<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 September 30, 1996
------------------
Commission File Number 0-18513
-------
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 November 8, 1996
--------------------------------------------------------------------------
Common Stock (par value $.01 per share) 948,092 Shares
<PAGE> 2
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION Page
- ----------------------------- ----
<S> <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 10
PART II. OTHER INFORMATION
- ---------------------------
ITEM 1. Legal Proceedings 17
ITEM 2. Changes in Securities 17
ITEM 3. Defaults Upon Senior Securities 17
ITEM 4. Submission of Matters to a Vote of Security Holders 17
ITEM 5. Other Information 17
ITEM 6. Exhibits and Reports on Form 8-K 17
SIGNATURES 18
- ----------
</TABLE>
2
<PAGE> 3
CENTER BANKS INCORPORATED
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
ASSETS 1996 1995
...........................................................................................
(In Thousands, Except Share
Data)
<S> <C> <C>
Cash and due from banks $ 5,975 5,889
Federal funds sold 0 3,400
Securities available for sale 8,081 8,653
Securities held to maturity, fair value of
$13,272 in 1996 and $13,117 in 1995 13,078 12,804
Federal Home Loan Bank stock, at cost 1,410 1,303
Mortgage loans receivable 160,542 143,677
Other loans receivable 43,663 27,888
..........................................................................................
204,205 171,565
Less: Net deferred costs (248) (69)
Allowance for loan losses 2,111 2,667
..........................................................................................
Loans receivable, net 202,342 168,967
Premises and equipment, net 6,342 5,885
Real estate owned, net 473 397
Accrued interest receivable 1,428 1,255
Other assets 2,776 2,094
..........................................................................................
$ 241,905 210,647
..........................................................................................
LIABILITIES AND STOCKHOLDERS' EQUITY
..........................................................................................
Liabilities:
Interest bearing deposits $ 189,502 167,182
Demand deposits 14,022 9,927
..........................................................................................
Total deposits 203,524 177,109
Advance payments by borrowers for property taxes and insurance 753 2,010
Borrowings 17,271 14,386
Accrued expenses and other liabilities 4,485 2,203
Total liabilities 226,033 195,708
..........................................................................................
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, 1,048,397
and 1,033,619 shares issued in 1996 and
1995, respectively 10 10
Additional paid-in capital 9,665 9,526
Retained earnings 6,973 6,083
Net unrealized gain (loss) on securities, net of taxes (63) 33
Treasury stock, at cost (102,700 shares) (713) (713)
..........................................................................................
Total stockholders' equity 15,872 14,939
..........................................................................................
$ 241,905 210,647
..........................................................................................
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE> 4
CENTER BANKS INCORPORATED
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1996 1995 1996 1995
............................................................................................
(In Thousands, Except Per Share Data)
<S> <C> <C> <C> <C>
Interest income:
Mortgage loans $ 3,140 2,838 8,934 8,365
Other loans 1,011 710 2,342 2,119
Securities 382 441 1,104 1,232
Federal funds sold 19 60 188 143
............................................................................................
Total interest income 4,552 4,049 12,568 11,859
............................................................................................
Interest expense:
Deposits 2,116 2,004 5,980 5,650
Borrowings 251 238 730 735
............................................................................................
Total interest expense 2,367 2,242 6,710 6,385
............................................................................................
Net interest income 2,185 1,807 5,858 5,474
Provision for loan losses 50 30 100 210
............................................................................................
Net interest income after provision
for loan losses 2,135 1,777 5,758 5,264
............................................................................................
Other operating income:
Net gain (loss) on security transactions 0 (83) 77 (99)
Net gain on sale of loans 6 4 23 9
Other income 271 184 657 487
............................................................................................
Total other operating income 277 105 757 397
............................................................................................
2,412 1,882 6,515 5,661
............................................................................................
Other operating expenses:
Salaries and employee benefits 951 678 2,360 2,032
Building, occupancy and equipment 323 292 897 806
Real estate owned, net 2 156 2 269
Other 706 467 2,131 1,597
............................................................................................
Total other operating expenses 1,982 1,593 5,390 4,704
............................................................................................
Income before income taxes 430 289 1,125 957
Income tax 25 71 65 242
............................................................................................
Net income $ 405 218 1,060 715
............................................................................................
Net income per common share $ 0.43 0.23 1.13 0.77
............................................................................................
Weighted average common shares 945,497 927,798 940,195 926,659
............................................................................................
</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 0 0 715 0 0 715
Sale of 1,945 shares under option 0 15 0 0 0 15
Issuance of 474 shares of stock under
1995 Non-employee Director's Stock Plan 0 7 0 0 0 7
Cash dividend declared on
Common stock ($.14 per share) 0 0 (129) 0 0 (129)
Change in net unrealized
gain on securities, net of
tax effect of $73,000 0 0 0 110 0 110
......................................................................................................
Balance at September 30, 1995 $ 10 9,497 5,792 (77) (713) 14,509
......................................................................................................
Balance at December 31, 1995 $ 10 9,526 6,083 33 (713) 14,939
Net income 0 0 1,060 0 0 1,060
Sale of 12,100 shares under option 0 102 0 0 0 102
Issuance of 2,678 shares of stock under
1995 Non-employee Director's Stock Plan 0 37 0 0 0 37
Cash dividend declared on
Common stock ($.18 per share) 0 0 (170) 0 0 (170)
Change in net unrealized
gain on securities, net of
taxes of $68,000 0 0 0 (96) 0 (96)
......................................................................................................
Balance at September 30, 1996 $ 10 9,665 6,973 (63) (713) 15,872
......................................................................................................
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE> 6
CENTER BANKS INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
1996 1995
........................................................................................
(In Thousands)
<S> <C> <C>
OPERATING ACTIVITIES
Net Income $ 1,060 715
Adjustments to reconcile net income to net cash
provided by operating activities
Provision for loan losses 100 210
Provision for losses on real estate owned 0 240
Depreciation and amortization 434 417
Mortgage loans originated for sale (3,210) (935)
Proceeds from sale of mortgage loans originated for sale 3,345 876
Net (gain) loss on security transactions (77) 99
Net increase in interest receivable (173) (157)
Net increase (decrease) in other liabilities 2,345 85
Other, net 170 (534)
........................................................................................
Total adjustments 2,934 301
........................................................................................
Net cash provided by operating activities 3,994 1,016
INVESTING ACTIVITIES
Proceeds from maturities of securities available for sale 1,000 6,020
Proceeds from sale of securities available for sale 2,462 0
Proceeds from maturities of securities held to maturity 3,150 1,518
Purchase of securities held to maturity (4,135) (7,982)
Purchase of securities available for sale (3,096) (2,977)
Principal collected on asset-backed securities 890 916
Purchase of Federal Home Loan Bank stock (107) (103)
Net increase in loans made to customers (19,670) (4,810)
Net cash and cash equivalents from acquired bank 3,387 0
Proceeds from sale of real estate owned 196 130
Purchase of property and equipment, net (293) (797)
........................................................................................
Net cash used in investing activities (16,216) (8,085)
FINANCING ACTIVITIES:
Net increase (decrease) in time certificates (1,091) 13,925
Net increase (decrease) in other deposits 7,145 (7,081)
Increase in overnight borrowings 2,930 433
Net decrease in long-term borrowings (45) (15)
Proceeds from issuance of stock pursuant to stock plans 139 22
Dividends paid (170) (129)
........................................................................................
Net cash provided by financing activities 8,908 7,155
........................................................................................
Net increase (decrease) in cash and cash equivalents (3,314) 86
Reclassification of balance due from Nationar to other assets 0 (1,057)
Cash and cash equivalents at beginning of period 9,289 6,325
........................................................................................
Cash and cash equivalents at end of period $ 5,975 5,354
........................................................................................
Interest paid $ 6,724 6,385
........................................................................................
Income taxes paid $ 89 266
........................................................................................
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 $ 271 358
........................................................................................
</TABLE>
See accompanying notes to consolidated financial statements.
6
<PAGE> 7
Center Banks Incorporated
Notes to Consolidated Financial Statements
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS
Center Banks (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 Skaneateles Savings Bank (the Bank), its sole subsidiary.
Skaneateles Savings Bank is a full service retail bank.
The preparation of the consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the consolidated
financial statements and the reported amounts of income and expenses during the
reporting period. Actual results could differ from those estimates.
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.
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.
The following summarizes the significant accounting policies of the Company:
A) BASIS OF PRESENTATION
The consolidated financial statements include the accounts of the Company and
the Bank. All significant intercompany balances and transactions are
eliminated in consolidation.
B) 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.
7
<PAGE> 8
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONT.
c) 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.
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.
d) 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.
Management considers a loan impaired when, based on current information and
events, it is probable that the Company will be unable to collect all amounts
of principal and interest under the original terms of the loan agreement.
Significant factors impacting management's judgment in determining when a loan
is impaired include an evaluation of compliance with repayment program,
condition of collateral, deterioration in financial strength of borrower or any
case when the expected future cash payments may be less than the recorded
amount. Accordingly, the Company measures certain impaired commercial mortgage
loans based on the present value of expected future cash flows, discounted at
the loan's effective interest rate or, at the loan's observable market price or
fair value of collateral. In considering loans for evaluation of impairment,
management generally excludes large groups of small balance, homogeneous loans
such as residential mortgage loans, home equity loans and all consumer loans.
These loans are collectively evaluated for impairment. Impairment losses are
included in the allowance for loan losses through a charge to the provision for
loan losses. Troubled debt restructurings involving a modification of terms are
recorded at fair value as of the date of the transaction. The Company
recognizes interest income on impaired loans using the cash basis of income
recognition. Cash receipts on impaired loans are generally applied according to
the terms of the loan agreement, or as a reduction of principal, based upon
management judgment and the related factors discussed above.
e) 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%.
f) CASH AND CASH EQUIVALENTS
For purposes of reporting cash flows, cash and cash equivalents include cash,
amounts due from banks and federal funds sold.
g) RECLASSIFICATIONS
8
<PAGE> 9
Certain reclassifications have been made to prior period amounts for
consistency in reporting.
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONT.
h) 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 Principles 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.
On June 28, 1996, the Financial Accounting Standards Board issued SFAS No. 125,
"Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities". The statement provides accounting and reporting standards for
transfers and servicing of financial assets and extinguishment of liabilities
based on a consistent application of a financial-components approach that
focuses on control. It distinguishes transfers of financial assets that are
sales from transfers that are secured borrowings. The Company will prospectively
adopt Statement 125 effective January 1, 1997, and the expected impact on the
Company's consolidated financial statements is not material.
9
<PAGE> 10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION &
RESULTS OF OPERATIONS
General
- -------
Center Banks Incorporated (the "Company") is a bank holding company, with
Skaneateles Savings Bank (the "Bank") being its sole subsidiary. The financial
condition and operating results of the Company are largely dependent on the
Bank, its primary investment.
On July 1, 1996, Skaneateles completed its previously announced purchase of
assets and assumption of deposit liabilities of Cicero Bank. Skaneateles assumed
Cicero's $19 million of deposit liabilities, and purchased an equal amount of
assets, consisting primarily of loans. Under purchase accounting rules, the
assets acquired and liabilities assumed were recorded by the Bank at fair value,
with the difference being recorded as goodwill. The Bank recorded a goodwill
asset of $275,000, which is being amortized straight-line over a seven year
period.
Changes in Financial Condition from
-----------------------------------
December 31, 1995 to September 30, 1996
---------------------------------------
Assets
- ------
Consolidated assets of the Company were $241.9 million at September 30, 1996, a
$31.3 million or 14.8% increase from December 31, 1995. As noted above, on July
1, the Company completed its acquisition of Cicero Bank. Asset growth was
further provided by loan originations, which were $16.1 million and $43.0
million for the three months and nine months ended September 30, 1996.
Loans
- -----
Net loans receivable were $202.3 million at September 30, 1996, an increase of
$33.4 million or 19.8% from December 31, 1995. Loans acquired from Cicero Bank
had aggregate balances of $14 million at the end of the third quarter. Total
loan originations were $43.0 million for the first nine months of 1996, which
was an increase of 102% from the year ago period. Residential mortgage, consumer
installment loan and commercial loan originations increased 102%, 44% and 168%,
respectively, in 1996's first nine months compared with the year ago period, due
mainly to a larger branch network and focused marketing efforts. Skaneateles
opened two new branches inside P&C Supermarkets in 1995, and added another
branch when it acquired Cicero Bank. The Bank's deposit base has grown
considerably in 1996, with more than 6,000 new deposit customers being added in
1996 as a result of a direct mail marketing program. This has provided the Bank
with an enormous opportunity to cross-sell the Bank's credit products, and is
expected to be a significant source of future consumer loan growth. 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 and business
publications and participation in trade shows.
Residential mortgages accounted for 59% of total originations in 1996, while 25%
were commercial loans and mortgages and 16% were consumer loans. These
percentages were similar with those of a year ago, however going forward the
relative levels are expected to change in favor of consumer and commercial
lending, as management is placing increased emphasis on these higher yielding
loans. A large portion of the residential mortgages originated in 1996 were
referred to the Bank by independent mortgage brokers in areas contiguous with
its market area. Beginning in the fourth quarter of 1996 the Bank significantly
curtailed the number of residential mortgages from brokers and shifted its focus
to consumer and commercial lending. The Bank will continue to originate
residential mortgage loans in its immediate market area.
The allowance for loan losses was $2,111,000 at September 30, 1996, which is a
$556,000 decrease from the balance at December 31, 1995. The allowance of Cicero
Bank at the time of acquisition was $447,000. Net charge offs during the first
nine months of 1996 totaled $1.1 million. During the second quarter, the Bank
charged off $863,000 on one commercial loan. This loan was originated in 1988
and had 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.
10
<PAGE> 11
The following table sets forth the activity in the allowance for loan losses for
the periods indicated:
<TABLE>
<CAPTION>
Nine Months Ended
September 30, Year Ended 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 100 210 235 360 600
Charge-offs
Residential mortgages (35) 0 0 (18) 0
Commercial mortgages (168) (217) (569) 0 (237)
Business (939) (127) (153) (331) (428)
Other consumer (14) (9) (10) (17) (64)
.........................................................................................
(1,156) (353) (732) (366) (729)
.........................................................................................
Recoveries
Commercial mortgages 0 0 0 0 4
Business 49 103 118 96 203
Other consumer 4 4 6 12 13
.........................................................................................
53 107 124 108 220
.........................................................................................
Net Charge-offs (1,103) (246) (608) (258) (509)
.........................................................................................
Allowance of Cicero Bank
at time of acquisition 447 0 0 0 0
.........................................................................................
Ending Balance $ 2,111 3,004 2,667 3,040 2,938
.........................................................................................
Ratio of net charge-offs
to average loans outstanding 0.60% 0.15% 0.36% 0.17% 0.41%
.........................................................................................
</TABLE>
11
<PAGE> 12
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>
September 30, December 31,
------------- ------------
1996 1995 1995 1994 1993
---- ---- ---- ---- ----
(In Thousands)
<S> <C> <C> <C> <C> <C>
Nonaccruing loans
Residential real estate mortgages $1,029 298 271 317 291
Commercial (1) 1,649 1,574 1,757 2,894 2,481
Consumer 153 53 110 40 10
..........................................................................................................
Total $2,831 1,925 2,138 3,251 2,782
..........................................................................................................
Other loans past due 90 days or more and still accruing:
Consumer (2) 0 9 1 0 12
Commercial (1) 544 322 0 447 0
..........................................................................................................
Total $ 544 331 1 447 12
..........................................................................................................
Restructured loans, not included above 0 1,125 1,125 932 1,006
..........................................................................................................
Real estate owned 473 975 397 984 1,807
..........................................................................................................
Total assets containing specific risk elements $3,848 4,356 3,661 5,614 5,607
..........................................................................................................
Ratio of total loans past due
90 days or more to gross loans 1.65% 1.32% 1.25% 2.05% 1.95%
..........................................................................................................
Ratio of assets containing specific
risk elements to total assets 1.59% 2.11% 1.74% 2.78% 3.21%
..........................................................................................................
<FN>
(1) Includes commercial real estate loans.
(2) Consists primarily of Guaranteed Student Loans.
</TABLE>
Nonperforming loans were $3,375,000 or 1.65% of gross loans at September 30,
1996, compared with $2,256,000 or 1.32% at September 30, 1995 and $2,139,000 or
1.25% at December 31, 1995. Nonperforming loans acquired from Cicero Bank
totaled $448,000 at September 30, 1996. The allowance for loan losses covered
70% of nonperforming loans at September 30, 1996, compared with coverage of 133%
at September 30, 1995 and 125% at December 31, 1995.
Impaired loans, which included troubled debt restructured loans, were $2,647,000
and $3,837,000 at September 30, 1996 and 1995, respectively. Included in these
amounts are $1,248,000 and $3,318,000 of impaired loans for which the related
allowance for loan losses is $412,000, and $1,137,000, respectively. In
addition, included in the total impaired loans at September 30, 1996 and 1995
are $1,399,000 and $519,000, respectively, of impaired loans for which no
allowance is recorded due to the adequacy of collateral values in accordance
with SFAS 114. The average recorded investment in impaired loans during the
three months and nine months ended September 30, 1996 was approximately
$2,592,000 and $3,220,000, respectively. 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 September 30, 1996 and 1995 was approximately $25,000 and $83,000,
respectively. The amount of interest income recognized on
12
<PAGE> 13
impaired loans for the nine months ended September 30, 1996 and 1995 was
approximately $156,000 and $208,000 respectively. The Bank is not committed to
lend additional funds to these borrowers.
Potential problem loans at September 30, 1996 amounted to $1,420,000. "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 $1,420,000 in potential problem loans, loans
totaling $1,076,000 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.
Deposits
- --------
Total deposits (including advance payments by borrowers for property taxes and
insurance) increased $25.2 million or 14.1 % in the first nine months of 1996,
to reach $204.3 million at September 30. The Bank assumed Cicero Bank's $19
million of deposit accounts on July 1. The Bank's lower costing transaction
accounts (NOW, demand, and savings accounts, excluding accounts acquired from
Cicero Bank) increased a combined $10.3 million or 18.3% due almost exclusively
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 35.90% of total
deposits at September 30, 1996, up from 31.03% at September 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.
Escrow accounts decreased $1.3 million or 62.5% in 1996 due to the annual
payment of real estate taxes on behalf of mortgage customers in the third
quarter. Also contributing to the decrease is a change in regulations relating
to escrow accounts, resulting in generally lower balances in customer accounts.
13
<PAGE> 14
The following table sets forth deposits by type of account as of the dates
indicated.
<TABLE>
<CAPTION>
September 30, December 31,
............................................ ..........................................
1996 1995 1995 1994
.................................................................. ....................
Percent Percent Percent Percent
of total of total of total of total
Amount deposits Amount deposits Amount deposits Amount deposits
...................... ..................... ..................... ....................
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Savings and club accounts $ 39,808 19.49% 32,734 18.44% 33,016 18.43% 36,255 21.24%
Time certificates 108,251 52.99% 99,834 56.23% 99,474 55.54% 85,909 50.33%
Money market accounts 21,937 10.74% 21,551 12.14% 21,448 11.98% 25,502 14.94%
NOW accounts 19,506 9.55% 12,717 7.16% 13,244 7.39% 13,488 7.90%
Demand accounts 14,022 6.86% 9,633 5.43% 9,927 5.54% 7,645 4.48%
Escrow accounts 753 0.37% 1,071 0.60% 2,010 1.12% 1,897 1.11%
....................................................................................................................
Total $204,277 100.00% 177,540 100.00% 179,119 100.00% 170,696 100.00%
....................................................................................................................
</TABLE>
Stockholders' Equity
- --------------------
Stockholders' equity at September 30, 1996 was $15.9 million, or $16.78 per
share, compared with $14.9 million or $16.05 per share at December 31, 1995. At
September 30, 1996, the Company's leverage capital ratio was 6.55% and its
risk-based capital ratio was 11.42%. Both capital measurements were in excess of
regulatory requirements.
In October 1996 the Company declared a dividend of $.10 per share, representing
a 66.7% increase over the previous quarter. The dividend is payable on November
12, 1996 to shareholders of record on October 29.
Comparison of the Results of Operations
---------------------------------------
General
- -------
Net income was $405,000 or $.43 per share for the third quarter of 1996,
compared with $218,000 or $.23 per share for the same period in 1995. For the
first nine months of 1996, net income was $1,060,000 or $1.13 per share,
compared with $715,000 or $.77 per share in the year ago period. The earnings
growth resulted from strong gains in both net interest income and other
operating income.
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.
14
<PAGE> 15
The following table sets forth, for the three 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>
<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 $158,903 $3,140 7.90% $141,971 $2,838 8.00%
Other loans 41,927 1,011 9.59% 27,707 710 10.17%
....................................................................................................................
Total loans 200,830 4,151 8.25% 169,678 3,548 8.35%
....................................................................................................................
Securities 24,048 382 6.32% 26,034 441 6.72%
Federal funds sold 1,153 19 6.56% 4,104 60 5.80%
....................................................................................................................
Total interest-earning assets 226,031 4,552 8.04% 199,816 4,049 8.09%
....................................................................................................................
Non-interest earning assets 14,284 0 10,098 0
....................................................................................................................
Total assets $ 240,315 4,552 209,914 4,049
....................................................................................................................
Interest-bearing liabilities:
Deposits:
Savings and club accounts $ 39,420 282 2.84% 35,745 251 2.79%
Time certificates 108,706 1,534 5.62% 100,180 1,491 5.90%
Money market accounts 22,894 193 3.35% 22,555 188 3.31%
Now and escrow accounts 19,724 107 2.16% 13,087 74 2.24%
....................................................................................................................
Total interest-bearing deposits 190,744 2,116 4.41% 171,567 2,004 4.63%
....................................................................................................................
Borrowings 15,375 251 6.49% 14,111 238 6.69%
....................................................................................................................
Total interest-bearing liabilities 206,119 2,367 4.57% 185,678 2,242 4.79%
Non-interest-bearing deposits 14,747 0 9,010 0
Non-interest-bearing liabilities 3,567 0 663 0
....................................................................................................................
Total liabilities 224,433 2,367 195,351 2,242
Stockholders' equity 15,882 0 14,563 0
....................................................................................................................
Total liabilities and
stockholders' equity $ 240,315 2,367 209,914 2,242
....................................................................................................................
Net interest income/
interest rate spread 2,185 3.47% 1,807 3.30%
....................................................................................................................
Net interest-earning assets/
net yield on interest-earning
assets $ 19,912 3.87% 14,138 3.62%
....................................................................................................................
Ratio of interest-earning assets
to interest-bearing liabilities 1.10 1.08
....................................................................................................................
</TABLE>
Net interest income was $2,185,000 for the three months ended September 30,
1996 compared with $1,807,000 for the same period in 1995. For the first nine
months of 1996, net interest income was $5,858,000, compared with $5,474,000 for
the same period in 1995. Strong loan growth and a change in the Company's
deposit mix, both of which were discussed above, drove the increase in net
interest income.
The yield on loans decreased 10 basis points in the third quarter of 1996
compared with the year ago quarter due in part to lower bond market interest
rates. The effect of lower rates was partially offset by a proportionately
higher rate of growth in higher yielding commercial and consumer loans (Other
loans) versus mortgage loans. The third quarter drop in loan yields was much
less than the 22 basis point drop that occurred in the second quarter of 1996
compared with the second quarter of 1995, due to the increased weighting of
Other loans in the Company's
15
<PAGE> 16
portfolio. The average balance of Other loans represented 20.9% of the total
loan portfolio in the third quarter of 1996, compared with 16.7% in the second
quarter of 1996.
The average cost of interest bearing liabilities decreased 22 basis points due
to a change in the mix of interest bearing deposits, and to lower market
interest rates. Savings and NOW accounts, which are the Company's lowest costing
source of funds, grew to 31.0% of average interest bearing deposits in the third
quarter of 1996, up from 28.5% in the year ago quarter.
The net interest margin, which is equal to net interest income divided by
average interest-earning assets, was 3.87% for the third quarter of 1996, up
from 3.62% for the year ago quarter. The margin was 3.72% and 3.62% for the nine
months ended September 30, 1996 and 1995, respectively.
Other Operating Income
- ----------------------
Other operating income (excluding gains on sales of loans and securities) was
$271,000 in the third quarter of 1996, compared with $184,000 for the same
period in 1995. For the first nine months of 1996, other operating income
(excluding gains on sales of securities and loans) was $657,000, compared with
$487,000 for the same period in 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 $1,982,000 for quarter ended September 30,
1996, compared with $1,593,000 for the same period in 1995. Other operating
expenses were $5,390,000 and $4,704,000 for the nine months ended September 30,
1996 and 1995, respectively. The costs of operating the branch acquired from
Cicero Bank and one-time charges relating to the acquisition accounted for
approximately 50 percent of the increase in the third quarter. The cost of the
direct mail marketing program also contributed to the increase in operating
expenses for both the quarter and nine months ended September 30, 1996.
Income Taxes
- ------------
Income taxes for the third quarter of 1996 totaled $25,000 or 5.8% of pre-tax
income, compared with $71,000 or 24.6% 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 approximately 35% in 1997.
16
<PAGE> 17
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
On October 8, 1996, the Company declared a cash dividend of
$.10 per share, payable on November 12, 1996 to shareholders
of record on October 29.
ITEM 6. Exhibits and Reports on Form 8-K
a) Exhibits
No. Exhibit
--- -------
27 Financial Data Schedule
a) Not applicable
17
<PAGE> 18
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 12, 1996
-------------------- -----------------
John P. Driscoll
Chairman, President and Chief
Executive Officer
By: /s/ J. Daniel Mohr Date: November 12, 1996
------------------ -----------------
J. Daniel Mohr
Chief Financial Officer
and Treasurer
18
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS INCLUDED WITHIN THE COMPANY'S SEPTEMBER 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> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 5,975
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 8,081
<INVESTMENTS-CARRYING> 13,078
<INVESTMENTS-MARKET> 13,272
<LOANS> 202,342
<ALLOWANCE> 2,111
<TOTAL-ASSETS> 241,905
<DEPOSITS> 204,277
<SHORT-TERM> 0
<LIABILITIES-OTHER> 4,485
<LONG-TERM> 0
<COMMON> 10
0
0
<OTHER-SE> 15,862
<TOTAL-LIABILITIES-AND-EQUITY> 241,905
<INTEREST-LOAN> 11,276
<INTEREST-INVEST> 1,104
<INTEREST-OTHER> 188
<INTEREST-TOTAL> 12,568
<INTEREST-DEPOSIT> 5,980
<INTEREST-EXPENSE> 6,710
<INTEREST-INCOME-NET> 5,858
<LOAN-LOSSES> 100
<SECURITIES-GAINS> 77
<EXPENSE-OTHER> 5,390
<INCOME-PRETAX> 1,125
<INCOME-PRE-EXTRAORDINARY> 1,125
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,060
<EPS-PRIMARY> 1.13
<EPS-DILUTED> 1.13
<YIELD-ACTUAL> 8.04
<LOANS-NON> 2,831
<LOANS-PAST> 554
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 1,420
<ALLOWANCE-OPEN> 2,667
<CHARGE-OFFS> 1,156
<RECOVERIES> 53
<ALLOWANCE-CLOSE> 1,103
<ALLOWANCE-DOMESTIC> 1,103
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
