ITEM 1. BUSINESS.
BUSINESS OF BANCORPORATION
GENERAL
Broad National Bancorporation ("Bancorporation") is a bank holding company registered under the Bank Holding Company Act of 1956, as amended (the "BHC Act"). Although Bancorporation was incorporated under the laws of the State of New Jersey on April 7, 1981, it did not engage in any business activity until February 1, 1983. On that date, it acquired all of the issued and outstanding capital stock of Broad National Bank, a national banking association (the "Bank") pursuant to a corporate reorganization involving an exchange of shares. Bancorporation's activities currently are limited to ownership of the outstanding common securities of BNB Capital Trust (the "Issuer Trust"), as well as the outstanding capital stock of the Bank and to performing certain services for the Bank. Except as otherwise provided herein, references herein to "Bancorporation" include Bancorporation and its consolidated subsidiaries.
Bancorporation's principal executive offices are located at 905 Broad Street, Newark, New Jersey 07102, and its telephone number is (973) 624-2300.
DESCRIPTION OF BUSINESS
BANCORPORATION
Bancorporation is a bank holding company registered under the BHC Act. Bancorporation's activities currently are limited to ownership of the outstanding capital stock of the Bank and to performing certain services for the Bank.
THE ISSUER TRUST
The Issuer Trust is a statutory business trust formed under Delaware law pursuant to (i) a trust agreement, as amended and restated, dated as of June 9, 1997, executed by Bancorporation, as Depositor, Bankers Trust Company, as Property Trustee, and Bankers Trust (Delaware), as Delaware Trustee, and (ii) the filing of a Certificate of Trust with the Delaware Secretary of State on June 9, 1997. The Issuer Trust is wholly owned by Bancorporation. Bancorporation, while holder of all of the beneficial interests represented by common securities of the Issuer Trust (the "Common Securities"), has selected two individuals who are employees of Bancorporation to serve as Administrators. The Issuer Trust's business and affairs are conducted by its Property Trustee, Delaware Trustee, and the two
Administrators. The Issuer Trust exists for the exclusive purposes of (i) issuing and selling the 9.5% Cumulative Trust Preferred Securities (the "Preferred Securities") and the Common Securities, (ii) using the proceeds from the sale of the Preferred Securities and the Common Securities to acquire the 9.5% Junior Subordinated Debentures (the "Junior Subordinated Debentures") issued by Bancorporation and (iii) engaging in only those other activities necessary, advisable or incidental thereto (such as registering the transfer of the Preferred Securities). Accordingly, the Junior Subordinated Debentures are the sole asset of the Issuer Trust and payments under the Junior Subordinated Debentures are the sole revenue of the Issuer Trust. Bancorporation has entered into several contractual arrangements for the purpose of fully and unconditionally supporting the Issuer Trust's payment of distributions on, payments on any redemption of, and any liquidation distribution with respect to, the Preferred Securities. These contractual arrangements constitute a full and unconditional guarantee by Bancorporation of the Issuer Trust's obligations under the Preferred Securities. The Issuer Trust has a term of 31 years, but may terminate earlier as provided in the Trust Agreement. The principal executive office of the Issuer Trust is 905 Broad Street, Newark, New Jersey, 07102 and its telephone number is (973)624-2300. See "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations, and Item 8. Financial Statements and Supplementary Data.
THE BANK
The Bank is a national banking association organized in 1925 under the laws of the United States with offices in Newark (7 offices), East Orange, Millburn, North Arlington, Livingston, Perth Amboy, Kearny and Elizabeth (2 offices), New Jersey. The Bank is a full service commercial bank and offers a broad range of commercial and retail banking services. It offers checking accounts, savings accounts, money market accounts and individual retirement accounts (IRAs), as well as various other types of time deposits which are insured by the Bank Insurance Fund ("BIF") administered by the Federal Deposit Insurance Corporation ("FDIC") to the full extent provided by law. The Bank also provides typical bank services such as cashiers checks, United States Savings Bonds and travelers checks. The Bank had total deposits of $485,073,000 as of December 31, 1996 and of $518,238,000 as of December 31, 1997. See "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operation."
The Bank originates and services both secured and unsecured loans which totaled $278,585,000 as of December 31, 1996 and $315,554,000 as of December 31, 1997, in each case, net of deferred loan fees and the allowance for possible loan losses. Commercial lending operations include various types of credit for
the Bank's commercial and industrial customers. The Bank's installment loan department makes direct loans to individuals. The Bank's mortgage loan department makes a variety of residential, industrial, and commercial loans secured by real estate. See "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operation."
The Bank also provides agency and custody services for individuals and institutional accounts. The Bank has trust powers which permit it to administer trusts and estates, although the Bank has no trust accounts at this time.
The Bank currently has fourteen branch banking facilities in addition to its main location. See "Item 2.
Item 2. Properties.
The main offices of both the Bank and Bancorporation are located at 905 Broad Street, Newark, New Jersey 07102. The building, which is owned by the Bank, is a two-story structure constructed in 1960. It has approximately 18,000 square feet of usable office space, which currently are used for the Bank's operations. A wholly-owned subsidiary of the Bank owns the five-story (approximately 45,000 square feet) Western Union Building at 909 Broad Street in Newark, New Jersey, adjacent to the Bank's main office. Approximately 81% of this building is used by the Bank and the remaining 19% of the building is leased to nonaffiliated companies.
The Bank currently has fourteen branch banking facilities as described below in addition to its main location:
Approximate Expiration Location Square Feet Date of Lease
Plaza Banking Center 5,092 December 31, 745 Broad Street 1998 /5/ Newark, New Jersey
Ironbound Banking Center 4,100 February 28, 7 Wheeler Point Road 1999 /1/ Newark, New Jersey
North Newark Banking Center 3,500 December 31, 466 Bloomfield Avenue 2002 /1/ Newark, New Jersey
Millburn Banking Center 2,600 March 31, 225 Millburn Avenue 2001 /1/ Millburn, New Jersey
Gateway III Banking Center 2,076 September 30, 100 Mulberry Street 1999 /1/ Newark, New Jersey
North Arlington Banking Center 1,700 October 7, 65 River Road 1998 /4/ North Arlington, New Jersey
Jackson Street Banking Center 10,900 Owned 123-133 Jackson Street Newark, New Jersey
Bayway Banking Center 3,700 April 30, 1000 South Elmora Avenue 2006 /2/ Elizabeth, New Jersey
Livingston Banking Center 3,450 November 30, 30 W. Mt. Pleasant Avenue 2001 /3/ Livingston, New Jersey
Perth Amboy Banking Center 3,400 August 31, Convery Plaza, Route 35 2002 /5/ Perth Amboy, New Jersey
East Orange Central 6,070 Owned Banking Center 554 Central Avenue East Orange, New Jersey
Elizabeth Banking Center 3,190 Owned 826 Elizabeth Avenue Elizabeth, New Jersey
Kearny Banking Center 700 March 31, 180 Schuyler Ave. 2000 /5/ Kearny, New Jersey
East Ferry Office 800 November 30, 290 Ferry Street 2000 /2/ Newark, New Jersey _______________________
/1/ The Bank has the option to extend the term of the lease for one additional five year period.
/2/ The Bank has the option to extend the term of the lease for up to four additional five year periods.
/3/ The Bank has the option to extend the term of the lease for up to one additional five year period and one additional ten year period.
/4/ The Bank has the option to extend the term of the lease for two additional one year periods.
/5/ The Bank has the option to extend the term of the lease for two additional five year periods.
The Bank also owns an 18,000 square foot building located at 465 Bloomfield Avenue, Bloomfield, New Jersey. Under a lease agreement dated August 1993 between the Bank and EDS, all of the space in the Bloomfield Avenue building is being leased to EDS, which uses the space to provide data processing services, related professional services, information processing and related outsourcing services to the Bank and other financial institutions.
During 1998, the Bank will open a new full-service banking center in Newark, New Jersey.
Bancorporation neither owns nor leases any property.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS.
Neither Bancorporation nor the Bank is involved in any material pending legal proceedings, other than routine litigation incidental to their respective businesses.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matter was submitted to a vote of Bancorporation's shareholders during the fourth quarter of the year ended December 31, 1997.
ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT.
Executive officers of Bancorporation and of the Bank are elected annually and serve until their successors are elected and qualified at the next annual meeting of the directors of the respective corporations. The following table sets forth information with respect to the executive officers of Bancorporation and of the Bank.
Position with Bancorporation and Bank and Year Principal Name Age First Elected Occupation /1/
Donald M. Karp 61 Chairman of Position with the Board of Bancorporation Bancorporation (1985) and the Bank/2/ and the Bank (1985); Chief Executive Officer of Bancorporation (1991) and the Bank (1991); Vice Chairman of the Board of Bancorporation (1981-1985) and the Bank (1978-1985); Director (1972)
John A. Dorman 59 President of Position with Bancorporation (1992) Bancorporation and the Bank (1992); and the Bank Director (1992)
Fred S. Campo 48 Senior Vice President Position with of the Bank (1986); Bancorporation Secretary of and the Bank Bancorporation (1982) and the Bank (1991)
Fred Perry, Jr. 68 Senior Vice Position with President of the Bank the Bank (1978)
Peter Kenny 52 First Vice Position with President of the Bank the Bank (1991); Senior Vice President of the Bank (1992)
James Boyle 47 Treasurer of Position with Bancorporation; Bancorporation Comptroller of the Bank (1988); Senior Vice President of the Bank (1992)
Ellen Rogoff 48 First Vice President Position with of the Bank (1993); the Bank /3/ Senior Vice President of the Bank (1994)
Ronald E. Schwarz 43 Senior Vice President Position with of the Bank (1997) the Bank/4/
___________________
/1/ Unless otherwise indicated, each of the persons listed has been employed in the indicated principal occupation during the last five years.
/2/ Mrs. Donald M. Karp is the niece of Stanley J. Lesnik and the daughter of Harriet M. Alpert, a principal shareholder of Bancorporation.
/3/ For the three years prior to joining the Bank, Ms. Rogoff was Manager of Human Resources for Bristol Myers. For at least two years prior to joining Bristol Myers, Ms. Rogoff was Manager of Human Resources for Action Tungsram.
/4/ Prior to joining the Bank, from June of 1995 to April of 1997, Mr. Schwarz was Senior Vice President, Regional President Bergen/Passaic Counties for Hudson United Bank (successor to Urban National Bank). From 1992 to June of 1995, Mr. Schwarz was Senior Vice President, Director of Retail Banking for Urban National Bank.
There are no arrangements or understandings between any of the executive officers or any other persons pursuant to which any of the executive officers have been selected to their respective positions.
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
Shares of the Common Stock of Bancorporation have been traded under the symbol BNBC on the NASDAQ National Market System since June 2, 1988, and in the over-the-counter market prior to this date. The following table sets forth the range of high and low closing sale price quotations per share for Bancorporation's Common Stock as reported by NASDAQ, together with cash dividends per share paid on Bancorporation's Common Stock, during the periods indicated.
The market price information does not include retail markups, markdowns or commissions, but is based on actual transactions.
Bancorporation High* Low* Dividend*
1997 1st Quarter $16 1/4 $10 3/4 $.10 2nd Quarter 17 5/8 14 .10 3rd Quarter 20 1/2 16 3/8 .10 4th Quarter 24 1/2 15 5/8 .11
1996 1st Quarter $10 1/8 $8 $.06 2nd Quarter 10 1/8 9 .06 3rd Quarter 9 1/2 8 5/8 .07 4th Quarter 11 5/8 9 .08
____________ * The market prices and dividends have been restated to give effect to the 5% stock dividend declared December 18, 1997 and distributed January 6, 1998, and the 10% stock dividend which was declared September 19, 1996 and distributed October 4, 1996.
As of January 31, 1998, there were 4,707,321 shares of Bancorporation's Common Stock outstanding and approximately 900 holders of record of such stock.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA.
The following table sets forth certain historical financial data with respect to Bancorporation on a consolidated basis. The information contained in this table should be read in conjunction with Bancorporation's historical Consolidated Financial Statements and related notes thereto included elsewhere in this Report.
December 31, 1997 1996 1995 1994 1993 (Dollars in thousands) SELECTED CONSOLIDATED STATEMENTS OF CONDITION INFORMATION
Total assets $601,669 $533,615 $481,185 $428,630 $438,532 Loans, gross 322,752 287,364 267,419 267,422 265,920 Investment securities 206,407 159,214 116,212 110,933 102,165 Total deposits 518,238 485,073 429,681 391,466 406,066 Short-term borrowings 13,000 1,000 782 177 342 Long-term debt 9,000 0 0 0 0 9.5% Cumulative Trust Preferred Securities 11,500 0 0 0 0 Shareholders' equity 39,231 38,358 34,529 30,266 27,421
December 31, 1997 1996 1995 1994 1993 (Dollars in thousands)
CONSOLIDATED STATEMENTS OF INCOME INFORMATION Interest income $ 40,855 $ 35,162 $ 33,398 $ 29,795 $28,313 Interest expense 15,930 11,818 10,082 7,464 8,082 Net interest income 24,925 23,344 23,316 22,331 20,231 Provision for possible loan losses 1,800 1,350 720 450 900 Net interest income after provision for possible loan losses 23,125 21,994 22,596 21,881 19,331 Non-interest income 7,117 6,556 4,491 3,649 4,023 Non-interest expense 19,549 19,849 19,536 20,073 19,813 Provision for income taxes 4,282 3,428 3,131 768 1,491 Net income before cumulative effect of a change in accounting principle 6,411 5,273 4,420 4,689 2,050 Cumulative effect of a change in accounting principle 0 0 0 0 1,086 Net income $ 6,411 $ 5,273 $ 4,420 $ 4,689 $3,136 Per Share Data Net income per common share Basic Before cumulative effect of a change in accounting principle $1.34 $1.10 $1.13 $1.23 $0.44 Cumulative effect of a change in accounting principle 0.00 0.00 0.00 0.00 0.33 Basic earnings per common share $1.34 $1.10 $1.13 $1.23 $0.77 Diluted Before cumulative effect of a change in accounting principle $1.29 1.06 0.89 0.96 0.43 Cumulative effect of a change in accounting principle 0.00 0.00 0.00 0.00 0.23 Diluted earnings per common share $1.29 $1.06 $0.89 $0.96 $0.66 Cash dividends per common share $0.37 $0.27 $0.16 $0.15 $0.00 Book value per common share 8.33 7.82 7.05 6.81 5.96 Dividend payout ratio 27.16% 24.54% 26.58% 24.05% 20.37% Weighted average number of common shares outstanding (in thousands): Basic 4,788 4,789 3,407 3,322 3,276 Diluted 4,957 4,998 4,959 4,896 4,781
FINANCIAL RATIOS Return on average assets 1.13% 1.05% 0.97% 1.04% 0.48% Return on average shareholders' equity 16.33 14.58 13.52 16.16 7.83 Average equity to average assets 6.94 7.20 7.14 6.44 6.12 Earnings to fixed charges /1/ 1.56 1.74 1.71 1.68 1.30 Net interest margin 4.70 5.05 5.59 5.41 5.12 Net interest spread 3.89 4.33 4.88 4.92 4.55 Asset Quality Ratios Non-performing loans as a % of gross loans 1.49% 3.39% 3.82% 3.63% 7.72% Non-performing loans as a % of total assets 0.80 1.82 2.12 2.26 4.68 Allowance for possible loan losses as a % of gross loans 2.16 2.97 2.77 2.84 4.23 Allowance for possible loan losses as a % of non-performing loans 145.00 87.65 72.47 78.32 54.81 Net chargeoffs as a % of average gross loans 1.10 0.08 0.35 1.56 0.90 Non-performing assets as a % of loans and OREO 2.19 5.03 6.00 5.81 10.03 Capital Ratios Leverage capital 8.19% 6.92% 7.17% 7.00% 6.23% Tier 1 capital to total risk-weighted assets 13.16 11.17 10.58 9.96 9.16 Total capital to total risk-weighted assets 14.41 12.44 11.85 11.22 10.45
/1/ The ratio of earnings to fixed charges is computed by dividing the sum of income before taxes, fixed charges and preferred stock dividends by the sum of fixed charges and preferred stock dividends. Fixed charges represent interest expense and payment of debt.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
EXCEPT FOR THE HISTORICAL INFORMATION CONTAINED HEREIN, THE STATEMENTS MADE IN THIS REPORT ON FORM 10-K ARE FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES. BANCORPORATION'S ACTUAL RESULTS, FINANCIAL CONDITION OR BUSINESS COULD DIFFER MATERIALLY FROM ITS HISTORICAL RESULTS, FINANCIAL CONDITION OR BUSINESS, OR THE RESULTS OF OPERATIONS, FINANCIAL CONDITION OR BUSINESS CONTEMPLATED BY SUCH FORWARD-LOOKING STATEMENTS. FACTORS THAT COULD CAUSE OR CONTRIBUTE TO SUCH DIFFERENCES INCLUDE, BUT ARE NOT LIMITED TO, THOSE DISCUSSED BELOW UNDER THE CAPTION "FACTORS THAT MAY AFFECT FUTURE RESULTS OF OPERATIONS, FINANCIAL CONDITION OR BUSINESS," AS WELL AS THOSE DISCUSSED ELSEWHERE IN BANCORPORATION'S REPORTS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION.
The following discussion and analysis is intended to provide information about the financial condition and results of operations of Broad National Bancorporation and its subsidiaries on a consolidated basis and should be read in conjunction with the Consolidated Financial Statements and their related notes. As used in the following discussion, the term "Company" refers to Broad National Bancorporation and its subsidiaries on a consolidated basis; the term "Bank" refers to Broad National Bank and its subsidiaries on a consolidated basis; and the term "Bancorporation" refers to Broad National Bancorporation on a parent company only basis. When necessary, reclassifications have been made to prior years' data throughout the following discussion and analysis for purposes of comparability with 1997 data.
SUMMARY
The Company recorded net income of $6,411,000 or diluted per share earnings of $1.29 in 1997, compared to net income of $5,273,000 or diluted per share earnings of $1.06 in 1996, and net income of $4,420,000 or diluted per share earnings of $.89 in 1995.
The per-share data for 1996 and 1995 have been restated to reflect the effects of the 5% stock dividend declared December 18, 1997 and distributed January 6, 1998, as well as all prior stock dividends.
An improvement in net interest income and non-interest income as well as a decrease in non-interest expense contributed to the increase in income for 1997 as compared to 1996.
An improvement in non-interest income, particularly the increase in service charges on deposit accounts resulting from a more consistent collection of fee income for services provided,
is the primary reason for the increase in net income for 1996 as compared to 1995.
The Company's return on average assets was 1.13% for 1997, 1.05% for 1996 and 0.97% for 1995. The Company's return on average shareholders' equity was 16.33% for 1997, 14.58% for 1996 and 13.52% for 1995.
The Company's total assets increased $68,054,000 or 12.8% in 1997 following an increase of $52,430,000 or 10.9% in 1996. Total deposits increased $33,165,000 or 6.8% in 1997 following an increase of $55,392,000 or 12.9% in 1996. Total loans, net of the allowance for possible loan losses and unearned income, increased $36,969,000 or 13.3% in 1997 following growth of $18,857,000 or 7.3% in 1996.
RESULTS OF OPERATIONS
Net Interest Income
Net interest income, the primary source of earnings for the Company, is the difference between interest and fees earned on loans and other earning assets, and interest paid on deposits and other interest bearing liabilities. Earning assets include loans, investment securities and federal funds sold. Interest bearing liabilities include savings, interest bearing demand and time deposits, short-term borrowings, long-term debt and 9.5% Cumulative Trust Preferred Securities.
The following table shows the Company's consolidated average balance of assets, liabilities, and shareholders' equity as well as the amount of interest income or interest expense and the average rate for each category of interest-earning assets and interest-bearing liabilities. Non-accrual loans are included in average loans and interest on loans includes loan fees. Nontaxable income from investment securities and loans is presented on a tax-equivalent basis assuming a 34% tax rate.