<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the quarterly period ended September 30, 1995
------------------
Commission File Number 0-18513
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CENTER BANKS INCORPORATED
-------------------------
(Exact name of registrant as specified in its charter)
Delaware 16-1368745
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
33 E. Genesee St., Skaneateles, New York, 13152
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(Address of principal executive offices-Zip code)
Registrant's telephone number, including area code 315-685-2265
------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by sections 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 the number of shares outstanding for each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at November 9, 1995
------------------------------------------------------------------------
Common Stock (par value $.01 per share) 930,079 Shares
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<TABLE>
<S> <C>
PART I. FINANCIAL INFORMATION Page
- - ----------------------------- ----
Item 1. Consolidated Financial Statements
------
1. Consolidated Balance Sheets 4
2. Consolidated Statements of Income 5
3. Consolidated Statements of Stockholders' Equity 6
4. Consolidated Statements of Cash Flows 7
5. Notes to Consolidated Financial Statements 8
Item 2. Management's Discussion and Analysis of Financial Condition
-------
and Results of Operations 10
PART II. OTHER INFORMATION
- - ---------------------------
Item 1. Legal Proceedings 17
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Item 2. Changes in Securities 17
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Item 3. Defaults Upon Senior Securities 17
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Item 4. Submission of Matters to a Vote of Security Holders 17
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Item 5. Other Information 17
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Item 6. Exhibits and Reports on Form 8-K 17
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SIGNATURES 18
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</TABLE>
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<TABLE>
CENTER BANKS INCORPORATED
CONSOLIDATED BALANCE SHEETS
<S> <C> <C>
September 30, December 31,
ASSETS 1995 1994
- - -----------------------------------------------------------------------------------------------------------------------
(In Thousands, Except Share Data)
Cash and due from banks $1,072 $2,143
Federal funds sold 1,300 1,200
Securities available for sale 6,047 17,276
Securities held to maturity, fair value of
$18,900 in 1995 and $4,479 in 1994 18,552 4,595
Federal Home Loan Bank stock, at cost 1,303 1,200
Mortgage loans receivable 143,164 138,579
Other loans receivable 28,119 28,430
- - -----------------------------------------------------------------------------------------------------------------------
171,283 167,009
Less:Unearned discount and net deferred fees (25) 48
Allowance for loan losses 3,004 3,040
- - -----------------------------------------------------------------------------------------------------------------------
Loans receivable, net 168,304 163,921
Premises and equipment, net 5,995 5,606
Real estate owned, net 975 984
Accrued interest receivable 1,318 1,161
Other assets 2,026 773
- - -----------------------------------------------------------------------------------------------------------------------
$206,892 $198,859
=======================================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
- - -----------------------------------------------------------------------------------------------------------------------
Liabilities:
Interest bearing deposits 166,836 161,154
Demand deposits 9,633 7,645
- - -----------------------------------------------------------------------------------------------------------------------
Total deposits 176,469 168,799
Advance payments by borrowers for property
taxes and insurance 1,071 1,897
Borrowings 14,402 13,984
Accrued expenses and other liabilities 441 388
- - -----------------------------------------------------------------------------------------------------------------------
Total liabilities 192,383 185,068
- - -----------------------------------------------------------------------------------------------------------------------
Stockholders' equity:
Preferred stock, par value $.01 per share,
authorized 500,000 shares, none issued 0 0
Common stock, par value $.01 per share,
authorized 2,500,000 shares, 1,030,863 and
1,028,444 shares issued in 1995 and 1994, respectively 10 10
Additional paid-in capital 9,497 9,475
Retained earnings 5,792 5,206
Net unrealized holding loss on securities, net of tax effect 0 0
of $51,000 and $141,000 in 1995 and 1994, respectively. (77) (187)
Treasury stock, at cost (102,700 shares) (713) (713)
- - -----------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 14,509 13,791
- - -----------------------------------------------------------------------------------------------------------------------
$206,892 $198,859
=======================================================================================================================
See accompanying notes to consolidated financial statements.
</TABLE>
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<TABLE>
CENTER BANKS INCORPORATED
CONSOLIDATED STATEMENTS OF INCOME
<S> <C> <C> <C> <C>
Three months ended Sept. 30, Nine months ended Sept. 30,
1995 1994 1995 1994
- - ----------------------------------------------------------------------------------------------------------------------------
(In Thousands, Except Per Share Data)
Interest income:
Mortgage loans $2,838 $2,269 $8,365 $6,513
Other loans 710 619 2,119 1,792
Securities 441 359 1,232 1,105
Federal funds sold 60 0 143 0
- - ----------------------------------------------------------------------------------------------------------------------------
Total interest income 4,049 3,247 11,859 9,410
- - ----------------------------------------------------------------------------------------------------------------------------
Interest expense:
Deposits 2,004 1,373 5,650 3,956
Borrowings 238 198 735 590
Total interest expense 2,242 1,571 6,385 4,546
Net interest income 1,807 1,676 5,474 4,864
Provision for loan losses 30 90 210 270
- - ----------------------------------------------------------------------------------------------------------------------------
Net interest income after provision
for loan losses 1,777 1,586 5,264 4,594
- - ----------------------------------------------------------------------------------------------------------------------------
Other operating income :
Net gain (loss) on redemption of securities (83) 7 (99) 7
Net gain (loss) on sale of loans 4 4 9 (7)
Other income 184 133 487 385
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Total other operating income 105 144 397 385
- - ----------------------------------------------------------------------------------------------------------------------------
1,882 1,730 5,661 4,979
- - ----------------------------------------------------------------------------------------------------------------------------
Other operating expenses:
Salaries and employee benefits 678 585 2,032 1,678
Building, occupancy and equipment 292 181 806 537
Real estate owned, net 156 107 269 254
Other 467 544 1,597 1,576
- - ----------------------------------------------------------------------------------------------------------------------------
Total other operating expenses 1,593 1,417 4,704 4,045
- - ----------------------------------------------------------------------------------------------------------------------------
Income before income taxes 289 313 957 934
Income tax 71 49 242 165
Net income $218 $264 $715 $769
- - ----------------------------------------------------------------------------------------------------------------------------
Net income per common share $0.23 $0.29 $0.77 $0.83
- - ----------------------------------------------------------------------------------------------------------------------------
Weighted average common shares 927,798 925,279 926,659 924,917
- - ----------------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
CENTER BANKS INCORPORATED
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<S> <C> <C> <C> <C> <C> <C> <C>
Net
unrealized
Additional holding
Common paid-in- Retained gain (loss) on Treasury Loan to
stock capital earnings securities stock ESOP Total
- - -----------------------------------------------------------------------------------------------------------------------------------
(In Thousands)
- - -----------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1993 $10 $9,468 $4,335 $215 ($713) ($29) $13,286
Net income 0 0 769 0 0 0 769
Sale of 700 shares under option 0 4 0 0 0 0 4
Cash dividend declared on
Common stock ($.08 per share) 0 0 (111) 0 0 0 (111)
Net unrealized holding
loss on securities,
net of tax effect of $237,000 0 0 0 (314) 0 0 (314)
- - -----------------------------------------------------------------------------------------------------------------------------------
Balance at September 30, 1994 $10 $9,472 $4,993 ($99) ($713) ($29) $13,634
- - -----------------------------------------------------------------------------------------------------------------------------------
- - -----------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1994 $10 $9,475 $5,206 ($187) ($713) $0 $13,791
Net income 0 0 715 0 0 0 715
Sale of 1,945 shares under option 0 15 0 0 0 0 15
Issuance of 474 shares of stock under
1995 Non-employee
Director's Stock Plan 0 7 0 0 0 0 7
Cash dividend declared on
Common stock ($.14 per share) 0 0 (129) 0 0 0 (129)
Net unrealized holding
gain on securities,
net of tax effect of $73,000 0 0 0 110 0 0 110
- - -----------------------------------------------------------------------------------------------------------------------------------
Balance at September 30, 1995 $10 $9,497 $5,792 ($77) ($713) $0 $14,509
- - -----------------------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
CENTER BANKS INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
<S> <C> <C>
Nine months ended September 30,
1995 1994
- - ----------------------------------------------------------------------------------------------------------------------------
(In Thousands)
Cash flows from operating activities:
Interest received $11,660 $9,458
Fees and service charges received 717 836
Interest paid (6,385) (4,514)
Cash paid to employees and suppliers (4,651) (4,454)
Income taxes paid (266) (465)
Originations of loans held for sale (935) (2,576)
Proceeds from sales of loans held for sale 876 2,900
Proceeds from sale of real estate owned 130 417
- - ----------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 1,146 1,602
- - ----------------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Proceeds from maturities and redemptions of securities 7,538 1,590
Proceeds from sales of securities 0 3,053
Purchase of Federal Home Loan Bank stock (103) (140)
Purchase of securities (10,959) (3,538)
Principal collected on asset-backed securities 916 1,876
Net increase in loans made to customers (4,810) (14,928)
Purchase of property and equipment, net (797) (389)
- - ----------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (8,215) (12,476)
- - ----------------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Net increase in time certificates 13,925 5,275
Net increase (decrease) in other deposits (7,081) 702
Increase in overnight borrowings 433 4,775
Net decrease in long-term borrowings (15) (60)
Proceeds from issuance of stock pursuant to stock plan's 22 4
Dividends paid (129) (74)
- - ----------------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 7,155 10,622
- - ----------------------------------------------------------------------------------------------------------------------------
Net increase in cash and cash equivalents 86 (252)
Reclassification of balance due from Nationar to other assets (1,057) 0
Cash and cash equivalents at beginning of period 3,343 1,120
- - ----------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $2,372 $868
- - ----------------------------------------------------------------------------------------------------------------------------
Reconciliation of net income to net cash provided by operating activities:
Net income $715 $769
Adjustments:
Depreciation and amortization 417 272
Provision for loan losses 210 270
Provision for losses on real estate owned 240 140
Decrease (increase) in loans held for sale, net (68) 324
Net amortization (accretion) of deferred expenses and premiums (48) 31
Proceeds from sale of real estate owned 130 417
Net loss (gain) on sales and redemptions of securities 99 (7)
Net gain on sales of property and equipment (11) (1)
Decrease (increase) in interest receivable (157) 18
Increase in other assets (202) (379)
Decrease in accrued expenses (28) (93)
Other, net (151) (159)
- - ----------------------------------------------------------------------------------------------------------------------------
Total adjustments 431 833
- - ----------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities $1,146 $1,602
- - ----------------------------------------------------------------------------------------------------------------------------
Supplemental schedule of noncash investing activities:
Transfer of securities available for sale to securities held to maturity $8,334 $0
Mortgage loans foreclosed and transferred to real estate owned $358 $92
- - ----------------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
Center Banks Incorporated
Notes to Consolidated Financial Statements
1. Principles of Consolidation
---------------------------
The consolidated financial statements include the accounts of Center
Banks Incorporated (the "Company") and its wholly-owned subsidiary,
Skaneateles Savings Bank (the "Bank"). All significant intercompany
balances and transactions are eliminated in consolidation.
The data in the consolidated balance sheet for December 31, 1994 was
derived from the Company's 1994 Annual Report to Stockholders. That
data, along with the other interim financial information presented in
the consolidated balance sheets, statements of income, statements of
stockholders' equity and cash flows should be read in conjunction with
the consolidated financial statements, including the notes thereto,
contained in the 1994 Annual Report to Stockholders.
2. Capital Stock
-------------
The Company has 500,000 shares of preferred stock, par value $.01 per
share, authorized; none have been issued. The Company has 2,500,000
shares of common stock, par value $.01 per share, authorized; 1,032,779
shares are issued as of November 9, 1995, of which 102,700 shares are
held as treasury stock.
3. Securities
----------
The Company has adopted the provisions of Statement of Financial
Accounting Standards No. 115, Accounting for Certain Investments in
Debt and Equity Securities (Statement 115). Under Statement 115, debt
and equity securities are classified in one of three categories:
trading, available for sale, or held to maturity. Trading securities
are bought and held principally for the purpose of selling them in the
near term. Held to maturity securities are those debt securities that
the Company has the ability and intent to hold until maturity. All
other securities not included in trading or held to maturity are
classified as available-for-sale. The Company currently classifies all
securities either as held to maturity or available for sale.
Available-for-sale securities are recorded at fair value.
Held-to-maturity securities are recorded at amortized cost, adjusted
for the amortization or accretion of premiums or discounts. Unrealized
holding gains and losses, net of the related tax effect, on
available-for-sale securities are excluded from earnings and are
reported as a separate component of stockholders' equity until
realized. Transfers of securities between categories are recorded at
fair value at the date of transfer. Unrealized holding gains or losses
associated with transfers of securities from held-to-maturity to
available-for-sale are recorded as a separate component of
stockholders' equity. The unrealized holding gains or losses included
in the separate component of equity for securities transferred from
available-for-sale to held-for-maturity are maintained and amortized
into earnings over the remaining life of the security as an adjustment
to yield in a manner consistent with the amortization or accretion of
premium or discount on the associated security.
A decline in the market value of any available-for-sale or
held-to-maturity security below cost that is deemed other than
temporary is charged to earnings resulting in the establishment of a
new cost basis for the security.
Premiums and discounts are amortized or accreted over the life of the
related security as an adjustment of yield using the effective interest
method. Interest income is recognized when earned. Purchases and sales
are recorded on a trade date basis with settlement occurring shortly
thereafter. Realized gains and losses on securities sold are derived
using the specific identification method for determining the cost of
securities sold.
On January 1, 1995 the Company reclassified its entire portfolio of
mortgage-backed securities from available for sale to held to maturity,
at the securities' fair value of $8.3 million. The change reflects
management's intention to hold the securities to maturity and will
shield equity from future volatility in the fair value of the
securities due to changes in market rates.
<PAGE>
4. Loans Receivable and Loan Fees
------------------------------
Loans receivable are reported at the principal amount outstanding, net
of unearned discount, net deferred fees and an allowance for loan
losses. Accrual of interest is discontinued on a loan when management
believes, after considering economic and business conditions and
collection efforts, that the borrower's financial condition precludes
accrual. Generally, interest income is not recognized on loans which
are delinquent over 90 days.
Net loan fees and costs are capitalized as an adjustment of loan
principal and amortized over the life of the related loan as an
adjustment of yield using the interest method.
The Financial Accounting Standards Board issued Statement 114
Accounting by Creditors for Impairment of a Loan as amended by
Statement 118, Accounting by Creditors for Impairment of a Loan -
Income and Disclosure. These statements prescribe recognition criteria
for loan impairment, generally related to commercial type loans, and
measurement methods for certain impaired loans and all loans whose
terms are modified in troubled debt restructuring subsequent to the
adoption of these statements. A loan is considered impaired when it is
probable that the borrower will be unable to repay the loan according
to the original contractual terms of the loan agreement.
As of January 1, 1995, the Company has adopted the provisions of SFAS
No. 114 and SFAS No. 118 and has provided the required disclosures. The
effect of adoption was not material to the consolidated financial
statements. As of January 1, 1995, all of the Company's in-substance
foreclosed assets were reclassified into impaired loan status as
required by SFAS No. 114. For all prior periods presented, all amounts
related to in-substance foreclosures have also been reclassified. These
reclassifications did not materially impact the Company's consolidated
financial condition or results of operations.
As a result of the adoption of SFAS No. 114, the allowance for possible
loan losses related to impaired loans that are identified for
evaluation in accordance with SFAS No. 114 is based on the present
value of expected cash flows discounted at the loan's initial effective
interest rate, except that as a practical expedient, impairment may be
measured at the loan's observable market price, or the fair value of
the collateral for certain loans where repayment of the loan is
expected to be provided solely by the underlying collateral (collateral
dependent loans). The Company considers estimated costs to sell, on a
discounted basis, when determining the fair value of collateral in the
measurement of impairment if those costs are expected to reduce the
cash flows available to repay or otherwise satisfy the loans. Prior to
the adoption of SFAS No. 114 and 118, the allowance for possible loan
losses related to these loans was based on estimated undiscounted cash
flows or the fair value of the collateral, less estimated costs to sell
for collateral dependent loans.
Prior to the adoption of SFAS No. 114, other real estate owned included
both formally foreclosed and in-substance foreclosed real properties.
In accordance with SFAS No. 114, a loan is classified as an
in-substance foreclosure when the Company has taken possession of the
collateral regardless of whether formal foreclosure proceedings have
taken place. Prior to the adoption of SFAS No. 114 and SFAS No. 118,
in-substance foreclosed properties included those properties where the
borrower had little or no remaining equity in the property considering
its fair value; where repayment was only expected to come from the
operation or sale of the property; and where the borrower had
effectively abandoned control of the property or it was doubtful that
the borrower would be able to rebuild equity in the property.
Cash receipts on impaired loans are generally recorded as principal or
interest according to the terms of the loan agreement.
At September 30, 1995, the recorded investment in loans that are
considered to be impaired under SFAS No. 114 totaled $3,837,000.
Included in this amount is $3,318,000 of impaired loans for which the
related allowance for credit losses is $1,137,000. In addition,
included in the total impaired loans at September 30, 1995 is $519,000
of impaired loans that do not have an allowance for credit losses
determined in accordance with SFAS No. 114. The average recorded
investment in impaired loans during the three months and nine months
ended September 30, 1995 was approximately $3,951,000 and $3,810,000,
respectively.
<PAGE>
For the three months and nine months ended September 30, 1995 the
Company recognized interest income of $83,000 and $208,000,
respectively on those impaired loans.
5. Per Common Share Data
---------------------
Per common share data is computed based upon the weighted average
number of shares.
6. Reclassifications
-----------------
Certain reclassifications have been made to prior period amounts for
consistency in reporting.
7. Opinion of Management
---------------------
The interim financial statements of the Company included in this Report
reflect all adjustments which are, in the opinion of management,
necessary to a fair statement of the financial condition of the
Company. All adjustments made to the interim financial statements were
of a normal recurring nature.
Item 2. Management's Discussion and Analysis of Financial Condition
-----------------------------------------------------------
& Results of Operations
-----------------------
General
- - -------
The Company is a bank holding company registered under the Bank Holding Company
Act of 1956. The results of the Company are largely dependent upon the results
of the Bank, its sole subsidiary.
Changes in Financial Condition from
-----------------------------------
December 31, 1994 to September 30, 1995
---------------------------------------
Assets
- - ------
Total assets of the Company were $206.9 million at September 30, 1995, an
increase of $8.0 million or 4.0% from December 31, 1994. Net loans receivable
increased $4.4 million, investment securities were up $2.7 million and other
assets increased $1.2 million.
Loans
- - -----
Net loans receivable increased $4.4 million during the first nine months of 1995
to $168.3 million. Total loan originations were $21.3 million for the nine
months ended September 30, 1995, of which 59.2% were residential mortgages, 22%
were commercial loans and mortgages and 18.8% were consumer loans. Loan
originations dropped 34.1% compared with the year ago period due primarily to
the sharply rising rate environment in 1994, which slowed housing starts and
home sales late in 1994 and into 1995. Mortgage refinancings are also down
substantially, following record levels of refinancings in 1993 and early 1994.
As a result, residential loan originations in the first nine months of 1995
totaled $12.6 million, down 50% from the year earlier period. Lending activity
recovered in the second and third quarters of 1995 in response to a decrease in
interest rates during this period. Mortgage and commercial loan applications in
process totaled $6.9 million at September 30, 1995, up from $3.1 million at
March 31, 1995.
The allowance for loan losses was $3,004,000 at September 30, 1995, which is a
$36,000 decrease from the balance at December 31, 1994. The provision for loan
losses was $30,000 and $210,000 for the three months and nine months ended
September 30, 1995, respectively, compared with $90,000 and $270,000 for the
same periods in 1994. The Company reduced its provision for loan losses
reflecting the continuing improvement in the quality of its loan portfolio.
<PAGE>
<TABLE>
The following table sets forth the activity in the allowance for loan losses for the periods indicated:
<S> <C> <C> <C> <C> <C>
September 30, December 31,
---------------------- ---------------------------------------------
1995 1994 1994 1993 1992
---------- ---------- ------------- ---------------- ----------
(In Thousands)
Beginning Balance $3,040 $2,938 $2,938 $2,847 $4,019
Provision 210 270 360 600 455
Charge-offs
- - -----------
Residential mortgages 0 (18) (18) 0 0
Commercial mortgages (217) 0 0 (237) (522)
Business (127) (263) (331) (428) (1,145)
Other consumer (9) (17) (17) (64) (30)
- - -------------------------------------------------------------------------------------------------------------------
(353) (298) (366) (729) (1,697)
- - -------------------------------------------------------------------------------------------------------------------
Recoveries
- - ----------
Commercial mortgages 11 0 0 4 0
Business 92 39 96 203 60
Other consumer 4 9 12 13 10
- - ------------------------------------------------------------------------------------------------------------------
107 48 108 220 70
- - ------------------------------------------------------------------------------------------------------------------
Net Charge-offs (246) (250) (258) (509) (1,627)
- - -------------------------------------------------------------------------------------------------------------------
Ending Balance $3,004 $2,958 $3,040 $2,938 $2,847
- - ------------------------------------------------------------------------------------------------------------------
Ratio of net charge-offs
to average loans outstanding 0.15% 0.16% 0.17% 0.41% 1.43%
- - ------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
The following table sets forth information with respect to loans delinquent 90
days or more, non-accrual loans, restructured loans, and real estate owned as of
the dates indicated.
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
September 30, December 31,
------------- -------------------------------------------------------
1995 1994 1993 1992 1991 1990
------------------------------------------------------------------------
(In Thousands)
Nonaccruing loans
Residential real estate mortgages $298 $317 $291 $582 $686 $352
Commercial (1) 1,574 2,894 2,716 2,135 4,271 3,334
Consumer 53 40 10 63 22 216
- - -------------------------------------------------------------------------------------------------------------------------
Total $1,925 $3,251 $3,017 $2,780 $4,979 $3,902
- - -------------------------------------------------------------------------------------------------------------------------
Other loans past due 90 days or more
and still accruing:
Consumer (2) $9 $0 $12 $16 $25 $40
Commercial (1) 322 447 0 0 0 0
Lease loans 0 0 0 0 52 0
- - -------------------------------------------------------------------------------------------------------------------------
Total $331 $447 $12 $16 $77 $40
- - -------------------------------------------------------------------------------------------------------------------------
Restructured loans, not included above 1,125 932 1,006 901 114 392
- - -------------------------------------------------------------------------------------------------------------------------
Real estate owned 975 984 1,572 1,343 1,671 1,617
- - -------------------------------------------------------------------------------------------------------------------------
Total assets containing specific risk elements $4,356 $5,614 $5,607 $5,040 $6,841 $5,951
- - -------------------------------------------------------------------------------------------------------------------------
Ratio of total loans past due
90 days or more to gross loans 1.32% 2.05% 1.95% 2.27% 4.36% 2.66%
- - -------------------------------------------------------------------------------------------------------------------------
Ratio of assets containing specific
risk elements to total assets 2.11% 2.82% 3.21% 2.98% 3.74% 2.76%
- - -------------------------------------------------------------------------------------------------------------------------
(1) Includes commercial real estate loans.
(2) Consists primarily of Guaranteed Student
Loans.
</TABLE>
Nonperforming loans were $1,925,000 or 1.12% of total loans at September 30,
1995, compared with $3,251,000 or 1.95% at December 31, 1994. Nonperforming
commercial loans, which accounted for 81.8% of nonperforming loans at September
30, 1995, decreased by $1.0 million or 39.8%, primarily due to the restructuring
of one commercial loan in February 1995. The restructured terms of this loan
call for interest only payments monthly at 2% over the Bank's prime rate, with
the full principal balance due in December 1995. The Company is currently
negotiating a repayment plan and expects this loan will be renewed and its
maturity date extended. This loan is considered to be impaired at September 30,
1995 and an allowance for this loan has been established pursuant to SFAS No.
114. The allowance for loan losses covered 156% of nonperforming loans at
September 30, 1995, compared with coverage of 94% at December 31 1994.
Potential problem loans at September 30, 1995 amounted to $3,057,000. "Potential
problem loans" are defined as loans which are not included with past due and
non-accrual loans discussed above, but about which management, through normal
internal credit review procedures, has information about possible credit
problems which may result in the borrowers inability to comply with the present
loan repayment terms. Of the $3,057,000 in potential problem loans, loans
totaling $2,789,000 are considered impaired under SFAS No. 114. There have been
no loans classified for regulatory purposes as loss, doubtful, or substandard
that are not included above or which caused management to have serious doubts as
to the ability of the borrower to comply with repayment terms. In addition,
there were no material commitments to lend additional funds to borrowers whose
loans were classified as non-performing.
<PAGE>
Real Estate Owned
- - -----------------
Real estate owned, net (REO) totaled $975,000 at September 30, 1995 and is
comprised primarily of non-residential real estate. Two properties totaling
$544,000 are under contract to sell and are expected to close by November 30,
1995.
The Company maintains an allowance for possible losses on REO, which was
$49,000 at September 30, 1995. Provisions of $150,000 and $240,000,
respectively, were recorded in the three months and nine months ended September
30, 1995, compared with $45,000 and $140,000 for the same periods in 1994.
Writedowns of $229,000 were recorded in the third quarter of 1995 to better
position the Company to liquidate the properties in a weak real estate market.
All the Company's properties have been written down during the third quarter to
their currently estimated net realizable value. Future writedowns may be
necessary if the value of these properties decline due to factors outside the
control of the Company, such as adverse market conditions or a lack of buyer
interest.
The activity in the allowance for losses on real estate owned for the nine
months ended September 30 is summarized as follows:
<TABLE>
<S> <C> <C>
- - ---------------------------------------------------------------------------------------------
1995 1994
- - ---------------------------------------------------------------------------------------------
(In Thousands)
Balance at January 1 $38 $253
Provision charged to operations 240 140
Writedowns (229) (365)
- - ---------------------------------------------------------------------------------------------
Balance at September 30 $49 $28
- - ---------------------------------------------------------------------------------------------
</TABLE>
Other Assets
- - ------------
Other assets totaled $2.0 million at September 30, 1995, an increase of $1.2
million or 162% from December 31, 1994. The Company reclassified $1.7 million of
cash balances due from Nationar to other assets at June 30, 1995. Nationar,
which provided item processing and check clearing services for the Bank, was
seized by the New York State Banking Department (the Department) on February 6,
1995 due to liquidity problems. The Department froze all assets of Nationar and
a liquidation of Nationar is in process. In July 1995 the Department released to
the Bank $618,000 of its funds on deposit with Nationar. Under the provisions of
the Banking Law of the State of New York, there may be certain preferences that
might affect the percentage recovery of any particular institution. Management
is taking all steps necessary to recover the amounts owed the Bank by Nationar.
In July, 1995 the Bank filed a claim on the estate of Nationar for the remaining
balance owed the Bank of $1.1 million. The seizure of Nationar has not had a
significant impact on the Bank's liquidity or its day-to-day operations.
Deposits
- - --------
Total deposits (including advance payments by borrowers for property taxes and
insurance) increased $6.8 million or 4.0% in the first 9 months of 1995, to
reach $177.5 million at September 30, 1995. During the third quarter, deposits
decreased $3.0 million, reversing increases in the first two quarters of 1995
totaling $9.8 million. Disbursements of escrowed funds for payments of property
taxes and insurance accounted for $1 million of the decrease during the third
quarter. Interest bearing accounts decreased $3.4 million during the third
quarter due primarily to an overall decrease in market interest rates. During
the first two quarters of 1995 while market interest rates were rising, the
Company experienced a $9.1 million increase in interest bearing deposits.
The Company's mix of deposits was 56.2% in time accounts and 43.2% in
transaction accounts (savings, demand, money market accounts) at September 30,
1995. This is a change in deposit mix from the end of 1994 when 48.3% were in
time accounts and 50.3% were in transaction accounts. Transaction accounts
decreased $6.0 million in the first nine months of 1995, mostly in the first
half of the year, due in large part to the movement of rate sensitive savings
and money market accounts to higher yielding time accounts and other alternative
investments. This movement of funds has slowed in the third quarter due in part
to lower interest rates.
The Company is currently developing a marketing program, which will include new
product offerings, that will be designed to attract and retain transaction
accounts, especially consumer demand accounts. Increased transaction accounts
will provide the Company with a low cost, stable source of funds for future
asset growth. Transaction accounts are historically more stable and less
sensitive to changes in interest rates than time deposits and provide the
Company a greater opportunity to cross-sell other products and services, such as
direct deposit, ATM cards, and consumer loans. The Company expects to implement
this program late in the first quarter of 1996.
Stockholders' Equity
- - --------------------
Stockholders' equity at September 30, 1995 was $14.5 million, or $15.63 per
share, compared with $13.8 million or $14.90 per share at December 31, 1994. At
September 30, 1995, the Company's leverage capital ratio was 7.04% and its
risk-based capital ratio was 12.41%. Both capital measurements were in excess of
regulatory requirements.
The Company declared a dividend of $.05 per share during the third quarter,
payable on November 14, 1995 to shareholders of record on October 31.
Comparison of the Results of Operations
---------------------------------------
General
- - -------
Net income was $218,000 or $.23 per share for the third quarter of 1995,
compared with $264,000 or $.29 per share for the same period in 1994. Net income
was $715,000 or $.77 per share and $769,000 or $.83 per share for the nine
months ended September 30, 1995 and 1994, respectively. The third quarter
results for 1995 include charges for losses on foreclosed real estate totaling
$150,000 and a one-time charge of $83,000 to write off the Bank's investment in
Nationar, a correspondent bank that was seized by the New York State Banking
Department earlier this year. Partially offsetting these charges was a $109,000
one-time refund from the Federal Deposit Insurance Corporation (FDIC) resulting
from the re-capitalization of the Bank Insurance Fund. The Bank's FDIC insurance
assessment was reduced to $.04 per $100 of insured deposits, from $.23 per $100
retroactive to June 1, 1995. Based on the Bank's total deposits at September 30,
1995, annual savings from this lower assessment will be approximately $332,000
before taxes.
Net Interest Income
- - -------------------
Net interest income is affected by the difference between the yield earned on
interest earning assets and rates paid on interest bearing deposits and
borrowings. The relative amounts of interest earning assets, interest bearing
deposits, and borrowings also impact net interest income levels.
<PAGE>
The following table sets forth, for the nine months ended September 30,
information regarding (i) the total dollar amount of interest income from
interest-earning assets and the resulting average yields; (ii) the total dollar
amount of interest expense on interest-bearing liabilities and the resultant
average cost; (iii) net interest income; (iv) interest rate spread; (v) net
interest-earning assets; (vi) net yield on interest-earning assets; and (vii)
ratio of interest-earning assets to interest-bearing liabilities. No tax
equivalent adjustments were made.
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
1995 1994
--------------------------------- ---------------------------------
Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate
--------------------------------- ---------------------------------
(Dollars In Thousands)
Interest-earning assets:
Mortgage loans $141,215 $8,364 7.89% $122,057 $6,513 7.12%
Other loans 27,564 2,120 10.28 28,513 1,792 8.40
- - -------------------------------------------------------------------------------------------------------------
Total loans 168,779 10,484 6.21 150,570 8,305 5.52
- - -------------------------------------------------------------------------------------------------------------
Securities 24,474 1,234 6.74 23,013 1,105 6.42
Federal funds sold 3,094 141 6.09 0 0
- - -------------------------------------------------------------------------------------------------------------
Total interest-earning assets 196,348 11,859 8.08 173,583 9,410 7.25
- - -------------------------------------------------------------------------------------------------------------
Non-interest earning assets 10,095 0 6,239 0
- - -------------------------------------------------------------------------------------------------------------
Total assets $206,443 $11,859 $179,822 $9,410
- - -------------------------------------------------------------------------------------------------------------
Interest-bearing liabilities:
Deposits:
Savings and club accounts $33,656 $706 2.81% $37,756 $725 2.57%
Time certificates 96,896 4,112 5.67 68,662 2,445 4.76
Money market accounts 23,535 585 3.32 28,272 585 2.77
Now and escrow accounts 14,525 247 2.27 12,312 201 2.18
- - -------------------------------------------------------------------------------------------------------------
Total interest-bearing deposits 168,613 5,650 3.35 147,001 3,956 2.69
- - -------------------------------------------------------------------------------------------------------------
Borrowings 14,711 735 6.68 12,807 590 6.16
Total interest-bearing 183,324 6,385 4.66 159,808 4,546 3.80
liabilities
Non-interest-bearing deposits 8,116 0 5,884 0
Non-interest-bearing liabilities 590 0 728 0
- - -------------------------------------------------------------------------------------------------------------
Total liabilities 192,030 6,385 166,420 4,546
Stockholders' equity 14,413 0 13,402 0
- - -------------------------------------------------------------------------------------------------------------
Total liabilities and
stockholders' equity $206,443 $6,385 $179,822 $4,546
- - -------------------------------------------------------------------------------------------------------------
Net interest income/
interest rate spread $5,474 3.42% $4,864 3.44%
- - -------------------------------------------------------------------------------------------------------------
Net interest-earning assets/
net yield on interest-earning
assets $13,024 3.72% $13,775 3.74%
- - -------------------------------------------------------------------------------------------------------------
Ratio of interest-earning assets
to interest-bearing liabilities 1.07% 1.09%
- - -------------------------------------------------------------------------------------------------------------
</TABLE>
Net interest income was $1,807,000 and $5,474,000 for the three months and nine
months ended September 30, 1995, respectively, compared with $1,676,000 and
$4,864,000 for the same periods in 1994. The increase resulted primarily from
loan growth, partially offset by lower net interest margin. Total loans
outstanding at the end of the third quarter were $171.2 million, up 8.7% from
$157.5 million as of September 30, 1994. The Company's net interest margin was
3.62% in the third quarter, down from 3.82% in the year ago quarter. Net
interest margin was 3.72% for the nine months ended September 30, 1995, down
slightly from 3.74% in the year ago period. Much of the contraction in the
Company's net interest margin over the past twelve months occurred during the
second quarter of 1995, with the margin shrinking by 22 basis points. A higher
costs of funds due to rising rates in the first quarter of 1995 was exacerbated
by a drop in the prime rate in the second quarter, which is the index used for
many adjustable commercial and consumer loans. Relatively stable interest rates
during the third quarter helped to limit the reduction in margin during the
quarter to only 4 basis points.
<PAGE>
Other Operating Income
- - ----------------------
Total other operating income was $105,000 and $397,000 for the three months and
nine months ended September 30, 1995, respectively, compared with $144,000 and
$385,000 for the same periods in 1994. Writeoffs of the Bank's investment in
Nationar reduced other operating income by $83,000 and $99,000, respectively in
the three months and nine months ended September 30, 1995. Excluding these
writeoffs, other operating income increased 30.6% and 28.8%, respectively,
resulting primarily from fee income generated by the Bank's new branches.
Other Operating Expenses
- - ------------------------
Total other operating expenses were $1.6 million and $4.7 million for the three
months and nine months ended September 30, 1995, respectively, compared with
$1.4 million and $4.0 million for the same periods in 1994. Most of the increase
is due to the cost of staffing and operating the Bank's four new branches, and
to higher depreciation expense on new computer equipment purchased in 1994. Also
contributing to the increase in third quarter expenses is a $49,000 increase in
real estate owned expense.
Income Taxes
- - ------------
Tax expense of $71,000 and $242,000 was recorded for the three months and nine
months ended September 30, 1995 compared with $49,000 and $165,000 for the same
periods in 1994.
PART II. OTHER INFORMATION
- - ---------------------------
Item 1. Legal Proceedings
------- Not applicable
Item 2. Changes in Securities
------- Not applicable
Item 3. Defaults Upon Senior Securities
------- Not applicable
Item 4. Submission of Matters to a Vote of Security Holders
------- Not applicable
Item 5. Other Information
------- Not applicable
Item 6. Exhibits and Reports on Form 8-K
------- a. Not applicable
b. Not applicable
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CENTER BANKS INCORPORATED
-------------------------
(Registrant)
By: /s/John P. Driscoll Date: November 10, 1995
---------------- -----------------
John P. Driscoll
Chairman, President and Chief
Executive Officer
By: /s/J. Daniel Mohr Date: November 10, 1995
-------------- -----------------
J. Daniel Mohr
Chief Financial Officer
and Treasurer
