Comptroller(Principal Financial
and Accounting Officer)
/s/ Licinio Cruz March 18, 1999
Licinio Cruz, Director
<PAGE>
/s/ Arthur Fischman March 18, 1999
Arthur Fischman, Director
/s/ John J. Iannuzzi March 18, 1999
John J. Iannuzzi, Director
/s/ James J. Lazarus March 18, 1999
James J. Lazarus, Director
March __, 1999
Edward J. Lenihan, Director
/s/ Stanley J. Lesnik March 18, 1999
Stanley J. Lesnik, Director
/s/ Louis J. Owen March 18, 1999
Louis J. Owen, Director
/s/ Catherine McFarland March 18, 1999
Catherine McFarland, Director
/s/ A. Harold Schwartz March 18, 1999
A. Harold Schwartz, Director
/s/ Hubert Williams March 18, 1999
Hubert Williams, Director
<PAGE>
EXHIBIT INDEX
Exhibit No. Description Page No.
3.1 Restated Certificate of Incorporation **
of the Registrant as amended through and
including June 29, 1995 (filed September
18, 1997 as Exhibit 4.2 to the Registrant's
Registration Statement under cover of
Form 8-A/A (No. 0-16637)and incorporated
herein by reference).
3.1.1 Certificate of Amendment of Certificate of **
Incorporation of the Registrant, respecting
the Amendment of ARTICLE THIRD to increase
the number of authorized shares of capital
stock (filed September 18, 1997 as Exhibit
4.2.1 to the Registrant's Registration
Statement under cover of Form 8-A/A
(No. 0-16637) and incorporated herein by
reference).
3.1.2 Certificate of Amendment of Certificate of **
Incorporation of the Registrant, respecting
the Amendment of ARTICLE THIRD to establish
certain limitations with respect to preemptive
rights of shareholders (filed September 18,
1997 as Exhibit 4.2.2 to the Registrant's
Registration Statement under cover of Form
8-A/A (No. 0-16637) and incorporated herein by
reference).
3.2 Bylaws of the Registrant, as amended to date **
(filed as Exhibit 3(d) to the Registrant's
Form 10-K Report for the fiscal year ended
December 31, 1989 and incorporated herein by
reference).
10.1 Lease between The Prudential Insurance Company **
of America and Broad National Bank dated as of
December 15, 1988 (filed as Exhibit 3(e) to the
Registrant's Form 10-K Report for the fiscal
year ended December 31, 1989 and incorporated
herein by reference).
10.1.1 Amendment of Lease between The Prudential **
Insurance Company of America and Broad
National Bank dated as of February 7, 1996
(filed as Exhibit 10.1.1 to the Registrant's
Form 10-K Report for the fiscal year ended
December 31, 1995 and incorporated herein by
reference).
<PAGE>
10.2 Lease between Third Newark Gateway Urban **
Renewal Association and Broad National Bank,
dated September 7, 1984 (filed as Exhibit
10(b) to Registration Statement No. 33-01560
and incorporated herein by reference).
10.3 Lease between O. Navigador Bar, Inc. and **
Broad National Bank (filed as Exhibit 10(c)
to Amendment No. 1 to Registration Statement
No. 2-78220 and incorporated herein by
reference).
10.4 Lease between Millburn Common Associates and **
Broad National Bank dated June 16, 1976, and
Amendment to such Lease, dated September 10,
1985 (filed as Exhibit 10(d) to Registration
Statement No. 33-01560 and incorporated herein
by reference).
10.5 Lease between Cada Holding Corp. and Broad **
National Bank dated October 8, 1976 (filed
as Exhibit 10(e) to Amendment No. 1 to
Registration Statement No. 2-78220 and
incorporated herein by reference).
10.6 Lease between Euro Associates and Broad **
National Bank acknowledged by the parties
on December 12, 1985 and December 10, 1985
(filed with Amendment No. 2 to the Registrant's
Registration Statement No. 33-53658 as
Exhibit 10.6 and incorporated herein by
reference).
10.7 Workletter Agreement between Euro Associates **
and Broad National Bank (filed with Amendment
No. 2 to the Registrant's Registration
Statement No. 33-53658 as Exhibit 10.7 and
incorporated herein by reference).
10.8 Lease between 1000 South Elmora Associates **
and Broad National Bank dated May 18, 1986
(filed with Amendment No. 2 to the Registrant's
Registration Statement No. 33-53658 as
Exhibit 10.8 and incorporated herein by
reference).
10.9 Lease between Convery Associates and Broad **
National Bank dated July 1, 1987, and Rider
to Lease Agreement, dated September 1, 1992
(filed with Amendment No. 2 to the Registrant's
Registration Statement No. 33-53658 as Exhibit
10.10 and incorporated herein by reference).
<PAGE>
10.10 Lease Agreement and Amendment between 466 **
Bloomfield Avenue Associates, Inc. and Broad
National Bank dated February 9, 1988 (filed
as Exhibit 10(1) to the Registrant's Form 10-K
Report for the fiscal year ended December 31,
1989 and incorporated herein by reference).
10.11 Lease Agreement between George Zeik and Broad **
National Bank dated September 1, 1989 (filed
as Exhibit 10(m) to the Registrant's Form 10-K
Report for the fiscal year ended December 31,
1989 and incorporated herein by reference).
10.12 Lease between Broad National Realty **
Corporation and Broad National Bank dated
May 1, 1990 (filed as Exhibit 10(n) to the
Registrant's Form 10-K for the fiscal year
ended December 31, 1990 and incorporated by
reference herein).
10.12.1 Rider to Lease Agreement between Broad **
National Realty and Broad National Bank
dated December 21, 1993 (filed as Exhibit
10.13.1 to the Registrant's Form 10-K for
the fiscal year ended December 31, 1993 and
incorporated herein by reference).
10.13 Broad National Bank Employees' Retirement **
Plan (filed as Exhibit 10(g) to Registration
Statement No. 2-78220 and as Exhibit 10(f)
to Amendment No. 1 to Registration Statement
No. 2-78220 and incorporated herein by
reference ).*
10.14 Form of Amendment to Sections 2.1 and 3.1(c) **
of the Broad National Bank Employees'
Retirement Plan (filed as Exhibit 10(p) to
the Registrant's Form 10-K for the fiscal
year ended December 31, 1990 and incorporated
by reference herein).*
10.15 Description of Bonus Plan for Designated **
Officers and Employees (appears on page 10
of the Registrant's definitive proxy statement
for its 1991 Annual Meeting of Shareholders
and is incorporated herein by reference).*
10.16 Incentive Stock Option Plan for certain **
employees adopted on March 26, 1987, and
amended April 27, 1989 (filed as Exhibit
10.18 to the Registrant's Form 10-K for the
fiscal year ended December 31, 1992 and
incorporated by reference herein).*
<PAGE>
10.17 Non-Statutory Stock Option Plan for **
directors adopted on March 26, 1987 (filed
with Amendment No. 2 to the Registrant's
Registration Statement No. 33-53658 as
Exhibit 10.19 and incorporated herein by
reference).*
10.18 Employment Agreement between Donald M. Karp __
and the Registrant dated December 31, 1998.*
10.19 Employment Agreement among John A. Dorman __
Broad National Bank and the Registrant,
dated December 31, 1998.*
10.20 Consultant Agreement between Stanley J. Lesnik __
and the Registrant dated January 1, 1998.*
10.21 Lease between Broad National Bank, **
landlord, and Newtrend, L.P., tenant,
dated August 10, 1993 (filed as Exhibit
10.22 to the Registrant's Form 10-K for
the fiscal year ended December 31, 1993
and incorporated herein by reference).
10.22 Newtrend Service Bureau Agreement between **
Newtrend, Inc. and Broad National Bank dated
August 10, 1993 (filed as Exhibit 10.23 to
the Registrant's Form 10-K for the fiscal
year ended December 31, 1993 and incorporated
herein by reference).
10.23 Newtrend Item Processing Addendum between **
Newtrend, Inc. and Broad National Bank dated
August 10, 1993 (filed as Exhibit 10.24 to
the Registrant's Form 10-K for the fiscal
year ended December 31, 1993 and incorporated
herein by reference).
10.24 1993 Broad National Incentive Stock Option **
Plan for certain employees adopted on
September 19, 1994 (filed as Exhibit 10.24
to the Registrant's Form 10-K Report for the
fiscal year ended December 31, 1994 and
incorporated herein by reference).*
10.25 1993 Broad National Directors Non-Statutory **
Stock Option Plan for directors adopted on
September 19,1994 (filed as Exhibit 10.25
to the Registrant's Form 10-K Report for the
fiscal year ended December 31, 1994 and
incorporated herein by reference).*
<PAGE>
10.26 Lease between Lucky Realty LLC and Broad **
National Bank (filed as Exhibit 10.26 to the
Registrant's Form 10-K Report for the fiscal
year ended December 31, 1995 and incorporated
herein by reference).
10.27 Lease between A.J. Seabra Supermarkets V, Inc. **
and Broad National Bank dated as of April 20,
1995 (filed as Exhibit 10.27 to the
Registrant's Form 10-K Report for the fiscal
year ended December 31, 1995 and incorporated
herein by reference).
10.28 1996 Broad National Bancorporation Incentive **
Stock Option Plan for certain employees
adopted on December 19, 1996 and subsequently
amended on January 16, 1997 (filed as Exhibit
10.28 to the Registrant's Form 10-K Report for
the fiscal year ended December 31, 1996 and
incorporated herein by reference).*
10.29 1996 Broad National Bancorporation Directors **
Non-Statutory Stock Option Plan for directors
adopted on December 19, 1996 (filed as Exhibit
10.29 to the Registrant's Form 10-K Report for
the fiscal year ended December 31, 1996 and
incorporated herein by reference).*
10.30 Broad National Bank Long-Term Capital **
Accumulation Plan for certain employees
adopted on October 19, 1995 (filed as
Exhibit 10.30 to the Registrant's Form
10-K Report for the fiscal year ended
December 31, 1996 and incorporated herein by
reference).*
10.31 Broad National Bank Deferred Compensation **
Plan for certain employees and directors
adopted on October 19, 1995 (filed as Exhibit
10.31 to the Registrant's Form 10-K Report
for the fiscal year ended December 31, 1996
and incorporated herein by reference).*
10.32 Broad National Bank Management Incentive Plan **
for certain employees adopted on October 19,
1995 (filed as Exhibit 10.32 to the
Registrant's Form 10-K Report for the fiscal
year ended December 31, 1996 and incorporated
herein by reference).*
<PAGE>
10.33 Form of Change of Control Agreement and **
Schedule of Parties Thereto (filed as Exhibit
10.33 to the Registrant's Form 10-K Report for the
fiscal year ended December 31, 1997 and
incorporated herein by reference).*
10.34 Junior Subordinated Indenture, dated as **
of June 30, 1997, between Broad National
Bancorporation and Bankers Trust Company
(filed as Exhibit 10.34 to the Registrant's
Form 10-K Report for the fiscal year ended
December 31, 1997 and incorporated herein
by reference).
10.35 9.50% Junior Subordinated Debenture, dated **
as of June 30, 1997, made and given by Broad
National Bancorporation to and for the benefit
of BNB Capital Trust (filed as Exhibit 10.35 to the
Registrant's Form 10-K Report for the fiscal year
ended December 31, 1997 and incorporated herein by
reference).
10.36 Trust Agreement, dated as of June 9, 1997, **
between Broad National Bancorporation and
Bankers Trust (Delaware) (filed as Exhibit 10.36
to the Registrant's Form 10-K Report for the
fiscal year ended December 31, 1997 and
incorporated herein by reference).
10.37 Amended and Restated Trust Agreement, dated **
as of June 30, 1997, among Broad National
Bancorporation, Bankers Trust Company and Bankers
Trust (Delaware) (filed as Exhibit 10.37 to the
Registrant's Form 10-K Report for the fiscal year
ended December 31, 1997 and incorporated herein by
reference).
10.38 Form of Certificate Evidencing Preferred **
Securities issued by BNB Capital Trust (filed as
Exhibit 10.38 to the Registrant's Form 10-K Report
for the fiscal year ended December 31, 1997 and
incorporated herein by reference).
10.39 Guarantee Agreement, dated as of June 30, **
1997, between Broad National Bancorporation,
as Guarantor, and Bankers Trust Company, as
Trustee (filed as Exhibit 10.39 to the
Registrant's Form 10-K Report for the fiscal
year ended December 31, 1997 and incorporated
herein by reference).
<PAGE>
10.40 Agreement and Plan of Merger, dated as of **
February 1, 1999, between Independence Community
Bank Corp. and Broad National Bancorporation
(filed on February 8, 1999 with the Registrant's
Current Report on Form 8-K as Exhibit 2.1 and
incorporated herein by reference).
11 Statement re Computation of Net Income
Per Share. __
22 List of Subsidiaries (filed with Amendment **
No. 3 to the Registrant's Registration
Statement No. 33-53658 as Exhibit 22 and
incorporated herein by reference).
24 Consent of KPMG LLP with regard to __
Bancorporation's Registration Statement on
Form S-8 (Reg. No. 33-28183).
27 Financial Data Schedule. __
__________________________
* Management contracts or compensatory plans or arrangements
required to be identified by Item 14(a)(3).
** Incorporated by reference from previous filings.
BROAD NATIONAL BANCORPORATION
COMPUTATION OF NET INCOME PER SHARE
Year Ended December 31,
1998/1/ 1997/1/ 1996/1/
(Dollars in Thousands, Except Per Share Amounts)
BASIC:
Net income available to $8,047,141 $6,410,820 $5,273,146
common shareholders
Weighted average common 4,934,554 5,027,538 5,028,575
shares outstanding
BASIC EARNINGS PER $1.63 $1.28 $1.05
COMMON SHARE
DILUTED:
Net income available to $8,047,141 $6,410,820 $5,273,146
common shareholders
Weighted average common 4,934,554 5,027,538 5,028,575
shares outstanding
Effects of dilutive
securities
Stock options 191,853 176,931 97,805
Convertible
preferred stock 0 0 121,347
Contingently issuable
shares 35,474 0 0
Adjusted weighted average
common shares
outstanding 5,161,881 5,204,469 5,247,727
DILUTED EARNINGS PER
COMMON SHARE $1.56 $1.23 $1.01
/1/ All share and per share amounts have been adjusted to
reflect the 5% stock dividend which was declared
December 17, 1998 and distributed January 7, 1999, as well
as all previous stock dividends.
Independent Accountants' Consent
The Board of Directors
Broad National Bancorporation:
We consent to the incorporation by reference in the Registration
Statement No. 33-28183 on form S-8, Registration Statement No.
333-26687 on Form S-8, Registration Statement No 333-36521 on
Form S-8, Registration Statement No. 333-70935 on Form S-8 of
Broad National Bancorporation of our report dated January 21,
1999, relating to the consolidated statements of condition of
Broad National Bancorporation and subsidiaries as of December 31,
1998 and 1997, and the related consolidated statements of income,
changes in shareholders' equity, and cash flows for each of the
years in the three-year period ended December 31, 1998, which
report appears in the December 31, 1998 Annual Report on Form
10-K of Broad National Bancorporation.
/s/ KMPG LLP
KPMG LLP
Short Hills, New Jersey
March29, 1999
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM BROAD
NATIONAL BANCORPORATION'S FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1998 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 45,793
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 231,828
<INVESTMENTS-CARRYING> 32,949
<INVESTMENTS-MARKET> 33,083
<LOANS> 360,142
<ALLOWANCE> 8,246
<TOTAL-ASSETS> 684,793
<DEPOSITS> 575,064
<SHORT-TERM> 40,651
<LIABILITIES-OTHER> 12,889
<LONG-TERM> 11,500
0
0
<COMMON> 5,213
<OTHER-SE> 39,476
<TOTAL-LIABILITIES-AND-EQUITY> 684,793
<INTEREST-LOAN> 30,098
<INTEREST-INVEST> 13,821
<INTEREST-OTHER> 1,876
<INTEREST-TOTAL> 45,795
<INTEREST-DEPOSIT> 16,166
<INTEREST-EXPENSE> 18,467
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<LOAN-LOSSES> 975
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<EXPENSE-OTHER> 21,540
<INCOME-PRETAX> 12,357
<INCOME-PRE-EXTRAORDINARY> 12,357
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 8,047
<EPS-PRIMARY> 1.63
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<LOANS-NON> 716
<LOANS-PAST> 1,366
<LOANS-TROUBLED> 3,701
<LOANS-PROBLEM> 3,425
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