<PAGE> 1
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 June 30, 1996
-------------
Commission File Number 0-18513
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CENTER BANKS INCORPORATED
-------------------------
(Exact name of registrant as specified in its charter)
Delaware 16-1368745
-------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
33 E. Genesee St., Skaneateles, New York, 13152
-----------------------------------------------
(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 August 9, 1996
- ------------------------------------------------------------------------
Common Stock (par value $.01 per share) 945,697 Shares
<PAGE> 2
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION Page
- ----------------------------- ----
<S> <C> <C>
Item 1. Consolidated Financial Statements
-------
1. Consolidated Balance Sheets 3
2. Consolidated Statements of Income 4
3. Consolidated Statements of Stockholders' Equity 5
4. Consolidated Statements of Cash Flows 6
5. Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial Condition
------- and Results of Operations 9
PART II. OTHER INFORMATION
- ---------------------------
Item 1. Legal Proceedings 14
-------
Item 2. Changes in Securities 14
-------
Item 3. Defaults Upon Senior Securities 14
-------
Item 4. Submission of Matters to a Vote of Security Holders 14
-------
Item 5. Other Information 14
-------
Item 6. Exhibits and Reports on Form 8-K 14
-------
SIGNATURES 15
- ----------
</TABLE>
2
<PAGE> 3
CENTER BANKS INCORPORATED
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
ASSETS 1996 1995
- -------------------------------------------------------------------------------------
(In Thousands, Except Share Data)
<S> <C> <C>
Cash and due from banks $ 4,773 5,889
Federal funds sold -- 3,400
Securities available for sale 9,096 8,653
Securities held to maturity, fair value of
$14,571 in 1996 and $13,117 in 1995 14,416 12,804
Federal Home Loan Bank stock, at cost 1,410 1,303
Mortgage loans receivable 151,436 143,677
Other loans receivable 31,186 27,888
- -------------------------------------------------------------------------------------
182,622 171,565
Less: Net deferred costs (149) (69)
Allowance for loan losses 1,781 2,667
- -------------------------------------------------------------------------------------
Loans receivable, net 180,990 168,967
Premises and equipment, net 5,803 5,885
Real estate owned, net 202 397
Accrued interest receivable 1,325 1,255
Other assets 2,358 2,094
- -------------------------------------------------------------------------------------
$ 220,373 210,647
=====================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
- -------------------------------------------------------------------------------------
Liabilities:
Interest bearing deposits $ 171,902 167,182
Demand deposits 10,851 9,927
- -------------------------------------------------------------------------------------
Total deposits 182,753 177,109
Advance payments by borrowers for property
taxes and insurance 1,809 2,010
Borrowings 16,462 14,386
Accrued expenses and other liabilities 3,850 2,203
- -------------------------------------------------------------------------------------
Total liabilities 204,874 195,708
- -------------------------------------------------------------------------------------
Stockholders' equity:
Preferred stock, par value $.01 per share,
authorized 500,000 shares, none issued -- --
Common stock, par value $.01 per share,
authorized 2,500,000 shares,
1,046,963 and 1,033,619 shares issued
in 1996 and 1995, respectively 10 10
Additional paid-in capital 9,651 9,526
Retained earnings 6,625 6,083
Net unrealized gain (loss) on securities, net of taxes (74) 33
Treasury stock, at cost (102,700 shares) (713) (713)
- -------------------------------------------------------------------------------------
Total stockholders' equity 15,499 14,939
- -------------------------------------------------------------------------------------
$ 220,373 210,647
=====================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE> 4
CENTER BANKS INCORPORATED
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
1996 1995 1996 1995
- ----------------------------------------------------------------------------------------------------------
(In Thousands, Except Per Share Data)
<S> <C> <C> <C> <C>
Interest income:
Mortgage loans $ 2,931 $ 2,814 $ 5,794 $ 5,526
Other loans 651 706 1,331 1,410
Securities 385 420 723 793
Federal funds sold 78 71 169 81
- ----------------------------------------------------------------------------------------------------------
Total interest income 4,045 4,011 8,017 7,810
- ----------------------------------------------------------------------------------------------------------
Interest expense:
Deposits 1,925 1,963 3,863 3,646
Borrowings 245 237 480 498
- ----------------------------------------------------------------------------------------------------------
Total interest expense 2,170 2,200 4,343 4,144
- ----------------------------------------------------------------------------------------------------------
Net interest income 1,875 1,811 3,674 3,666
Provision for loan losses 25 90 50 180
- ----------------------------------------------------------------------------------------------------------
Net interest income after provision
for loan losses 1,850 1,721 3,624 3,486
- ----------------------------------------------------------------------------------------------------------
Other operating income:
Net gain (loss) on security transactions -- -- 77 (16)
Net gain on sale of loans 11 5 18 7
Other income 220 147 401 301
- ----------------------------------------------------------------------------------------------------------
Total other operating income 231 152 496 292
- ----------------------------------------------------------------------------------------------------------
2,081 1,873 4,120 3,778
- ----------------------------------------------------------------------------------------------------------
Other operating expenses:
Salaries and employee benefits 676 704 1,409 1,354
Building, occupancy and equipment 286 265 575 514
Real estate owned, net (2) 53 0 113
Other 843 546 1,439 1,130
- ----------------------------------------------------------------------------------------------------------
Total other operating expenses 1,803 1,568 3,423 3,111
- ----------------------------------------------------------------------------------------------------------
Income before income taxes 278 305 697 667
Income tax 16 76 40 170
- ----------------------------------------------------------------------------------------------------------
Net income $ 262 $ 229 $ 657 $ 497
==========================================================================================================
Net income per common share $ 0.28 $ 0.24 $ 0.70 $ 0.53
==========================================================================================================
Weighted average common shares 943,280 936,922 937,544 936,763
==========================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE> 5
CENTER BANKS INCORPORATED
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
NET
ADDITIONAL UNREALIZED
COMMON PAID-IN- RETAINED GAIN (LOSS) ON TREASURY
STOCK CAPITAL EARNINGS SECURITIES STOCK TOTAL
- ------------------------------------------------------------------------------------------------------------------
(In Thousands)
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1994 $ 10 9,475 5,206 (187) (713) 13,791
Net income -- -- 497 -- -- 497
Sale of 755 shares under option -- 6 -- -- -- 6
Cash dividend declared on
Common stock ($.09 per share) -- -- (83) -- -- (83)
Change in net unrealized
gain on securities, net of
tax effect of $77,000 -- -- -- 107 -- 107
- ------------------------------------------------------------------------------------------------------------------
Balance at June 30, 1995 $ 10 9,481 5,620 (80) (713) 14,318
==================================================================================================================
- ------------------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------------
Balance at December 31, 1995 $ 10 9,526 6,083 33 (713) 14,939
Net income -- -- 657 -- -- 657
Sale of 11,500 shares under option -- 99 -- -- -- 99
Issuance of 1,844 shares of stock under
1995 Non-employee Director's Stock Plan -- 26 -- -- -- 26
Cash dividend declared on
Common stock ($.12 per share) -- -- (112) -- -- (112)
Change in net unrealized
gain on securities, net of
taxes of $72,000 -- -- -- (110) -- (110)
- ------------------------------------------------------------------------------------------------------------------
Balance at June 30, 1996 $ 10 9,651 6,628 (77) (713) 15,499
==================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE> 6
CENTER BANKS INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
1996 1995
- ------------------------------------------------------------------------------------------------------
(In Thousands)
<S> <C> <C>
OPERATING ACTIVITIES
Net Income $ 657 497
Adjustments to reconcile net income to net cash provided by operating activities
Provision for loan losses 50 180
Provision for losses on real estate owned -- 90
Depreciation and amortization 282 274
Mortgage loans originated for sale (2,254) (435)
Proceeds from sale of mortgage loans originated for sale 2,585 435
Net (gain) loss on security transactions (77) 16
Net increase in interest receivable (70) (51)
Net increase (decrease) in other liabilities 1,718 (1,915)
Other, net (422) (299)
- ------------------------------------------------------------------------------------------------------
Total adjustments 1,812 (1,705)
- ------------------------------------------------------------------------------------------------------
Net cash provided by (used in) operating activities 2,469 (1,208)
INVESTING ACTIVITIES
Proceeds from maturities of securities available for sale -- 5,023
Proceeds from sale of securities available for sale 2,462 --
Proceeds from maturities of securities held to maturity 2,125 515
Purchase of securities held to maturity (4,135) (7,982)
Purchase of securities available for sale (3,096) --
Principal collected on asset-backed securities 556 576
Purchase of Federal Home Loan Bank stock (107) (103)
Net increase in loans made to customers (12,318) (3,344)
Proceeds from sale of real estate owned 196 60
Purchase of property and equipment, net (200) (768)
- ------------------------------------------------------------------------------------------------------
Net cash used in investing activities (14,517) (6,023)
FINANCING ACTIVITIES:
Net increase (decrease) in time certificates (324) 15,350
Net increase (decrease) in other deposits 5,767 (5,533)
Increase in overnight borrowings 2,096 94
Net decrease in long-term borrowings (20) (15)
Proceeds from issuance of stock pursuant to stock plans 125 6
Dividends paid (112) (83)
- ------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 7,532 9,819
- ------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents (4,516) 2,588
Reclassification of balance due from Nationar to other assets -- (1,681)
Cash and cash equivalents at beginning of period 9,289 6,325
- ------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 4,773 7,232
======================================================================================================
Interest paid $ 4,347 4,147
======================================================================================================
Income taxes paid $ 86 91
======================================================================================================
Supplemental schedule of noncash investing activities:
Transfer of securities available for sale to securities held to maturity $ -- 8,195
Mortgage loans foreclosed and transferred to real estate owned $ -- 275
======================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
6
<PAGE> 7
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, 1995 was
derived from the Company's 1995 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 1995 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; 1,048,397
shares are issued as of August 9, 1996, of which 102,700 shares are
held as treasury stock.
3. Securities
----------
The Company classifies its debt securities as either available-for-sale
or held-to-maturity. Equity securities are classified as
available-for-sale. 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 as held-to-maturity are
classified as 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
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 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 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 fair 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.
4. Loans Receivable
----------------
Loans receivable are reported at the principal amount outstanding, net
of 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,
and income is subsequently recognized only to the extent that cash
payments are received until, in management's judgment, the borrower's
ability to make periodic interest and principal payments is back to
normal, in which case the loan is returned to accrual status.
7
<PAGE> 8
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 Bank originates some mortgage loans with the intent to sell. These
loans are carried at the lower of aggregate cost or fair value. Gains
or losses on sales of mortgages are recorded equal to the difference
between sales proceeds and the carrying value of the loans. The Bank
typically retains the servicing rights to mortgages sold.
5. Allowance for Loan Losses
-------------------------
The allowance for loan losses consists of the provision charged to
operations based upon past loan loss experience, management's
evaluation of the loan portfolio under current economic conditions and
such other factors that require current recognition in estimating loan
losses. Loan losses and recoveries of loans previously written-off are
charged or credited to the allowance as incurred or realized,
respectively.
Management believes that the allowance for loan losses is adequate.
Management uses presently available information to recognize losses on
loans; however, future additions to the allowance 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 loan losses and may
require the Company to recognize additions to the allowance based on
their judgment of information available to them at the time of their
examination.
Impaired loans, which included troubled debt restructured loans, were
$2,748,000 and $3,451,000 at June 30, 1996 and 1995, respectively.
Included in these amounts are $1,638,000 and $3,145,000 of impaired
loans for which the related allowance for loan losses is $277,000, and
$1,119,000, respectively. In addition, included in the total impaired
loans at June 30, 1996 and 1995 are $1,110,000 and $306,000,
respectively, of impaired loans for which no allowance is recorded due
to the adequacy of collateral values in accordance with SFAS 114. The
large reduction in the amount of impaired loans and the related
allowance for loan losses resulted from a writedown of $863,000 in the
second quarter of 1996 on an impaired loan with an outstanding balance
of approximately $1.1 million.
The amount of interest income recognized on impaired loans for the
three months ended June 30, 1996 and 1995 was approximately $69,000 and
$67,000, respectively. The amount of interest income recognized on
impaired loans for the six months ended June 30, 1996 and 1995 was
approximately $131,000 and $125,000 respectively. The Bank is not
committed to lend additional funds to these borrowers.
6. New Accounting Pronouncements
-----------------------------
On January 1, 1996, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 122, "Accounting For Mortgage
Servicing Rights" on a prospective basis. SFAS 122 requires the Company
to recognize as separate assets rights to service mortgage loans for
others, however those servicing rights are acquired, and also requires
the Company to assess its capitalized mortgage servicing rights for
impairment based on the fair value of those rights. The adoption of
SFAS 122 did not have a material impact on the Company's financial
condition or results of operations.
On January 1, 1996, the Company adopted SFAS No. 123, "Accounting for
Stock-Based Compensation" which encourages, but does not require,
companies to use a fair value based method of determining compensation
cost for grants of stock options under stock-based employee
compensation plans. As permitted by SFAS No. 123, the Company elected
to continue accounting for stock-based compensation in accordance with
Accounting Principals Board Opinion No. 25 ("APB 25"). Under APB 25, no
compensation cost is recorded as options are granted by the Company at
a purchase price not less than the fair market value of the common
stock on the date of the grant. Companies electing to continue
accounting under the provisions of APB 25 are required to present pro
forma disclosures of net income and net income per share for each
period in which a complete set of financial statements are presented.
7. Per Common Share Data
---------------------
Per common share data is computed based upon the weighted average
number of shares outstanding. Common stock equivalents are not included
since dilution is less than 3%.
8
<PAGE> 9
8. Reclassifications
-----------------
Certain reclassifications have been made to prior period amounts for
consistency in reporting.
9. 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 present 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
- -------
Center Banks 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.
On July 1, 1996, Skaneateles completed its previously announced acquisition of
Cicero Bank. The assumption of Cicero's $19 million of deposit liabilities
increased the Bank's total deposits to approximately $204 million. An equal
amount of assets, consisting primarily of loans, were purchased by Skaneateles,
bringing its total assets to $239 million.
Changes in Financial Condition from
-----------------------------------
December 31, 1995 to June 30, 1996
----------------------------------
Assets
- ------
Total assets were $220.3 million at June 30, 1996, an increase of $9.7 million
or 4.6% from December 31, 1995. Total loans increased $12 million, while cash
and Federal funds sold decreased $4.5 million.
Loans
- -----
Net loans receivable increased $12 million or 7.1% during the first half of 1996
to $181 million. Total loan originations were $26.8 million for the first half
of 1996, of which 61% were residential mortgages, 25% were commercial loans and
mortgages and 14% were consumer loans. Loan originations increased 97% compared
with the same period a year ago due to increased demand for residential
mortgages and a successful commercial loan calling program. Residential mortgage
originations are up 103% compared with the first half of 1995, while commercial
loans and mortgage originations are up 144%. The increase in commercial loan
activity is a direct result of the Bank's efforts to expand its presence in this
part of the local market. The Bank sees its market niche for commercial loans as
being small to mid sized businesses in central New York, including corporations,
partnerships and sole proprietorships. The Bank's commercial loan department
instituted an expanded calling program in late 1995 whereby lenders dedicate
more of their time to making calls on businesses. In addition, the Bank has
attempted to increase its name recognition in the business community via
advertisements in trade journals, business publications and participation in
trade shows.
The allowance for loan losses was $1,781,000 at June 30, 1996, which is a
$886,000 decrease from the balance at December 31, 1995. Net charge offs during
the first half of 1996 totaled $936,000. During the second quarter, the Bank
charged off $863,000 on one commercial loan. This loan was originated in 1988
and has been an impaired loan for a number of years. The Bank has since changed
its underwriting standards and loans of this type are no longer originated. The
Bank had established loss reserves for this loan in prior years.
9
<PAGE> 10
The following table sets forth the activity in the allowance for loan losses for
the periods indicated:
<TABLE>
<CAPTION>
June 30, December 31,
-------------------- ------------------------------
1996 1995 1995 1994 1993
--------- -------- -------- -------- --------
(In Thousands)
<S> <C> <C> <C> <C> <C>
Beginning Balance $ 2,667 3,040 3,040 2,938 2,847
Provision 50 180 235 360 600
Charge-offs
- -----------
Residential mortgages (35) -- -- (18) --
Commercial mortgages (6) (147) (569) -- (237)
Business (907) (98) (153) (331) (428)
Other consumer (14) (9) (10) (17) (64)
- ------------------------------------------------------------------------------------
(962) (254) (732) (366) (729)
- ------------------------------------------------------------------------------------
Recoveries
- ----------
Commercial mortgages -- -- -- -- 4
Business 26 63 118 96 203
Other consumer -- 4 6 12 13
- ------------------------------------------------------------------------------------
26 67 124 108 220
- ------------------------------------------------------------------------------------
Net Charge-offs (936) (187) (608) (258) (509)
- ------------------------------------------------------------------------------------
Ending Balance $ 1,781 3,033 2,667 3,040 2,938
====================================================================================
Ratio of net charge-offs
to average loans outstanding 0.54% 0.11% 0.36% 0.17% 0.41%
====================================================================================
</TABLE>
10
<PAGE> 11
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>
<CAPTION>
June 30, December 31,
---------------- -------------------------
1996 1995 1995 1994 1993
------- ------ ------ ------ -------
(In Thousands)
<S> <C> <C> <C> <C> <C>
Nonaccruing loans
Residential real estate mortgages $ 198 298 271 317 291
Commercial (1) 1,797 1,619 1,757 2,894 2,481
Consumer 19 36 110 40 10
- -----------------------------------------------------------------------------------------------------
Total $2,014 1,953 2,138 3,251 2,782
=====================================================================================================
Other loans past due 90 days or more and still accruing:
Consumer (2) -- 11 1 -- 12
Commercial (1) 198 345 -- 447 --
- -----------------------------------------------------------------------------------------------------
Total $ 198 356 1 447 12
=====================================================================================================
Restructured loans, not included above -- 1,129 1,125 932 1,006
=====================================================================================================
Real estate owned 202 1,109 397 984 1,807
=====================================================================================================
Total assets containing specific risk elements $2,414 4,547 3,661 5,614 5,607
=====================================================================================================
Ratio of total loans past due
90 days or more to gross loans 1.21% 1.36% 1.25% 2.05% 1.95%
=====================================================================================================
Ratio of assets containing specific
risk elements to total assets 1.10% 2.17% 1.74% 2.78% 3.21%
=====================================================================================================
<FN>
(1) Includes commercial real estate loans.
(2) Consists primarily of Guaranteed Student Loans.
</TABLE>
Nonperforming loans were $2,014,000 or 1.10% of gross loans at June 30, 1996,
compared with $1,953,000 or 1.17% at June 30, 1995 and $2,138,000 or 1.25% at
December 31, 1995. The allowance for loan losses covered 88% of nonperforming
loans at June 30, 1996, compared with coverage of 155% at June 30, 1995 and 125%
at December 31, 1995.
Potential problem loans at June 30, 1996 amounted to $1,867,000. "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 $1,867,000 in potential problem loans, loans
totaling $1,213,000 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.
Other Assets
- ------------
Included in other assets is $632,000 of cash balances due from Nationar, which
provided item processing and check clearing services for the Bank until it was
seized by the New York State Banking Department (the Department) on February 6,
1995. The Department froze all assets of Nationar and a liquidation of Nationar
is in process. The Bank had approximately $1.1 million on deposit at Nationar at
the time of the seizure. On June 26, 1996 the bankruptcy court overseeing the
liquidation approved an initial payout of 40% of the Bank's claim. Based on
information set forth in certain publicly available documents, which by their
terms are preliminary, management believes that the Bank will recover
substantially all of the amount owed by Nationar. The foregoing event has not
had any material effect on the Bank's ability to meet its liquidity needs.
Management has taken all steps necessary to recover the amounts owed the Bank by
Nationar.
11
<PAGE> 12
Deposits
- --------
Total deposits (including advance payments by borrowers for property taxes and
insurance) increased $5.4 million or 3.0% in the first half of 1996, to reach
$184.6 million at June 30. The Bank's lower costing transaction accounts (NOW,
demand, and savings accounts) increased a combined $6.7 million or 11.9% due in
large part to the Bank's Checking Account Marketing Program (CHAMP) which was
implemented in February 1996. The Bank completely redesigned and expanded its
interest and non-interest bearing checking account product line, offering seven
different checking accounts, each one targeted to specific demographic groups.
These products are backed up by an on-going direct mail marketing campaign that
has been very successful to date. Transaction accounts comprised 33.95% of total
deposits at June 30, 1996, up from 30.12% at June 30, 1995 and 31.36% at
December 31, 1995. The CHAMP program is an integral part of the Bank's plan to
increase its lower costing transaction account base and reduce its dependence on
higher costing time deposits. In addition to reducing the Bank's cost of funds,
transaction accounts provide a more stable funding source than time accounts and
the Bank earns service fee income on most transaction accounts.
The following table sets forth deposits by type of account as of the dates
indicated.
<TABLE>
<CAPTION>
June 30, December 31,
------------------------------------------ ------------------------------------------------------------
1996 1995 1995 1994 1993
--------------------- ------------------ ------------------ ------------------ --------------------
Percent of Percent of Percent of Percent of Percent of
total total total total total
Amount deposits Amount deposits Amount deposits Amount deposits Amount deposits
--------------------- ------------------ ------------------ ------------------ --------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Savings and club accounts $ 36,205 19.62% 33,391 18.50% 33,016 18.43% 36,255 21.24% 37,421 25.09%
Time certificates 99,150 53.72% 101,259 56.09% 99,474 55.54% 85,909 50.33% 65,575 43.96%
Money market accounts 20,945 11.35% 22,863 12.67% 21,448 11.98% 25,502 14.94% 27,706 18.57%
NOW accounts 15,602 8.45% 12,720 7.05% 13,244 7.39% 13,488 7.90% 11,437 7.67%
Demand accounts 10,851 5.88% 8,248 4.57% 9,927 5.54% 7,645 4.48% 5,159 3.46%
Escrow accounts 1,809 0.98% 2,032 1.12% 2,010 1.12% 1,897 1.11% 1,875 1.25%
- ---------------------------------------------------------------------------------------------------------------------------------
Total $184,562 100.00% 180,513 100.00% 179,119 100.00% 170,696 100.00% 149,173 100.00%
=================================================================================================================================
</TABLE>
Stockholders' Equity
- --------------------
Stockholders' equity at June 30, 1996 was $15.5 million, or $16.41 per share,
compared with $14.9 million or $16.05 per share at December 31, 1995. At June
30, 1996, the Company's leverage capital ratio was 7.01% and its risk-based
capital ratio was 12.60%. Both capital measurements were in excess of regulatory
requirements.
The Company declared a dividend of $.06 per share during the second quarter,
payable on August 18, 1996 to shareholders of record on July 30.
Comparison of the Results of Operations
---------------------------------------
General
- -------
Net income was $262,000 or $.28 per share for the second quarter of 1996,
compared with $229,000 or $.24 per share for the same period in 1995. For the
first six months of 1996, net income was $657,000 or $.70 per share, compared
with $497,000 or $.53 per share in the year ago period.
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.
12
<PAGE> 13
The following table sets forth, for the three months ended June 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>
<CAPTION>
1996 1995
----------------------------------- ------------------------------------
Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate
----------------------------------- ------------------------------------
(Dollars In Thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Mortgage loans $ 147,211 $2,931 7.96% $141,742 $2,814 7.94%
Other loans 29,463 651 8.89% 27,246 706 10.39%
- ----------------------------------------------------------------------------------------------------------------------
Total loans 176,674 3,582 8.12% 168,988 3,520 8.34%
- ----------------------------------------------------------------------------------------------------------------------
Securities 23,525 385 6.58% 24,348 420 6.92%
Federal funds sold 5,456 78 5.75% 4,612 71 6.17%
- ----------------------------------------------------------------------------------------------------------------------
Total interest-earning assets 205,655 4,045 7.88% 197,948 4,011 8.11%
- ----------------------------------------------------------------------------------------------------------------------
Non-interest earning assets 11,657 -- 10,918 --
- ----------------------------------------------------------------------------------------------------------------------
Total assets $ 217,312 4,045 208,866 4,011
======================================================================================================================
Interest-bearing liabilities:
Deposits:
Savings and club accounts $ 35,258 250 2.85% 32,860 233 2.84%
Time certificates 99,216 1,401 5.68% 101,128 1,457 5.78%
Money market accounts 21,763 179 3.31% 23,159 193 3.34%
Now and escrow accounts 17,388 95 2.20% 14,612 80 2.20%
- ----------------------------------------------------------------------------------------------------------------------
Total interest-bearing deposits 173,625 1,925 4.46% 171,759 1,963 4.58%
- ----------------------------------------------------------------------------------------------------------------------
Borrowings 15,221 245 6.47% 14,142 237 6.72%
- ----------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 188,846 2,170 4.62% 185,901 2,200 4.75%
Non-interest-bearing deposits $ 10,618 -- $7,875 --
Non-interest-bearing liabilities 2,314 -- 680 --
- ----------------------------------------------------------------------------------------------------------------------
Total liabilities 201,778 2,170 194,456 2,200
Stockholders' equity 15,534 -- 14,410 --
- ----------------------------------------------------------------------------------------------------------------------
Total liabilities and
stockholders' equity $ 217,312 2,170 208,866 2,200
======================================================================================================================
Net interest income/
interest rate spread 1,875 3.26% 1,811 3.36%
======================================================================================================================
Net interest-earning assets/
net yield on interest-earning
assets $ 16,809 3.65% 12,047 3.66%
======================================================================================================================
Ratio of interest-earning assets
to interest-bearing liabilities 1.09 1.06
======================================================================================================================
</TABLE>
Net interest income was $1,875,000 for the three months ended June 30, 1996
compared with $1,811,000 for the same period in 1995. For the first six months
of 1996, net interest income was $3,674,000, compared with $3,666,000 in the
first half of 1995. The yield on loans decreased 22 basis points in the second
quarter of 1996 compared with the year ago quarter due to a combination of lower
open market interest rates and an increase in the ratio of mortgage loans to
total loans, which generally earn a lower yield compared with other loans. In
addition, an increase of approximately $750,000 in the average balance of
nonperforming loans slightly decreased loan yields in the second quarter of 1996
compared with the year ago quarter. The average cost of interest bearing
liabilities decreased 13 basis points due to the decrease in market interest
rates. The net interest margin was 3.65% and 3.66% for the second quarter of
1996 and 1995, respectively. The margin was 3.64% and 3.77% for the six months
ended June 30, 1996 and 1995, respectively.
Other Operating Income
- ----------------------
Other operating income (net of gains on sales of loans and securities) was
$220,000 in the second quarter of 1996, compared with $147,000 for the same
period in 1995. For the first half of 1996, other operating income net of gains
13
<PAGE> 14
on sales of securities and loans was $401,000, compared with $301,000 for the
first half of 1995. The increases are due primarily to increased service charges
on deposits, due to the growth in the Bank's transaction accounts.
Other Operating Expenses
- ------------------------
Total other operating expenses were $1,803,000 for three months ended June 30,
1996, compared with $1,568,000 for the same period in 1995. Other operating
expenses were $3,423,000 and $3,111,000 for the six months ended June 30, 1996
and 1995, respectively. The settlement of a legal dispute accounted for 36% of
the increase in operating expenses in the second quarter. Also contributing to
the increase are costs associated with the implementation of the CHAMP program
and costs associated with the Bank's growth over the past year.
Income Taxes
- ------------
Income taxes for the second quarter of 1996 totaled $16,000 or 5.7% of pre-tax
income, compared with $76,000 or 24.9% of pre-tax income for the year ago
period. The Company has unrecognized deferred tax assets relating to prior
years' provision for loan losses that have not yet been deducted for income tax
purposes. The Company expects to generate sufficient earnings in 1996 to
recognize the deferred tax assets, which will result in an effective tax rate of
approximately 5% for 1996. The Company's effective tax rate is projected to
increase to 30% in 1997.
PART II. OTHER INFORMATION
- ---------------------------
<TABLE>
<S> <C>
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
------- On July 9, 1996, the Company declared a dividend of $.06 per share, payable on August 18, 1996
to shareholders of record on July 30.
Item 6. Exhibits and Reports on Form 8-K
------- Not applicable
</TABLE>
14
<PAGE> 15
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: August 13, 1996
------------------------------- ---------------
John P. Driscoll
Chairman, President and Chief
Executive Officer
By: /s/ J. Daniel Mohr Date: August 13, 1996
------------------------------- ---------------
J. Daniel Mohr
Chief Financial Officer
and Treasurer
15
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS INCLUDED WITHIN THE COMPANY'S JUNE 30, 1996
FORM 10-Q AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-30-1996
<CASH> 4,773
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 9,096
<INVESTMENTS-CARRYING> 14,416
<INVESTMENTS-MARKET> 14,571
<LOANS> 180,990
<ALLOWANCE> 1,781
<TOTAL-ASSETS> 220,373
<DEPOSITS> 184,562
<SHORT-TERM> 0
<LIABILITIES-OTHER> 3,850
<LONG-TERM> 0
<COMMON> 10
0
0
<OTHER-SE> 15,489
<TOTAL-LIABILITIES-AND-EQUITY> 220,373
<INTEREST-LOAN> 7,125
<INTEREST-INVEST> 723
<INTEREST-OTHER> 169
<INTEREST-TOTAL> 8,017
<INTEREST-DEPOSIT> 3,863
<INTEREST-EXPENSE> 4,343
<INTEREST-INCOME-NET> 3,674
<LOAN-LOSSES> 50
<SECURITIES-GAINS> 77
<EXPENSE-OTHER> 3,423
<INCOME-PRETAX> 697
<INCOME-PRE-EXTRAORDINARY> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 657
<EPS-PRIMARY> .70
<EPS-DILUTED> .70
<YIELD-ACTUAL> 0
<LOANS-NON> 2,014
<LOANS-PAST> 198
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 1,867
<ALLOWANCE-OPEN> 2,667
<CHARGE-OFFS> 962
<RECOVERIES> 26
<ALLOWANCE-CLOSE> 1,781
<ALLOWANCE-DOMESTIC> 1,781
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
