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 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 (201) 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 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 $429,681,000 as of December 31, 1995 and of
$485,073,000 as of December 31, 1996. 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 $259,728,000 as of December 31, 1995 and $278,585,000 as of December 31, 1996, 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, serves as fiscal and paying agent, and as escrow agent. 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. During 1987, a wholly-owned subsidiary of the Bank purchased the five-story (approximately 45,000 square feet) Western Union Building at 909 Broad Street in Newark, New Jersey, adjacent to its main office. During 1994, the Bank and Bancorporation increased the amount of space available for the Bank's use in this building from approximately 55% to 81% of the building. Approximately 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 /1/ 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 1997 /1/ Newark, New Jersey
Millburn Banking Center 2,600 March 31, 2001 225 Millburn Avenue Millburn, New Jersey
Gateway III Banking Center 2,076 September 7, 100 Mulberry Street 1999 /1/ Newark, New Jersey
North Arlington Banking Center 1,700 October 7, 65 River Road 1997 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 1997 /4/ 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 three additional five 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 1995, the Bank opened a new full-service banking center in Kearny, New Jersey and converted its Gateway III Banking Center to a fully electronic branch, featuring multiple ATM's and a video banking link. During 1996, the Bank opened 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, 1996.
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 60 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 58 President of Position with Bancorporation (1992) Bancorporation and the Bank (1992); and the Bank/3/ Director (1992)
Fred S. Campo 47 Senior Vice President Position with of the Bank (1986); Bancorporation Secretary of and the Bank/4/ Bancorporation (1982) and the Bank (1991)
Fred Perry, Jr. 67 Senior Vice Position with President of the Bank the Bank (1978)
Peter Kenny 51 First Vice Position with President of the Bank /5/ the Bank (1991); Senior Vice President of the Bank (1992)
James Boyle 46 Treasurer of Position with Bancorporation; Bancorporation Vice President and and the Bank/6/ Comptroller of the Bank (1988); Senior Vice President of the Bank (1992)
Ellen Rogoff 47 First Vice President Position with of the Bank (1993); the Bank /7/ Senior Vice President of the Bank (1994) ___________________
/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/ Prior to joining Bancorporation and the Bank, Mr. Dorman was an executive vice president of Chemical Bank New Jersey where he managed the Statewide Commercial Lending division. For the two years prior to the merger in 1989 of Horizon Bank Corp. and Chemical Bank, Mr. Dorman served as President and Chief Executive Officer of Chemical New Jersey
Corporation, Chemical Banking Corporation's loan production office in New Jersey.
/4/ Mr. Campo joined the Bank in December 1978 as an internal auditor. In 1982, Mr. Campo became secretary of Bancorporation. In 1986, he was promoted to senior vice president of the Bank. In 1991, he became secretary of the Bank.
/5/ For at least five years prior to joining Bancorporation, Mr. Kenny was executive vice president and secretary of United Jersey Bank, Northwest.
/6/ Prior to joining Bancorporation, from April 1982 to December 1988 Mr. Boyle was a vice president and project director at National Westminister Bancorporation NJ (formerly First Jersey National Bank).
/7/ 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.
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*
1996 1st Quarter $10 5/8 $8 3/8 $.06 2nd Quarter 10 5/8 9 1/2 .06 3rd Quarter 10 9 1/8 .07 4th Quarter 12 1/4 9 1/2 .08
1995 1st Quarter $7 1/2 $6 1/8 $.03 2nd Quarter 9 1/8 6 3/8 .04 3rd Quarter 9 3/4 8 .05 4th Quarter 12 8 1/8 .05
____________ * The market prices and dividends have been restated to give effect to the 10% stock dividend which was distributed October 3, 1996.
As of January 31, 1997, there were 4,667,188 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.
/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 1996 data.
SUMMARY
The Company recorded net income of $5,273,000 or $1.10 per fully diluted common share in 1996, compared to net income of $4,420,000 or $0.93 per fully diluted common share in 1995 and net income of $4,689,000 or $1.00 per fully diluted common share in 1994. Net income in 1994 included tax benefits of $1,500,000 as well as a one-time recovery of $875,000 ($578,000 tax effected) of legal expenses in conjunction with an insurance settlement.
The per-share data for 1995 and 1994 have been restated to reflect the effects of the 10% stock dividend declared September 20, 1996 and distributed October 3, 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.
An improved net interest margin, an increase in non- interest income and a decline in non-interest expense contributed to the increase in income, before income taxes, for 1995 as compared to 1994. The increase in income tax expense offset these improvements and resulted in the overall decrease of net income for 1995 as compared to 1994.
The Company's return on average assets was 1.05% for 1996, 0.97% for 1995 and 1.04% for 1994. The Company's return on average shareholders' equity was 14.58% for 1996, 13.52% for 1995 and 16.16% for 1994.
The Company's total assets increased $52,430,000 or 10.9% in 1996 following an increase of $52,555,000 or 12.3% in 1995. Total deposits increased $55,392,000 or 12.9% in 1996 following an increase of $38,215,000 or 9.8% in 1995. Total loans, net of the allowance for possible loan losses and unearned income, increased $18,857,000 or 7.26% in 1996 following growth of $282,000 or 0.11% in 1995.
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, and short-term borrowings and long-term debt.
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 which are not material. Nontaxable income from investment securities and loans is presented on a tax-equivalent basis assuming a 34% tax rate.
(1) Interest income for investments in states and political subdivisions include tax-equivalent adjustments at a 34% rate. (2) Average rates reflect the tax-equivalent adjusted yields on non-taxable investments and loans. (3) Represents the difference between interest earned and interest paid, divided by total interest-earning assets.
RATE/VOLUME ANALYSIS OF NET INTEREST INCOME
The effect of changes in average balance and rate from the corresponding prior period on interest income, interest expense and net interest income for the years ended December 31, 1996 and 1995 is set forth below. The effect of a change in average balance has been determined by applying the average rate for the earlier period to the change in average balance for the later period, as compared with the earlier period. The effect of a change in the average rate has been determined by applying the average balance for the earlier period to the change in average rate for the later period, as compared with the earlier period. The variances attributable to simultaneous balance and rate changes have been allocated in proportion to the relationship of the dollar amount of change in each category.
Total tax equivalent interest income of $35,222,000 for 1996 represents an increase of $1,746,000 or 5.2% over total tax equivalent interest income of $33,476,000 for 1995. This improvement is primarily due to an increase of $44,932,000 in the average balance of interest earning assets for 1996 as compared to 1995. The largest increase in average balances is reflected in total investment securities, for which the average balance of $137,351,000 for 1996 is $23,194,000 higher than 1995. The average balances of total loans and federal funds sold for 1996 as compared to 1995 increased $11,920,000 and $9,818,000, respectively. The overall increase in the average balance of total interest earning assets contributed an additional $3,072,000 to total tax equivalent interest income for 1996 as compared to 1995. However, this increase was partially offset by a decrease of $1,326,000 in total tax equivalent interest income for 1996 as compared to 1995, resulting from a decline of 40 basis points in the average rate earned on interest earning assets. Decreases in the federal funds rate and the prime rate are the primary reasons for the decline in the average rates earned on total interest earning assets.
Total interest expense of $11,818,000 for 1996 was $1,736,000 or 17.2% higher than 1995. The cost of total interest bearing liabilities increased to 3.27% for 1996 as compared to 3.12% for 1995. An increase of $37,682,000 in total interest bearing liabilities, and a change in the mix of interest bearing liabilities contributed to the increase in total interest expense for 1996 as compared to 1995. Total average time deposits of $136,968,000 for 1996 were $38,178,000 or 38.7% higher than 1995 total average time deposits. This increase in average time deposit balances increased 1996 interest expense by $1,955,000 as compared to 1995 interest expense. The increase in the average balance of total time deposits also resulted in higher cost time deposits representing 37.9% of total interest bearing liabilities for 1996 as compared to 30.6% of total interest bearing liabilities for 1995. This change in the mix of interest bearing liabilities contributed to the increase in the cost of interest bearing liabilities to 3.27% for 1996 as compared to 3.12% for 1995.
Tax equivalent net interest income for 1996 was $10,000 or .04% higher than 1995 tax equivalent net interest income. The decline in the average rate on interest earning assets and the increase in the volume of interest bearing liabilities, particularly higher cost time deposits, offset the increased interest income which resulted from the increased volume of interest earning assets.
During 1995, total interest income, on a tax equivalent basis, increased $3,613,000 or 12.1% compared to 1994. The mix of average interest earning assets changed slightly for 1995 as compared to 1994. Average federal funds sold declined to 9.2% of average interest earning assets, as compared to 10.8% for 1994, while total investment securities increased to 27.3% of average interest earning assets for 1995 as compared to 25.9% for 1994. Total loans remained relatively unchanged, representing 63.5% of average interest earning assets for 1995, as compared to 63.3% for 1994. The increase of $3,613,000 in total interest income for 1995 as compared to 1994 was primarily attributable to an increase of 79 basis points in the average rate earned on total average interest earning assets, and to a lesser extent, an increase of $4,664,000 in total average interest earnings assets. An increase of $4,042,000 in the average balance of loans combined with an increase of 70 basis points in the average rate earned on loans to result in an increase of $2,205,000 in interest income earned on loans. Similarly, an increase of $6,748,000 in the average balance of investment securities combined with a 55 basis point increase in the average rate earned on investment securities to result in an increase of $991,000 in interest income earned on investment securities. Interest income earned on federal funds sold increased $417,000, primarily as the result of an increase of 174 basis points in the average rate earned on federal funds sold, which increase was partially offset by a decrease of $6,126,000 in the average balance of federal funds sold.
Total interest expense of $10,082,000 for 1995 was $2,618,000 or 35% higher than 1994. The increase in interest expense was primarily attributable to an increase in the average rates paid on interest bearing liabilities, and to a lesser extent due to the change in the mix of interest bearing liabilities. The average rate paid for interest bearing liabilities during 1995 was 83 basis points higher than 1994, with the largest increase in rates reflected in time deposits and short-term borrowings. In addition to the increase in average rates, the average balance of relatively higher costing time deposits and short- term borrowings increased during 1995. Average rates on time deposits under $100,000 were 197 basis points higher for 1995 as compared to 1994, while average rates on time deposits over $100,000 were 159 basis points higher for 1995 than for 1994. The average rate on short-term borrowings for 1995 was 384 basis points higher than 1994. The increase in the average rate paid on all interest bearing liabilities was responsible for an increase of $2,293,000 in total interest expense. Additionally, increases in the average balance of time deposits and short-term borrowings contributed to an additional $325,000 increase in total interest expense for 1995 as compared to 1994.
Tax equivalent net interest income for 1995 increased $995,000 or 4.4% from 1994, and the net interest margin for 1995 was 18 basis points higher than that for 1994. The increase is primarily attributable to the fact that average rates earned on interest earning assets increased more quickly than rates paid on interest bearing liabilities.
PROVISION FOR POSSIBLE LOAN LOSSES
In determining the provision for possible loan losses, management considers historical loan loss experience, changes in composition and volume of the portfolio, the level and composition of non-performing loans, the adequacy of the allowance for possible loan losses, and prevailing economic conditions. The provision for possible loan losses was $1,350,000, $720,000 and $450,000 for 1996, 1995 and 1994, respectively. The increase in the provision for possible loan losses during 1996 was primarily due to the increase in loans outstanding, as well as management's efforts to address specific problem loans and improve the Company's asset quality ratios.
Actual net loan charge-offs were $221,000 or .08% of average total loans, $920,000 or .35% of average total loans and $4,100,000 or 1.56% of average total loans for 1996, 1995 and 1994, respectively. Included in the net charge-off figure of $4,100,000 for 1994 are charge-offs for approximately $2,696,000 related to the sale of $5,651,000 of troubled loans, including approximately $4,500,000 of non-performing loans, which was completed during the second quarter of 1994. The net charge-off figure for 1994 also includes a $500,000 recovery received in conjunction with a previously discussed insurance settlement.
NON-INTEREST INCOME AND NON-INTEREST EXPENSES
Total non-interest income of $6,556,000 for 1996 was $2,065,000 or 46% higher than 1995. The most significant component of this increase is represented by service charges on deposit accounts, which were $1,855,000 or 52.8% higher for 1996 as compared to 1995. This improvement is attributable to a more consistent application and collection of certain deposit fee income for services provided to the existing base of deposit accounts. The 52.8% annual growth rate for 1996 is not indicative of future growth, and future growth, if any, of
service charge income will more closely coincide with increases in the number of deposit accounts, increased fees, or new fees associated with new services.
Other non-interest income increased $344,000 in 1996 as compared to 1995. The largest component of this increase was a non-recurring recognition of $285,000 which represented damages awarded to the bank in settlement of a lawsuit it had filed against an outside service provider for breach of duty. Non- interest income for 1996 also included a loss of $45,000 from the sale of securities available-for-sale, compared to a gain of $71,000 from the sale of securities available-for-sale in 1995.
Total non-interest income increased $842,000 or 23.1% for 1995 as compared to 1994. The most significant changes were represented by investment security and loan sale transactions. During 1995, the Company recorded a gain of $71,000 from the sale of securities available-for-sale. This gain represented an improvement of $240,000 over the loss of $169,000 recorded from the sale of securities available-for-sale in 1994. Additionally, during 1995 the Company recorded gains of $18,000 from the sale of residential mortgages. These gains represented an improvement of $314,000 over the loss of $296,000 realized from the sale of residential mortgages during 1994. Increases of $40,000 in ATM fee income and $36,000 in credit card fees represented the larger components of the $166,000 increase in other income.
Total non-interest expense of $19,849,000 for 1996 was $313,000 or 1.6% higher than 1995.
Salaries expense totaled $7,896,000 for 1996, an increase of $161,000, or 2.1%, compared to 1995. Merit increases and increased incentive salary programs were partially offset by reductions in staff. Employee benefits expense was $231,000 or 10.2% higher for 1996 as compared to 1995. Most of this increase is attributable to higher costs for hospital and medical insurance and pension plans.
Furniture and equipment expense of $1,090,000 for 1996 was $123,000 or 10.1% lower than 1995. This is primarily attributable to the reduction of equipment rental costs resulting from the Company's decision to purchase rather than lease its personal computer equipment.
Legal fees totaled $858,000 for 1996, an increase of $311,000, or 56.9%, as compared to 1995. Most of this increase is attributable to increased legal expenses associated with the Bank's efforts to work out its problem loans.
Professional fees of $1,307,000 for 1996 were $488,000 or 59.6% higher than for 1995. The largest contributing factor to this increase were fees of approximately $625,000 paid to an outside consulting firm which assisted management with a reengineering project for the Bank. All identifiable direct costs associated with this project were expensed in 1996, and fees paid to this firm for future services are anticipated to be significantly lower than fees paid in 1996. However, management anticipates that the expected savings from lower fees will be partially offset by higher costs to address ongoing staff training and bankwide technology improvements identified during the 1996 reengineering process.
FDIC and OCC assessments totaled $112,000 for 1996, a decrease of $455,000, or 80.2%, compared to 1995. The FDIC assessment declined from $461,000 in 1995 to the $2,000 minimum assessment which the Bank was required to pay in 1996 as a well capitalized institution as defined in the regulatory prompt corrective action framework for capital adequacy requirements. As the result of the Deposit Insurance Act of 1996, the $2,000 annual minimum deposit insurance assessment was repealed, and in 1997 the Bank's insurance assessment will increase to 1.29 cents per $100 in deposits, which is anticipated to result in an annual FDIC assessment of approximately $60,000 for 1997, subject to changes in the Bank's level of deposits.
Other real estate expense of $202,000 for 1996 was $103,000 or 104% higher than for 1995. A significant factor contributing to this increase was a loss of approximately $95,000 resulting from the sale of an OREO property during 1996.
Total non-interest expenses of $19,536,000 for 1995 were $537,000 or 2.7% lower than 1994. Salaries and wages in 1995 were $292,000 or 3.9% higher than those for 1994. This increase was attributable in part to an increase of approximately $112,000 in incentive salary programs as well as payments of approximately $60,000 to selected employees who qualified for and elected to participate in an early retirement program. The remaining increase was primarily attributable to merit increases. Employee benefits expense increased $260,000 or 13% during 1995 as compared to 1994. The most significant component of this increase was additional pension expense of $150,000 related to the early retirement program for selected employees. Legal fees in 1995 of $547,000 represented an increase of $411,000 over 1994 legal fees; however, 1994 legal fees were reduced by a one-time recovery of $875,000 resulting from the settlement of an insurance claim. FDIC and OCC assessments were $586,000 lower in 1995 than 1994 as the result of the reduction of the FDIC assessment during 1995. The largest component of the decrease in other expenses was a decline in expenses associated with a data processing conversion that occurred during 1994.
INCOME TAXES
The effective tax rates for 1996, 1995 and 1994 were 39.4%, 41.5% and 14.1%, respectively. The decrease in the effective tax rate to 39.4% for 1996 was primarily due to the recognition of tax benefits resulting from the adjustment of the valuation allowance for deferred tax assets. The decrease in the effective rate to 14.1% for 1994 was also primarily due to the recognition of tax benefits resulting from the adjustment of the valuation allowance for deferred tax assets.
The net change in the total valuation allowance for 1996 was a decrease of $160,000, which was primarily the result of the reduction of the Bank's state tax loss carryforward during 1996. The net change in the total valuation allowance for 1994 was a decrease of $1,500,000, which was the result of the accelerated recognition of temporary differences related to the sale of non-performing loans in 1994 and improvement in the Bank's core earnings.
FINANCIAL CONDITION
LOANS
Total loans, net of deferred loan fees, of $287,116,000 at December 31, 1996 increased $19,986,000 or 7.5% from the December 31, 1995 balance of $267,130,000. The most significant growth occurred in the residential mortgage category, which benefitted from a new fixed rate equity loan program, as well as an increased emphasis on an adjustable rate one to four family mortgage program. Average loans totaled $278,015,000 for 1996, an increase of $11,920,000 or 4.5% compared to an average of $266,095,000 for 1995. For 1996, average loans represented 60.0% of total interest earning assets, compared to 63.5% of total interest earning assets for 1995.
The following table shows the classification of loans by major category, at December 31, for each of the past five years.
Real estate loans include construction mortgages, residential mortgages (including home equity loans), and commercial mortgages.
Construction loans are predominately floating rate loans and the term thereof generally does not exceed one year. The majority of the Bank's construction loans consist of loans secured by single - or multi- family dwellings located in the Bank's primary market area.
Residential mortgage loans include mortgages for the purchase or refinancing of residential properties and are secured by first liens on those properties. This category also includes home equity loans which are secured by either a first or second lien on real estate.
Commercial mortgages include mortgages on owner occupied buildings and investment properties, secured by first mortgages on these properties. Amortization is generally based on terms of 15 years or less, and most loans have interest rate reset terms of 5 years or less.
Commercial loans primarily represent loans to commercial borrowers for working capital and other short-term needs and term loans for the acquisition of assets. The terms of such loans generally range from one to five years.
Installment loans are granted primarily to individuals on an installment basis, may be secured by liens on personally held assets or may be unsecured, and include auto loans, home improvement loans, student loans, revolving credit plans and personal loans.
The following table summarizes the contractual maturities of certain loan categories at December 31, 1996.
Within 1-5 Over One Year Years 5 Years Total (Dollars in Thousands)
Real estate loans: Construction $ 5,990 $ 0 $ 0 $ 5,990 Mortgage 29,309 46,894 119,188 195,391 Commercial loans 35,122 27,805 10,244 73,171
The table below presents the breakdown of loans with fixed and variable rates at December 31, 1996 for loans with a term of greater than one year in the following categories:
Fixed Variable Interest Rates Interest Rates (Dollars in Thousands)
Real Estate loans: Mortgage $ 95,546 $70,536 Commercial loans 18,263 19,786
The Company's loan portfolio is varied, with no undue concentration in any single industry, although most of the loans in the Company's loan portfolio have been made to borrowers in New Jersey. The Company's home equity loan portfolio (which is included in real estate mortgages in the table above) and a substantial portion of its commercial loan portfolio have interest rates that reprice with changes in the prime rate.
ALLOWANCE FOR POSSIBLE LOAN LOSSES
The allowance for possible loan losses is maintained at an amount considered adequate by management and the Board of Directors to provide for potential credit losses based upon a periodic evaluation of the risk characteristics of the loan portfolio.
Management and the Board of Directors of the Company review the allowance for possible loan losses on a regular basis. Management and the Board evaluate a number of factors in determining the appropriate level of the allowance for possible loan losses. Weakening credits are evaluated individually and factors such as the creditworthiness of the borrower, the adequacy of underlying collateral and the probable impact of business and economic conditions upon the borrower are examined. The review process also takes into consideration the possibility that there may be losses in the loan portfolio which cannot currently be identified, and the degree of risk inherent in the composition of the loan portfolio. The volume of non-performing and other classified loans and their relationship to the loan portfolio, as well as historical charge-off experience, are also examined.
The following table summarizes the activity in the allowance for possible loan losses over each of the past five years. Also presented are certain key ratios regarding the allowance.
The following table reflects the allowance for possible loan losses by category as of December 31, for each of the past five years:
As previously discussed under "PROVISION FOR POSSIBLE LOAN LOSSES", approximately $2,696,000 of the $5,141,000 of loans charged off during 1994 resulted from the sale of troubled loans.
The allowance for possible loan losses includes an allocation for all loans classified as special mention, substandard, doubtful or loss (See "Asset Quality" below for definitions of such classifications). After allocating the allowance for classified loans, an allocation is made for all non-classified loans. The allocation for non-classified loans is made by loan category, based upon the historical loss experience for each loan category as well as perceived risk of loss for each loan category. The amount of the allowance applicable to non-classified loans was $5,819,000 and $3,778,000 at December 31, 1996 and December 31, 1995, respectively. Since these factors are subject to change, the allocation of the allowance for possible loan losses should not be interpreted as an indication that such amounts or proportions will continue or indicate future trends.
The specific amount of the allowance in any particular category may prove excessive or inadequate and consequently may be reallocated in the future to reflect current conditions. Accordingly, the Company considers the entire reserve to be available to absorb losses in any category.
ASSET QUALITY
Various degrees of credit risk are associated with substantially all investing activities. Management believes that the lending function, however, carries the greatest risk of loss.
The Bank's credit due diligence begins at the time a borrower and the Bank begin to discuss the origination of a loan. Documentation including a borrower's credit history, materials establishing the value and liquidity of potential collateral, the
purpose of the loan, the source and timing of the repayment of the loan and other factors are analyzed before a loan is submitted for approval.
The Company attempts to minimize overall credit risk through loan diversification. The Company's loan portfolio is varied, with no undue concentration in any single industry, although most of the loans in the Company's loan portfolio have been made to borrowers in New Jersey.
Individual loan officers are assigned to monitor non-installment and non-residential mortgage loans and are responsible for the periodic updating of their reviews of such loans. Loan officers are actively encouraged to identify potential deteriorating loan situations through a self-reporting system.
Installment and residential mortgage loans are primarily monitored through an analysis of their payment status.
Classified loan reports are prepared and reviewed regularly by the problem loan committee. Classified loans are categorized into one of several categories, depending upon the condition of the borrower and the strength and amount of collateral.
Classifications consist of "special mention loans," defined as loans with only modest deficiencies in documentation and with potentially weakening credit features; "substandard loans," defined as loans that have a well-defined credit weakness; "doubtful loans," defined as loans that have a significantly higher probability of loss than substandard loans; and "loss" loans which are charged-off when they are deemed uncollectible.
Non-performing assets consist of (i) non-performing loans, which include non-accrual loans and loans past due 90 days or more as to interest or principal payments but not placed on non-accrual status; (ii) loans that have been restructured due to a weakening in the financial position of the borrower (restructured loans) and (iii) other real estate owned ("OREO"), net of reserves.
The following table reflects the components of non-performing assets at December 31, for each of the past five years:
It is the Company's general policy to discontinue the accrual of interest and reverse previously accrued but unpaid interest as to a particular loan when interest or principal is more than 90 days past due on such loan or other circumstances indicate that full collection is questionable, unless the loan is adequately secured and in the process of collection. Income on non-accrual loans is recognized only in the period in which it is collected.
In addition to the non-performing and restructured loans as of December 31, 1996 and 1995, the Company had classified an additional $3,088,000 and $4,932,000, respectively, as substandard loans. A loan loss reserve has been allocated to such loans in accordance with the Company's policies.
In the course of resolving non-performing loans, the Bank may restructure the contractual terms of its loans with its borrowers. If, prior to such restructuring, the loan was classified as non-accrual, it is the Bank's policy to continue to carry these restructured loans on non-accrual status for a period of time (typically six months) before management considers their
return to accrual status. At December 31, 1996, loans aggregating $3,934,000 were categorized as restructured. These loans are currently performing in accordance with their modified terms.
The level of non-performing assets is heavily dependent upon local economic conditions. The December 31, 1996 total non-performing assets of $14,508,000 represents a decrease of $1,583,000 or 9.8% from December 31, 1995. There can be no assurance that the level of the Company's non-performing assets will not increase in the future.
In May of 1993, FASB issued Statement of Financial Accounting Standards No. 114, "Accounting by Creditors for Impairment of a Loan" and Statement of Financial Accounting Standards No. 118 "Accounting by Creditors for Impairment of a Loan-Income Recognition and Disclosure" which apply to financial statements for fiscal years beginning after December 15,1994. These Statements require that impaired loans be measured based on the present value of expected future cash flows discounted at the loan's effective interest rate or, as a practical expedient, at the loan's observable market price or at the fair value of the collateral if the loan is collateral dependent. There was no material impact on the financial position or results of operations as a result of the Company adopting these statements during 1995.
INVESTMENT SECURITIES AND FEDERAL FUNDS SOLD
The Company invests a portion of its available funds in short-term and longer-term instruments, including federal funds sold and investment securities.
Federal funds sold are used primarily for daily cash management purposes. Average federal funds sold of $48,201,000 for 1996 represented 10.4% of total average interest earning assets, as compared to 9.2% for 1995.
Investment securities include obligations of the U.S. Government or its agencies, obligations of states and political subdivisions, Federal Reserve Bank stock and debt securities. The Company's investment securities portfolio is utilized to collateralize certain of the Bank's lines of credit and public and fiduciary deposits. It also provides liquidity through proceeds from scheduled maturities. The majority of the Company's investment securities carry fixed interest rates.
Effective January 1, 1994, the Company adopted Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities" ("SFAS 115"). The financial impact of the adoption was $57,000, net of tax, which was recorded as an increase to shareholders' equity.
SFAS 115 requires companies to divide their securities holdings among three categories: held-to-maturity, available-for-sale, and trading securities. The accounting standard provides a different accounting treatment for each category.
The Company does not have trading securities, but does differentiate between held-to-maturity securities and available-for-sale securities. Management determines the appropriate classification of securities at the time of purchase.
If management has the positive intent and the Company has the ability at the time of purchase to hold securities until maturity, they are classified as held-to-maturity securities. Such securities are stated at amortized cost, adjusted for unamortized purchase premiums and discounts.
Securities in the available-for-sale category are those for which the Company does not have the positive intent and ability to hold to maturity. Available-for-sale securities are reported at fair value. Any unrealized appreciation or depreciation in the available-for-sale securities, net of tax effects, is reported as a separate component of equity capital. At December 31, 1996 and 1995, the Company reported net unrealized securities gains of $146,000 and $284,000, respectively, in the Shareholders' Equity section of the consolidated statement of condition.
On November 15, 1995, the Financial Accounting Standards Board (FASB) issued a Special Report, "A Guide to Implementation of Statement 115 on Accounting for Certain Investments in Debt and Equity Securities." The guidance in this Special Report became effective November 15, 1995.
Included within the Special Report is guidance that permitted banking organizations to perform a one-time assessment to determine the appropriateness of the designations of all securities currently held. Any resulting redesignations were to be made in conjunction with the guidance which allowed banking organizations to transfer debt securities from the held-to- maturity portfolio before year-end 1995, without calling into question their intent to hold other debt securities to maturity.
In accordance with the guidance contained within the Special Report, effective December 1, 1995 the Company transferred securities with a book value of $37,911,000 from held-to-maturity to available-for-sale. These securities had a market value of $38,238,000 which resulted in the Company recording an unrealized gain on securities available-for-sale, net of tax, within Shareholders' Equity of $216,000.
At December 31, 1996, securities held-to-maturity of $90,170,000 represented 56.6% of the total investment securities portfolio, as compared to 51.9% at December 31, 1995. Securities available-for-sale of $69,044,000 at December 31, 1996 represented 43.4% of the total investment securities portfolio, as compared to 48.1% at December 31, 1995. Total average investment securities of $137,351,000 for 1996 represented 29.6% of 1996 total average interest earning assets, up from 27.3% of total average interest earning assets for 1995.
The table below presents the amortized cost and total estimated fair values of securities held-to-maturity as of year end for each of the past five years:
Maturities and weighted average yields of securities held-to-maturity at December 31, 1996, segregated by contractual maturity, are illustrated below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
The table below presents the amortized cost and total estimated fair values of securities available-for-sale at December 31, 1996, 1995, 1994 and 1993. There were no such securities available-for-sale for years prior to 1993:
December 31, 1996 1995 1994 1993 (Dollars in Thousands)
U.S. Treasury $12,513 $14,745 $10,932 $14,008 U.S. Government Agencies 1,000 1,000 0 0 Mortgage-backed securities 55,309 39,774 11,297 17,209 Amortized cost $68,822 $55,519 $22,229 $31,217 Estimated fair value $69,044 $55,946 $21,144 $31,303
Maturities and weighted average yields of securities available-for-sale at December 31, 1996, segregated by contractual maturity, are illustrated below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
Realized gains (losses) from the sale of securities available-for-sale were ($45,000), $71,000 and ($169,000) for 1996, 1995 and 1994, respectively.
DEPOSITS
The Bank's deposit base is its primary source of funds. The Bank offers a broad range of deposit products, including non-interest bearing demand deposits, NOW accounts, savings accounts, IMMA's and certificates of deposit.
The December 31, 1996 total deposit balance of $485,073,000 represents an increase of $55,932,000 or 12.9% from the December 31, 1995 balance of $429,681,000. This growth occurred in time deposits of $100,000 or more, which time deposits served primarily as the funding source to support the growth in the investment and loan portfolios. This growth in time deposits originated from new or expanded relationships with municipal government units within markets served by the bank, and served as an alternative to other sources of borrowed funds. Average time deposits over $100,000 of $52,891,000 for 1996 represented 14.7% of total average interest bearing deposits as compared to 6.3% in 1995. This increase in relatively higher cost deposits was a significant contributor to the overall increase in the cost of funds for 1996 as compared to 1995.
The following table shows a breakdown of the average balances and average rates paid on the following deposit categories for each of the past three years:
The following is a breakdown of the maturity of time certificates of deposit and other time deposits in excess of $100,000 as of December 31, 1996 and December 31, 1995, respectively:
Dec. 31, 1996 Dec. 31, 1995 (Dollars in Thousands)
Under three months $71,160 $12,463 Three to six months 5,851 4,904 Six to twelve months 2,993 2,057 Over twelve months 1,160 1,483 Total $81,164 $20,907
SHORT-TERM BORROWINGS
Short-term borrowings represent federal funds purchased and securities sold under agreements to repurchase, which are used to supplement the Bank's deposit base as a source of funding. The majority of these instruments have terms ranging from one to thirty days. These balances increased $218,000 to $1,000,000 at December 31, 1996 from $782,000 at December 31, 1995. The average balance of short-term borrowings represented less than 1% of total average interest bearing liabilities for both 1996 and 1995.
Information regarding the levels of short-term borrowings for each of the past three years is as follows:
December 31, 1996 1995 1994 (Dollars in Thousands) Balance, end of year $ 1,000 $ 782 $ 177 Maximum outstanding during the year at any month end $ 1,282 $21,345 $ 177 Average interest rate, end of year 4.95% 5.69% 2.95% Average outstanding during the year $ 1,149 $ 2,808 $ 275 Average interest rate for the year 4.97% 6.02% 2.18%
The average amounts outstanding were computed from daily averages and the average interest rates for the period were computed by dividing the respective interest expense by the average balance outstanding.
LIQUIDITY OF THE BANK
The Bank actively monitors its liquidity position to ensure that it has sufficient funds to provide for cash outflows without incurring losses from the premature liquidation of assets or the unexpected acquisition of costly liabilities. The Bank's cash outflows encompass interest paid to depositors and other creditors, deposit withdrawals, and disbursements to acquire assets and pay general operating costs. The Bank obtains cash from customers in the form of interest and principal payments on loans, fees paid for services, and from new deposits. Investment maturities also provide a source of cash.
Many different measurements of liquidity are used in the banking industry. The ratios of cash and cash equivalents (including federal funds sold) and short-term securities to total assets and net loans to total deposits are among some of the more commonly used indicators. These measurements are set forth below as of December 31, 1996 and 1995.
Dec. 31, 1996 Dec. 31, 1995 Cash and cash equivalents and securities maturing in one year to total assets 14.9% 22.1% Net loans to total deposits 57.4% 60.4%
To assist in the management of its liquidity, the Bank had available $23,750,000 in lines of credit with correspondent banks, which lines were not in use at December 31, 1996.
Managing the Bank's liquidity position involves a significant degree of analytical estimation and other objective factors. Although customer demand for funds, in the form of loans or deposit withdrawals, is largely dependent on general economic factors outside of the Bank's control, management believes that its present liquidity structure is adequate to meet such needs.
LIQUIDITY OF BANCORPORATION
Bancorporation's ability to meet its cash requirements, including dividend payments, is generally dependent upon the declaration and payment of dividends by the Bank to Bancorporation.
Under Federal law, the approval of the Comptroller of the Currency is required for the payment of dividends in any calendar year by Broad National Bank to Broad National Bancorporation if the total of all dividends declared in any calendar year exceeds the net income for that year combined with the retained net income for the preceding two calendar years. As of December 31, 1996, retained earnings of the Bank of $6,942,000 are available for payment of dividends to the parent company without regulatory approval.
Additionally, at December 31, 1996, Bancorporation had available $684,000 of cash for the purpose of paying future dividends and operating costs. However, a change in circumstances, such as changes in regulatory requirements or in the Bank's financial condition, could result in Bancorporation being required by regulatory authorities to utilize its funds to increase the Bank's capital. In such event, Bancorporation may not have sufficient cash for operations or to make dividend payments and may be required to seek other sources of capital and liquidity, if available.
INTEREST RATE SENSITIVITY
Management of interest rate sensitivity involves matching the maturity and repricing dates of interest-earning assets with those of interest-bearing liabilities in an effort to manage the impact of fluctuating net interest rates on net interest margins.
The Company's Asset/Liability Committee (the "Committee") meets at least monthly to establish, communicate, coordinate and control asset/liability management procedures. The purpose of the Committee is to monitor the volume and mix of the Company's interest sensitive assets and liabilities consistent with the Company's overall liquidity, capital, growth, risk and profitability goals.
Interest rate sensitivity is measured as the difference between the percentage of assets and liabilities in the Company's existing portfolio that are subject to repricing within specified time periods. These differences, known as interest sensitivity gaps, are usually calculated cumulatively for blocks of time.
Companies that are asset-sensitive (a positive gap) have more assets than liabilities subject to repricing within specified time periods and these companies are likely to benefit in periods of rising interest rates, but suffer as rates decrease. Companies that are liability-sensitive (a negative gap) are likely to benefit in periods of declining rates, but suffer as rates increase.
At December 31, 1996, there was a cumulative twelve month liability sensitive gap of .51:1. In a rising rate environment, a liability sensitive gap position generally indicates that increases in the cost of interest bearing liabilities will outpace increases in income from interest earning assets. This risk can be reduced by various strategies, including the management of liability costs and the investment of asset maturities and cash flows in such a way as to insulate net interest income from the effects of changes in interest rates.
An interest sensitivity table is not a complete picture of the possible effect of interest rate changes on net interest income. First, changes in the general level of interest rates will not affect all categories of assets and liabilities equally or simultaneously. Second, the table represents a one-day position: variations occur daily as the Company adjusts its interest sensitivity throughout the year. Third, the repricing distribution of interest sensitive assets may not be indicative of the liquidity of those assets. Finally, since this table is based on contractual maturities, it does not include required principal payments or estimates of early principal payments on residential mortgages, installment loans and investment securities. These static measurements are best used as early indicators of potential interest rate exposure.
These gap positions are also monitored through the use of simulation modeling techniques which apply alternative interest rate scenarios to periodic forecasts of future business activity and estimate the related impact on net interest income. The use of simulation modeling assists management in its continuing efforts to achieve earnings growth in ever-changing interest rate environments.
The table below indicates as of December 31, 1996 the time period in which interest-earning assets and interest-bearing liabilities are scheduled to mature or reprice in accordance with their contractual terms.
SHAREHOLDERS' EQUITY
Shareholders' equity of $38,358,000 at December 31, 1996 was $3,829,000 or 11.1% higher as compared to December 31, 1995. The ratio of average total equity to average total assets was 7.20% for 1996 compared to 7.14% for 1995. Book value per common share increased to $8.21 at December 31, 1996 from $7.40 at December 31, 1995.
The redemption of both classes of the Company's preferred stock was completed during 1996 and 3,947 shares of both classes of preferred stock were redeemed. In lieu of redemption, 575,730 shares or 99.3% of the total outstanding shares of both classes of preferred stock were converted into 1,176,522 shares of common stock.
The Company and its bank subsidiary are subject to various regulatory capital requirements. Capital adequacy for the Company is measured against guidelines established by the Federal Reserve Board. The Federal Reserve Board measures capital adequacy for bank holding companies by using a risk-based capital framework and by monitoring compliance with minimum leverage guidelines. Effective December 31, 1992, bank holding companies were required to maintain a ratio of at least 8.00% between capital and risk-weighted assets, of which approximately one-half (4.00%) must be in Tier 1 capital. In addition, the Federal Reserve Board has established minimum leverage ratio guidelines for bank holding companies. These guidelines provide for a minimum leverage ratio (Tier 1 capital to quarterly average total assets less goodwill) of 3% for bank holding companies that meet certain criteria, including that they maintain the highest regulatory rating. All other bank holding companies are required to maintain a leverage ratio of 3% plus an additional cushion of at least 100 to 200 basis points.
The Bank is subject to generally similar capital requirements adopted by the OCC.
The tables below present in summary form the risk-based and leverage capital ratios of the Company and the Bank as of December 31, 1996 and 1995.
RECENT ACCOUNTING PRONOUNCEMENTS
In May 1995 the FASB issued SFAS No. 122, "Accounting for Mortgage Servicing Rights." The Statement requires capitalization of the value of rights to service mortgage loans for others, whether those rights were acquired through purchase or origination. SFAS No. 122 also requires that capitalized mortgage servicing rights be evaluated for impairment based on their fair value with any adjustments recognized through a valuation allowance. The Company did not sell any loans in 1996 and therefore has not been impacted by SFAS No.122. The Company does not expect the adoption of SFAS No.122 to have a material effect on its future financial position or results of operations.
In October 1995 the FASB issued SFAS No. 123, "Accounting for Stock-Based Compensation." This Statement encourages use of a fair value based method of accounting for stock-based compensation plans while allowing continued use of the intrinsic value method of accounting prescribed by Accounting Principles Board Opinion (APB) No. 25, "Accounting for Stock Issued to Employees." Entities electing to continue using the APB No. 25 method of accounting must make pro forma disclosures of net income and earnings per shares as if the fair value based method of accounting, as defined is SFAS No. 123, had been applied.
The Company adopted SFAS No. 123 effective January 1, 1996 and will continue accounting for stock-based compensation under APB No. 25 and include the pro forma disclosures required by SFAS No. 123 in annual financial statements beginning in the year ended December 31, 1996.
In June 1996, the FASB issued SFAS No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities." SFAS No. 125 provides accounting and reporting standards for transfers and servicing of financial assets and extinguishments of liabilities. These standards are based on consistent application of a financial- components approach that focuses on control. Under this approach, after a transfer of financial assets, an entity recognizes the financial and servicing assets it controls and the liabilities it has incurred, derecognizes financial assets when control has been surrendered, and derecognizes liabilities when extinguished. SFAS No. 125 provides consistent standards for distinguishing transfers of financial assets that are sales from transfers that are secured borrowings. SFAS No. 125 is effective for transfers that occur after December 31, 1996, and will be applied prospectively. The Company does not expect the adoption of SFAS No. 125 to have a material effect on its future financial position or results of operations.
FACTORS THAT MAY AFFECT FUTURE RESULTS OF OPERATIONS, FINANCIAL CONDITION OR BUSINESS
In order to take advantage of the safe harbor provisions for forward-looking statements contained in Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, added to those Acts by the Private Securities Litigation Reform Act of 1995, Bancorporation is hereby identifying important risks and uncertainties that could affect Bancorporation's actual results of operations, financial condition or business and could cause Bancorporation's actual results of operations, financial condition or business to differ materially from its historical results of operations, financial condition or business, or the results of operations, financial condition or business contemplated by forward-looking statements made herein or elsewhere orally or in writing, by, or on behalf of, Bancorporation. Factors that could cause or contribute to such differences include, but are not limited to, those factors described below.
ECONOMIC CONDITIONS IN BANCORPORATION'S PRIMARY MARKET AREA
The profitability of Bancorporation is dependant on the profitability of its subsidiary, Broad National Bank, which is a national banking association operating out of New Jersey. The Bank's financial condition is affected by fluctuations in the economic conditions prevailing in that portion of New Jersey in which the Bank's banking operations are located. Accordingly, the financial conditions of both the Bank and Bancorporation would be adversely affected by deterioration in the general economic and real estate climate in the State of New Jersey. The Bank's business is also subject to fluctuations in interest rates, national and local economic conditions, monetary and regulatory policies and consumer and institutional confidence in the Bank. The fluctuations are neither predictable nor controllable and may have materially adverse consequences upon the operations and financial condition of the Bank and Bancorporation in the future even if other favorable events occur.
IMPORTANCE OF NET INTEREST INCOME AND SUSCEPTIBILITY TO CHANGES IN INTEREST RATES
The primary source of earnings for the Bank and Bancorporation is net interest income, which is the difference between interest and fees earned on loans and other interest- earning assets, and the interest paid on deposits and other interest-bearing liabilities. There may be a difference between the amount of interest-earning assets scheduled to reprice in any given period and the amount of interest-bearing liabilities scheduled to reprice over the same time. Any difference can create a lag between the time it takes the rate the bank earns interest to respond to market fluctuations and the time it takes the rate the bank incurs interest costs to respond to market fluctuations, and vice-versa. Because of these "interest sensitivity gaps," the amount of net interest income may be affected by fluctuations in the interest rate.
ASSET QUALITY AND LENDING RISKS
Success in the banking industry largely depends on the quality of loans and other assets. The Bank's loan officers are actively encouraged to identify deteriorating loans. Loans are also monitored and categorized through an analysis of their payment status. The Bank's failure to timely and accurately monitor the quality of its loans and other assets could have a materially adverse effect on the operations and financial condition of the Bank and Bancorporation. There is a degree of credit risk associated with any lending activity. Bancorporation attempts to minimize its credit risk through loan diversification. Although Bancorporation's loan portfolio is varied, with no undue concentration in any one industry, substantially all of the loans in the portfolio have been made to borrowers in New Jersey. Therefore, the loan portfolio is susceptible to factors affecting the New Jersey area and the level of non-performing assets is heavily dependant upon local conditions. See "Economic Conditions in Bancorporation's Primary Market Area." There can be no assurance that the level of Bancorporation's non-performing assets will not increase above current levels. High levels of non-performing assets could have a materially adverse effect on the operations and financial condition of the Bank and Bancorporation.
PROVISIONS FOR POSSIBLE LOAN LOSSES
Bancorporation makes a provision for possible loan losses based upon management's analysis of potential losses in the loan portfolio and consideration of prevailing economic conditions. Bancorporation may need to increase the provision for loan losses through additional provisions in the future if the financial condition of any of its borrowers deteriorates or if real estate values decline. See "Asset Quality and Lending Risks." Furthermore, various regulatory agencies, as an integral part of their examination process, periodically review Bancorporation's loan portfolio, provision for loan losses, in- substance foreclosed loans, and real estate acquired by foreclosure. Such agencies may require, and in the past have required, Bancorporation to recognize additions to the provision for loan losses based on their judgments of information available to them at the time of the examination. Any additional provisions for possible loan losses, whether required as a result of regulatory review or initiated by Bancorporation itself, may materially alter the financial outlook of the Bank and Bancorporation.
COMPETITION IN BANCORPORATION'S MARKET AREA
Vigorous competition exists in all major areas where Bancorporation and the Bank presently engage in business. The Bank faces intense competition in local and national markets from other major banking institutions. The Bank is in direct competition with some larger institutions that have substantially greater resources, better name recognition, stronger market presence, and the ability to offer a wider range of services. Competition from larger institutions is especially prevalent due to the accelerated pace of bank mergers in the New Jersey area. The long-term impact of such mergers and consolidations on the New Jersey market area is uncertain. The Bank may face even more intense competition because of the proliferation of bank mergers. An increase in the intensity of competition from other banks in the New Jersey market could have a materially adverse impact on the operations and financial condition of the Bank and Bancorporation.
In addition to the competition from rival banking companies, the Bank faces competition from non-bank institutions including: finance companies; mortgage lenders; small loan companies; credit unions; insurance companies; and a variety of other financial service and advisory companies. The stock market, mutual funds, and other non-federally insured investments also compete with the Bank for customer deposits. The Bank may face more intense competition from these and other non-banking industries and investments in the future. A failure of the Bank to be competitive could have a materially adverse effect on the Bank and Bancorporation.
REGULATION
Banks and bank holding companies such as Bancorporation are subject to regulation by both federal and state bank regulatory agencies. The regulations, which are designed to protect borrowers and promote certain social policies, include limitations on the operations of banks and bank holding companies, such as minimum capital requirements and restrictions on dividend payments. These regulations are not necessarily designed to maximize the profitability of banking institutions. Future changes in the banking laws and regulations could have a materially adverse effect on the operations and financial condition of the Bank and Bancorporation.
IMPORTANCE OF EXECUTIVE OFFICERS
The success of the Bank and Bancorporation has been largely dependant on the efforts of Donald Karp, John Dorman and the other executive officers. These individuals are expected to continue to perform their services. However, the loss of the services of Donald Karp, John Dorman, or any of the other key executive officers could have a materially adverse effect on the Bank and Bancorporation.
ADDITIONAL FACTORS
Additional risks and uncertainties that may affect the future results of operations, financial condition or business of the Bank and Bancorporation include, but are not limited to: (i) the ability to keep pace with technological change including developing and implementing technological advances timely and cost-effectively in order to provide better service and remain competitive; (ii) adverse publicity, news coverage by the media, or negative reports by brokerage firms, industry and financial analysts regarding the Bank or Bancorporation; and (iii) changes in accounting policies and practices.
ITEM 8.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
BROAD NATIONAL BANCORPORATION AND SUBSIDIARIES INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
Independent Auditors' Report as of December 31, 1996 and 1995 and for the years ended December 31, 1996, 1995 and 1994 53
Consolidated Statements of Condition as of December 31, 1996 and 1995 54
Consolidated Statements of Income for each of the years ended December 31, 1996, 1995 and 1994 55
Consolidated Statements of Changes in Shareholders' Equity for the years ended December 31, 1996, 1995 and 1994 57
Consolidated Statements of Cash Flows for each of the years ended December 31, 1996, 1995 and 1994 58
Notes to Consolidated Financial Statements 59
All schedules are omitted because they are not applicable, or not required, or because the required information is included in the financial statements or the notes thereto.
INDEPENDENT AUDITOR'S REPORT
To the Shareholders and Board of Directors of Broad National Bancorporation:
We have audited the accompanying consolidated statements of condition of Broad National Bancorporation and subsidiaries as of December 31, 1996 and 1995 and the related consolidated statements of income, changes in shareholders' equity, and cash flows for each of the years in the three-year period ended December 31, 1996. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Broad National Bancorporation and subsidiaries as of December 31, 1996 and 1995, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1996 in conformity with generally accepted accounting principles.
As discussed in note 1 to the consolidated financial statements, Broad National Bancorporation and subsidiaries adopted the provisions of the Financial Accounting Standards Board's Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities" in 1994.
/s/ KPMG Peat Marwick LLP
KPMG Peat Marwick LLP
Short Hills, New Jersey January 15, 1997
Broad National Bancorporation and Subsidiaries CONSOLIDATED STATEMENTS OF CONDITION December 31, 1996 and 1995 (Dollars in thousands, except share amounts) 1996 1995 ASSETS CASH AND DUE FROM BANKS (Note 10) $ 19,782 $25,810 FEDERAL FUNDS SOLD 57,075 61,300 CASH AND CASH EQUIVALENTS 76,857 87,110 SECURITIES HELD-TO-MATURITY (aggregate market value $89,482 and $59,948, respectively) (Note 2) 90,170 60,266 SECURITIES AVAILABLE-FOR-SALE (Note 2) 69,044 55,946 LOANS, net of deferred loan fees (Note 3) 287,116 267,130 LESS - Allowance for possible loan losses (Note 4) 8,531 7,402 NET LOANS 278,585 259,728 PREMISES AND EQUIPMENT, net (Note 5) 8,888 9,418 ACCRUED INTEREST RECEIVABLE 3,351 2,819 OTHER ASSETS (Note 6) 6,720 5,898 TOTAL ASSETS $533,615 $481,185
LIABILITIES AND SHAREHOLDERS' EQUITY DEPOSITS Non-interest bearing demand $100,945 $102,207 Savings and interest bearing demand 217,250 220,058 Time deposits less than $100,000 85,714 86,509 Time deposits of $100,000 or more 81,164 20,907 Total deposits 485,073 429,681 SHORT-TERM BORROWINGS (Note 9) 1,000 782 ACCRUED TAXES, INTEREST AND OTHER LIABILITIES (Notes 6 and 7) 9,184 16,193 TOTAL LIABILITIES 495,257 446,656 COMMITMENTS AND CONTINGENCIES (Note 10) SHAREHOLDERS' EQUITY (Note 11) Preferred stock-1985 class, $10 par value, authorized 17,124 shares, outstanding 0 shares in 1996 and 17,124 shares in 1995 0 171 8 1/2% Cumulative Convertible Preferred Stock-1992 class, $1 par value, authorized 690,000 shares, outstanding 0 shares in 1996 and 562,553 shares in 1995 0 563 Common stock, $1 par value, authorized 5,500,000 shares; issued: 1996, 4,677,188 shares; 1995, 3,059,203 shares 4,677 3,059 Capital surplus 26,589 23,145 Retained earnings 7,004 7,307 Common stock in treasury, at cost: 5,000 shares in 1996 and 0 shares in 1995 (58) 0 Unrealized gain on securities available-for-sale, net 146 284 TOTAL SHAREHOLDERS' EQUITY 38,358 34,529 TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $533,615 $481,185
The accompanying notes to the consolidated financial statements are an integral part of these statements.
Broad National Bancorporation and Subsidiaries CONSOLIDATED STATEMENTS OF INCOME For the years ended December 31, 1996, 1995 and 1994 (In thousands, except per share amounts)
1996 1995 1994
INTEREST INCOME Interest and fees on loans (Note 3) $24,190 $24,337 $22,130 Interest on securities held-to-maturity Taxable 4,667 5,071 4,544 Tax exempt 49 55 28 Interest on securities available-for-sale 3,689 1,682 1,257 Interest on federal funds sold 2,567 2,253 1,836 TOTAL INTEREST INCOME 35,162 33,398 29,795 INTEREST EXPENSE Interest on savings and interest bearing demand deposits 4,899 4,900 5,018 Interest on time certificates of deposit of $100,000 or more 2,639 1,040 491 Interest on other time deposits 4,222 3,973 1,949 Interest on short-term borrowings 58 169 6 TOTAL INTEREST EXPENSE 11,818 10,082 7,464 NET INTEREST INCOME 23,344 23,316 22,331 PROVISION FOR POSSIBLE LOAN LOSSES (Note 4) 1,350 720 450 NET INTEREST INCOME AFTER PROVISION FOR POSSIBLE LOAN LOSSES 21,994 22,596 21,881 NON-INTEREST INCOME Service charges on deposit accounts 5,370 3,515 3,393 Other income 1,231 887 721 Gain (loss) on sale of securities available- for-sale (Note 2) (45) 71 (169) Gain (loss) on sale of loans 0 18 (296) TOTAL NON-INTEREST INCOME 6,556 4,491 3,649 NON-INTEREST EXPENSES Salaries and wages 7,896 7,735 7,443 Employee benefits (Note 7) 2,486 2,255 1,995 Occupancy expense (Note 10) 1,923 1,975 1,927 Furniture and equipment expense 1,090 1,213 1,361 Advertising 406 425 360 Data processing fees 1,070 1,086 1,256 Legal fees 858 547 136 Professional fees 1,307 819 806 Insurance 413 415 374 Postage, delivery and communication 675 624 589 FDIC and OCC assessments 112 567 1,153 Other real estate expense 202 99 169 Other expenses 1,411 1,776 2,504 TOTAL NON-INTEREST EXPENSES 19,849 19,536 20,073
INCOME BEFORE INCOME TAXES 8,701 7,551 5,457 PROVISION FOR INCOME TAXES (Note 6) 3,428 3,131 768 NET INCOME $ 5,273 $ 4,420 $4,689
NET INCOME APPLICABLE TO COMMON STOCK (NOTE 11) $ 5,273 $ 3,840 $4,075 AVERAGE NUMBER OF COMMON SHARES OUTSTANDING (Note 11) PRIMARY 4,650 3,302 3,168 ASSUMING FULL DILUTION 4,791 4,735 4,676 NET INCOME PER COMMON SHARE (Note 11) PRIMARY EARNINGS PER COMMON SHARE $1.13 $1.16 $1.29 FULLY DILUTED EARNINGS PER COMMON SHARE $1.10 $0.93 $1.00
The accompanying notes to the consolidated financial statements are an integral part of these statements.
Broad National Bancorporation and Subsidiaries CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY For the years ended December 31, 1996, 1995, and 1994 (In thousands, except per share amounts)
Broad National Bancorporation and Subsidiaries CONSOLIDATED STATEMENTS OF CASH FLOWS For the years ended December 31, 1996, 1995 and 1994 (In thousands)
The accompanying notes to the consolidated financial statements are an integral part of these statements.
Broad National Bancorporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1996
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The more significant accounting policies not described elsewhere in these notes are as follows:
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Broad National Bancorporation (the Company), its wholly owned subsidiary Broad National Bank (the Bank) and the Bank's wholly owned subsidiaries, BNB Investment Corporation, Broad National Realty Corporation and Bronatoreo. All intercompany accounts and transactions have been eliminated.
BASIS OF FINANCIAL STATEMENT PRESENTATION
In preparing the consolidated financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the statements of condition and results of operations for the periods indicated. Actual results could differ significantly from those estimates.
Material estimates that are particularly susceptible to significant change in the near-term relate to the determination of the allowance for possible loan losses and the valuation of other real estate owned. In connection with the determination of these allowances, management generally obtains independent appraisals.
While management uses available information to recognize losses on loans and other real estate owned, future additions may be necessary based on changes in economic conditions. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Company's allowance for losses on loans, and valuation of other real estate owned. Such agencies may require the Company to recognize additions to the allowance or changes in valuation based on their judgments of information available to them at the time of their examination.
A substantial portion of the Company's loans are secured by real estate in New Jersey. Accordingly, as with most financial institutions in this market area, the ultimate collectibility of a substantial portion of the Company's loan portfolio is susceptible to changes in New Jersey's market conditions.
FEDERAL HOME LOAN BANK OF NEW YORK (FHLBNY) STOCK
The Bank, as a member of the FHLBNY, is required to hold shares of capital stock of FHLBNY, which are carried at cost, based upon a specified formula.
INVESTMENT SECURITIES
Effective January 1, 1994, the Company adopted Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities" ("SFAS 115"). The financial impact of the adoption was $57,000, net of tax, which was recorded as an increase to shareholders' equity. SFAS 115 requires companies to divide their securities holdings among three categories: held-to-maturity, available-for-sale, and trading securities. The accounting standard provides a different accounting treatment for each category.
The Company does not have trading securities, but does differentiate between held-to-maturity securities and available-for-sale securities. Management determines the appropriate classification of securities at the time of purchase.
If management has the positive intent and the Company has the ability at the time of purchase to hold securities until maturity, they are classified as held-to-maturity securities. Such securities are stated at amortized cost, adjusted for unamortized purchase premiums and discounts.
Securities in the available-for-sale category are those for which the Company does not have the positive intent and ability to hold to maturity. Available-for-sale securities are reported at fair value. Any unrealized appreciation or depreciation in the available-for-sale securities, net of tax effects, is reported as a separate component of shareholders' equity. Realized gains or losses on the sale of securities available-for-sale are recognized on the specific identification method.
LOANS AND LOAN FEES
Loans are stated at their principal amount outstanding, net of deferred loan fees and costs.
Non-refundable fees and costs associated with originating or acquiring loans are deferred and amortized over the expected remaining life of the related loans by use of a method which approximates the level yield method.
It is the policy of the Bank to discontinue the accrual of interest and reverse previously accrued but unpaid interest where interest or principal is more than 90 days past due or when other circumstances indicate that collection is questionable, unless the loans are adequately secured and in the process of collection. Income on these loans is recognized only in the period in which it is collected.
ALLOWANCE FOR POSSIBLE LOAN LOSSES
The allowance for possible loan losses is maintained at a level considered adequate to provide for potential loan losses. The allowance is increased by provisions charged to expense and reduced by net charge-offs. The level of the allowance is based upon management's evaluation of potential losses in the loan portfolio, after consideration of prevailing economic conditions.
Effective January 1, 1995, the Company adopted Statement of Financial Accounting Standards No. 114, "Accounting by Creditors for Impairment of a Loan" ("SFAS 114"). SFAS 114 requires that the value of an impaired loan be measured based upon the present value of expected future cash flows discounted at the loan's effective interest rate, or the fair value of the collateral if the loan is collateral dependent. Smaller balance homogeneous loans that are collectively evaluated for impairment, such as residential mortgage loans and installment loans, are specifically excluded from impaired loans. The impaired loan portfolio is primarily collateral dependent, as defined by SFAS 114. Impaired loans are assessed to determine that each loan's carrying value is not in excess of the fair value of the related collateral or the present value of expected future cash flows. The Bank has identified the population of loans to be evaluated for impairment to be non-accrual loans and loans internally classified as substandard or below and in each instance above an established dollar threshold. All loans below the established dollar threshold are considered in the Bank's normal credit evaluation process.
Effective January 1, 1995, the Bank adopted Statement of Financial Accounting Standards No. 118, "Accounting by Creditors for Impairment of a Loan - Income Recognition and Disclosures" ("SFAS 118"). The Bank has chosen to maintain existing income recognition policies with respect to non-accrual loans.
OTHER REAL ESTATE OWNED
Other real estate owned is composed of foreclosed properties where the Bank has actually received title. Such properties are carried at the lower of cost or fair value less estimated cost to sell. The fair value of such assets is determined based upon independent appraisals and other relevant factors. Operating expenses, and gains or losses from the sale of other real estate owned are charged or credited to other real estate expense.
Other real estate owned is included in "Other Assets" in the Consolidated Statements of Condition.
PREMISES AND EQUIPMENT
These assets are stated at cost less accumulated depreciation and amortization, which are computed primarily using the straight-line method over the estimated useful lives of the assets. Gains or losses on dispositions are reflected in current operations. Maintenance and repairs are charged to expense as incurred.
INCOME TAXES
Bancorporation and the Bank file a consolidated federal income tax return. State income tax returns are filed on a separate basis.
The Company accounts for income taxes using the asset and liability method. Temporary differences between the basis of assets and liabilities for financial reporting and tax purposes are measured as of the balance sheet date. Deferred tax liabilities or recognizable deferred tax assets are calculated on such differences, using current statutory rates which result in future taxable or deductible amounts. The effect on deferred taxes of a change in tax rates is recognized in income in the period that includes the enactment date.
NET INCOME PER SHARE
Primary net income per share is computed by dividing net income, less dividends on preferred stock, by the weighted average number of common shares outstanding during each year adjusted for dilutive stock options. Fully diluted per share amounts are computed by dividing net income by the weighted average number of common shares outstanding adjusted for shares issuable upon conversion of preferred stock and dilutive stock options.
All share and per share amounts have been restated to reflect the 5% stock dividend distributed in December 1994, and the 10% stock dividend distributed in October 1996.
STOCK COMPENSATION PLANS
Prior to January 1, 1996, the Bank accounted for its stock option plans in accordance with the provisions of Accounting Principles Board (APB) Opinion No. 25, "Accounting for Stock Issued to Employees," and related interpretations. As such, compensation expense would be recorded on the date of grant only if the current market price of the underlying stock exceeded the exercise price. On January 1, 1996, the Bank adopted Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"), which permits entities to recognize as expense over the vesting period the fair value of all stock-based awards on the date of grant. Alternatively, SFAS 123 also allows entities to continue to apply the provisions of APB Opinion No. 25 and provide pro forma net income and pro forma earnings per share disclosures for employee stock option grants made in 1995 and future years as if the fair- value-based method defined in SFAS 123 had been applied. The Bank has elected to continue to apply the provisions of APB Opinion No. 25 and provide the pro forma disclosure provisions of SFAS 123.
STATEMENT OF CASH FLOWS
For purposes of reporting cash flows, cash and cash equivalents include cash on hand, noninterest bearing amounts due from banks, and federal funds sold.
RECLASSIFICATIONS
Certain amounts in the consolidated financial statements presented for prior periods have been reclassified to conform with the 1996 presentation.
NOTE 2: INVESTMENT SECURITIES
The amortized cost and estimated fair value of securities held-to-maturity at December 31, 1996, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
Estimated Amortized Fair Cost Value (in Thousands) Due in one year or less $ 129 $129 Due in one year through five years 49,237 48,736 Due after five years through ten years 32,200 32,100 Due after ten years 6,456 6,369 Total Debt Securities $88,022 87,334 FRB and FHLB Stock 2,148 2,148 Total Securities held-to-maturity $90,170 $89,482
On November 15, 1995, the Financial Accounting Standards Board (FASB) issued a Special Report, "A Guide to Implementation of Statement 115 on Accounting for Certain Investments in Debt and Equity Securities." The guidance in this Special Report became effective November 15, 1995. In accordance with the guidance contained within the Special Report, effective December 1, 1995 the Company transferred securities with a book value of $37,911,000 from held-to-maturity to available-for-sale. These securities had a market value of $38,238,000 which resulted in the Company recording an unrealized gain on securities available-for-sale, net of tax, within shareholders' equity of $216,000.
The amortized costs, gross unrealized gains and losses and estimated fair values of securities available-for-sale are as follows (in thousands):
The amortized cost and estimated fair value of securities available-for-sale at December 31, 1996, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
Estimated Amortized Fair Cost Value (in Thousands) Due in one year or less $ 2,303 $ 2,302 Due in one year through five years 33,595 33,642 Due after five years through ten years 0 0 Due after ten years 32,924 33,100 $68,822 $69,044
Gross realized gains (losses) from the sale of securities available-for-sale were $52,000 and ($97,000) during 1996, $71,000 and ($0) during 1995 and $0 and ($169,000) during 1994.
At December 31, 1996 and 1995, securities having a book value of $75,559,000 and $49,509,000 respectively, were pledged to secure lines of credit, letters of credit, public deposits and for other purposes as required by law.
NOTE 3: LOANS
Loans are summarized as follows (in thousands):
December 31 1996 1995 Real Estate loans Construction $ 5,990 $4,097 Secured conventional Residential 69,341 59,390 Nonresidential 126,050 122,347 Commercial and industrial loans 73,171 68,479 Loans to individuals Automobile 2,488 2,440 Revolving credit 315 286 Other installment loans 8,988 9,692 All other loans 1,021 688 Total loans $287,364 267,419 Less deferred loan fees (248) (289) Total loans net of deferred loan fees $287,116 $267,130
Non-performing loans and non-performing assets include the following (in thousands):
December 31 1996 1995
Non-accrual loans $ 8,384 $7,091 Accruing loans past due 90 days or more 1,349 3,123 Total non-performing loans $ 9,733 $10,214 Restructured loans(excluding amounts classified as non-performing loans) 3,934 5,105 Other real estate owned, net 841 772 Total non-performing assets $14,508 $16,091
If the non-accrual loans had continued to accrue interest in accordance with their original contract terms, interest income would have increased approximately $710,500, $689,000 and $475,000, in 1996, 1995 and 1994, respectively. No interest income was collected on these loans subsequent to their classification as non-accrual in 1996, 1995 and 1994.
At December 31, 1996 and 1995, the recorded investment in loans that are considered to be impaired under SFAS 114 was $10,109,000 and $6,662,000, respectively. The related allowance for credit losses was $500,000 at December 31, 1996, and $770,000 at December 31, 1995. The impaired loan portfolio is primarily collateral dependent, as defined by SFAS 114. The change in the allowance for impaired loans represented a recovery of $270,000 during 1996 as compared to a provision of $123,000 during 1995. The average recorded investment in impaired loans during the years ended December 31, 1996 and 1995 was approximately $9,657,000 and $5,213,000, respectively. For the years ended December 31, 1996 and 1995, the Company recognized cash basis interest income on these impaired loans of $265,500 and $70,000, respectively.
All loans to directors, executive officers, significant shareholders and their related interests are current as to principal and interest payments at December 31, 1996. The following summarizes the activity for related party loans for the year ended December 31, 1996 (in thousands):
Balance, beginning of year $2,178 Additions 265 Payments 685 Balance, end of year $1,758
The Bank is party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financial needs of its customers. These financial instruments include commercial and standby letters of credit and unused lines of credit and involve, to varying degrees, elements of credit risk in excess of the amount recognized in the statements of condition. The contract or notional amounts of these instruments express the extent of involvement the Bank has in each class of financial instruments.
The Bank's exposure to credit loss from non-performance by the other party to the above mentioned financial instruments is represented by the contractual amount of those instruments. The Bank uses the same credit policies in making commitments and conditional obligations as it does for on-balance-sheet instruments.
Unless otherwise noted, the Bank does not require collateral or other security to support financial instruments with off-balance-sheet credit risk.
Contract or Notional Amount Financial Instruments Whose Contract at December 31,1996 Amounts Represent Credit Risk (in Thousands)
Commercial and standby letters of credit $ 3,742 Outstanding loan commitments-fixed rate $15,270 Outstanding loan commitments-variable rate $49,121
Commercial and standby letters of credit are conditional commitments issued by the Bank guaranteeing performance by a customer to a third party. Outstanding loan commitments represent the unused portion of loan commitments available to individuals and companies as long as there is no violation of any condition established in the contract. Outstanding loan commitments generally have a fixed expiration date of one year or less, except for home equity lines of credit commitments which generally have an expiration date of 15 years. The Bank evaluates each customer's credit worthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Bank upon extension of credit, is based upon management's credit evaluation of the customer. Various types of collateral may be held, including property and marketable securities.
The credit risk involved in these financial instruments is essentially the same as that involved in extending loan facilities to customers.
NOTE 4: ALLOWANCE FOR POSSIBLE LOAN LOSSES
The allowance for possible loan losses is based upon estimates, and ultimate losses may vary from the current estimates. These estimates are reviewed periodically and, as adjustments become necessary, they are reported in earnings in the periods in which they become known.
The following summarizes the activity in the allowance for possible loan losses (in thousands):
Approximately $2,696,000 of the $5,141,000 of loans charged off during 1994 resulted from the sale of troubled loans. Additionally, approximately $500,000 of the $1,041,000 of recoveries resulted from the settlement of certain claims made under the Company's insurance policy for reimbursement of losses arising from alleged loan irregularities discovered in February 1991.
The allowance for loan losses for Federal income tax purposes was $3,024,000 at December 31, 1996, $3,360,000 at December 31, 1995 and $3,151,000 at December 31, 1994.
NOTE 5: PREMISES AND EQUIPMENT
The detail of premises and equipment is as follows (in thousands):
December 31 1996 1995
Land $ 1,309 $ 1,309 Building 8,550 8,416 Furniture and equipment 7,609 7,153 Leasehold improvements 4,058 3,981 $21,526 $20,859 Less-Accumulated depreciation and amortization 12,638 11,441 $ 8,888 $ 9,418
NOTE 6: INCOME TAXES
The provision for income taxes (benefit) comprises the following components (in thousands):
Year Ended December 31 1996 1995 1994
Federal Current tax expense $3,124 $2,126 $1,434 Deferred tax expense (benefit) (334) 563 (1,051) State Current tax expense 696 106 164 Deferred tax expense (58) 336 221 $3,428 $3,131 $768
In accordance with SFAS 115 (See Note 1), deferred tax expense (benefit) of $68,000,$143,000 and ($436,000) has been provided through shareholders' equity to reflect unrealized gains (losses) on available-for-sale securities at December 31, 1996,1995 and 1994, respectively.
The following is a reconciliation of the Federal income tax expense as reported with the statutory Federal tax on income before income taxes (in thousands):
Year Ended December 31 1996 1995 1994
Tax at statutory rate $ 2,958 $2,567 $1,855 Tax exempt interest income (15) (38) (31) State income taxes, net of Federal tax benefit 421 292 254 Contributions and other 31 34 0 Valuation allowance (160) 0 (1,500) Other, net 193 276 190 Total $ 3,428 $3,131 $ 768 Effective tax rate 39.4% 41.5% 14.1%
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities are as follows (in thousands):
December 31
1996 1995 Deferred tax assets: Deferred fee income $ 93 $ 145 Allowance for possible loan losses 2,228 1,708 Nonaccrual loan interest 1,185 1,040 Allowance for losses on OREO 38 38 Pension expense 440 383 Premises and equipment, principally due to differences in depreciation 789 696 Net operating loss carryforwards 0 140 Other 110 518 Total gross deferred tax asset 4,883 4,668 Valuation allowance (270) (430) Total net deferred tax asset $ 4,613 $4,238 Deferred tax liabilities: Investment securities, principally due to accretion of discounts $ 25 $ 42 Unrealized gain-securities available-for-sale 75 143 Total gross deferred tax liabilities $ 100 $ 185 Net deferred tax asset $ 4,513 $ 4,053
Management has projected that the Company will generate sufficient taxable income to utilize the net deferred tax asset. There can be no assurance, however, that the Company will generate any earnings or any specific level of continuing earnings.
The valuation allowance for deferred tax assets as of December 31, 1996 and 1995 was $270,000 and $430,000, respectively. The net change in the total valuation allowance for 1996 was a decrease of $160,000 which is the result of the reduction of the Bank's state tax loss carry forward. There was no change in the valuation allowance for 1995.
NOTE 7: BENEFITS PLANS
PENSION PLAN:
The Bank has a noncontributory defined benefit pension plan which covers substantially all employees. Actuarial gains and losses, if any, are amortized on a straight line basis over the average expected future service of the active employees. The Company makes annual contributions to the plan equal to the amount accrued for pension expense if deductible for tax purposes.
The following table sets forth the plan's funded status and amounts recognized in the Company's consolidated financial statements (in thousands):
December 31 1996 1995
Actuarial present value of benefit obligation Accumulated benefit obligations, including vested benefits of $2,425 and $1,662 in 1996 and 1995, respectively $2,554 $1,797 Plan assets at fair value, primarily listed stocks, U.S. Bonds, and commingled funds $4,141 $3,387 Projected benefit obligation for service rendered to date 4,874 3,375 Plan assets greater (less) than projected benefit obligation (733) 12 Unrecognized net loss due to past experience different from assumptions made and effects of changes in assumptions (218) (801) Unrecognized prior service cost 211 238 Unrecognized transition asset being amortized over 15 years (146) (170) Accrued pension cost included in other liabilities $(886) $(721)
Net pension cost for 1996, 1995 and 1994 included the following components (in thousands):
Year Ended December 31 1996 1995 1994
Service cost-benefits earned during the year $ 543 $ 387 $ 386 Interest cost on projected benefit obligation 289 250 222 Actual (return) loss on plan assets (377) (697) 124 Net deferral and amortization 68 448 (403) Net pension cost $523 $ 388 $ 329
In determining the projected benefit obligation, the weighted average assumed discount rate was 7% for 1996 and 8% for 1995 and 1994, respectively, while the rate of increase in future salary levels was 5% for 1996, 1995 and 1994, respectively. The expected long term rate of return on assets, used in determining the net period pension cost was 8% for all years presented.
Effective in 1995, the Bank established a non-qualified deferred compensation plan for certain officers. All benefits provided under this plan are unfunded. As of December 31, 1996, approximately $138,000 was included in accrued expense for this plan. For the year ended December 31,1996 and 1995, expenses related to this plan were $51,000 and $87,000, respectively.
401K PLAN:
The Bank sponsors a 401k Plan which provides several tax deferred investment opportunities to salaried employees of the Bank who have satisfied the service requirements of the Plan. The Plan allows eligible employees to make periodic contributions of certain percentages of their salary, subject to the Internal Revenue Code limits on maximum annual contributions. The Bank matches part of these contributions. The Bank's matching contribution expense was $62,300, $65,100 and $61,000 for 1996, 1995, and 1994, respectively.
NOTE 8: STOCK COMPENSATION PLANS:
At December 31, 1996, the Company had five stock based compensation plans, which are described below. The Company applies APB Opinion No. 25 and related interpretations in accounting for its plans. Accordingly, no compensation cost is recognized for its stock option plans. Had compensation cost for the Company's five stock -based compensation plans been determined consistent with SFAS NO.123, the Company's net income and earnings per share would have been reduced to the proforma amounts indicated below (in thousands, except per share amounts):
1996 1995
Net income As Reported $5,273 $4,420 Pro forma $5,152 $4,368
Primary earnings As Reported $1.13 $1.16 per share Pro forma $1.11 $1.15
Fully diluted As Reported $1.10 $0.93 earnings per share Pro forma $1.08 $0.92
The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions used for grants in 1996, and 1995, respectively: dividend yield of 2.4 percent and 2.3 percent; expected volatility of 45 percent for both periods; risk-free interest rates of 6.7 percent, and 7.0 percent for the 1993 Non-Statutory Plan options, 6.3 percent, and 5.7 percent for the 1993 and 1996 Incentive Plan options; and expected lives of 8 years for both periods for the 1993 Non-Statutory Plan options, and 7 years for both periods for the 1993 and 1996 Incentive Plan options. The effects of applying SFAS 123 on the pro forma net income may not be representative of the effects on the pro forma net income for future years.
STOCK OPTION PLANS:
The Company has five option plans. The 1986 Incentive Stock Option Plan expired April 16, 1996. No additional options are available for granting under this plan. The 36,039 options issued and outstanding prior to April 16,1996 remain available for exercise until their expiration dates.
Under the 1993 Broad National Incentive Stock Option Plan (1993 Incentive Plan), the Company may grant options to its management personnel for up to 231,000 shares of common stock.
Under the 1993 Broad National Directors Non-Statutory Stock Option Plan (1993 Non-Statutory Plan), the Company may grant options to its directors for up to 86,625 shares of common stock.
Under the 1996 Broad National Bancorporation Incentive Stock Option Plan (1996 Incentive Plan), the Company may grant options to its management personnel for up to 200,000 shares of common stock.
Under the 1996 Broad National Bancorporation Directors Non- Statutory Stock Option Plan (1996 Non-Statutory Plan), the Company may grant options to its directors for up to 75,000 shares of common stock.
Both the 1996 Incentive Stock Option Plan and the 1996 Non- Statutory Stock Option Plan were approved by the Company's Board of Directors in December 1996, but remain subject to shareholder approval at the Company's 1997 Annual Meeting of Shareholders. 26,000 options granted under the 1996 Incentive Stock Option Plan were subject to such shareholder approval at December 31, 1996.
Under all plans, the exercise price of each option is no less than the market price of the Company's stock on the date of grant, and an option's maximum term is ten years.
Options granted under the 1993 and 1996 Non-Statutory Plans vest at the expiration of two years from the granting date.
Vesting under the 1993 and the 1996 Incentive Plans is subject to the authority of the committee which administers these plans, and all options granted to date under these plans vest 40% at the end of the second year and 20% each year over the next three years.
A summary of the status of the Company's stock option plans as of December 31, 1994, 1995 and 1996, and changes during the years ended on those dates is presented below:
Shares Under Weighted-Avg. Option Exercise Price
Outstanding at December 31, 1993 170,964 $6.14 Granted in 1994 72,957 6.38 Expired unexercised in 1994 ( 5,526) 6.63 Outstanding at December 31, 1994 238,395 6.20 Exercised in 1995 (3,572) 5.25 Granted in 1995 83,050 8.67 Expired unexercised in 1995 ( 2,143) 8.95 Outstanding at December 31, 1995 315,730 6.84 Exercised in 1996 (18,098) 5.43 Granted in 1996 77,150 12.16 Expired unexercised in 1996 ( 7,593) 6.89 Outstanding at December 31, 1996 367,189 8.03
Weighted-average fair value 1996 1995 of options granted during the year $5.30 $4.09
NOTE 9: SHORT-TERM BORROWINGS
Details with respect to other short-term borrowings are as follows (in thousands):
December 31 1996 1995
Balance, end of year $ 1,000 $ 782 Maximum outstanding during the year at any month end $ 1,282 $21,345 Average interest rate, end of year 4.95% 5.69% Average outstanding during the year $ 1,149 $ 2,808 Average interest rate for the year 4.97% 6.02%
The average amounts outstanding were computed primarily from daily averages and the average interest rate for the year and at the end of the year were computed by dividing the respective interest expenses by the average balances outstanding.
The Bank has available $23,750,000 in lines of credit with correspondent banks. At December 31, 1996, these line of credit were not in use.
NOTE 10: COMMITMENTS AND CONTINGENCIES
In the ordinary course of business, the Company and the Bank may be a party to outstanding legal proceedings and claims. In its judgement, management does not believe that the Company's consolidated financial position or results of operations will be materially affected by any of these present proceedings.
Cash balances reserved to meet the requirements of the bank regulatory authorities amounted to $9,408,000 at December 31, 1996.
The Bank has lease commitments on certain of its branches expiring at various dates through 2006. Rental expense on these leases charged to operations amounted to $544,000, $567,000 and $519,000 for the years ended December 31, 1996, 1995, and 1994, respectively. The minimum annual rentals under the terms of the leases as of December 31, 1996 were as follows:
1997 $429,000 1998 332,000 1999 251,000 2000 189,000 2001 129,000 Thereafter 77,000
NOTE 11: SHAREHOLDERS' EQUITY
Stock dividends:
On September 20, 1996, the Board of Directors of the Company declared a 10% stock dividend which was distributed October 3, 1996.
On November 17, 1994, the Board of Directors of the Company declared a 5% stock dividend which was distributed December 16, 1994 to shareholders of record two weeks prior thereto.
All per share data included in the accompanying financial statements and notes thereto reflect the retroactive effect of these stock dividends.
PREFERRED STOCK 1992 CLASS:
On January 29, 1993 the Company completed its Rights Offering of 8-1/2% Cumulative Convertible Preferred Stock 1992 Class, $1.00 par value ("1992 Preferred Stock"). All 690,000 shares of the 1992 Preferred Stock were sold at a price of $10.00 per share.
On November 16, 1995, the Board of Directors of the Company called for redemption 250,000 shares of the 1992 Preferred Stock. Additionally, on January 18, 1996, the Board of Directors of the Company called for redemption all of the remaining outstanding shares of the 1992 Preferred Stock. On April 8, 1996, the Company completed the redemption of the 1992 Preferred Stock. As a result of the redemption programs, 3,750 shares of 1992 Preferred Stock were redeemed at the price of $10.60 per share, for a total redemption price of $43,750. In lieu of redemption, 558,803 shares of 1992 Preferred Stock were converted into 1,066,616 shares of common stock. Cash was paid for fractional shares resulting from conversion.
PREFERRED STOCK 1985 CLASS:
On December 31, 1985, the Company issued 20,000 shares of nonvoting, 9% Cumulative Convertible Preferred Stock-1985 Class ("1985 Preferred Stock").
On November 16, 1995, the Board of Directors of the Company called for redemption all of the outstanding shares of the 1985 Preferred Stock. The redemption of the 1985 Preferred Stock was completed on January 7, 1996 and 197 shares of the 1985 Preferred Stock were redeemed at a price of $38 per share, for a total redemption price of $7,486. In lieu of redemption, 16,927 shares of the 1985 Preferred Stock were converted into 109,916 shares of common stock. Cash was paid for fractional shares resulting from conversion.
STOCK BUYBACK PROGRAM:
On November 21, 1996, the Board of Directors of the Company authorized the repurchase of up to 100,000 of its outstanding common shares. These repurchases will be made from time to time in the open market, subject to prevailing conditions and in a manner to avoid disrupting the market. Purchasing activities may be discontinued and resumed at any time, as market conditions warrant. The repurchased shares will be held in treasury and may be used by the Company for general corporate purposes including stock-based employee benefit plans and stock dividends.
At December 31, 1996, the Company had repurchased 5,000 shares of common stock at a cost of $57,500.
NOTE 12: REGULATORY MATTERS
Capital adequacy for the Company is measured against regulations established by the Federal Reserve Board (FRB). The Bank is subject to generally similar capital regulations adopted by the Office of the Comptroller of the Currency (the OCC). These regulations require the Company and the Bank to maintain minimum levels of regulatory capital. Under the regulations in effect at December 31,1996, the Company and the Bank were required to maintain (i) a minimum leverage ratio of Tier 1 capital to total adjusted assets of 4.0%, and (ii) minimum ratios of Tier 1 and total capital to risk-weighted assets of 4.0% and 8.0%, respectively.
Under its prompt corrective action regulations, the FDIC is required to take certain supervisory actions ( and may take additional discretionary actions) with respect to an undercapitalized institution. Such actions could have a direct material effect on the institution's financial statements. The regulations establish a framework for the classification of financial institutions into five categories: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized. Generally, an institution is considered well capitalized if it has a leverage(Tier 1) capital ratio of at least 5.0%; a Tier 1 risk- based capital ratio of at least 6.0%; and a total risk-based capital ratio of at least 10.0%.
The foregoing capital ratios are based in part on specific quantitative measures of assets, liabilities and certain off- balance sheet items as calculated under regulatory accounting practices. Capital amounts and classifications are also subject to qualitative judgments by the FRB, the OCC and the FDIC about capital components, risk weightings and other factors.
Management believes that, as of December 31, 1996, the Company and the Bank meet all capital adequacy requirements to which they are subject. Further, the most recent FDIC notification categorized the Bank as a well-capitalized institution under the prompt corrective action regulations. There have been no conditions or events since that notification that management believes have changed the Bank's capital classification.
The following is a summary of the Company's and the Bank's actual capital amounts and ratios as of December 31, 1996 and 1995, compared to the regulatory minimum capital adequacy requirements and the regulatory requirements for classification as a well-capitalized institution:
NOTE 13: SELECTED QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
The following quarterly financial information for the two years ended December 31, 1996 and 1995, is unaudited. However, in the opinion of management all adjustments, which include only normal recurring adjustments necessary to present fairly the results of operations for the periods, are reflected. Results of operations for these three-month periods are not necessarily indicative of the results for the entire year or any other interim period (in thousands, except per share amounts):
NOTE 14: FAIR VALUES OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107, "Disclosures About Fair Value of Financial Instruments" ("SFAS 107") requires that the Company disclose estimated fair values for its financial instruments whether or not recognized in the Statement of Financial Condition.
Limitations: The fair value estimates made at December 31, 1996 and 1995 were based on pertinent market data and relevant information on the financial instrument at that time. These estimates do not reflect any premium or discount that could result from offering for sale at one time the entire portion of the financial instruments. Because no market exists for a portion of the financial instruments, fair value estimates may be based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments, and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates.
Fair value estimates are based on existing on-and-off balance sheet financial instruments without attempting to estimate the value of anticipated future business and the value of assets and liabilities that are not considered financial instruments. In addition, the tax implications related to the realization of the unrealized gains and losses can have a significant effect on fair value estimates and have not been considered in many of the estimates.
Fair value estimates, methods and assumptions are set forth below for the Company's financial instruments (in thousands):
The following methods and assumptions were used to estimate the fair value of each class of financial instrument:
CASH AND SHORT-TERM INVESTMENTS
The carrying amount approximates fair value.
INVESTMENT SECURITIES
The fair values are based on quoted market prices obtained from outside sources.
LOANS
The fair value of the loan portfolio was estimated using the discounted value of the future cash flows expected to be received using a market discount rate. For loans that have short-term maturities or that reprice to market rates, the carrying value was used as an estimate of fair value.
DEPOSIT LIABILITIES
The fair value of deposits is equal to the amount payable on demand at the reporting dates except for the fair value of fixed maturity certificates of deposit which were estimated by discounting the value of the future cash flows expected to be paid on deposits.
SHORT TERM BORROWINGS
The carrying amount approximates fair value.
COMMITMENTS TO EXTEND CREDIT AND LETTER OF CREDIT
The fair market value of unearned fees associated with financial instruments with off-balance sheet risk at December 31, 1996 approximates the fees received. Amount is not material.
NOTE 15: CONDENSED FINANCIAL INFORMATION OF BANCORPORATION (PARENT COMPANY ONLY)
Condensed Statements of Condition (in thousands): December 31, 1996 1995 Assets Cash, principally on deposit with subsidiary bank $ 684 $ 220 Investment in subsidiary 37,784 33,763 Other assets 375 975 Total Assets $38,843 $34,958 Liabilities and Shareholders' Equity Other liabilities $ 485 $ 429 Shareholders' equity 38,358 34,529 Total Liabilities and Shareholders' Equity $38,843 $34,958
Condensed Statements of Income for the years ended December 31, 1996, 1995 and 1994 (in thousands):
December 31, 1996 1995 1994 Income Equity in undistributed income of subsidiary $ 4,160 $2,782 $3,860 Dividends received from banking subsidiary 1,230 1,818 945 $ 5,390 $4,600 $4,805 Expenses Salaries and related benefits $ 39 $ 39 $ 39 Other 78 141 77 $ 117 $ 180 $ 116 Net income $ 5,273 $4,420 $4,689
Condensed Statements of Cash Flows for the years ended December 31, 1996, 1995 and 1994 (in thousands):
December 31, 1996 1995 1994 Cash flows from operating activities: Net income $5,273 $4,420 $4,689 Less- Equity in undistributed income of subsidiary (4,160) (2,782) (3,860) Increase in other liabilities 56 123 73 Other, net 601 (975) (56) Net cash provided by operating activities $1,770 $ 786 $ 846 Cash flows from investing activities: Investments in and advances to subsidiary $ 0 $ 0 $ (600) Net cash used in investing activities $ 0 $ 0 $ (600) Cash flows from financing activities: Redemption of preferred stock $ (52) $ 0 $ 0 Proceeds from issuance of common stock 98 18 0 Dividends to shareholders (1,294) (1,175) (1,071) Purchase of treasury stock (58) 0 0 Net cash used in financing activities $(1,306) $(1,157) $(1,071) Net increase (decrease) in cash and cash equivalents 464 (371) (825) Cash and cash equivalents- beginning of year 220 591 1,416 Cash and cash equivalents- end of year $ 684 $ 220 $ 591
ITEM 9.

ITEM 9. CHANGES IN AND DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10.

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Pursuant to General Instruction G(3) to Form 10-K, the information required by this Item (except for the information set forth in Item 4A of Part I hereof with respect to the Registrant's executive officers) is incorporated herein by reference to (i) the information under the caption "Election of Directors" (except that the information set forth under the following subcaptions thereunder is expressly excluded from such incorporation: "Compensation of Directors" and "Meetings of the Board and Committees") and (ii) the information under the caption "Compliance with Section 16(a) of the Securities Exchange Act of 1934," in each case, in the Registrant's definitive Proxy Statement for its 1997 Annual Meeting of Shareholders to be filed pursuant to Regulation 14A.
ITEM 11.

ITEM 11. EXECUTIVE COMPENSATION.
Pursuant to General Instruction G(3) to Form 10-K, the information required by this Item is incorporated herein by reference to the information under the caption "Executive Compensation and Other Information" (except that the information set forth under the following subcaptions thereunder is expressly excluded from such incorporation: "Compensation Committee and Board of Directors Report on Executive Compensation" and "Company Performance") in the Registrant's definitive Proxy Statement for its 1997 Annual Meeting of Shareholders to be filed pursuant to Regulation 14A.
ITEM 12.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
Pursuant to General Instruction G(3) to Form 10-K, the information required by this Item is incorporated herein by reference to the information under the caption "Ownership of Bancorporation Capital Stock" in the Registrant's definitive Proxy Statement for its 1997 Annual Meeting of Shareholders to be filed pursuant to Regulation 14A.
ITEM 13.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Pursuant to General Instruction G(2) to Form 10-K, the information required by this Item is incorporated herein by reference to the information under the caption "Transactions With Management and Others" in the Registrant's definitive Proxy Statement for its 1997 Annual Meeting of Shareholders to be filed pursuant to Regulation 14A.
PART IV
ITEM 14.

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) Exhibits and Financial Statement Schedules:
1. The following consolidated financial statements of the Registrant and subsidiaries and report of the Registrant's independent auditors included in Item 8 to this report:
Independent Auditors' Report as of December 31, 1996 and 1995 and for the years ended December 31, 1996, 1995 and 1994.
Consolidated Statements of Condition as of December 31, 1996 and 1995.
Consolidated Statements of Income for each of the years ended December 31, 1996, 1995 and 1994.
Consolidated Statements of Changes in Shareholders' Equity for the years ended December 31, 1996, 1995 and 1994.
Consolidated Statements of Cash Flows for each of the years ended December 31, 1996, 1995 and 1994.
Notes to Consolidated Financial Statements
2. Financial Statement Schedules: All schedules are omitted because they are not applicable, or not required, or because the required information is included in the financial statements or the notes thereto.
3. Exhibits:
NUMBER DESCRIPTION
3.1 Restated Certificate of Incorporation of the Registrant as amended through and including June 29, 1995 (filed as Exhibit 3 to the Registrant's Form 10-Q for the quarter ended March 31, 1996 and incorporated by reference herein).
3.2 Bylaws of the Registrant, as amended to date (filed as Exhibit 3(d) to the Registrant's Form 10-K Report for the fiscal year ended December 31, 1989 and incorporated herein by reference).
10.1 Lease between The Prudential Insurance Company of America and Broad National Bank dated as of December 15, 1988 (filed as Exhibit 3(e) to the Registrant's Form 10-K Report for the fiscal year ended December 31, 1989 and incorporated herein by reference).
10.1.1 Amendment of Lease between The Prudential Insurance Company of America and Broad National Bank dated as of February 7, 1996 (filed as Exhibit 10.1.1 to the
Registrant's Form 10-K Report for the fiscal year ended December 31, 1995 and incorporated herein by reference).
10.2 Lease between Third Newark Gateway Urban Renewal Association and Broad National Bank, dated September 7, 1984 (filed as Exhibit 10(b) to Registration Statement No. 33-01560 and incorporated herein by reference).
10.3 Lease between O. Navigador Bar, Inc. and Broad National Bank (filed as Exhibit 10(c) to Amendment No. 1 to Registration Statement No. 2-78220 and incorporated herein by reference).
10.4 Lease between Millburn Common Associates and Broad National Bank dated June 16, 1976, and Amendment to such Lease, dated September 10, 1985 (filed as Exhibit 10(d) to Registration Statement No. 33-01560 and incorporated herein by reference).
10.5 Lease between Cada Holding Corp. and Broad National Bank dated October 8, 1976 (filed as Exhibit 10(e) to Amendment No. 1 to Registration Statement No. 2-78220 and incorporated herein by reference).
10.6 Lease between Euro Associates and Broad National Bank acknowledged by the parties on December 12, 1985 and December 10, 1985 (filed with Amendment No. 2 to the Registrant's Registration Statement No. 33-53658 as Exhibit 10.6 and incorporated herein by reference).
10.7 Workletter Agreement between Euro Associates and Broad National Bank (filed with Amendment No. 2 to the Registrant's Registration Statement No. 33-53658 as Exhibit 10.7 and incorporated herein by reference).
10.8 Lease between 1000 South Elmora Associates and Broad National Bank dated May 18, 1986 (filed with Amendment No. 2 to the Registrant's Registration Statement No. 33-53658 as Exhibit 10.8 and incorporated herein by reference).
10.9 Lease between Convery Associates and Broad National Bank dated July 1, 1987, and Rider to Lease Agreement, dated September 1, 1992 (filed with Amendment No. 2 to the Registrant's Registration Statement No. 33-53658 as Exhibit 10.10 and incorporated herein by reference).
10.10 Lease Agreement and Amendment between 466 Bloomfield Avenue Associates, Inc. and Broad National Bank dated February 9, 1988 (filed as Exhibit 10(l) to the Registrant's Form 10-K Report for the fiscal year ended December 31, 1989 and incorporated herein by reference).
10.11 Lease Agreement between George Zeik and Broad National Bank dated September 1, 1989 (filed as Exhibit 10(m) to the Registrant's Form 10-K Report for the fiscal year
ended December 31, 1989 and incorporated herein by reference).
10.12 Lease between Broad National Realty Corporation and Broad National Bank dated May 1, 1990 (filed as Exhibit 10(n) to the Registrant's Form 10-K for the fiscal year ended December 31, 1990 and incorporated by reference herein).
10.12.1 Rider to Lease Agreement between Broad National Realty and Broad National Bank dated December 21, 1993 (filed as Exhibit 10.13.1 to the Registrant's Form 10-K for the fiscal year ended December 31, 1993 and incorporated herein by reference).
10.13 Broad National Bank Employees' Retirement Plan (filed as Exhibit 10(g) to Registration Statement No. 2-78220 and as Exhibit 10(f) to Amendment No. 1 to Registration Statement No. 2-78220 and incorporated herein by reference).*
10.14 Form of Amendment to Sections 2.1 and 3.1(c) of the Broad National Bank Employees' Retirement Plan (filed as Exhibit 10(p) to the Registrant's Form 10-K for the fiscal year ended December 31, 1990 and incorporated by reference herein).*
10.15 Description of Bonus Plan for Designated Officers and Employees (appears on page 10 of the Registrant's definitive proxy statement for its 1991 Annual Meeting of Shareholders and is incorporated herein by reference).*
10.16 Incentive Stock Option Plan for certain employees adopted on March 26, 1987, and amended April 27, 1989 (filed as Exhibit 10.18 to the Registrant's Form 10-K for the fiscal year ended December 31, 1992 and incorporated by reference herein).*
10.17 Non-Statutory Stock Option Plan for directors adopted on March 26, 1987 (filed with Amendment No. 2 to the Registrant's Registration Statement No. 33-53658 as Exhibit 10.19 and incorporated herein by reference).*
10.18 Employment Agreement between Donald M. Karp and the Registrant dated December 31, 1996.*
10.19 Employment Agreement by and between John A. Dorman, Broad National Bank and the Registrant, dated December 31, 1996.*
10.20 Consultant Agreement between Stanley J. Lesnik and the Registrant dated November 16, 1995 (filed as Exhibit 10.20 to the Registrant's Form 10-K for the fiscal year ended December 31, 1995 and incorporated herein by reference).*
10.21 Lease between Broad National Bank, landlord, and Newtrend L.P., tenant, dated August 10, 1993 (filed as Exhibit 10.22 to the Registrant's Form 10-K for the fiscal year ended December 31, 1993 and incorporated herein by reference).
10.22 Newtrend Service Bureau Agreement between Newtrend, Inc. and Broad National Bank dated August 10, 1993 (filed as Exhibit 10.23 to the Registrant's Form 10-K for the fiscal year ended December 31, 1993 and incorporated herein by reference).
10.23 Newtrend Item Processing Addendum between Newtrend, Inc. and Broad National Bank dated August 10, 1993 (filed as Exhibit 10.24 to the Registrant's Form 10-K for the fiscal year ended December 31, 1993 and incorporated herein by reference).
10.24 1993 Broad National Incentive Stock Option Plan for certain employees adopted on September 19, 1994 (filed as Exhibit 10.24 to the Registrant's Form 10-K Report for the fiscal year ended December 31, 1994 and incorporated herein by reference).*
10.25 1993 Broad National Directors Non-Statutory Stock Option Plan for directors adopted on September 19, 1994 (filed as Exhibit 10.25 to the Registrant's Form 10-K Report for the fiscal year ended December 31, 1994 and incorporated herein by reference).*
10.26 Lease between Lucky Realty LLC and Broad National Bank (filed as Exhibit 10.26 to the Registrant's Form 10-K Report for the fiscal year ended December 31, 1995 and incorporated herein by reference).
10.27 Lease between A.J. Seabra Supermarkets V, Inc. and Broad National Bank dated as of April 20, 1995 (filed as Exhibit 10.27 to the Registrant's Form 10-K Report for the fiscal year ended December 31, 1995 and incorporated herein by reference).
10.28 1996 Broad National Bancorporation Incentive Stock Option Plan for certain employees adopted on December 19, 1996 and subsequently amended on January 16, 1997.*
10.29 1996 Broad National Bancorporation Directors Non- Statutory Stock Option Plan for directors adopted on December 19, 1996.*
10.30 Broad National Bank Long-Term Capital Accumulation Plan for certain employees adopted on October 19, 1995.*
10.31 Broad National Bank Deferred Compensation Plan for certain employees and directors adopted on October 19, 1995.*
10.32 Broad National Bank Management Incentive Plan for certain employees adopted on October 19, 1995.*
11 Statement re Computation of Net Income Per Share.
22 List of Subsidiaries (filed with Amendment No. 3 to the Registrant's Registration Statement No. 33-53658 as Exhibit 22 and incorporated herein by reference).
24 Consent of KPMG Peat Marwick LLP with regard to Bancorporation's Registration Statement on Form S-8 (Reg. No. 33-28183).
27 Financial Data Schedule. ______________________
* Management contracts or compensatory plans or arrangements required to be identified by Item 14(a)(3).
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the last quarter of 1996.
(c) Exhibits
See Exhibits identified above under Item 14(a)(3).
(d) Financial Statement Schedules
See Item 14(a)(2) above.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
BROAD NATIONAL BANCORPORATION
By /s/ Donald M. Karp Donald M. Karp Chairman of the Board and Chief Executive Officer
Dated: March 20, 1997
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated:
SIGNATURE AND TITLE DATE
/s/ Donald M. Karp March 20, 1997 Donald M. Karp, Director, Chairman of the Board and Chief Executive Officer (Principal Executive Officer)
/s/ John A. Dorman March 20, 1997 John A. Dorman, Director, President and Chief Operating Officer
/s/ James Boyle March 20, 1997 James Boyle, Treasurer and Comptroller (Principal Financial and Accounting Officer)
/s/ Licinio Cruz March 20, 1997 Licinio Cruz, Director
/s/ Arthur Fischman March 20, 1997 Arthur Fischman, Director
/s/ John J. Iannuzzi March 20, 1997 John J. Iannuzzi, Director
/s/ James J. Lazarus March 20, 1997 James J. Lazarus, Director
/s/ Edward J. Lenihan March 20, 1997 Edward J. Lenihan, Director
/s/ Stanley J. Lesnik March 20, 1997 Stanley J. Lesnik, Director
/s/ Louis J. Owen March 20, 1997 Louis J. Owen, Director
/s/ Catherine McFarland March 20, 1997 Catherine McFarland, Director
/s/ A. Harold Schwartz March 20, 1997 A. Harold Schwartz, Director
/s/ Hubert Williams March 20, 1997 Hubert Williams, Director
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION PAGE NO.
3.1 Restated Certificate of Incorporation of the ** Registrant as amended through and including June 29, 1995 (filed as Exhibit 3 to the Registrant's Form 10-Q for the quarter ended March 31, 1996 and incorporated by reference herein).
3.2 Bylaws of the Registrant, as amended to date ** (filed as Exhibit 3(d) to the Registrant's Form 10-K Report for the fiscal year ended December 31, 1989 and incorporated herein by reference).
10.1 Lease between The Prudential Insurance Company ** of America and Broad National Bank dated as of December 15, 1988 (filed as Exhibit 3(e) to the Registrant's Form 10-K Report for the fiscal year ended December 31, 1989 and incorporated herein by reference).
10.1.1 Amendment of Lease between The Prudential ** Insurance Company of America and Broad National Bank dated as of February 7, 1996 (filed as Exhibit 10.1.1 to the Registrant's Form 10-K Report for the fiscal year ended December 31, 1995 and incorporated herein by reference).
10.2 Lease between Third Newark Gateway Urban ** Renewal Association and Broad National Bank, dated September 7, 1984 (filed as Exhibit 10(b) to Registration Statement No. 33-01560 and incorporated herein by reference).
10.3 Lease between O. Navigador Bar, Inc. and Broad ** National Bank (filed as Exhibit 10(c) to Amendment No. 1 to Registration Statement No. 2-78220 and incorporated herein by reference).
10.4 Lease between Millburn Common Associates and ** Broad National Bank dated June 16, 1976, and Amendment to such Lease, dated September 10, 1985 (filed as Exhibit 10(d) to Registration Statement No. 33-01560 and incorporated herein by reference).
10.5 Lease between Cada Holding Corp. and Broad ** National Bank dated October 8, 1976 (filed as Exhibit 10(e) to Amendment No. 1 to Registration Statement No. 2-78220 and incorporated herein by reference).
10.6 Lease between Euro Associates and Broad National ** Bank acknowledged by the parties on December 12, 1985 and December 10, 1985 (filed with Amendment No. 2 to the Registrant's Registration Statement No. 33-53658 as Exhibit 10.6 and incorporated herein by reference).
10.7 Workletter Agreement between Euro Associates and ** Broad National Bank (filed with Amendment No. 2 to the Registrant's Registration Statement No. 33-53658 as Exhibit 10.7 and incorporated herein by reference).
10.8 Lease between 1000 South Elmora Associates and ** Broad National Bank dated May 18, 1986 (filed with Amendment No. 2 to the Registrant's Registration Statement No. 33-53658 as Exhibit 10.8 and incorporated herein by reference).
10.9 Lease between Convery Associates and Broad ** National Bank dated July 1, 1987, and Rider to Lease Agreement, dated September 1, 1992 (filed with Amendment No. 2 to the Registrant's Registration Statement No. 33-53658 as Exhibit 10.10 and incorporated herein by reference).
10.10 Lease Agreement and Amendment between 466 ** Bloomfield Avenue Associates, Inc. and Broad National Bank dated February 9, 1988 (filed as Exhibit 10(1) to the Registrant's Form 10-K Report for the fiscal year ended December 31, 1989 and incorporated herein by reference).
10.11 Lease Agreement between George Zeik and Broad ** National Bank dated September 1, 1989 (filed as Exhibit 10(m) to the Registrant's Form 10-K Report for the fiscal year ended December 31, 1989 and incorporated herein by reference).
10.12 Lease between Broad National Realty Corporation ** and Broad National Bank dated May 1, 1990 (filed as Exhibit 10(n) to the Registrant's Form 10-K for the fiscal year ended December 31, 1990 and incorporated by reference herein).
10.12.1 Rider to Lease Agreement between Broad National ** Realty and Broad National Bank dated December 21, 1993 (filed as Exhibit 10.13.1 to the Registrant's Form 10-K for the fiscal year ended December 31, 1993 and incorporated herein by reference).
10.13 Broad National Bank Employees' Retirement Plan ** (filed as Exhibit 10(g) to Registration Statement No. 2-78220 and as Exhibit 10(f) to Amendment No. 1 to Registration Statement No. 2-78220 and incorporated herein by reference ).*
10.14 Form of Amendment to Sections 2.1 and 3.1(c) ** of the Broad National Bank Employees' Retirement Plan (filed as Exhibit 10(p) to the Registrant's Form 10-K for the fiscal year ended December 31, 1990 and incorporated by reference herein).*
10.15 Description of Bonus Plan for Designated Officers ** and Employees (appears on page 10 of the Registrant's definitive proxy statement for its 1991 Annual Meeting of Shareholders and is incorporated herein by reference).*
10.16 Incentive Stock Option Plan for certain employees ** adopted on March 26, 1987, and amended April 27, 1989 (filed as Exhibit 10.18 to the Registrant's Form 10-K for the fiscal year ended December 31, 1992 and incorporated by reference herein).*
10.17 Non-Statutory Stock Option Plan for directors ** adopted on March 26, 1987 (filed with Amendment No. 2 to the Registrant's Registration Statement No. 33-53658 as Exhibit 10.19 and incorporated herein by reference).*
10.18 Employment Agreement between Donald M. Karp and -- the Registrant dated December 31, 1996.*
10.19 Employment Agreement by and between John A. -- Dorman, Broad National Bank and the Registrant, dated December 31, 1996.*
10.20 Consultant Agreement between Stanley J. Lesnik ** and the Registrant dated November 16, 1995 (filed as Exhibit 10.20 to the Registrant's Form 10-K for the fiscal year ended December 31, 1995 and incorporated herein by reference).*
10.21 Lease between Broad National Bank, landlord, ** and Newtrend, L.P., tenant, dated August 10, 1993 (filed as Exhibit 10.22 to the Registrant's Form 10-K for the fiscal year ended December 31, 1993 and incorporated herein by reference).
10.22 Newtrend Service Bureau Agreement between ** Newtrend, Inc. and Broad National Bank dated August 10, 1993 (filed as Exhibit 10.23 to the
Registrant's Form 10-K for the fiscal year ended December 31, 1993 and incorporated herein by reference).
10.23 Newtrend Item Processing Addendum between ** Newtrend, Inc. and Broad National Bank dated August 10, 1993 (filed as Exhibit 10.24 to the Registrant's Form 10-K for the fiscal year ended December 31, 1993 and incorporated herein by reference).
10.24 1993 Broad National Incentive Stock Option Plan ** for certain employees adopted on September 19, 1994 (filed as Exhibit 10.24 to the Registrant's Form 10-K Report for the fiscal year ended December 31, 1994 and incorporated herein by reference).*
10.25 1993 Broad National Directors Non-Statutory Stock ** Option Plan for directors adopted on September 19, 1994 (filed as Exhibit 10.25 to the Registrant's Form 10-K Report for the fiscal year ended December 31, 1994 and incorporated herein by reference).*
10.26 Lease between Lucky Realty LLC and Broad National ** Bank (filed as Exhibit 10.26 to the Registrant's Form 10-K Report for the fiscal year ended December 31, 1995 and incorporated herein by reference).
10.27 Lease between A.J. Seabra Supermarkets V, Inc. ** and Broad National Bank dated as of April 20, 1995 (filed as Exhibit 10.27 to the Registrant's Form 10-K Report for the fiscal year ended December 31, 1995 and incorporated herein by reference).
10.28 1996 Broad National Bancorporation Incentive -- Stock Option Plan for certain employees adopted on December 19, 1996 and subsequently amended on January 16, 1997.*
10.29 1996 Broad National Bancorporation Directors -- Non-Statutory Stock Option Plan for directors adopted on December 19, 1996.*
10.30 Broad National Bank Long-Term Capital -- Accumulation Plan for certain employees adopted on October 19, 1995.*
10.31 Broad National Bank Deferred Compensation Plan -- for certain employees and directors adopted on October 19, 1995.*
10.32 Broad National Bank Management Incentive Plan -- for certain employees adopted on October 19, 1995.*
11 Statement re Computation of Net Income Per Share. --
22 List of Subsidiaries (filed with Amendment No. 3 ** to the Registrant's Registration Statement No. 33-53658 as Exhibit 22 and incorporated herein by reference).
24 Consent of KPMG Peat Marwick LLP with regard to -- Bancorporation's Registration Statement on Form S-8 (Reg. No. 33-28183).
27 Financial Data Schedule. --
__________________________
* Management contracts or compensatory plans or arrangements required to be identified by Item 14(a)(3).
** Incorporated by reference from previous filings.