SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1996
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______to ______
Commission file number 0-26384
CENTER FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
Connecticut 06-1260924
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization Identification No.)
60 North Main Street, Waterbury, Connecticut 06702
(Address of principal executive offices) (Zip Code)
(203) 578-7000
(Registrant's telephone number, including area code)
Not applicable
(Former name, former address and former fiscal year,
if changed since last report.)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes ___or No _X_.
14,929,594 shares of the registrant's common stock, par value $1.00, were
outstanding as of May 2, 1996.
Total number of pages: 35
The Exhibits Index, filed as a part of this report, appears on page 23.
<PAGE>
TABLE OF CONTENTS AND FORM 10-Q CROSS-REFERENCE INDEX
Part I - Financial Information
Management's Discussion and Analysis of Financial Condition
and Results of Operations (Item 2) 3
Financial Statements (Item 1):
Consolidated Balance Sheet (unaudited) 16
Consolidated Statement of Operations (unaudited) 17
Consolidated Statement of Changes in Shareholders'
Equity (unaudited) 18
Consolidated Statement of Cash Flows (unaudited) 19
Notes to Consolidated Financial Statements 20
Selected Statistical Information:
Consolidated Average Balance Sheet, Net Interest Income
and Interest Rates 21
Part II - Other Information
Legal Proceedings (Item 1) 23
Exhibits and Reports on Form 8-K (Item 6) 23
Signatures 25
FINANCIAL HIGHLIGHTS
March 31, March 31,
(in thousands) 1996 1995
--------------- ---------------
Three Months Ended
Net income $ 5,479 $ 4,600
Return on average assets 0.61 % 0.54 %
Return on average equity 9.87 9.15
Net interest margin 3.39 3.71
Efficiency ratio 75.77 77.13
Per Common Share
Net income $ 0.38 $ 0.32
Dividends declared 0.07 0.05
Book value 15.46 13.85
End of Period Balances
Loans and leases $ 2,910,836 $ 2,669,982
Allowance for loan and lease losses 42,470 46,580
Total assets 3,669,518 3,433,829
Deposits 2,525,237 2,424,701
Shareholders' equity 223,930 201,367
Capital Ratios
Shareholders' equity to total assets 6.10 % 5.86 %
Tier 1 capital 9.09 8.58
Total capital 11.44 9.84
Leverage 5.79 5.50
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<PAGE>
CENTER FINANCIAL CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OVERVIEW
Center Financial Corporation (the "Corporation") reported net income of $5.5
million, or $0.38 per share, for the quarter ended March 31, 1996, an increase
of 19 percent over net income of $4.6 million, or $0.32 per share, for the first
quarter of 1995
Net interest income for the first quarters of 1996 and 1995 was $28.2 million
and $29.1 million, respectively. Net interest margin declined to 3.39 percent
from 3.71 percent for the same periods. The Corporation's cost of funds on
interest-bearing liabilities continued to increase at a faster pace than the
rates earned on interest-earning assets. This trend reflects the shift from
lower cost or no cost funds such as savings, money market and demand deposits
into higher costing funds such as time deposits and borrowings. These higher
borrowing costs caused a contraction in the net interest margin.
The provision for loan and lease losses increased $0.4 million to $1.6 million
for the first quarter of 1996 from $1.2 million during the 1995 first quarter.
The allowance for loan and lease losses was $42.5 million at March 31, 1996,
compared with $43.0 million at December 31, 1995. The ratio of the allowance for
loan and lease losses to nonaccruing loans and leases decreased from 67.2
percent at December 31, 1995 to 59.5 percent at March 31, 1996.
Nonaccruing loans plus real estate owned ("nonperforming assets") at March 31,
1996 totaled $100.0 million, up $5.8 million, or 6 percent, from $94.3 million
at December 31, 1995. The ratio of nonperforming assets to related asset
categories (total loans and leases plus real estate owned) increased 20 basis
points to 3.40 percent at March 31, 1996 from 3.20 percent at December 31, 1995.
Noninterest income, excluding securities gains and losses, was $7.5 million for
the first quarter of 1996, compared with $6.3 million for the prior year period,
an increase of $1.2 million, or 20 percent. The increase in the 1996 period is
attributable to a higher level of gains on the sale of loans and servicing
rights.
Noninterest expenses were $27.9 million for the quarter ended March 31, 1996,
compared with $28.1 million for the first quarter of 1995. The efficiency ratio,
a measure of operating expenses to net revenue--before special charges and
gains--was 75.77 percent for the first quarter of 1996, down from 77.13 percent
for the comparable 1995 period.
Return on average shareholders' equity increased from 9.15 percent for the March
31, 1995 quarter to 9.87 percent for the first quarter of 1996. Return on
average assets increased from 0.54 percent to 0.61 percent for the first
quarters of 1995 and 1996, respectively. The Corporation's Tier 1 capital ratio
was 9.09 percent, its Total capital ratio was 11.44 percent and its Leverage
ratio was 5.79 percent. These ratios are as of March 31, 1996.
Subsequent Events
The Corporation announced on April 12, 1996, it had completed the merger with
Heritage Bank of Watertown, Connecticut, with assets of $56.8 million at March
31, 1996. The transaction will be accounted for as a pooling of interests. The
merger resulted in the issuance of a total of 438,151 shares of the
Corporation's common stock, representing an exchange of 0.6938 shares for each
share of Heritage Bank common stock.
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TABLE 1 - SUMMARY OF RESULTS OF OPERATIONS
Three months ended
(in thousands, except March 31,
per share data) 1996 1995
--------------- ---------------
Statement of Operations
Interest and dividend income $ 65,339 $ 60,946
Interest expense 37,116 31,801
--------------- ---------------
Net interest income 28,223 29,145
Provision for loan
and lease losses 1,587 1,248
Noninterest income 9,442 6,706
Noninterest expenses 27,887 28,130
--------------- ---------------
Income (loss) before
income taxes 8,191 6,473
Income tax expense 2,712 1,873
--------------- ---------------
Net income $ 5,479 $ 4,600
--------------- ---------------
Net income per common share $ 0.38 $ 0.32
--------------- ---------------
Selected Ratios and Other Data
Per common share at March 31:
Book value $ 15.46 $ 13.85
Market value 18.13 12.75
Return on average assets 0.61 % 0.54 %
Return on shareholders' equity 9.87 9.15
Dividend payout ratio 18.42 15.63
Average shareholders' equity
to average assets 6.14 5.88
Total shareholders' equity
to total assets 6.10 5.86
Yield on interest-earning assets 7.85 7.76
Cost of interest-bearing
liabilities 4.70 4.29
Net interest spread 3.15 3.47
Net interest margin 3.39 3.71
Regulatory Ratios
Center Financial Corporation:
Leverage ratio 5.79 5.50
Tier 1 capital ratio 9.09 8.58
Total capital ratio 11.44 9.84
Centerbank:
Leverage ratio 5.77 5.50
Tier 1 capital ratio 9.07 8.58
Total capital ratio 11.42 9.84
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Net Interest Income
The Corporation's net interest income was $28.2 million and $29.1 million for
the first quarters of 1996 and 1995, respectively. Average loans and leases
increased to $2.9 billion during the 1996 first quarter from $2.5 billion during
the first quarter of 1995, an increase of $313.3 million, or 12 percent. The
increase reflects the $207.3 million growth in the residential mortgage
portfolio held for investment and the $96.1 million increase in the residential
mortgage portfolio available for sale. Average investment securities and other
interest-earning assets decreased $133.9 million, or 24 percent, to $428.4
million during the first quarter of 1996 from $562.2 million for the comparable
1995 period. Average interest-bearing liabilities were $3.2 billion for the
three months ended March 31, 1996, compared with $3.0 billion during the
comparable 1995 period, an increase of $147.1 million, or 5 percent.
The Corporation's mortgage-banking operations continued to experience
substantial closing volume during the first quarter of 1996, reflecting reduced
mortgage interest rates following the lowering of the prime interest rate at the
end of 1995. Its national scope provides the opportunity to originate mortgage
loans outside the Northeast, where competition is fierce and margins are thin,
in other more profitable markets. Loan applications closed more than tripled the
volume of one year ago ($670.7 million during the 1996 quarter, compared with
$212.8 million during the first quarter of 1995). Of the loans closed, the
Corporation retained the adjustable rate residential mortgage loans while
selling the fixed rate residential mortgage loans.
The increase in the residential mortgage portfolio contributed approximately
$5.5 million of additional interest income during the first quarter of 1996
compared with the same period a year ago. In addition to the growth in the total
average residential mortgage portfolio, the weighted average yield on
residential mortgages increased from 7.19 percent during the first quarter of
1995 to 7.62 percent during the 1996 period. This increased yield contributed
approximately $1.7 million in additional interest income during the 1996 first
quarter compared with the first quarter of 1995.
The Corporation also experienced increases in its cost of funds. The growth in
average interest-earning assets has been funded primarily through increased
utilization of borrowings. Interest on borrowings increased approximately $1.2
million in the first quarter of 1996 from $11.3 million during the comparable
1995 period.
The Corporation's deposit base increased $48.3 million in average balances
during the first quarter of 1996 from the first quarter of 1995. The Corporation
began increasing the rates paid on its time deposits during the third quarter of
1995 in an effort to reduce or reverse the flow of deposits out of the bank. The
rates stabilized during the first quarter of 1996 after deposits began to
increase. As a result of this initiative, interest expense on deposits increased
approximately $4.1 million from $20.3 million during the 1995 first quarter to
$24.4 million in the comparable 1996 period.
An analysis of net interest income is presented in Table 2 below.
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TABLE 2 - ANALYSIS OF NET INTEREST INCOME
Three months ended
March 31,
(in thousands) 1996 1995
--------------- ---------------
Interest and Dividend Income
Residential first mortgage loans $ 36,718 $ 29,165
Other loans and leases 21,815 22,943
Mortgage-backed securities 6,044 8,162
Other earning assets 762 676
--------------- ---------------
Total interest income 65,339 60,946
--------------- ---------------
Interest Expense
Deposits 24,352 20,278
Borrowings 12,577 11,342
Mortgage escrow deposits 187 181
--------------- ---------------
Total interest expense 37,116 31,801
--------------- ---------------
Net Interest Income $ 28,223 $ 29,145
--------------- ---------------
Net Interest Spread 3.15 % 3.53 %
--------------- ---------------
Net Interest Margin 3.39 % 3.71 %
--------------- ---------------
Net Interest Margin
The net interest margin for the March 31, 1996 quarter was 3.39 percent, a
decline of 32 basis points, compared with 3.71 percent for the comparable prior
year quarter. Net interest margin for the fourth quarter of 1995 was 3.24
percent. The decline in net interest margin from the first quarter of 1996
reflects the liability sensitive nature of the Corporation's balance sheet.
Interest-bearing liabilities are repricing faster than interest-earning assets.
The Corporation utilizes borrowings, including advances from the Federal Home
Loan Bank and securities sold under agreements to repurchase, as a source of
funding a portion of its interest-earning assets. The average interest rate paid
on total borrowings decreased from 6.19 percent for the first quarter of 1995 to
6.06 percent for the same quarter of 1996. The Corporation took advantage of the
reduction in the Federal Funds rate initiated by the Federal Reserve Board early
in 1995 to restructure borrowings maturing during the first quarter of 1996.
This initiative enabled the Corporation to lengthen the weighted average
maturity of its FHLB fixed rate term borrowings from 10 months at December 31,
1995 to 13 months at March 31, 1996. The Corporation had $538.7 million of FHLB
fixed rate term borrowings outstanding at December 31, 1995 with a weighted
average rate of interest of 6.28 percent, compared with $623.4 million at March
31, 1996 with a weighted average rate of interest of 5.94 percent.
As previously stated, the Corporation embarked on a program to increase the
rates paid on certain time deposits in an effort to retain and attract new
deposits into the bank. Average deposits increased during the first quarter of
1996, compared with the first and fourth quarters of 1995. The weighted average
rate paid on deposits increased 62 basis points from 3.60 percent during the
first quarter of 1995 to 4.22 percent for the comparable 1996 period. If
interest rates continue to increase, the resultant contraction of the spread
between the Corporation's interest-earning assets and interest-bearing
liabilities would continue to reduce net interest margin.
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<PAGE>
The Corporation also increased its utilization of noninterest-bearing sources of
funds from $131.0 million to $173.1 million during the first quarters of 1995
and 1996, respectively. Noninterest-bearing sources of funds include demand
deposits and shareholders' equity.
A discussion of interest rate risk appears on page 10. An analysis of net
interest margin is presented in Table 3 below.
TABLE 3 - ANALYSIS OF NET INTEREST MARGIN
Three months ended
March 31,
(in millions) 1996 1995
--------------- ---------------
Net Interest Income $ 28.2 $ 29.1
--------------- ---------------
Average interest-earning assets supported by:
Interest-bearing liabilities $ 3,158.4 $ 3,009.0
Noninterest-bearing liabilities 173.1 131.0
--------------- ---------------
Total average interest-
earning assets $ 3,331.5 $ 3,140.0
--------------- ---------------
Average yields and average rates:
Yield on interest-earning assets 7.85 % 7.76 %
Rate paid on interest-bearing
liabilities 4.70 4.23
--------------- ---------------
Net Interest Spread 3.15 % 3.53 %
--------------- ---------------
Net Interest Margin 3.39 % 3.71 %
--------------- ---------------
Provision for Loan and Lease Losses
The provision for loan and lease losses was $1.6 million for the first quarter
of 1996, up $0.4 million, or 27 percent, from $1.2 million for the first quarter
of 1995. Management believes the provision for loan and lease losses is adequate
to maintain the allowance for loan and lease losses at a level sufficient to
absorb credit losses inherent in the loan and lease portfolio. Future levels of
the allowance and provisions for loan and lease losses may be affected by
changes in economic conditions, loan quality and the regulatory environment.
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<PAGE>
TABLE 4 - NONINTEREST INCOME
Three months ended
March 31,
(in thousands) 1996 1995
--------------- ---------------
Customer service fees $ 1,661 $ 574
Mortgage servicing income, net 2,280 990
Gain on sale of loans and
servicing rights, net 2,588 1,222
Gain on sale of securities, net 1,897 441
Other income:
Loan and lease fees 611 652
Miscellaneous 405 ( 614 )
--------------- ---------------
Total noninterest income $ 9,442 $ 6,265
--------------- ---------------
Noninterest income, excluding gains on sales of securities, was $7.5 million for
the three-month period ended March 31, 1996, up $1.7 million, or 30 percent,
from $5.8 million for the comparable 1995 period. Gains on sales of loans and
servicing rights increased $1.4 million to $2.6 million during the 1996 first
quarter from $1.2 million for the first quarter of 1995. In addition,
miscellaneous income increased $1.0 million for the 1996 first quarter to $0.4
million from a loss of $0.6 million for the quarter ended March 31, 1995. The
Corporation closed five branches during the 1995 first quarter and incurred
losses associated with write-offs of fixed assets of the closed branches.
TABLE 5 - NONINTEREST EXPENSES
Three months ended
March 31,
(in thousands) 1996 1995
--------------- ---------------
Salaries and employee benefits $ 13,093 $ 13,200
Occupancy and equipment 4,411 4,600
Professional and other services 3,489 3,503
Net cost of real estate owned 1,429 1,452
FDIC and state assessment 169 1,773
Advertising and public relations 1,200 980
Other expenses:
Stationery, supplies and printing 849 426
Postage, express and freight 587 488
Telephone 911 681
Miscellaneous 1,749 1,027
--------------- ---------------
Total noninterest expenses $ 27,887 $ 28,130
--------------- ---------------
Noninterest expenses were $27.9 million and $28.1 million for the first quarters
of 1996 and 1995, respectively. Salaries and employee benefits and occupancy and
equipment expenses decreased 1 percent and 2 percent, respectively, during the
first quarter of 1996, compared with the same period of 1995. The decreases
reflect the Corporation's continuing efforts to achieve the objectives of High
Performance 97 and to effectively manage expenses. The FDIC and state assessment
expense declined $1.6 million to $0.2 million for the first quarter of 1996 from
$1.8 million for the comparable 1995 period. The decrease reflects Centerbank's
achievement of regulatory capital ratios in excess of ratios required to be
classified as a "well capitalized" financial institution. Institutions which
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<PAGE>
have achieved such capital strength are afforded reduced FDIC insurance premium
rates. The rates charged are reflective of the perceived risk.
Advertising and public relations expense was $1.2 million for the quarter ended
March 31, 1996, compared with $1.0 million for the first quarter of 1995. The
increase is attributable to increased advertising following the merger with
Great Country Bank, as well as advertising related to Centerbank's new credit
card. Stationery, supplies and printing; postage, express and freight and
telephone expenses were $0.8 million, $0.6 million and $0.9 million for the
quarter ended March 31, 1996, respectively, up 99 percent, 20 percent and 34
percent, respectively, from the comparable 1995 period. These increases are
attributable to the merger of Great Country Bank and the subsequent changeover
to the Centerbank name and method of operation. Other miscellaneous expenses for
the 1996 first quarter totaled $1.7 million, compared with $1.0 million for the
quarter ended March 31, 1995. The $0.7 million increase is attributable to the
release of reserves during the 1995 period. The reserves are related to the
Corporation's FDIC-assisted acquisition of Connecticut Savings Bank and Central
Bank during 1991.
The table below provides an analysis of the Corporation's restructuring reserve
established during the second quarter of 1995 related to its High Performance
'97 initiative to streamline operations and reduce operating expenses.
TABLE 6 - ANALYSIS OF RESTRUCTURING RESERVE
Three months ended
March 31,
(in thousands) 1996
------------------
Beginning balance $ 6,250
Transfers to pension and post retirement
accrual accounts ( 4,738 )
Expenses charged to the reserve ( 1,256 )
------------------
Ending balance $ 256
------------------
The Corporation elected to transfer the portion of the restructuring charge
related to retirement and other postemployment benefits to existing accrual
accounts which are periodically evaluated in conjunction with its consulting
actuaries. The accruals will be reduced in line with actuarial projections. The
remaining $0.3 million balance in the restructuring reserve is expected to be
utilized by the end of the second quarter of 1996.
CONSOLIDATED BALANCE SHEET ANALYSIS
Total assets were $3.7 billion at March 31, 1996 and $3.6 billion at December
31, 1995. Total loans were $2.9 billion at March 31, 1996 and December 31, 1995.
The Corporation's loan to deposit ratio as of March 31, 1996 was 114 percent,
compared with 116 percent at December 31, 1995.
Total securities increased $68.3 million, or 14 percent, from $408.9 million at
December 31, 1995 to $477.3 million at March 31, 1996. Securities classified as
held to maturity and reported at amortized cost decreased $10.8 million to
$151.2 million at March 31, 1996 from $162.0 million at December 31, 1995.
Securities classified as available for sale and reported at fair value totaled
$291.6 million at March 31, 1996, compared with $214.6 million at December 31,
1995.
Total deposits at March 31, 1996 were $2.5 billion, up from $2.4 billion at
year-end 1995. Savings, demand and money market deposits totaled $1.1 billion at
March 31, 1996 and December 31, 1995. Time deposits increased $52.0 million, or
4 percent, reflecting a shifting of balances from savings into higher yielding,
longer-term deposits. Time deposits totaled $1.4 billion at March 31, 1996 and
$1.3 billion at December 31, 1995.
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<PAGE>
Total borrowings, primarily securities sold under agreements to repurchase and
advances from the Federal Home Loan Bank, increased $41.6 million, or 5 percent,
to $829.0 million at March 31, 1996 from $787.4 million at year-end 1995. The
increase in borrowings was primarily due to funding the growth in
interest-earning assets.
Interest Rate Risk
As indicated in the interest rate sensitivity table on page 12, the twelve-month
cumulative gap, representing the total net assets and liabilities that are
projected to reprice over the next twelve months, was liability sensitive in the
amount of $527.2 million at March 31, 1996.
A liability sensitive interest rate gap would tend to reduce earnings over a
period of rising interest rates, while declining rates would tend to enhance
earnings. The Corporation utilizes modeling and other analytical techniques to
measure the effect on net interest income under different interest rate
scenarios. Given an immediate and sustained 100 basis point increase in interest
rates, the effect on net interest income would be a reduction of approximately
$2.9 million when compared with the amount of net interest income assumed to be
earned absent an interest rate increase for the twelve-month period following
March 31, 1996.
The Corporation manages the net interest rate sensitivity position, expressed as
a percentage of total assets to total liabilities repricing over a one year
period, between plus or minus 25 percent based on management's assessment of the
balance sheet composition and macroeconomic conditions. The ratio of total
assets to total liabilities repricing within one year was 79.28 percent at March
31, 1996, compared with 77.16 percent at December 31, 1995. The slight increase
in the ratio reflects the lengthening of the weighted average maturity of a
portion of short-term borrowings following the reduction of the Federal Funds
rate by the Board of Governors of the Federal Reserve in early 1996.
As a financial intermediary, the Corporation is subject to the term and pricing
preferences of its customers, which may result in an interest rate sensitivity
position that does not meet corporate policy or is otherwise undesirable. In
this case, the Corporation may choose to utilize off-balance sheet financial
instruments to manage the interest rate risk associated with the mismatched
position. There were no such financial instruments outstanding at March 31,
1996.
LIQUIDITY
Liquidity is the ability to meet cash needs arising from fluctuations in loans,
securities, deposits and other borrowings. Management routinely monitors
liquidity. The primary sources of funds include deposits, cash flows from
operations and cash flows from principal prepayments and repayments of loans and
securities.
The Corporation also has off-balance sheet sources of liquidity in the form of a
credit facility with the Federal Home Loan Bank of Boston. The Corporation had
borrowings of $666.6 million at March 31, 1996 from the Federal Home Loan Bank
of Boston and additional borrowing capacity of $698.1 million, consisting of
$54.5 million through the Ideal Way Program and $643.6 million through advances.
The Corporation also has a $25.0 million unused facility for the purchase of
federal funds from a commercial bank.
Centerbank is required to monitor its liquidity level utilizing criteria
established by the FDIC. The liquidity ratio is defined as the total of net
cash, short-term investments and other marketable assets divided by total net
deposits and short-term liabilities. Management has established a policy
requiring a liquidity ratio of 10.00 percent or greater at each quarter end. The
liquidity ratio was 14.29 percent at March 31, 1996, compared with 14.93 percent
at December 31, 1995.
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CAPITAL
The Corporation's total shareholders' equity at March 31, 1996 was $223.9
million, or 6.10 percent of total assets, compared with $221.4 million at
December 31, 1995. Volatility in shareholders' equity may occur in future
periods as the fair value of the available for sale securities portfolio changes
with market conditions.
The Corporation must now file regulatory reports with the Federal Reserve Board
(the "FRB") which are similar in nature to the reports currently filed by
Centerbank with the FDIC. One component of the FRB reports is information
necessary to compute the holding company's risk-based capital ratios. The
Corporation's Tier 1 capital ratio was 9.09 percent, its Total capital ratio was
11.44 percent and its Leverage ratio was 5.79 percent. These ratios are as of
March 31, 1996.
Centerbank must also calculate separate risk-based capital ratios. Centerbank's
Tier 1 and Total capital ratios were 9.07 percent and 11.42 percent,
respectively, at March 31, 1996, compared with 8.82 percent and 11.17 percent,
respectively, at December 31, 1995. Centerbank's Leverage ratio was 5.77 percent
at March 31, 1996 and 5.74 percent at December 31, 1995.
Under Federal banking regulations, an institution is deemed to be
wellcapitalized if it has a Risk-based Tier 1 capital ratio of 6.00 percent or
greater, a Risk-based Total capital ratio of 10.00 percent or greater and a
Leverage ratio of 5.00 percent or greater. The Corporation and Centerbank both
exceeded the requirements for a well-capitalized financial institution at March
31, 1996.
The Corporation's ability to pay dividends is governed by Connecticut banking
law. Accordingly, the Corporation may not declare a dividend unless it has
sufficient net profits from which to do so. The Corporation had sufficient net
profits to declare a cash dividend of $.07 per common share, payable May 13,
1996, to shareholders of record on May 2, 1996.
TABLE 7 - INTEREST RATE SENSITIVITY GAP ANALYSIS
The table below depicts the Corporation's interest rate sensitivity as of March
31, 1996. Allocations of assets and liabilities, including noninterest-bearing
sources of funds, to specific periods are based upon management's assessment of
contractual or anticipated repricing characteristics and amortization, adjusted
periodically to reflect actual experience. Management considers all demand
deposits to be stable sources of funds and, therefore, includes these deposits
in the over one year category. Prepayment characteristics are spread throughout
the categories below based upon management's expectations of changes in interest
rates as well as industry statistics regarding prepayment rates. Nonaccruing
loans are included in the respective loan categories. Available for sale
securities are included in the 1 to 30 day category and are so included at
market value. Mortgage servicing rights and other assets are included based upon
anticipated cash flows and scheduled amortization, adjusted for actual and
anticipated experience regarding prepayment and valuation impairment.
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<PAGE>
<TABLE>
<CAPTION>
Period to repricing
1-30 31-90 91-180 181-365 Total Over
(in thousands, except ratios) days days days days one year one year Total
Assets:
<S> <C> <C> <C> <C> <C> <C> <C>
Residential first mortgage $ 30,080 $ 156,888 $ 203,294 $ 386,803 $ 777,065 $ 925,170 $ 1,702,235
Residential first mortgage loans
held for sale 195,322 - - - 195,322 10,946 206,268
Other consumer loans 11,949 237,856 20,029 24,043 293,877 80,210 374,087
Commercial first mortgag 56,112 15,791 21,318 40,769 133,990 200,932 334,922
Other commercial loans 76,030 7,001 2,280 5,627 90,938 19,461 110,399
Leases 3,921 12,708 21,887 40,905 79,421 103,504 182,925
Mortgage-backed securities and
other investments 332,615 14,944 25,189 32,501 405,249 72,011 477,260
Mortgage servicing rights and
excess servicing fees receivable 1,427 2,845 4,271 8,542 17,085 68,337 85,422
Other assets 523 3,301 5,189 15,127 24,140 171,860 196,000
----------- ---------- ---------- ---------- ----------- ----------- -----------
Total assets $ 707,979 $ 451,334 $ 303,457 $ 554,317 $ 2,017,087 $ 1,652,431 $ 3,669,518
----------- ---------- ---------- ---------- ----------- ----------- ------------
Liabilities and shareholders' equity:
Transaction accounts * $ 914,773 $ - $ - $ - $ 914,773 $ 213,165 $ 1,127,938
Time deposits 186,173 192,450 292,102 411,793 1,082,518 374,782 1,457,300
FHLB borrowings 102,755 126,870 44,304 135,997 409,926 256,695 666,621
Other borrowings 74,518 62,513 20 41 137,092 25,249 162,341
Other liabilities and
shareholders' equity - - - - - 255,318 255,318
----------- ---------- ---------- ---------- ----------- ----------- -----------
Total liabilities and
shareholders' equity $ 1,278,219 $ 381,833 $ 336,426 $ 547,831 $ 2,544,309 $ 1,125,209 $ 3,669,518
----------- ---------- ----------- ---------- ----------- ----------- -----------
Asset (liability) sensitivity:
For the period $ (570,240) $ 69,501 $ (32,969) $ 6,486 $ (527,222) $ 527,222 -
On a cumulative basis (570,240) (500,739) (533,708) (527,222) (527,222) - -
Ratio of assets to liabilities
available for repricing-
on a cumulative basis 55.39 % 69.84 % 73.27 % 79.28 % 79.28 % 100.00 % -
Net liability sensitivity as
a percentage of interest-earning
assets - on a cumulative basis (15.54)% (13.65)% (14.54)% (14.37)% (14.37)% - -
<FN>
* Transaction accounts include savings, NOW, MMG, escrow and demand deposits.
</FN>
</TABLE>
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CREDIT QUALITY
TABLE 8 - ALLOWANCE FOR LOAN AND LEASE LOSSES
Three months ended
March 31,
(in thousands) 1996 1995
--------------- ---------------
Allowance for loan and lease losses
at beginning of period $ 43,025 $ 45,706
Provision charged to operations 1,587 1,248
Loans charged off
Gross ( 3,103 ) ( 1,069 )
Recoveries 961 549
--------------- ---------------
Net ( 2,142 ) ( 520 )
--------------- ---------------
Allowance for loan and lease losses
at end of period $ 42,470 $ 46,434
--------------- ---------------
Net loan and lease charge-offs
to average loans and leases 0.07 % 0.02 %
Allowance for loan and lease losses
to average loans and leases 1.46 1.80
The allowance for loan and lease losses was $42.5 million at March 31, 1996,
compared with $43.0 million at December 31, 1995. The ratio of the allowance for
loan and lease losses to average loans and leases was 1.46 percent at March 31,
1996, compared with 1.53 percent at December 31, 1995. Net charge-offs were $2.1
million for the first quarter of 1996, compared with $0.5 million for the same
period a year ago.
The Corporation had $34.0 million of impaired loans at March 31, 1996,
consisting of $24.24 million of commercial mortgage loans and $9.8 million of
other commercial loans. Impairment reserves at March 31, 1996, determined in
accordance with SFAS 114 and included as part of the Corporation's allowance for
loan and lease losses, were approximately $1.5 million. Approximately $15.4
million of impaired loans, which had been subjected to a specific review, did
not require an impairment reserve due primarily to charge-offs. The
Corporation's impaired loans averaged $31.2 million during the quarter ended
March 31, 1996, compared with $27.7 million for the quarter ended December 31,
1995.The amount of interest income recognized on impaired loans was immaterial
for the quarter ended March 31, 1996.
- 13 -
<PAGE>
TABLE 9 - NONACCRUING LOANS AND LEASES AND REAL ESTATE OWNED
Three months ended
March 31,
(in thousands) 1996 1995
--------------- ---------------
Nonaccruing loans and leases:
Residential first mortgage loans:
1 to 4 family $ 26,827 $ 23,275
Other 3,151 1,380
Home equity and other
consumer loans 3,909 2,599
Commercial first
mortgage loans 24,228 21,856
Other commercial loans 9,769 9,579
Leases 3,452 3,112
--------------- ---------------
Total nonaccruing loans and leases 71,336 61,801
--------------- ---------------
Real estate owned:
Commercial 23,526 32,929
Residential 5,187 7,522
--------------- ---------------
Total real estate owned 28,713 40,451
--------------- ---------------
Total nonperforming assets $ 100,049 $ 102,252
--------------- ---------------
Nonaccruing loans and leases
to total loans and leases 2.45 % 2.31 %
Allowance for loan and lease losses
to nonaccruing loans and leases 59.54 75.13
Allowance for real estate owned losses:
Balance at beginning of period $ 4,540 $ 6,289
Provision for losses on real
estate owned 784 840
(Charge-offs) recoveries ( 855 ) 40
(Loss) gain on sales and other ( 223 ) ( 260 )
--------------- ---------------
Balance at end of period $ 4,246 $ 6,738
--------------- ---------------
Allowances for loan, lease and
real estate owned losses to
nonperforming assets 46.69 % 52.00 %
Nonperforming assets to total loans
and leases plus real estate owned 3.40 3.77
Nonperforming assets to total assets 2.73 2.98
Nonaccruing loans and leases were $71.3 million at March 31, 1996, compared with
$64.0 million at December 31, 1995. Nonaccruing loans and leases increased by
$7.3 million since year-end 1995 due primarily to increases in nonaccruing
residential and commercial first mortgage loans. The increase in the nonaccruing
residential mortgage portfolio reflects the Corporation's policy to transfer all
residential mortgage loans to nonaccruing loans once the principal or interest
is past due greater than 90 days, as well as the continuing weak Connecticut
economy resulting from corporate restructurings, downsizings and mergers which
have occurred in the state over the last several years. The increase in the
nonaccruing commercial first mortgage portfolio is attributable to a single
credit. The ratio of nonaccruing loans and leases to total loans and leases was
2.45 percent and 2.20 percent at March 31, 1996 and December 31, 1995,
respectively. The allowance for loan and lease losses to nonaccruing loans and
leases decreased to 59.54 percent at March 31, 1996, from 67.23 percent at
December 31, 1995.
- 14 -
<PAGE>
Approximately 70 percent of the increase in nonaccruing loans is concentrated
within the consumer loan portfolio, primarily residential first mortgage loans,
which are not as risky as commercial loans. Management believes the allowance
for loan and lease losses is adequate to absorb losses inherent within the loan
and lease portfolio at March 31, 1996, even though nonaccruing loans have
increased and the coverage ratios have declined.
Real estate owned decreased from $30.2 million at December 31, 1995, to $28.7
million at March 31, 1996, a decrease of $1.5 million, or 5 percent. The
reduction in real estate owned reflects the Corporation's aggressive sales
efforts to reduce its real estate owned portfolio, thereby reducing the earnings
drain. Real estate owned was also reduced due to writedowns based on recent
appraised values.
Nonperforming assets totaled $100.0 million at March 31, 1996, an increase of
$5.9 million, or 6 percent, from $94.1 million at December 31, 1995. The ratio
of nonperforming assets to total loans and leases plus real estate owned
increased 20 basis points from 3.20 percent at December 31, 1995, to 3.40
percent at March 31, 1996.
Restructured loans, which are loans with original terms that have been modified
as a result of a change in the borrower's financial condition, totaled $1.0
million at March 31, 1996 and December 31, 1995. Restructured loans are included
in Table 9 in nonaccruing loans and leases.
- 15 -
<PAGE>
<TABLE>
<CAPTION>
CENTER FINANCIAL CORPORATION
CONSOLIDATED BALANCE SHEET
(Unaudited)
March 31, December 31, March 31,
(In thousands, except share amounts) 1996 1995 1995
Assets
<S> <C> <C> <C>
Cash and due from banks $ 93,844 $ 77,069 $ 64,563
Securities:
Federal Home Loan Bank stock, at cost 34,506 32,321 28,248
Available for sale (amortized cost: $324,532, $241,032 and $84,104) 291,562 214,625 61,324
Held to maturity (fair value: $149,327, $160,438 and $430,139) 151,192 161,988 439,783
----------- ----------- -----------
Total securities 477,260 408,934 529,355
----------- ----------- -----------
Loans and leases:
Residential first mortgage loans available for sale 206,268 153,173 119,752
Residential first mortgage loans held for investment 1,702,235 1,732,253 1,542,290
Consumer home equity loans 237,136 247,127 268,739
Other consumer loans 136,951 131,293 110,857
Commercial first mortgage loans:
Permanent 305,263 295,202 290,895
Construction 29,659 33,896 12,260
Other commercial loans 110,399 123,026 122,988
Leases 182,925 193,762 202,201
Allowance for loan and lease losses ( 42,470 ) ( 43,025 ) ( 46,580 )
----------- ----------- -----------
Total loans and leases, net 2,868,366 2,866,707 2,623,402
----------- ----------- -----------
Real estate owned, net 24,467 25,659 32,534
Premises and equipment, net 47,108 46,617 48,011
Accrued interest receivable 20,580 21,816 18,883
Mortgage servicing rights 69,586 65,461 53,394
Excess servicing fees receivable 15,836 15,264 12,170
Deferred tax assets, net 15,835 15,399 16,909
Acquisition related intangibles 14,762 15,277 12,337
Other assets 21,874 22,216 22,271
----------- ----------- -----------
Total assets $ 3,669,518 $ 3,580,419 $ 3,433,829
----------- ----------- -----------
Liabilities and Shareholders' Equity
Liabilities:
Deposits:
Demand $ 213,167 $ 216,163 $ 185,179
Savings 644,073 643,816 835,905
Money market 270,700 271,347 128,566
Time 1,397,297 1,345,298 1,275,051
----------- ----------- -----------
Total deposits 2,525,237 2,476,624 2,424,701
----------- ----------- -----------
Escrow on first mortgage loans 60,001 63,546 50,578
Borrowings 828,962 787,385 723,108
Other liabilities 31,388 31,438 34,075
----------- ----------- -----------
Total liabilities 3,445,588 3,358,993 3,232,462
----------- ----------- -----------
Shareholders' equity:
Preferred stock - voting; no par value; 1,000,000 authorized
shares; issued and outstanding - none - - -
Preferred stock - nonvoting; no par value; 10,000,000
authorized shares; issued and outstanding - none - - -
Common stock; par value $1; 75,000,000 authorized shares;
14,487,375, 14,445,649 and 14,535,253 shares issued and
outstanding at March 31,1996, December 31, 1995 and
March 31, 1995, respectively 14,487 14,446 14,535
Paid-in capital 176,480 176,050 174,724
Retained earnings 32,060 27,592 11,457
Net unrealized gain (loss) on securities available for sale,
net of tax effect 903 3,338 651
----------- ----------- -----------
Total shareholders' equity 223,930 221,426 201,367
----------- ----------- -----------
Total liabilities and shareholders' equity $ 3,669,518 $ 3,580 419 $ 3,433,829
----------- ----------- -----------
<FN>
The accompanying notes are an integral part of this Consolidated Financial Statement.
</FN>
</TABLE>
- 16 -
<PAGE>
<TABLE>
<CAPTION>
CENTER FINANCIAL CORPORATION
CONSOLIDATED STATEMENT of OPERATIONS
(Unaudited)
(In thousands, except per share amounts)
Three months ended
March 31,
1996 1995
Interest and Dividend Income
<S> <C> <C>
Interest and fees on loans $ 54,672 $ 47,764
Leases 3,861 4,344
----------- -----------
Total interest and fees on loans and leases 58,533 52,108
----------- -----------
Interest on mortgage-backed securities 6,044 8,162
Interest and dividends on other earning assets 762 676
----------- -----------
Total interest income 65,339 60,946
----------- -----------
Interest Expense
Interest on deposits 24,351 20,279
Escrow on first mortgage loans 188 180
Interest on borrowings 12,577 11,342
----------- -----------
Total interest expense 37,116 31,801
----------- -----------
Net interest income 28,223 29,145
----------- -----------
Provision for loan and lease losses 1,587 1,248
----------- -----------
Net interest income after provision for loan and lease losses 26,636 27,897
----------- -----------
Noninterest Income
Customer service fees 1,661 1,574
Mortgage servicing income, net 2,280 2,990
Gain on sale of loans and servicing rights, net 2,588 1,222
Gain on sale of securities, net 1,897 441
Other income 1,016 479
Total noninterest income 9,442 6,706
Noninterest Expenses
Salaries and employee benefits 13,093 13,200
Occupancy and equipment 4,411 4,600
Professional and other services 3,489 3,505
Net cost of real estate owned 1,429 1,452
FDIC and state assessment 169 1,773
Advertising and public relations 1,200 980
Other expenses 4,096 2,620
Total noninterest expenses 27,887 28,130
Income before income taxes 8,191 6,473
Income tax expense 2,712 1,873
Net income $ 5,479 $ 4,600
Net income per common share $ 0.38 $ 0.32
Average common shares outstanding 14,462,674 14,253,174
<FN>
The accompanying notes are an integral part of this Consolidated Financial Statement.
</FN>
</TABLE>
- 17 -
<PAGE>
<TABLE>
<CAPTION>
CENTER FINANCIAL CORPORATION
CONSOLIDATED STATEMENT of CHANGES in SHAREHOLDERS' EQUITY
(Unaudited)
(In thousands)
Three months ended March 31, 1996
----------------------------------------------------------------------------
Net
unrealized
Common Paid-in Retained gain on
stock capital earnings securities Total
----------- ----------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1995 $ 14,446 $ 176,048 $ 27,594 $ 3,338 $ 221,426
Net income - - 5,479 - 5,479
Dividends - - (1,013) - (1,013)
Issuance of common stock 41 432 - - 473
Net unrealized gain on securities
available for sale, net of tax effect - - - (2,435) (2,435)
----------- ----------- ----------- ----------- -----------
Balance at March 31, 1996 $ 14,487 $ 176,480 $ 32,060 $ 903 $ 223,930
----------- ----------- ----------- ----------- -----------
</TABLE>
<TABLE>
<CAPTION>
Three months ended March 31, 1996
----------------------------------------------------------------------------
Net
unrealized
Common Paid-in Retained gain on
stock capital earnings securities Total
----------- ----------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1994 $ 14,229 $ 174,893 $ 7,493 $ (669) $ 195,946
Net loss - - 4,598 - 4,598
Dividends - - (634) - (634)
Issuance of common stock 34 103 - - 137
Net unrealized gain on securities
available for sale, net of tax
effect
As of January 1, 1994 - - - 2,932 2,932
Net change during the - - - (1,612) (1,612)
----------- ----------- ---------- ----------- -----------
Balance at March 31, 19 $ 14,263 $ 174,996 $ 11,457 $ 651 $ 201,367
----------- ----------- ---------- ----------- -----------
<FN>
The accompanying notes are an integral part of this Consolidated Financial Statement.
</FN>
</TABLE>
- 18 -
<PAGE>
<TABLE>
<CAPTION>
CENTER FINANCIAL CORPORATION
CONSOLIDATED STATEMENT of CASH FLOWS
(Unaudited)
(In thousand)
Three months ended
March 31,
--------------------------
1996 1995
----------- -----------
Cash flows from operating activities:
<S> <C> <C>
Net income (loss) $ 5,479 $ 4,472
Adjustments to reconcile net income (loss) to net cash provided by operating
activities:
Provision for loan and lease losses 1,587 20,103
Provision for losses on real estate owned 784 9,813
Amortization of mortgage and excess servicing rights 4,092 13,867
Depreciation 1,458 5,594
Gain on sale of loans, servicing rights, securities and other assets (4,485) (10,107)
Gain on sale of premises and equipment 23 -
Deferred income tax expense (benefit) 1,396 (5,264)
(Increase) decrease in first mortgage loans available for sale (53,507) 459,093
(Increase) decrease in other assets 2,050 36,934
Increase (decrease) in other liabilities (50) 272
Other adjustments, net 2,334 1,495
----------- -----------
Net cash provided by operating activities (38,839) 536,272
----------- -----------
Cash flows from investing activities:
Purchases of securities available for sale (146,077) (26,110)
Purchases of securities held to maturity (18,051) (411,644)
Purchases of securities held for investment - (11,209)
Proceeds from sales of securities available for sale 54,479 24,819
Principal payments and maturities of securities available for sale 10,109 24,633
Principal payments and maturities of securities held to maturity 28,695 71,927
Principal payments and maturities of securities held for investment - 9,863
Proceeds from bulk sales of loans and real estate owned - 105,799
Originations and principal payments on loan and lease portfolio, net 46,417 (574,266)
Proceeds from other sales of real estate owned 3,408 20,832
Additions to mortgage servicing rights (11,869) (7,628)
Other, net 2,399 (2,585)
----------- -----------
Net cash used by investing activities (30,490) (775,569)
----------- -----------
Cash flows from financing activities:
Increase (decrease) in deposits 48,613 (115,668)
Increase (decrease) in escrow on first mortgage loans (3,545) (18,745)
Increase (decrease) in borrowings, net 41,577 326,119
Issuance of common stock 471 2,663
Cash dividends (1,012) -
----------- -----------
Net cash provided (used) by financing activities 86,104 194,369
----------- -----------
Increase (decrease) in cash and cash equivalents 16,775 (44,928)
Decrease in cash and cash equivalents attributable to Great Country Bank
for the period from June 1, 1993 through December 31, 1993 - (11,843)
Cash and cash equivalents at beginning of period 77,069 127,128
----------- -----------
Cash and cash equivalents at end of period $ 93,844 $ 70,357
----------- -----------
Supplemental information:
Interest paid on deposits and borrowings $ 37,450 $ 30,711
Income taxes paid (refunded), net 147 1,021
Loans transferred to real estate owned 3,406 3,328
Loans made to facilitate the sale of real estate owned - 75
Securitization of mortgage loans 32,836 -
<FN>
The accompanying notes are an integral part of this Consolidated Financial Statement.
</FN>
</TABLE>
- 19 -
<PAGE>
CENTER FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - BASIS OF PRESENTATION
The accompanying consolidated financial statements include the accounts of
Center Financial Corporation and its subsidiary (the "Corporation"). These
financial statements reflect, in management's opinion, all adjustments
(consisting of normal recurring adjustments) necessary for a fair presentation
of the Corporation's financial position, results of operations and cash flows
for the periods presented. Certain amounts for prior periods have been
reclassified to conform to current period presentation. These financial
statements should be read in conjunction with the financial statements and notes
thereto included in the Corporation's 1996 Annual Report.
The accompanying consolidated financial statements have been retroactively
restated to reflect the combination of the Corporation with Great Country Bank,
which was acquired on December 15, 1995, as if the acquisition had occurred at
the beginning of the earliest period presented.
Earnings per share is computed based on weighted average shares outstanding.
Stock options outstanding did not materially dilute earnings per share and, as
such were not included in the earnings per share computations. Weighted average
shares outstanding for the three-month periods ended March 31, 1996 and 1996
were 12,753,416 and 12,637,398, respectively.
NOTE 2 - SUBSEQUENT EVENTS
The Corporation announced on April 12, 1996, it had completed the merger with
Heritage Bank of Watertown, Connecticut, with assets of $56.8 million at March
31, 1996. The transaction will be accounted for as a pooling of interests. The
merger resulted in the issuance of a total of 438,151 shares of the
Corporation's common stock, representing an exchange of 0.6938 shares for each
share of Heritage Bank common stock.
- 20 -
<PAGE>
CONSOLIDATED AVERAGE BALANCE SHEET, NET INTEREST INCOME AND INTEREST RATES
The following are the Corporation's average balance sheet, net interest income
and interest rates:
<TABLE>
<CAPTION>
Three months ended
March 31, 1996
Average Average
(in thousands) Balance Interest Rate
----------- ----------- -------
ASSETS
Interest-earning assets:
<S> <C> <C> <C>
Residential first mortgage loans $ 1,907,837 $ 36,718 7.70 %
Other loans and leases 985,836 21,815 8.85
----------- -----------
Total loans and leases 2,893,673 58,533 8.09
----------- -----------
Mortgage-backed securities 377,504 6,044 6.40
Other interest-earning assets 60,291 631 4.19
----------- -----------
Total securities and other
interest-earning assets 437,795 6,675 6.10
----------- -----------
Total interest-earning assets 3,331,468 65,739 7.85
-----------
Noninterest-earning assets:
Cash and due from banks 59,257
Premises and equipment 47,089
Other 176,077
-----------
Total assets $ 3,613,891
-----------
LIABILITIES AND SHAREHOLDERS' EQUITY:
Interest-bearing liabilities:
Savings, NOW and money
market deposits $ 904,010 $ 5,466 2.42 %
Time deposits 1,054,235 14,311 5.43
Other 369,624 4,762 5.15
----------- -----------
Total interest-bearing deposits 2,327,869 24,539 4.22
----------- -----------
Short-term borrowings 435,954 6,128 5.62
Long-term borrowings 394,629 6,449 6.54
----------- -----------
Total borrowings 830,583 12,577 6.06
----------- -----------
Total interest-bearings liabilities 3,158,452 37,116 4.70
----------- -----------
Noninterest-bearing liabilities:
Demand deposits 206,850
Other liabilities 26,604
Shareholders' equity 221,985
-----------
Total liabilities and
shareholders' equity $ 3,613,891
-----------
Net interest income $ 28,223
-----------
Net interest spread 3.15
Net interest margin 3.39
</TABLE>
- 21 -
<PAGE>
CONSOLIDATED AVERAGE BALANCE SHEET, NET INTEREST INCOME AND INTEREST RATES
(continued)
<TABLE>
<CAPTION>
Three months ended
March 31, 1995
Average Average
(in thousands) Balance Interest Rate
----------- ----------- -------
ASSETS
Interest-earning assets:
<S> <C> <C> <C>
Residential first mortgage loans $ 1,604,352 $ 29,164 7.27 %
Other loans and leases 973,390 22,944 9.43
----------- -----------
Total loans and leases 2,577,742 52,108 8.09
----------- -----------
Mortgage-backed securities 519,862 8,162 6.28
Other interest-earning assets 42,376 676 6.38
----------- -----------
Total securities and other
interest-earning assets 562,238 8,838 6.29
----------- -----------
Total interest-earning assets 3,139,980 60,946 7.76
-----------
Noninterest-earning assets:
Cash and due from banks 54,959
Premises and equipment 41,290
Other 166,673
-----------
Total assets $ 3,417,779
-----------
LIABILITIES AND SHAREHOLDERS' EQUITY:
Interest-bearing liabilities:
Savings, NOW and money
market deposits $ 987,678 $ 5,664 2.29 %
Time deposits 964,014 11,053 4.59
Other 323,982 3,742 4.62
----------- -----------
Total interest-bearing deposits 2,275,674 20,459 3.60
----------- -----------
Short-term borrowings 371,704 5,793 6.23
Long-term borrowings 361,660 5,549 6.14
----------- -----------
Total borrowings 733,364 11,342 6.19
----------- -----------
Total interest-bearings liabilities 3,009,038 31,801 4.23
----------- -----------
Noninterest-bearing liabilities:
Demand deposits 178,194
Other liabilities 29,440
Shareholders' equity 201,107
-----------
Total liabilities and
shareholders' equity $ 3,417,779
-----------
Net interest income $ 29,145
-----------
Net interest spread 3.53
Net interest margin 3.71
</TABLE>
- 22 -
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
The Corporation is subject to various pending and threatened lawsuits in which
claims for monetary damages are asserted. Management, after consultation with
legal counsel, does not anticipate that the ultimate liability, if any, arising
out of such other pending and threatened lawsuits will have a material effect on
the Corporation's results ofoperations or financial position.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits required by Item 601 of Regulation S-K are listed on the
Exhibits Index on page 2 of this report and are filed herewith or are
incorporated herein by reference.
3(i) Certificate of Incorporation of Center Financial Corporation,
incorporated herein by reference to the Corporation's
registration statement of Form 8-A dated July 6, 1995.
3(ii) By-Laws of Center Financial Corporation, incorporated herein
by reference to the Corporation's 1995 Annual Report on Form
10-K filed March 30, 1996.
4(i) 1. Common Stock Rights, incorporated herein by reference to
the Corporation's registration statement of Form 8-A
dated July 6, 1995.
4(ii) 2. Preferred Stock Purchase Rights, incorporated herein by
reference to the Corporation's registration statement of
Form 8-A dated July 7, 1995.
10(ii)D Lease Agreement dated December 30, 1988 between Centerbank
and Norman S. Drubner, Trustee, as amended, incorporated
herein by reference to the Corporation's registration
statement of Form 8-A dated July 6, 1995.
10(iii)A The following documents are incorporated herein by reference
to the Corporation's registration statement of Form 8-A dated
July 6, 1995.
1. Executive Stock Incentive Plan, as amended through
Amendment No. 3.
2. 1992 Executive Stock Incentive Plan, as amended through
Amendment No. 1.
3. Directors Deferred Compensation Plan, as amended.
4. 1991 Directors Stock Option Plan, as amended through
Amendment No. 3.
- 23 -
<PAGE>
5. 1993 Directors Stock Option Plan, as amended through
Amendment No. 1.
6. Executive Severance Plan, dated August 27, 1992.
7. Severance Pay Policy for employees other than executive
officers, dated July 13, 1992.
8. Severance Pay Agreement with Joseph M. Murphy, dated
October 26, 1992.
9. Severance Pay Agreement with Maureen A. Frank, dated
May 17, 1993.
10. Senior Executive Officer Deferred Compensation Plan,
dated December 20, 1993.
11. Directors Retirement Plan, as amended.
12. Employment Agreement with Robert J. Narkis, dated
September 1, 1994.
13. Employment Agreement with Joseph Carlson II, dated
September 1, 1994.
14. Employment Agreement with William H. Placke, dated
September 1, 1994.
15. Employment Agreement with Thomas C. Brown, dated
September 1, 1994.
The Centerbank 1993 Employee Stock Purchase Plan,
incorporated herein by reference to the Corporation's
registration statement on Form S-8 dated July 28, 1995.
The Centerbank Savings and Investment Plan, as amended and
restated, incorporated herein by reference to the
Corporation's registration statement on Form S-8 dated July
28, 1995
11 Computation re: Earnings per share
99.1 Press release of the Corporation, dated April 12, 1996,
entitled "Center Financial Corporation completes sixth
acquisition in four years with purchase of Heritage Bank."
99.2 Press release of the Corporation, dated April 23, 1996,
entitled "Center Financial Corporation announces 19% increase
in earnings for first quarter."
(b) Reports on Form 8-K - The Corporation filed the following reports on
Form 8-K during the quarter ended March 31, 1996.
1. The report dated October 10, 1995 (item 5) reported that the
Corporation (i) had formed a national consumer finance subsidiary
called Center Credit Corporation on October 10, 1995; (ii) announc-
ed, on February 6, 1996, projected earnings per share, return on
average assets and return on average shareholders' equity for 1996
and 1997; and (iii) announced earning of the Corporation, including
the earnings of the merged operations of Great Country Bank ("Great
Country"), following the merger with Great Country on December 15,
1995. This last filing was undertaken in accordance with the terms
of the Agreement and Plan of Merger between the Corporation and
Great Country.
- 24 -
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CENTER FINANCIAL CORPORATION
(Registrant)
Date: May 14, 1996 By JOSEPH CARLSON II
Joseph Carlson II
Chief Financial Officer
Date: May 14, 1996 By EDWARD L. OLCESE
Edward L. Olcese
Controller
(Principal Accounting Officer)
- 25 -
<PAGE>
<TABLE>
<CAPTION>
CENTER FINANCIAL CORPORATION
Computation of Earnings Per Share
For the quarters ended March 31, 1996 and 1995
March 31, 1996 March 31, 1995
-------------- --------------
Earnings Per Common Share as Reported
<S> <C> <C>
Net income $ 5,479,000 $ 4,600,000
-------------- --------------
Weighted average shares outstanding 14,462,674 14,253,174
-------------- --------------
Net income per common share $ 0.38 $ 0.32
-------------- --------------
Primary Earnings Per Share
Net income $ 5,479,000 $ 4,600,000
-------------- --------------
Weighted average shares outstanding 14,802,548 14,521,131
-------------- --------------
Net income per common share $ 0.37 $ 0.32
-------------- --------------
Fully-diluted Earning Per Share
Net income $ 5,479,000 $ 4,600,000
-------------- --------------
Weighted average shares outstanding 14,802,548 14,545,933
-------------- --------------
Net income per common share $ 0.37 $ 0.32
-------------- --------------
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> MAR-31-1996
<S> <C>
<CASH> 93,844
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 291,562
<INVESTMENTS-CARRYING> 185,698
<INVESTMENTS-MARKET> 183,833
<LOANS> 2,910,836
<ALLOWANCE> 42,470
<TOTAL-ASSETS> 3,669,518
<DEPOSITS> 2,525,237
<SHORT-TERM> 398,511
<LIABILITIES-OTHER> 91,389
<LONG-TERM> 430,451
0
0
<COMMON> 14,487
<OTHER-SE> 209,443
<TOTAL-LIABILITIES-AND-EQUITY> 3,669,518
<INTEREST-LOAN> 58,533
<INTEREST-INVEST> 6,806
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 65,339
<INTEREST-DEPOSIT> 24,351
<INTEREST-EXPENSE> 37,116
<INTEREST-INCOME-NET> 28,223
<LOAN-LOSSES> 1,587
<SECURITIES-GAINS> 1,897
<EXPENSE-OTHER> 27,887
<INCOME-PRETAX> 8,191
<INCOME-PRE-EXTRAORDINARY> 8,191
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,479
<EPS-PRIMARY> 0.38
<EPS-DILUTED> 0.38
<YIELD-ACTUAL> 3.39
<LOANS-NON> 71,336
<LOANS-PAST> 0
<LOANS-TROUBLED> 944
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 43,025
<CHARGE-OFFS> 3,103
<RECOVERIES> 961
<ALLOWANCE-CLOSE> 42,470
<ALLOWANCE-DOMESTIC> 42,470
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
For more information contact:
Patricia B. Sweet
Senior Vice President
Corporate Communications Division
(203) 578-6296
CENTER FINANCIAL CORPORATION COMPLETES SIXTH ACQUISITION
IN FOUR YEARS WITH PURCHASE OF HERITAGE BANK
Waterbury, Conn., April 12, 1996 ... Center Financial Corporation (CFCX/NASDAQ),
the holding company for Centerbank, today announced the completion of its
acquisition of Watertown-based Heritage Bank. On Monday, April 15, Heritage
Bank's one branch office will reopen as Centerbank.
Under the terms of the agreement, Heritage Bank shareholders will receive 0.6938
shares of Center Financial Corporation common stock in a tax-free exchange for
each of their Heritage Bank common shares. The exchange ratio was calculated
based on an average closing price of $18.1667 of Center Financial Corporation
common stock for the fifteen days prior to the receipt of final regulatory
approval on April 12, 1996.
With this acquisition, Center Financial Corporation increases its assets to $3.7
billion, and extends its branch network to 44 Centerbank locations in 27
communities throughout Connecticut.
In making the announcement, Center Financial Corporation President and Chief
Executive Officer Robert J. Narkis stated, "The acquisition of Heritage Bank
strengthens measurably Centerbank's leadership position in the Watertown market.
This addition is a further demonstration of Centerbank's strategic acquisition
plan for growth and market penetration, and we obviously are delighted to add
Heritage's fine customers to our banking family."
Barbara R. Rowley, Centerbank's Waterbury regional president added, "With the
support of our new customers, shareholders, and neighbors, we welcome the
opportunity to carry on the tradition of customer service and community
involvement which has been the signature of Heritage Bank these past eight
years. We will do everything possible to make this a smooth transition for all
parties."
Center Financial Corporation is the holding company for Centerbank, Centerbank
Mortgage Company, Center Capital Corporation, and Affiliated Business Credit
Corporation. It recently signed an agreement with Edwards Super Food Stores to
place full-service branches in their stores located in Clinton, Meriden, Orange,
Shelton and Southington.
Established in 1850, Centerbank delivers banking services throughout central
Connecticut and is insured by the FDIC. Centerbank Mortgage Company is a
full-service mortgage banking company with a residential servicing portfolio of
$7.3 billion. Center Capital Corporation is an equipment leasing firm that
provides lease financing services nationwide to manufacturers and end-users of
capital equipment. Affiliated Business Credit Corporation is a commercial
finance company serving the Northeast.
###
For more information:
Patricia B. Sweet
Senior Vice President
Corporate Communications
Phone: (203) 578-6296
Fax: (203) 578-6279
CENTER FINANCIAL CORPORATION ANNOUNCES 19% INCREASE
IN EARNINGS FOR FIRST QUARTER
Waterbury, CT - April 23, 1996 . . . Center Financial Corporation (CFCX/NASDAQ),
the holding company of Centerbank, today reported net income of $5.5 million, or
$0.38 per share, for the first quarter of 1996, an increase of $0.9 million over
net income of $4.6 million, or $0.32 per share, for the first quarter of 1995.
This represents an improvement of 19.6 percent.
The company also announced that the Board of Directors declared a regular
quarterly dividend of $0.07 per share, payable May 13, 1996, to shareholders of
record on May 2, 1996. This is the Company's sixth consecutive quarterly
dividend since restoring the dividend in the first quarter of 1995.
In making the announcement, Center Financial President and Chief Executive
Officer Robert J. Narkis commented, "I am gratified to report a healthy 40
percent increase in our noninterest income during the first quarter due, in
part, to securities gains and strong mortgage banking activity. I expect this
trend will continue, particularly in light of the high volume of loan
applications seen last month." He continued, "Noninterest expenses also improved
slightly this quarter as we began to see the results of our reengineering
efforts initiated in 1995."
Net interest margin for the quarter ended March 31, 1996 was 3.39 percent, down
32 basis points from a year earlier, but up from the fourth quarter 1995 level
of 3.24 percent . Total shareholders' equity, at $223.9 million, was 6.10
percent of total assets at March 31, 1996, representing a $22.6 million increase
from $201.4 million at March 31, 1995. Total assets were $3.7 billion at the
close of the first quarter, an increase of 6.9 percent over the first quarter of
1995. Book value at March 31, 1996 was $15.46 per share.
Center Financial Corporation completed the merger of Great Country Bank of
Ansonia, Connecticut, with Centerbank on December 15, 1995. The transaction was
accounted for as a pooling of interests. The 1995 historical results of
operations and financial condition of the company have been restated to reflect
Center Financial's financial position and its results of operations on a
combined basis with Great Country.
<PAGE>
"The remainder of 1996 will be an exciting time at Center Financial. In April,
we completed the transaction with Watertown-based Heritage Bank and we are
looking forward to opening our first supermarket branch during the second
quarter and anticipate seven additional supermarket branches by the end of the
year. Our investigation of other alternative delivery systems, such as PC-based
home banking, banking on the Internet, and advanced telemarketing, coupled with
the impending introduction of a Centerbank MasterCard(R) and the national
expansion of our consumer finance subsidiary, Center Credit Corporation, should
serve us well," Mr. Narkis added.
Center Financial Corporation is the holding company for Centerbank, Centerbank
Mortgage Company, Center Capital Corporation and Affiliated Business Credit
Corporation. It recently signed an agreement with Edwards Super Food Stores to
place full-service branches in their stores located in Clinton, Meriden, Orange,
Shelton and Southington.
Centerbank delivers banking services throughout central Connecticut via 44
branches in 27 communities and through alternative delivery systems, such as
ATMs and telephone banking. It is insured by the FDIC. Centerbank Mortgage
Company is a full-service mortgage banking company with a residential servicing
portfolio of $7.3 billion. Center Capital Corporation is an equipment leasing
firm that provides lease financing services nationwide to manufacturers and
end-users of capital equipment. Affiliated Business Credit Corporation is a
commercial finance company serving the Northeast.
<PAGE>
<TABLE>
<CAPTION>
CENTER FINANCIAL CORPORATION
CONSOLIDATED BALANCE SHEET
(Unaudited)
March 31, December 31, March 31,
(In thousands, except share amounts) 1996 1995 1995
Assets
<S> <C> <C> <C>
Cash and due from banks $ 93,844 $ 77,069 $ 64,563
Securities:
Federal Home Loan Bank stock, at cost 34,506 32,321 28,248
Available for sale (amortized cost: $324,532, $241,032 and $84,104) 291,562 214,625 61,324
Held to maturity (fair value: $149,327, $160,438 and $430,139) 151,192 161,988 439,783
----------- ----------- -----------
Total securities 477,260 408,934 529,355
----------- ----------- -----------
Loans and leases:
Residential first mortgage loans available for sale 206,268 153,173 119,752
Residential first mortgage loans held for investment 1,702,235 1,732,253 1,542,290
Consumer home equity loans 237,136 247,127 268,739
Other consumer loans 136,951 131,293 110,857
Commercial first mortgage loans:
Permanent 305,263 295,202 290,895
Construction 29,659 33,896 12,260
Other commercial loans 110,399 123,026 122,988
Leases 182,925 193,762 202,201
Allowance for loan and lease losses ( 42,470 ) ( 43,025 ) ( 46,580 )
----------- ----------- -----------
Total loans and leases, net 2,868,366 2,866,707 2,623,402
----------- ----------- -----------
Real estate owned, net 24,467 25,659 32,534
Premises and equipment, net 47,108 46,617 48,011
Accrued interest receivable 20,580 21,816 18,883
Mortgage servicing rights 69,586 65,461 53,394
Excess servicing fees receivable 15,836 15,264 12,170
Deferred tax assets, net 15,835 15,399 16,909
Acquisition related intangibles 14,762 15,277 12,337
Other assets 21,874 22,216 22,271
----------- ----------- -----------
Total assets $ 3,669,518 $ 3,580,419 $ 3,433,829
----------- ----------- -----------
Liabilities and Shareholders' Equity
Liabilities:
Deposits:
Demand $ 213,167 $ 216,163 $ 185,179
Savings 644,073 643,816 835,905
Money market 270,700 271,347 128,566
Time 1,397,297 1,345,298 1,275,051
----------- ----------- -----------
Total deposits 2,525,237 2,476,624 2,424,701
----------- ----------- -----------
Escrow on first mortgage loans 60,001 63,546 50,578
Borrowings 828,962 787,385 723,108
Other liabilities 31,388 31,438 34,075
----------- ----------- -----------
Total liabilities 3,445,588 3,358,993 3,232,462
----------- ----------- -----------
Shareholders' equity:
Preferred stock - voting; no par value; 1,000,000 authorized
shares; issued and outstanding - none - - -
Preferred stock - nonvoting; no par value; 10,000,000
authorized shares; issued and outstanding - none - - -
Common stock; par value $1; 75,000,000 authorized shares;
14,487,375, 14,445,649 and 14,535,253 shares issued and
outstanding at March 31,1996, December 31, 1995 and
March 31, 1995, respectively 14,487 14,446 14,535
Paid-in capital 176,480 176,050 174,724
Retained earnings 32,060 27,592 11,457
Net unrealized gain (loss) on securities available for sale,
net of tax effect 903 3,338 651
----------- ----------- -----------
Total shareholders' equity 223,930 221,426 201,367
----------- ----------- -----------
Total liabilities and shareholders' equity $ 3,669,518 $ 3,580 419 $ 3,433,829
----------- ----------- -----------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
CENTER FINANCIAL CORPORATION
CONSOLIDATED STATEMENT of OPERATIONS
(Unaudited)
(In thousands, except per share amounts)
Three months ended
March 31,
1996 1995
Interest and Dividend Income
<S> <C> <C>
Interest and fees on loans $ 54,672 $ 47,764
Leases 3,861 4,344
----------- -----------
Total interest and fees on loans and leases 58,533 52,108
----------- -----------
Interest on mortgage-backed securities 6,044 8,162
Interest and dividends on other earning assets 762 676
----------- -----------
Total interest income 65,339 60,946
----------- -----------
Interest Expense
Interest on deposits 24,351 20,279
Escrow on first mortgage loans 188 180
Interest on borrowings 12,577 11,342
----------- -----------
Total interest expense 37,116 31,801
----------- -----------
Net interest income 28,223 29,145
----------- -----------
Provision for loan and lease losses 1,587 1,248
----------- -----------
Net interest income after provision for loan and lease losses 26,636 27,897
----------- -----------
Noninterest Income
Customer service fees 1,661 1,574
Mortgage servicing income, net 2,280 2,990
Gain on sale of loans and servicing rights, net 2,588 1,222
Gain on sale of securities, net 1,897 441
Other income 1,016 479
----------- -----------
Total noninterest income 9,442 6,706
----------- -----------
Noninterest Expenses
Salaries and employee benefits 13,093 13,200
Occupancy and equipment 4,411 4,600
Professional and other services 3,489 3,505
Net cost of real estate owned 1,429 1,452
FDIC and state assessment 169 1,773
Advertising and public relations 1,200 980
Other expenses 4,096 2,620
----------- -----------
Total noninterest expenses 27,887 28,130
----------- -----------
Income before income taxes 8,191 6,473
Income tax expense 2,712 1,873
----------- -----------
Net income $ 5,479 $ 4,600
----------- -----------
Net income per common share $ 0.38 $ 0.32
----------- -----------
Average common shares outstanding 14,462,674 14,253,174
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
CENTER FINANCIAL CORPORATION
SELECTED CONSOLIDATED FINANCIAL DATA
(Unaudited)
(In thousands, except per share amounts)
Three months ended
March 31,
1996 1995
Statement of Operations
<S> <C> <C>
Interest and dividend income $ 65,339 $ 60,946
Interest expense 37,116 31,801
----------- -----------
Net interest income 28,223 29,145
Provision for loan and lease losses 1,587 1,248
Noninterest income 9,442 6,706
Noninterest expense 27,887 28,130
----------- -----------
Income before income taxes 8,191 6,473
Income tax expense 2,712 1,873
----------- -----------
Net income $ 5,479 $ 4,600
----------- -----------
Net income per common share $ 0.38 $ 0.32
----------- -----------
Average Balance Sheet
Loans and leases, net $ 2,893,679 $ 2,577,742
Securities and other interest-earning assets 437,795 562,238
----------- -----------
Total average interest-earning assets 3,331,468 3,139,980
Cash and due from banks 59,257 54,959
Other assets 223,166 222,840
----------- -----------
Total average assets $ 3,613,891 $ 3,417,779
----------- -----------
Deposits $ 2,483,262 $ 2,406,293
Escrow on first mortgage loans 51,457 47,575
Borrowings 830,583 733,364
Other liabilities 26,604 29,440
Shareholders' equity 221,985 201,107
----------- -----------
Total average liabilities and shareholders' equity $ 3,613,891 $ 3,417,779
----------- -----------
Selected Ratios and Other Data
Return on average assets 0.61 % 0.54 %
Return on average shareholders' equity 9.87 9.15
Dividend payout ratio 18.42 15.63
Average shareholders' equity to average assets 6.14 5.88
Total shareholders' equity to total assets 6.10 5.86
Yield on interest-earning assets 7.85 7.76
Cost of interest-bearing liabilities 4.70 4.29
Net interest spread 3.15 3.47
Net interest margin 3.39 % 3.71 %
Per common share at March 31:
Book value $ 15.46 $ 13.85
Market value (close) 18.13 12.75
Regulatory Ratios
Centerbank:
Leverage ratio 5.77 % 5.50 %
Tier 1 capital to risk-weighted assets 9.07 8.58
Total capital to risk-weighted assets 11.42 9.84
Center Financial Corporation: (as successor to Centerbank)
Leverage ratio 5.79 5.50
Tier 1 capital to risk-weighted assets 9.09 8.58
Total capital to risk-weighted assets 11.44 % 9.84 %
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
CENTER FINANCIAL CORPORATION
FINANCIAL HIGHLIGHTS
(Unaudited)
(In thousands)
Summary of Nonperforming Assets
March 31, December 31, March 31,
1996 1995 1995
Nonaccruing loans and leases:
Residential first mortgage loans:
<S> <C> <C> <C>
1 - 4 family $ 26,827 $ 24,495 $ 23,275
Other 3,151 3,650 1,380
Home equity and other consumer loans 3,909 3,678 2,599
Commercial first mortgage loans 24,228 20,639 21,856
Other commercial loans 9,769 7,755 9,579
Leases 3,452 3,777 3,112
Total nonaccruing loans and leases, net 71,336 63,994 61,801
Real estate owned ("REO"):
Commercial 23,526 23,682 32,929
Residential 5,187 6,517 7,522
Total real estate owned 28,713 30,199 40,451
Total nonperforming assets $ 100,049 $ 94,193 $ 102,252
Net loan and lease charge-offs during the quarter $ 2,142 $ 3,201 $ 520
Allowance for loan and lease losses (1) 42,470 43,025 46,434
Allowance for losses on REO 4,246 4,540 6,738
Net loan and lease charge-offs to average loans and 0.07 % 0.11 % 0.02 %
Allowance for loan and lease losses to average loan 1.47 1.53 1.80
Allowance for loan and lease losses to nonaccruing
loans and leases 59.54 67.23 75.13
Allowances for loan, lease and REO losses to nonperforming
assets 46.69 50.50 52.00
Nonperforming assets to related asset categories 3.40 3.20 3.77
Nonperforming assets to total assets 2.73 % 2.63 % 2.98 %
<FN>
Summary of Impaired Loans
Center Financial reported $33,997 of impaired loans at March 31, 1996. The
components of the impaired loan balance were as follows: $24,228 of commercial
mortgage loans and $9,769 of other commercial loans.
Summary of Restructured Loans
The total in the "Total nonaccruing loans and leases, net" category listed above
includes $944, $1,005 and $886 of loans that were restructured as of March 31,
1996, December 31, 1995 and March 31, 1995, respectively.
(1) The amount reported for March 31, 1996 includes $1,535 as an allowance for
credit losses on impaired loans totaling $18,641 in accordance 'with SFAS
Nos. 114 and 118.
</FN>
</TABLE>
