Back to GetFilings.com
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
Form 10-K
(Mark One)
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the fiscal year ended December 31, 1997.
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934. for the transition period from --- to ---.
Commission File Number 2-81353
CENTER BANCORP INC.
- --------------------------------------------------------------------------------
(exact name of registrant as specified in its charter)
New Jersey 52-1273725
- ------------------------------- -------------------
(State or other jurisdiction of IRS Employer
incorporation or organization) identification No.)
2455 Morris Avenue, Union, NJ 07083-0007
- --------------------------------------------------------------------------------
(Address of Principal Executive Offices, Including Zip Code)
(908) 688-9500
- --------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
Securities registered
pursuant to Section 12(b) of the Act: none
Securities registered pursuant to Section 12(g) of the Act:
Common stock, no par value
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes [X] or No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation 5-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of the Form 10-K or any amendment to the
Form 10-K. [X]
Aggregate Market value of voting stock held by non-affiliates based on the
average of Bid and Asked prices on February 27, 1998 was approximately
$60.8 million
Shares outstanding on February 27, 1998
- ---------------------------------------
Common stock no par value - 2,362,870 shares
Parts of Form 10-K in which
Documents Incorporated by reference document is incorporated
- ----------------------------------- -------------------------
Definitive proxy statement dated March 13, 1998,
in connection with the 1998 Annual Stockholders
Meeting filed with the Commission pursuant to
Regulation 14A................................................Part III
Annual Report to Stockholders for the fiscal
year ended December 31, 1997..................................Part I and Part II
INDEX TO FORM 10-K
PART I
ITEM 1 BUSINESS 1
ITEM 2 PROPERTIES 9-10
ITEM 3 LEGAL PROCEEDINGS 10
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 10
ITEM 4A EXECUTIVE OFFICERS OF THE REGISTRANT 10
PART II
ITEM 5 MARKET FOR THE REGISTRANTS COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS 10
ITEM 6 SELECTED FINANCIAL DATA 10
ITEM 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 10
ITEM 7A QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK 11
ITEM 8 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 11
ITEM 9 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE 11
PART III
ITEM 10 DIRECTORS OF THE REGISTRANT 11
ITEM 11 EXECUTIVE COMPENSATION 11
ITEM 12 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT 11
ITEM 13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 11
PART IV
ITEM 14 EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND
REPORTS ON FORM 8-K 12-13
SIGNATURES 14
Center Bancorp Inc
Form 10 K
Part I
Item I-Business
A) Historical Development Of Business
Center Bancorp Inc., a one-bank holding company, was incorporated in the state
of New Jersey on November 12, 1982. Center Bancorp Inc. commenced operations
on May 1, 1983, upon the acquisition of all outstanding shares of The Union
Center National Bank (the "Bank"). The holding company's sole activity, at
this time, is to act as a holding company for the Bank. As used herein, the
term "Corporation" shall refer to Center Bancorp Inc. and its subsidiary and
the term "Parent Corporation" shall refer to Center Bancorp Inc. on an
unconsolidated basis.
The Bank was organized in 1923 under the law of the United States of America.
The Bank operates six offices in Union Township, Union County, New Jersey, one
office in Springfield Township, Union County, New Jersey, one office in
Berkeley Heights, Union County, New Jersey and one office in Madison, Morris
County, New Jersey and currently employs 140 full time equivalent persons. A
tenth office, located in Morristown, Morris County, New Jersey is scheduled to
open in June 1998. The Bank is a full service commercial bank offering a
complete range of individual and commercial services.
On June 28, 1996, the Corporation completed its acquisition of Lehigh Savings
Bank SLA ("Lehigh"), a New Jersey chartered savings & loan association, in a
transaction accounted for under the purchase method of accounting. At June 28,
1996, Lehigh Savings Bank SLA had assets of $70.9 million (primarily cash and
cash equivalents of $53.0 million and loans of $15.0 million), deposits of
$68.2 million and stockholders' equity of $2.7 million. Lehigh had a net loss
of $1.1 million for the fiscal period of July 1, 1995 to June 27, 1996. The
acquisition was effected as a series of mergers pursuant to which the
Corporation paid a total of approximately $5.5 million in cash and Lehigh
ultimately was merged into the Bank . The resulting goodwill amounted to $3.8
million and will be amortized over a 15 year period. The December 31, 1997 and
1996 financial data set forth in this annual report and the consolidated
financial statements of the Corporation include the assets, liabilities, and
results of operations of Lehigh since the acquisition date.
B) Narrative Description Of Business
The Bank offers a broad range of lending, depository and related financial
services to commercial, industrial and governmental customers. In the lending
area, these services include short and medium term loans, lines of credit,
letters of credit, working capital loans, real estate construction loans and
mortgage loans. In the depository area, the Bank offers demand deposits,
savings accounts and time deposits. In addition, the Bank offers collection
services, wire transfers, night depository and lock box services.
The Bank offers a broad range of consumer banking services, including interest
bearing and non-interest bearing checking accounts, savings accounts, money
market accounts, certificates of deposit, IRA accounts, Automated Teller
Machines ("ATM") accessibility using Money Access(TM) service, secured and
unsecured loans, mortgage loans, home equity lines of credit, safe deposit
boxes, Christmas club accounts, vacation club accounts, collection services,
money orders and traveler's checks.
The Bank offers various money market services. It deals in U.S. Treasury and
U.S. Governmental agency securities, certificates of deposits, commercial
paper and repurchase agreements.
Competitive pressures affect the Corporation's manner of conducting business.
Competition stems not only from other commercial banks but also from other
financial institutions such as savings banks, savings and loan associations,
mortgage companies, leasing companies and various other financial service and
advisory companies. Many of the financial institutions operating in the
Corporation's primary market are substantially larger and offer a wider
variety of products and services than the Corporation.
The Parent Corporation is subject to regulation by the Board of Governors of
the Federal Reserve System and the New Jersey Department of Banking. As a
national bank, the Bank is subject to regulation and periodic examination by
the Comptroller of the Currency. Deposits in the Bank are insured by the
Federal Deposit Insurance Corporation (the "FDIC").
The Parent Corporation is required to file with the Federal Reserve Board an
annual report and such additional information as the Federal Reserve Board may
require pursuant to the Bank Holding Company Act of 1956, as amended (the
"Act"). In addition, the Federal Reserve Board makes examinations of bank
holding companies and their subsidiaries. The Act requires each bank holding
company to obtain the prior approval of the Federal Reserve Board before it
may acquire substantially all of the assets of any bank, or before it may
acquire ownership or control of any voting shares of any bank, if, after such
acquisition, it would own or control, directly or indirectly, more than 5
percent of the voting shares of such bank. The Act also restricts the types of
businesses and operations in which a bank holding company and its subsidiaries
may engage.
The operations of the Bank are subject to requirements and restrictions under
federal law, including requirements to maintain reserves against deposits,
restrictions on the types and amounts of loans that may be granted,
limitations on the types of investments that may be made and the types of
services which may be offered. Various consumer laws and regulations also
affect the operations of the Bank. Approval of the Comptroller of the Currency
is required for branching, bank mergers in which the continuing bank is a
national bank and in connection with certain fundamental corporate changes
affecting the Bank. Federal law also limits the extent to which the Parent
Corporation may borrow from the Bank and prohibits the Parent Corporation and
the Bank from engaging in certain tie-in arrangements.
FDICIA
The Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA")
substantially revised the bank regulatory provisions of the Federal Deposit
Insurance Act and several other federal banking statutes. Among other things,
FDICIA requires federal banking agencies to broaden the scope of regulatory
corrective action taken with respect to banks that do not meet minimum capital
requirements and to take such actions promptly in order to minimize losses to
the FDIC. Under FDICIA, federal banking agencies have established five capital
tiers: "well capitalized", "adequately capitalized", "undercapitalized",
"significantly undercapitalized" and "critically undercapitalized".
Under regulations adopted under these provisions, for an institution to be
well capitalized it must have a total risk-based capital ratio of at least 10
percent, a Tier I risk-based capital ratio of at least 6 percent and a Tier I
leverage ratio of at least 5 percent and not be subject to any specific
capital order or directive. For an institution to be adequately capitalized,
it must have a total risk-based capital ratio of at least 8 percent, a Tier I
risk-based capital ratio of at least 4 percent and a Tier I leverage ratio of
at least 4 percent (or in some cases 3 percent). Under the regulations, an
institution will be deemed to be undercapitalized if the bank has a total
risk-based capital ratio that is less than 8 percent, a Tier I risk-based
capital ratio that is less than 4 percent or a Tier I leverage ratio of less
than 4 percent (or in some cases 3 percent). An institution will be deemed to
be significantly undercapitalized if the bank has a total risk-based capital
ratio that is less than 6 percent, a Tier I risk-based capital ratio that is
less than 3 percent, or a Tier I leverage ratio of less than 3 percent and
will be deemed to be critically undercapitalized if it has a ratio of tangible
equity to total assets that is equal to or less than 2 percent.
FDICIA also directs that each federal banking agency prescribe standards for
depository institutions and depository institution holding companies relating
to internal controls, information systems, internal audit systems, loan
documentation, credit underwriting, interest rate exposure, asset growth, a
maximum ratio of classified assets to capital, a minimum ratio of market value
to book value for publicly traded shares (if feasible) and such other
standards as the agency deems appropriate.
FDICIA also contains a variety of other provisions that could affect the
operations of the Corporation, including reporting requirements, regulatory
standards for real estate lending, "truth in savings" provisions, the
requirement that depository institutions give 90 days notice to customers and
regulatory authorities before closing any branch, limitations on credit
exposure between banks, restrictions on loans to a bank's insiders and
guidelines governing regulatory examinations.
BIF Premiums
The Corporation is a member of the Bank Insurance Fund ("BIF") of the FDIC.
The FDIC also maintains another insurance fund, the Savings Association
Insurance Fund ("SAIF"), which primarily cover savings and loan association
deposits but also covers deposits that are acquired by a BIF-insured
institution from a savings and loan association. The Corporation had
approximately $420.8 million of deposits at December 31, 1997, with respect to
which the Corporation pays insurance premiums.
The Omnibus Spending Bill (H.R. 3610) that President Clinton signed on
September 30, 1996 included provisions for a special assessment to
recapitalize the SAIF, provisions to provide funding to meet the Financing
Corporation (FICO) bond obligations, and to merge BIF with the SAIF fund on
January 1, 1999. As a result of the acquisition of Lehigh, the Corporation was
obligated to pay a one-time assessment on Lehigh's deposits. The total
assessment amounted to $469,606 and was paid to the Federal Deposit Insurance
Corporation on November 27, 1996.
Effective January 1, 1997, Federal legislation separates the FICO assessment
to service the interest on its bond obligations from the SAIF assessment. The
amount assessed on individual institutions by the FICO will be in addition to
the amount paid for deposit insurance according to the FDIC's risk-related
assessment rate schedules. However, between October 1, 1996, and January 1,
1997, any amount required by the FICO was deducted from the amounts the FDIC
was authorized to assess SAIF-member savings associations, and could not be
assessed against certain institutions. FICO assessment rates for the first
semiannual period of 1997 were set at 1.30 basis points annually for
BIF-assessable deposits and 6.48 basis points annually for SAIF-assessable
deposits. (These rates may be adjusted quarterly to reflect changes in
assessment bases for the BIF and the SAIF by law; the FICO rate on
BIF-assessable deposits must be one-fifth the rate on SAIF-assessable deposits
until the insurance funds are merged or until January 1, 2000, whichever
occurs first.)
Future Federal Deposit Insurance expense will be affected by the FICO bond
payment and continued expense on Lehigh's acquired deposits. The FICO
obligation is to be shared by both SAIF and BIF insured institutions. For the
years 1997-1999, BIF-assessable deposits will be assessed at a rate of 1/5 of
the rate imposed on SAIF-assessable deposits. This assessment is estimated to
be 1.3 cents per $100.00 for BIF-insured deposits. The estimated assessments
should be completely phased out by the year 2019.
The SAIF-assessable deposits of "Oakar" banks are reduced by 20 percent for
the purpose of the special assessment where the Bank's BIF deposits exceed 50
percent of the total insured deposits. In addition, the SAIF-assessable
deposits of Oakar banks are reduced by 20 percent for the purposes of ongoing
regular premium assessments. The deposits acquired from Lehigh are classified
as "Oakar deposits" for premium assessments.
Proposed Legislation
From time to time proposals are made in the U.S. Congress and before various
bank regulatory authorities which would alter the policies of and place
restrictions on different types of banking operations. It is impossible to
predict the impact, if any, of potential legislative trends on the business of
the Corporation and the Bank.
C) Dividend Restrictions
Most of the revenue of the Corporation available for payment of dividends on
its capital stock will result from amounts paid to the Parent Corporation by
the Bank. There are a number of statutory and regulatory restrictions
applicable to the payment of dividends by national banks and bank holding
companies. First, the Bank must obtain the approval of the Comptroller of the
Currency (the "Comptroller") if the total dividends declared by the Bank in
any year will exceed the total of the Bank's net profits (as defined and
interpreted by regulation) for that year and retained profits (as defined) for
the preceding two years, less any required transfers to surplus. Second, the
Bank cannot pay dividends except to the extent that net profits then on hand
exceed statutory bad debts. Third, the authority of federal regulators to
monitor the levels of capital maintained by the Corporation and the Bank (see
Item 7 of this Annual Report on Form 10-K and the discussion of FDICIA above),
as well as the authority of such regulators to prohibit unsafe or unsound
practices, could limit the amount of dividends which
the Parent Corporation and the Bank may pay. Regulatory pressures to
reclassify and charge off loans to establish additional loan loss reserves
also can have the effect of reducing current operating earnings and thus
impacting an institution's ability to pay dividends. Regulatory authorities
have indicated that bank holding companies which are experiencing high levels
of non-performing loans and loan charge-offs should review their dividend
policies. Reference is also made to Note 13 of the Notes to the Company's
Consolidated Financial Statements.
D) Statistical Information
(Reference is also made to Exhibit 13.1 of this Annual Report on Form 10-K)
Information regarding interest sensitivity is incorporated by reference to
pages 28-30 of the 1997 Annual Report to Shareholders (the 1997 Annual
Report).
Information regarding related party transactions is incorporated by reference
to footnote 5 of the 1997 Annual Report.
The market risk results and gap results noted on pages 28 through 30 of the
1997 Annual Report take into consideration repricing and maturities of assets
and liabilities, but fail to consider the interest sensitivities of those
asset and liability accounts. Management has prepared for its use an income
simulation model to forecast future net interest income, in light of the
current gap position. Management has also prepared for its use alternative
scenarios to measure levels of net interest income associated with various
changes in interest rates. Results have indicated that an interest rate
increase of 100 basis points and a decline of 100 basis resulted in an impact
on future net interest income which is consistent with target levels contained
in the Corporation's Asset/Liability Policy. Management cannot provide any
assurances about the actual effect of changes in interest rates on the
Corporation's net income.
I. Investment Portfolio
a) For information regarding the carrying value of the investment portfolio,
see page 44 of the 1997 Annual Report which is incorporated herein by
reference.
b) The following table illustrates the maturity distribution and weighted
average yield on a tax-equivalent basis for investment securities at
December 31, 1997, on a contractual maturity basis.
Obligations Other Securities,
of US Obligations Federal Reserve
Treasury & of States and Federal
Government & Political Home Loan
(Dollars in Thousands) Agencies Subdivisions Bank Stock Total
----------- ------------ ----------------- ---------
Due in 1 year or less
Book Value $ 77,349 $ 9,103 $ 5,622 $ 92,074
Market Value 77,460 9,157 5,509 92,126
Weighted Average Yield 6.613% 5.306% 6.585% 6.482%
Due after one year through five years
Book Value $115,438 $23,467 $15,134 $154,039
Market Value 116,950 23,868 15,525 156,342
Weighted Average Yield 6.711% 5.934% 6.710% 6.593%
Due after five years through ten years
Book Value $ 16,666 $ 6,747 $ 997 $ 24,410
Market Value 16,860 6,983 982 24,825
Weighted Average Yield 6.705% 5.504% 6.298% 6.356%
Due after ten years
Book Value $ 24,400 $ 0 $ 783 $ 25,183
Market Value 24,595 0 784 25,379
Weighted Average Yield 6.633% 0.000% 6.795% 6.638%
No Maturity
Book Value $ 0 $ 0 $ 1,606 $ 1,606
Market Value 0 0 1,606 1,606
Weighted Average Yield 0.000% 0.000% 6.500% 6.300%
-------- ------- ------- --------
Total
Book Value $233,853 $39,317 $24,142 $297,312
Market Value 235,865 40,008 24,405 300,278
Weighted Average Yield 6.669% 5.714% 6.673% 6.542%
======== ======= ======= ========
c) Securities of a single issuer exceeding 10 percent of stockholders'
equity amounted to -0- for 1997. For other information regarding the
Corporation's investment securities portfolio, see Pages 20 and 44
of the 1997 Annual Report.
II. Loan Portfolio
The following table presents information regarding the components of the
Corporation's loan portfolio on the dates indicated.
Years Ended December 31,
---------------------------------------------------------------
(Dollars in thousands) 1997 1996 1995 1994 1993
-------- -------- ------- ------- -------
Commercial $ 39,397 $ 25,950 $21,302 $18,674 $18,692
Real estate-mortgage 88,067 85,994 69,954 64,666 40,005
Installment Loan 5,565 6,584 7,012 6,250 7,378
-------- -------- ------- ------- -------
Total 133,029 118,528 98,268 89,590 66,075
Less:
Unearned discount 605 698 698 785 330
Allowance for loan losses 1,269 1,293 1,073 1,073 943
-------- -------- ------- ------- -------
Net total $131,155 $116,537 $96,497 $87,732 $64,802
======== ======== ======= ======= =======
In 1994, demand for the Bank's real estate mortgage products improved
substantially, and new products in conjunction with a new marketing
program coupled with positive market trends supported the growth in 1995,
1996 and 1997. The Lehigh acquisition also accounted for a portion of
1996 loan growth approximating $15.2 million.
The maturities of commercial loans at December 31, 1997 are listed below. All
such loans which are due after one year have fixed interest rates (in
thousands).
At December 31, 1997, Maturing
------------------------------------------------------------
In One Year After One Year After
or Less Five Years Five Years Total
-------------- --------------- ---------- -------
Construction loans $ 420 $ 137 $ 0 $ 557
Commercial real estate loans 2,049 1,825 15,704 19,578
Commercial loans 13,852 2,348 3,062 19,262
========= ====== ======= =======
Total $16,321 $4,310 $18,766 $39,397
========= ====== ======= =======
Loans with:
Fixed rates $ 952 $3,985 $18,766 $23,703
Variable rates 15,369 325 0 15,694
========= ====== ======= =======
Total $16,321 $4,310 $18,766 $39,397
========= ====== ======= =======
Lending is one of Center Bancorp's primary business activities. The
Corporation's loan portfolio consists of both retail and commercial loans,
serving the diverse customer base in its market area. In 1997, average total
loans comprised 28.20 percent of average interest-earning assets. The
Corporation has experienced a compound growth rate in average loans since 1994
of 14.6 percent. Average loans amounted to $125.5 million in 1997 compared
with $107.9 million in 1996, $95.2 million in 1995 and $72.8 million 1994. The
composition of Center Bancorp's loan portfolio continues to change due to the
local economy. Factors such as the economic climate, interest rates, real
estate values and employment all contribute to these changes. Loan growth has
been generated through marketing and business development efforts.
Average commercial loans increased approximately $4.0 million or 23.4 percent
in 1997 as compared with 1996. The Corporation seeks to create growth in
commercial lending by offering new products, lowering pricing and capitalizing
on the positive trends in its market area. Specialized products are offered to
meet the financial requirements of the Corporation's clients. It is the
objective of the Corporation's credit procedures to diversify the commercial
loan portfolio to limit concentrations in any single industry.
The Corporation's commercial loan portfolio includes, in addition to real
estate development, loans to the manufacturing, services, automobile,
professional and retail trade sectors, and to specialized borrowers, including
high technology businesses. A large proportion of the Corporation's commercial
loans have interest rates which reprice with changes in short-term market
interest rates or mature in one year or less.
Average mortgage loans, which amounted to $80.5 million in 1997 increased $8.9
million or 12.4 percent as compared with average mortgage loans of $71.6
million in 1996 (which reflected a 2.4 percent increase over 1995). The
Corporation's long-term mortgage portfolio includes both residential and
commercial financing. Growth during the past two years largely reflected brisk
activity in mortgage financing. Although a portion of the Corporation's
commercial mortgages adjust to changes in the prime rate, most of these loans
and residential mortgage loans have fixed interest rates.
Residential loans increased steadily since 1994, but began to slow
considerably in the beginning of 1995 as economic interest rates began to rise
in 1995. During 1996 growth increased as rates stabilized with similar trends
experienced during 1997.
Average construction loans and other temporary mortgage financing decreased
from 1996 to 1997 by $2.3 million to $558,000 million. Such loans grew by
$1 million from 1995 to 1996. The change in construction and other temporary
mortgage lending has been generated by the market activity of our customers
engaging in residential and commercial development throughout New Jersey.
Interest rates on such mortgages are generally tied to key short-term market
interest rates. Funds are typically advanced to the builder or developer
during various stages of construction and upon completion of the project it is
contemplated that the loans will be repaid by cash flows derived from the
ongoing project.
Loans to individuals include personal loans, student loans, and home
improvement loans, as well as financing for automobiles and other vehicles.
Such loans averaged $5.6 million in 1997, as compared with $6.6 million in
1996 and $7.0 million in 1995. The growth in loans to individuals, during
1997, was buoyed by increases in automobile loans, offset in part by sales of
student loans.
Home equity loans, which the Corporation began actively promoting in 1994 and
1995, as well as traditional secondary mortgage loans, have become popular
with consumers due to their tax advantages over other forms of consumer
borrowing vehicles. Home equity loans and secondary mortgages averaged $18.2
million in 1997. At the end of 1997, automobile loans amounted to 61.0 percent
of total loans to individuals, excluding home equity and secondary mortgage
financing. Interest rates on floating rate home equity loans are generally
tied to the prime rate while most other loans to individuals, including fixed
rate home equity loans, are medium-term (ranging between one-to-five years)
and carry fixed interest rates.
At December 31, 1997, the Corporation had total lending commitments
outstanding of $39.4 million, of which approximately 50.6 percent and 12.7
percent were for commercial loans and construction loans, respectively.
Credit risks are an inherent part of the lending function. The Corporation has
set in place specific policies and guidelines to limit credit risks to the
degree possible. The following describes the Corporation's credit management
policy and describes certain risk elements in its earning assets portfolio.
Credit Management. The maintenance of comprehensive and effective credit
policies is a paramount objective of the Corporation. Credit procedures are
enforced at each individual branch office and are maintained at the senior
administrative level as well as through internal control procedures.
Prior to extending credit, the Corporation's credit policy generally requires
a review of the borrower's credit history, collateral and purpose of each
loan. Requests for most commercial and financial loans are to be accompanied
by financial statements and other relevant financial data for evaluation.
After the granting of a loan or lending commitment, this financial data is
typically updated and evaluated by the credit staff on a periodic basis for
the purpose of identifying potential problems. Construction financing requires
a periodic submission by the borrowers of sales/leasing status reports
regarding their projects, as well as, in some case, inspections of the project
sites by independent engineering firms. Advances are normally made only upon
the satisfactory completion of periodic phases of construction.
Certain lending authorities are granted to loan officers based upon each
officer's position and experience. However, large dollar loans and lending
lines are reported to and are subject to the approval of the Bank's loan
committee and/or board of directors. Loan committees are chaired by either the
president or a senior officer of the Bank.
Real Estate lending policies must include changes implemented by FDICIA, more
specifically the requirement to monitor and report the aggregate of any loans
with loan-to-value ratios in excess of the supervisory limits set forth in the
Interagency Guidelines for Real Estate Lending Policies. The Corporation has
established its own internal loan-to-value limits for real estate loans. In
general, except as described below, these internal limits are not permitted to
exceed the following supervisory limits.:
Loan Category Loan-to-Value Limit
Raw Land 65%
Land Development 75%
Construction:
Commercial, Multifamily*,
and other Nonresidential 80%
Improved Property 85%
Owner-occupied 1 to 4 family and home equity **
* Multifamily construction includes condominiums and cooperatives.
** A loan-to-value limit has not been established for permanent mortgage or
home equity loans on owner-occupied, 1 to 4 family residential property.
However, for any such loan with a loan-to-value ratio that equals or
exceeds 90 percent at origination, an institution is expected to require
appropriate credit enhancement in the form of either mortgage insurance
or readily marketable collateral.
It may be appropriate in individual cases to originate loans with
loan-to-value ratios in excess of the supervisory loan-to-value limits, based
on the support provided by other credit factors. The President or Board of
Directors must approve such exceptions. These loans must be identified by the
Bank as exceptions to the supervisory limits and their aggregate amount must
be reported at least quarterly to the Board of Directors. Non-conforming loans
should not exceed 100% of capital, or 30% with respect to non 1 to 4 family
residential loans.
Collateral margin guidelines are based on cost, market, or other appraised
value to maintain a reasonable amount of collateral protection in relation to
the inherent risk in the loan. This does not mitigate the fundamental analysis
of cash flow from the conversion of assets in the normal course of business or
from operations to repay the loan. It is merely designed to provide a cushion
to minimize the risk of loss if the ultimate collection of the loan becomes
dependent on the liquidation of security pledged.
The Corporation also seeks to minimize lending risk through loan
diversification. The composition of the Corporation's commercial loan
portfolio reflects and is highly dependent upon the economy and industrial
make-up of the region it serves. Effective loan diversification spreads risk
to many different industries, thereby reducing the impact of downturns in any
specific industry on overall loan profitability.
Weakening credits are monitored through a loan review process which requires
that, on a regular basis, a classified loan report is prepared. Classified
loans are categorized into one of several categories depending upon the
condition of the borrower and the strength of the underlying collateral.
"Other assets especially mentioned" is an early warning signal consisting of
loans with only modest deficiencies in documentation or with potentially
weakening credit features.
A consolidated classified loan report is prepared on a monthly basis and is
examined by both the senior management of the Bank and the Corporation's Board
of Directors. The review of classified loan reports is designed to enable
management to take such action as is considered necessary to remedy problems
on a timely basis.
Regularly scheduled audits performed by the Corporation's internal and
external credit review staff further the integrity of the credit monitoring
process. Any noted deficiencies are expected to be corrected within a
reasonable period of time.
Risk Elements. Risk elements include non-performing loans, loans past due
ninety days or more as to interest or principal payments but not placed on a
non-accrual status, potential problem loans, other real estate owned, net, and
other non-performing, interest-earning assets.
Non-performing and Past Due Loans Non-performing loans include non accrual
loans and troubled debt restructurings. Non-accrual loans represent loans on
which interest accruals have been suspended. It is the Corporation's general
policy to consider the charge-off of loans when they become contractually past
due ninety days or more as to interest or principal payments or when other
internal or external factors indicate that collection of principal or interest
is doubtful. Troubled debt restructurings represent loans on which a
concession was granted to a borrower, such as a reduction in interest rate
which is lower than the current market rate for new debt with similar risks.
Loans accounted for on a non-accrual basis at December 31, 1997, 1996, 1995,
1994, and 1993 are as follows.
(Dollars in thousands) 1997 1996 1995 1994 1993
-------- -------- -------- -------- --------
Mortgage Real Estate $ 27 $ 298 $ 0 $ 0 $ 0
Commercial 0 0 0 0 0
Installment 0 0 0 0 0
-------- -------- -------- -------- --------
Net loans $ 27 $ 298 $ 0 $ 0 $ 0
======== ======== ======== ======== ========
Accruing loans which are contractually past due 90 days or more as to
principal or interest payments are as follows:
December 31,
------------------------------------------------
(Dollars in thousands) 1997 1996 1995 1994 1993
-------- -------- -------- -------- --------
Commercial $ 0 $ 11 $ 0 $ 0 $ 0
Installment 73 110 48 0 5
-------- -------- -------- -------- --------
Net loans $ 73 $ 121 $ 48 $ 0 $ 5
======== ======== ======== ======== ========
There were no loans which are "troubled debt restructurings" as of the last
day of each of the last five years.
In general, it is the policy of management to consider the charge-off of loans
at the point that they become past due in excess of 90 days, with the
exception of loans that are secured by cash or marketable securities or
mortgage loans which are in the process of foreclosure.
There were no other known "potential problem loans" (as defined by SEC
regulations) as of December 31, 1997 that have not been identified and
classified. Such loans, consisting of other assets especially mentioned and
substandard loans, amounted to $239,304 and $0, respectively, at December 31,
1997. At December 31, 1996 these loans amounted to $994,000 and $942,000
respectively.
The Corporation has no foreign loans.
As of December 31, 1997, $8.4 million of the commercial loan portfolio, or
24.1 percent of $34.9, represented outstanding working capital loans to
various real estate developers. All but $2.5 million of these loans are
secured by mortgages on land and on buildings under construction.
III. Allowance for Loan Losses
Implicit in the lending function is the fact that loan losses will be
experienced and that the risk of loss will vary with the type of loan being
made, the creditworthiness of the borrower and prevailing economic conditions.
The allowance for loan losses has been allocated below according to the
estimated amount deemed to be reasonably necessary to provide for the
possibility of losses being incurred within the following categories of loans
at December 31, for each of the past five years. The table below shows, for
three types of loans, the amounts of the allowance allocable to such loans and
the percentage of such loans to total loans. The percentage of loans to total
loans is based upon the classification of loans shown on page 5 of this
report.
Commercial Real Estate Mortgage Installment Unallocated
-------------------- ----------------------- -------------------- -----------
Amount Loans to Amount Loans to Amount Loans to Amount
Total Total Total
Loans Loans Loans
(Dollars in thousands) % % %
-----------------------------------------------------------------------------------------------------------------
1997 $ 498 29.6 $ 262 66.2 $ 56 4.2 $ 453
1996 $ 415 21.9 $ 220 66.1 $ 62 12.0 $ 596
1995 $ 467 21.7 $ 187 71.2 $ 22 7.1 $ 397
1994 $ 399 20.2 $ 185 72.8 $ 55 7.0 $ 434
1993 $ 408 23.4 $ 140 69.4 $ 87 7.2 $ 308
IV. Deposits
Information regarding average amounts/rates of deposits is incorporated by
reference to pages 30 and 35 of the 1997 Annual Report. Information regarding
the amount of time certificates of deposits of $100,000 or more is presented
on pages 30, 31 and 36 of the 1997 Annual Report.
V. Return on Equity and Assets
Information regarding the return on average assets, return on average equity
and dividend payout ratio is incorporated by reference to pages 1 and 13 of
the 1997 Annual Report. Return on average assets was 0.94 percent, 1.00
percent and 1.15 percent for the years ended December 31, 1997, 1996, and
1995, respectively. The dividend payout ratio was 41.0 percent, 43.0 percent
and 44.0 percent for the years ended December 31, 1997, 1996, and 1995,
respectively. Return on tangible average shareholders equity was 15.9 percent
in 1997, compared with 15.2 percent for 1996 and 15.3 percent in 1995.
VI. Short-term Borrowings
Information regarding the amount outstanding of short-term borrowings is
incorporated by reference to page 32 of the 1997 Annual Report.
ITEM 2-Properties
The Bank's operations are located at six sites in Union Township, one in
Springfield Township, one in Berkeley Heights, and one in Vauxhall, Union
County, New Jersey. The Bank also has one site in Madison, Morris County, New
Jersey. The principal office is located at 2455 Morris Avenue, Union, Union
County, New Jersey. The principal office is a two story building constructed
in 1993.
All but four of the locations are owned by the Bank. The lease of the Five
Points Branch located at 356 Chestnut Street, Union, New Jersey expires
November 30, 2002 and is subject to renewal at the Bank's option. The Career
Center Branch located in Union High School expires December 31, 2002 and is
also subject to renewal at the Bank's option and the lease of the Madison
office located at 300 Main Street, Madison, New Jersey expires June 6, 2005
and is subject to renewal at the Bank's option. The lease of the Millburn Mall
Branch located at 2933 Vauxhall Road, Vauxhall, New Jersey expires February
01, 2003 and is subject to renewal at the Bank's option and the lease of the
Morristown office located at 86 South Street, Suite 2A, Morristown, New Jersey
expires February 28, 2003 and is subject to renewal at the Bank's option. (See
the back
inside cover of the 1997 Annual Report for a complete listing of all
branches and locations. The Drive In/walk Up located at 2022 Stowe Street,
Union, New Jersey is adjacent to a part of the Main Office facility.) The Bank
has two off-site ATM's, one at Union Hospital, 100 Galloping Hill Road, Union,
New Jersey and one at Union County College, 1033 Springfield Avenue, Cranford,
New Jersey.
ITEM 3-Legal Proceedings
There are no significant pending legal proceedings involving the Parent
Corporation or Bank other than those arising out of routine operations.
Management does not anticipate that the ultimate liability, if any, arising
out of such litigation will have a material effect on the financial condition
or results of operations of the Parent Corporation and Bank on a consolidated
basis.
ITEM 4-Submission of Matters to a Vote of Security Holders
The Corporation had no matter submitted to a vote of security holders during
the fourth quarter of 1997.
ITEM 4 A-Executive Officers
The following table sets forth the name and age of each executive officer of
the Parent Corporation, the period during which each such person has served as
an officer of the Parent Corporation or the Bank and each such person's
business experience (including all positions with the Parent Corporation and
the Bank) for the past five years:
Name and Age Officer Since Business Experience
- ----------------------------------------------------------------------------------------------------------------
John J. Davis 1982 the Parent Corporation: President & Chief Executive Officer
Age - 55 1977 the Bank of the Parent Corporation and the Bank
Anthony C. Weagley 1996 the Parent Corporation: Vice President & Treasurer of the Parent Corporation
Age - 36 1995 the Corporation Senior Vice President & Cashier (1996-Present),
1985 the Bank Vice President & Cashier (1991 - 1996) and
Assistant Vice President prior years of the Bank
Donald Bennetti 1996 the Parent Corporation: Vice President of the Parent Corporation
Age - 54 1993 the Bank Senior Vice President (1997-Present)
Vice President of the Bank (1993-1997)
Part II
ITEM 5-Market Information For the Registrant's Stock and Related
Stockholder Matters
The information required by Item 5 of Form 10-K appears on page 33 of the 1997
Annual Report and is incorporated herein by reference. As of December 31,
1997, there were 609 holders of record of the Parent Corporation's Common
Stock.
ITEM 6-Selected Financial Data
The information required by Item 6 of Form 10-K appears on pages 1 and 13 of
the 1997 Annual Report and is incorporated herein by reference.
ITEM 7-Management's Discussion And Analysis of Financial Condition and Results
of Operations
The information required by Item 7 of Form 10-K appears on pages 14 - 35 of
the 1997 Annual Report and is incorporated herein by reference.
ITEM 7A-Quantitative and Qualitative Disclosures About Market Risk
The information required by Item 7A of Form 10-K appears on pages 28, 29, and
30 of the 1997 Annual Report and is incorporated herein by reference.
ITEM 8-Financial Statements and Supplementary Data
The information required by Item 8 of Form 10-K appears on pages 36 - 39 of
the 1997 Annual Report and is incorporated herein by reference.
ITEM 9-Changes In and Disagreements With Accountants on Accounting and
Financial Disclosures
None
Part III
ITEM 10-Directors of the Registrant
The Corporation responds to this item by incorporating herein by reference the
material responsive to such item in the Corporation's definitive proxy
statement for its 1998 Annual Meeting of Stockholders.
ITEM 11-Executive Compensation
The Corporation responds to this item by incorporating herein by reference the
material responsive to such item in the Corporation's definitive proxy
statement for its 1998 Annual Meeting of Stockholders.
ITEM 12-Security Ownership of Certain Beneficial Owners and Management
The Corporation responds to this item by incorporating herein by reference the
material responsive to such item in the Corporation's definitive proxy
statement for its 1998 Annual Meeting of Stockholders.
ITEM 13-Certain Relationships and Related Transactions The Corporation
responds to this item by incorporating herein by reference the material
responsive to such item in the Corporation's definitive proxy statement for
its 1998 Annual Meeting of Stockholders.
Part IV
ITEM 14-Exhibits, Financial Statement Schedules,
and Reports on Form 8 -K
- --------------------------------------------------------------------------------
A1. Financial Statements
Page in Annual Report
Consolidated Statements of Condition-December 31, 1997, and 1996 36
- --------------------------------------------------------------------------------
Consolidated Statements of Income for the years ended
December 31, 1997, 1996 and 1995 37
- --------------------------------------------------------------------------------
Consolidated Statements of Changes in Stockholders'
Equity for the years ended
December 31, 1997, 1996 and 1995 38
- --------------------------------------------------------------------------------
Consolidated Statements of Cash Flows for the years ended
December 31, 1997, 1996 and 1995 39
- --------------------------------------------------------------------------------
Notes to Consolidated Financial Statements 40 - 57
- --------------------------------------------------------------------------------
Report of Independent Auditors 58
- --------------------------------------------------------------------------------
A2. Financial Statement Schedules
All Schedules have been omitted as inapplicable, or not required, or because
the required information is included in the Consolidated Financial Statements
or the notes thereto.
A3. Exhibits
3.1 Certificate of Incorporation of the Registrant is incorporated by
reference to Exhibit 3.1 to the Registrant's Annual Report on Form 10-K for
the year ended December 31, 1992
3.2 Bylaws of the Registrant is incorporated by reference to Exhibit 3.2 to
the Registrant's Annual Report on Form 10-K for the year ended December 31,
1992
10.1 Employment agreement between the Registrant and Don Bennetti.
10.2 Employment agreement between the Registrant and John J. Davis is
incorporated by reference to exhibit 10.2 to the Registrant's Annual Report
on Form 10-K for the year ended December 31, 1995
10.3 The Registrant's Employee Stock Option Plan is incorporated by
reference to exhibit 10.3 to the Registrant's Annual Report on Form 10-K
for the year ended December 31, 1993
10.4 The Registrant's Outside Director Stock Option Plan is incorporated by
reference to exhibit 10.4 to the Registrant's Annual Report on Form 10-K
for the year ended December 31, 1993
10.5 Supplemental Executive Retirement Plans ("SERPS") are incorporated by
reference to exhibit 10.5 to the Registrant's Annual Report on Form 10-K
for the year ended December 31, 1994
10.6 Executive Split Dollar Life Insurance Plan is incorporated by
reference to exhibit 10.5 to the Registrant's Annual Report on Form 10-K
for the year ended December 31, 1994
10.7 Employment agreement between the Registrant and Anthony C. Weagley,
dated as of January 1, 1996 is incorporated by reference to exhibit 10.7 to
the Registrant's Annual Report on Form 10-K for the year ended December 31,
1995
10.8 Agreement and Plan of Merger, by and between the Registrant and Lehigh
Savings Bank, SLA., dated as of February 14, 1996, as amended is
incorporated by reference to exhibit 2 to the Registrant's Annual Report on
Form 10-K for the year ended December 31, 1995
10.9 Inducement Agreement, dated February 14, 1996 by and between the
Registrant and the trustee under a trust agreement applicable to the
majority shareholder of Lehigh Savings Bank, SLA is incorporated by
reference to exhibit 10.2 of the Registrant's for 10-Q for the period ended
March 31, 1996.
11.1 Statement regarding computation of per share earnings is omitted
because the computation can be clearly determined from the material
incorporated by reference in this Report.
13.1 Registrant's Annual Report to Shareholders for the year ended December
31, 1997 (parts not incorporated by reference are furnished for information
purposes only and are not to be deemed to be filed herewith.)
21.1 Subsidiaries of the Registrant is incorporated by reference to exhibit
22.1 to the Registrant's Annual Report on Form 10-K for the year ended
December 31, 1992
23.1 Consent of KPMG Peat Marwick LLP
27.1 Financial Data Schedule
B. Reports on Form 8-K
There were no reports on Form 8-K filed by the Registrant during the fourth
quarter of 1997.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, Center Bancorp Inc. has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
CENTER BANCORP INC.
/s/ JOHN J. DAVIS
-------------------------------------
John J. Davis
President and Chief Executive Officer
Dated March 31, 1998
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, in the capacities described below and on the date indicated above:
/s/ CHARLES P. WOODWARD /s/ HUGO BARTH, III
- ------------------------------------- -------------------------------------
Charles P. Woodward, Hugo Barth, III
Director and Chairman of the Board Director
/s/ ROBERT L. BISCHOFF /s/ ALEXANDER BOL
- ------------------------------------- -------------------------------------
Robert L. Bischoff Alexander Bol
Director Director
/s/ BRENDA CURTIS /s/ DONALD G. KEIN
- ------------------------------------- -------------------------------------
Brenda Curtis Donald G. Kein
Director Director
/s/ JOHN J. DAVIS /s/ HERBERT SCHILLER
- ------------------------------------- -------------------------------------
John J. Davis Herbert Schiller
President and Chief Executive Officer Director
and Director
/s/ PAUL LOMAKIN, JR. /s/ STAN R. SOMMER
- ------------------------------------- -------------------------------------
Paul Lomakin, Jr. Stan R. Sommer
Director Director
/s/ WILLIAM THOMPSON /s/ ANTHONY C. WEAGLEY
- ------------------------------------- -------------------------------------
William Thompson Anthony C. Weagley
Director Vice President & Treasurer ( Chief
Accounting and Financial Officer)
Financial Hilights
- ------------------------------------------------------------------------------
For the years ended December 31, Percent
-------------------------------
1997 1996 change
(Dollars, in thousands, except per share data)
EARNINGS
Net interest income 16,219 $ 14,844 9.26%
Provision (credit) for loan losses 0 (132) (100.00)%
Other income 1,111 727 52.82%
Other Expenses 10,596 9,910 6.92%
Net Income 4,511 4,157 8.52%
Cash Dividends Declared 1,863 $ 1,787 4.25%
- -------------------------------------------------------------------------------------------------------------------------
PER SHARE DATA
Net Income
Basic 1.91 $ 1.77 7.91%
Diluted 1.90 1.77 7.34%
Cash Dividends 0.79 0.76 3.95%
Book Value 14.15 12.86 10.03%
Tangible Book Value 12.72 $ 11.29 12.67%
- -------------------------------------------------------------------------------------------------------------------------
AT YEAR END Bid Ask Bid Ask
Market Value Per Common Share $23.50 $24.50 $20.00 $21.43
- -------------------------------------------------------------------------------------------------------------------------
AT YEAR END
Investment Securities $ 298,298 $ 280,123 6.49%
Loans 132,424 117,830 12.39%
Assets 473,112 459,218 3.03%
Deposits 436,010 426,654 2.19%
Stockholders' Equity $ 33,422 $ 30,213 10.62%
Total Shares Outstanding 2,361,447 2,349,156 0.52%
FINANCIAL RATIOS
Return on Average Assets 0.94% 1.00%
- -------------------------------------------------------------------------------------------------------------------------
Return on Average Stockholders' Equity 14.16% 14.54%
Return on Tangible Average Stockholders' Equity 15.92% 15.21%
- -------------------------------------------------------------------------------------------------------------------------
Cash Dividends Declared as a Percent of
Net Income 41.30% 42.99%
- -------------------------------------------------------------------------------------------------------------------------
Average Stockholders' Equity as a
Percent of Average Total Assets 6.65% 6.89%
Tangible Average Stockholders' Equity as a
Percent of Average Total Assets 5.92% 6.66%
- -------------------------------------------------------------------------------------------------------------------------
Stockholders' Equity as a Percent of Total Assets 7.06% 6.58%
Tangible Stockholders' Equity as a
Percent of Average Total Assets 6.27% 6.39%
- -------------------------------------------------------------------------------------------------------------------------
Average Risk-Based Tier I Capital Ratio 15.48% 15.61%
Average Risk-Based Tier I and Tier II Capital 16.15% 16.38%
Tier I Leverage Ratio 6.19% 5.76%
- -------------------------------------------------------------------------------------------------------------------------
1
All share and per share amounts have been restated to reflect the 5% stock
dividend paid in May, 1997 and the 3-for-2 stock split paid in May, 1996.
MANAGEMENT'S DISCUSSION & ANALYSIS
OF FINANCIAL CONDITION & RESULTS OF OPERATIONS
The following introduction to Management's Discussion and Analysis
highlights the principal activities of Center Bancorp Inc. that have
contributed to its earnings performance in 1997.
Center Bancorp's performance for 1997 was highlighted by loan growth,
principally in the mortgage and consumer loan portfolios, with consistent
asset quality which resulted in no additional provision to the allowance for
loan losses and no other real estate owned (OREO) at December 31, 1997. 1997
represented another year of solid earnings. As a result of sustained earnings
and capital growth, dividends were maintained at over a 40 percent dividend
payout ratio and the Board of Directors declared a 5% stock dividend. The
stock dividend was paid May 31, 1997, and constituted the fourth time in the
last five years that the Corporation has either paid a stock dividend or
declared a stock split.
Net income for the twelve months ended December 31, 1997, amounted to
$4,511,000 as compared to $4,157,000 and $4,040,000 earned for the comparable
periods in 1996 and 1995, respectively. Basic earnings per share amounted to
$1.91 as compared to $1.77 and $1.73 earned in 1996 and 1995, respectively.
Diluted earnings per share were $1.90 for 1997 compared to $1.77 in 1996 and
$1.73 in 1995. These figures have been restated to reflect the five percent
stock dividend in 1997, and the three-for-two stock split in 1996.
Earnings performance for 1997 reflected increased net interest income
being offset in part by an increase in operating expenses. These expenses were
a direct result of the growth and expansion of Union Center National Bank (the
"Bank"). The increased net interest income was primarily a result of a change
in the asset mix, and an increased volume of earnings-assets, offset in part
by an increased volume of interest-bearing liabilities that partially funded
earning-asset growth. The expanded level of net average earning-assets was
primarily supported by an increased level of average interest-bearing time
deposits.
The Corporation's total assets grew to an all time year-end high of
$473.1 million at December 31, 1997, increasing $13.9 million or 3 percent
over December 1996 levels. The return on average assets was 0.94 percent in
1997, as compared with 1.00 percent and 1.15 percent in 1996 and 1995,
respectively.
A continuing key element of the Corporation's consistent performance is
its strong capital base. The Corporation's risk-based capital ratios at
December 31, 1997 were 15.5 percent for Tier I capital and 16.2 percent for
total risk-based capital. These ratios substantially exceed the minimum of 4
percent for Tier I capital and 8 percent for total capital under regulatory
guidelines. From a performance viewpoint, return on tangible average
shareholder's equity was 15.9 percent in 1997, compared with 15.2 percent for
1996 and 15.3 percent in 1995.
The following sections discuss the Corporation's Results of Operations,
Asset and Liability Management, Liquidity and Capital Resources.
- --------------------------------------------------------------------------------
15
CENTER BANCORP INC.
MANAGEMENT'S DISCUSSION & ANALYSIS
OF FINANCIAL CONDITION & RESULTS OF OPERATIONS (continued)
RESULTS OF OPERATIONS
The most significant component of Center Bancorp's is net interest
income, which is the difference between the interest earned on the portfolio
of earning assets (principally investments and loans) and the interest paid
for deposits and short-term borrowings which support these assets.
Net interest income is directly affected by changes in the volume and mix
of interest-earning-assets and interest-bearing liabilities which support
those assets, as well as changes in the rates earned and paid. Net interest
income is presented in this financial review on a fully tax-equivalent basis,
whereby tax-exempt income (primarily interest earned on various obligations of
state and political subdivisions) was adjusted by the amount of income tax
which would have been paid had the assets been invested in taxable issues- As
a result, the net interest income data presented in this financial review
differ from the Corporation's net interest income components of the
consolidated financial statements presented elsewhere in this report.
The following table presents the components of net interest income (on a
tax-equivalent basis) for the past three years.
Years Ended December 31,
- ------------------------------------------------------------------------------------------------------------------------------
1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------------------
Increase Increase
(Decrease) (Decrease)
from Percent from Percent
(dollars in thousands) Amount Prior Year Change Amount Prior Year Change Amount
- ------------------------------------------------------------------------------------------------------------------------------
Interest Income:
Investments $20,178 $ 2,854 16.4 $17,324 $ 4,043 30.4 $13,281
Loans, including fees 9,980 1,355 15.7 8,625 1,099 14.6 7,526
Federal funds sold and securities
purchased under agreement
to resell 548 67 13.9 481 (461) (48.9) 942
- ------------------------------------------------------------------------------------------------------------------------------
*Total Interest income 30,706 4,276 16.2 26,430 4,681 21.5 21,749
- ------------------------------------------------------------------------------------------------------------------------------
Interest expense:
Certificates $100,000 or more 5,836 1,723 41.9 4,113 1,349 48.8 2,764
Deposits 8,034 937 13.2 7,097 1,176 19.9 5,921
Short-term borrowings 617 241 64.1 376 274 268.6 102
- ------------------------------------------------------------------------------------------------------------------------------
Total interest expense 14,487 2,901 25.0 11,586 2,799 31.9 8,787
- ------------------------------------------------------------------------------------------------------------------------------
Net interest income * 16,219 1,375 9.3 14,844 1,882 14.5 12,962
Tax-equivalent adjustment 481 (97) (16.6) 578 (112) (16,2) 690
- ------------------------------------------------------------------------------------------------------------------------------
Net interest income on a fully
tax-equivalcnt basis $16,700 $ 1,278 8.3 $15,422 $ 1,770 13.0 $13,652
- ------------------------------------------------------------------------------------------------------------------------------
16
*Before the provision (credit) for loan losses.
NOTE: The tax-equivalent adjustment was computed based on an assumed statutory
Federal income tax rate of 34 percent. Adjustments were made for interest
earned on securities of state and political subdivisions.
NET INTEREST INCOME
Net interest income on a fully tax-equivalent basis increased $1.3
million or 8.3 percent to approximately $16.7 million during 1997 from
approximately $15.4 million for 1996. The net interest margin decreased from
4.01 percent to 3.75 percent for 1997 due to the effect of the increased cost
of funds reflecting the rise in short-term interest rates that prevailed
throughout most of 1997. This was offset in part by an increase in the average
volume of interest-earning assets in 1997 as compared to 1996. The average
balance of interest-earning assets and interest-bearing liabilities increased
from $385.0 million and $321.3 million, respectively, in 1996 to $445.2
million and $371.6 million, respectively, in 1997. Net average
interest-earning-assets increased from $63.8 million in 1996 to $73.6 in 1997.
The 1997 change in average balances was primarily due to increased volumes of
taxable investments funded with increased volumes of time deposits.
The average yield on interest-earning assets remained even from 1996 to
1997 (7.01 % in both years) while there was a substantial increase in the
average cost of interest-bearing liabilities (3.61 percent in 1996 versus 3.90
percent in 1997), reflecting the rise in short-term interest rates that
prevailed through most of 1997.
The factors underlying the year-to-year changes in net interest income
are reflected in the tables appearing below and on page 35, both of which have
been presented on a tax-equivalent basis (assuming a 34 percent tax rate). The
table on page 35 (Average Statements of Condition with Interest and Average
Rates) shows the Corporation's consolidated average balance of assets,
liabilities and stockholders' equity, the amount of income produced from
interest-earning assets and the amount of expense resulting from
interest-bearing liabilities, and net interest income as a percentage of
average interest-earning assets. The table on page 18 (Analysis of Variance in
Net Interest Income Due to Volume and Rates) quantifies the impact on net
interest income resulting from changes in average balances and average rates
over the past three years. Any change in interest income or expense
attributable to both changes in volume and changes in rate has been allocated
in proportion to the relationship of the absolute dollar amount of change in
each category.
- ------------------------------------------------------------------------------
17
CENTER BANCORP INC.
MANAGEMENT'S DISCUSSION & ANALYSIS
OF FINANCIAL CONDITION & RESULTS OF OPERATIONS (continued)
ANALYSIS OF VARIANCE IN NET INTEREST INCOME DUE TO VOLUME AND RATES
1997/1996 1996/1995
Increase (Decrease) Increase (Decrease)
Due to Change in: Due to Change in:
- ---------------------------------------------------------------------------------------------------------------------------------
Average Average Net Average Average Net
(dollars in thousands) Volume Rate Change Volume Rate Change
- ---------------------------------------------------------------------------------------------------------------------------------
Interest-earning assets:
Investment securities:
Taxable $ 2,984 $ 21 $ 3,005 $ 3,984 $ 276 $ 4,260
Non-taxable (278) 26 (252) (337) 8 (329)
Federal funds sold and securities
purchased under agreement to resell 931 (864) 67 (426) (35) (461)
Loans, net of unearned discounts 1,399 (40) 1,359 1,013 86 1,099
- ---------------------------------------------------------------------------------------------------------------------------------
Total interest-earning assets 5,036 (857) 4,179 4,234 335 4,569
- ---------------------------------------------------------------------------------------------------------------------------------
Interest-bearing liabilities:
Money market deposits (130) (140) (270) (80) 129 49
Savings deposits 68 (11) 57 123 (136) (13)
Time deposits 2,684 203 2,887 2,874 (76) 2,798
Other interest-bearing deposits (46) 32 (14) (29) (280) (309)
Short-term borrowings 241 0 241 268 6 274
- ---------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 2,817 84 2,901 3,156 (357) 2,799
- ---------------------------------------------------------------------------------------------------------------------------------
Change in net interest income $ 2,219 $ (941) $ 1,278 $ 1,078 $ 692 $ 1,770
- ---------------------------------------------------------------------------------------------------------------------------------
Interest income (tax-equivalent) increased by $4.2 million from 1996 to
1997 and by $4.6 million from 1995 to 1996. The primary factor in the
improvement in interest income during 1997 was the increased level of
earning-assets, as previously noted. The Corporation's loan portfolio
increased on average by $17.6 million, primarily as a result of increased
volumes of commercial real estate, commercial and home equity loans. This
increase was primarily achieved through increased business development. The
loan portfolio (traditionally the highest yielding type of interest-earning
asset) represented 28.1 percent of the Corporation's interest-earning assets
(on average) during 1997 as compared with 28.0 percent of such assets (on
average) during 1996. The increased level of interest income generated from
the loan portfolio in 1997 was due to increased volume, as the average yield
on the Corporation's loans declined by 3 basis points.
Investments contributed the most significant change in the earning-asset
mix in 1997. Investment volume which increased on average by $41.3 million was
driven by increased deposit volume, primarily time deposits. Within the
investment portfolio, volume increases in taxable securities of $45.1 million
far outweighed (decreases) in the non-taxable portfolio of $3.8 million. The
substantial growth in the taxable securities portfolio reflects the
availability of higher rate taxable securities, making the yields on taxable
instruments more attractive.
Interest expense increased during 1997, primarily as a result of the
increased deposit volumes, and the continued pressure of the cost of funds in
the short-term market, as the yield curve flattened. For the twelve months
ended December 31, 1997, interest expense increased by $2.9 million or 25.0
- ------------------------------------------------------------------------------
18
percent as compared with the twelve months ended December 31, 1996. The
average cost of funds increased by 29 basis points, reflecting the rise in
interest rates, and changes in the liability mix, (i.e., increased volumes of
more costly interest-bearing time deposits).
During 1996 interest expense increased $2.8 million or 31.8 percent as
compared with the twelve months ended December 31, 1995. This was primarily a
result of higher average funding costs, as short-term interest rates moved
higher throughout most of 1996. The resulting average cost of funds to the
Corporation increased by 24 basis points. This cost was further impacted by a
change in the liability mix, as the Corporation had increased volumes of more
costly interest-bearing liabilities and funding sources. During 1996 and 1997,
less expensive deposits such as checking, Savings and Money Market accounts
were replaced by more costly time deposits of $100,000 and over.
Inflationary fears and the expanding economy have pushed short-term
interest rates up. This in turn has effected the cost of funds associated with
a number of the Corporation's funding products, including municipal deposits
tied to market indices, "Jumbo" Certificates of Deposit, and short-term
repurchase agreements. Deposit growth continued to be impacted by the
depositors' desire for higher-yielding investment alternatives, such as mutual
funds, equity securities, tax-free instruments, and a variety of insurance
products. As interest rates remained high in the short term market in 1996,
and into 1997, depositors shifted funds from lower yielding savings and money
market accounts into higher yielding certificates of deposit. This shift
continued throughout 1997. The impact of this change in the deposit mix,
coupled with the higher rates at the short end of the yield curve, gave rise
to the net change in the cost of funds.
For the three year period ended December 31, 1997, the Corporation's net
interest yield on a tax-equivalent basis (i.e., net interest income on a
tax-equivalent basis as a percent of average interest-caming assets) declined
to 3.75 percent in 1997 from 4.01 percent, and 4.21 percent for 1996 and 1995,
respectively. The declines noted reflected a narrowing of spreads between
yields earned on loans and investments and rates paid for supporting funds.
There was a favorable change in the mix of interest-earning assets, primarily
the increased loan volumes. However, this was not sufficient to offset the
effects of the change in the mix of interest-bearing liabilities to more
costly funding.
The contribution of noninterest-bearing sources (i.e. the differential
between the average rate paid on all sources of funds and the average rate
paid on interest-bearing sources) increased approximately 4 basis points
during 1997 from 60 basis points in 1996. During the comparable periods of
1996 and 1995 there was a decrease of 6 basis points, from 66 basis points to
60 basis points.
The Corporation's net interest rate spread (i.e., the average yield on
average interest-earning assets, calculated on a tax-equivalent basis, minus
the average rate paid on interest-bearing liabilities) declined to 3.11
percent in 1997 from 3.40 percent in 1996 and 3.55 percent in 1995. The
decline in net interest spreads is primarily a result of the increased cost of
interest-bearing liabilities and the limitations on the Corporation's ability
to expand its loan portfolio.
- ------------------------------------------------------------------------------
19
CENTER BANCORP INC.
MANAGEMENT'S DISCUSSION & ANALYSIS
OF FINANCIAL CONDITION & RESULTS OF OPERATIONS (continued)
INVESTMENTS
The average volume of investment securities increased by $41.3 million in
1997 as compared to 1996. The tax-equivalent yield on investments remained
unchanged at 6.67 percent during 1997. The stability in the yield on the
investment portfolio in 1997 was achieved through equal or higher market rates
on purchases made to replace similar yielding investments which had matured,
were prepaid or were called.
The impact of repricing activity on yields was lessened by a change in
the mix of the portfolio and shorter investment maturities, resulting in
narrowed spreads. The change in investment strategies resulted from the
current uncertainty of rates and the constraints imposed by SFAS No. 115.
Securities available-for-sale are a part of the Corporation's interest rate
risk management strategy and may be sold in response to changes in interest
rates, changes in prepayment risk, liquidity management and other factors.
Pursuant to the provisions and implementation guidance contained within
the special report "A Guide to Implementation of Statement 115 on Accounting
for Certain Investments in Debt and Equity Securities", on November 27, 1995,
the Corporation reassessed the classification of all securities within its
portfolio and transferred $17.8 million from its held-to-maturity investment
portfolio to its available-for-sale portfolio. These securities had a market
value of $17.9 million, which resulted in the Corporation's recording an
unrealized gain on securities available-for-sale, net of tax, within
stockholders' equity of $60,000. During 1997 and 1996, the Corporation had no
such transfers. Sales from the Available-for-Sale portfolio were made in the
normal course of business.
At December 31, 1997, the total investment portfolio excluding overnight
investments, was $298.3 million, or 67.5 percent of earning-assets, as
compared to $280.1 million or 66.5 percent at December 31, 1996. The principal
components of the investment portfolio are U.S. government Treasury and
Federal Agency securities. For additional information regarding the
Corporation's investment portfolio, see Note 4 to the Consolidated Financial
Statements.
LOANS
Loan growth during 1997 occurred in all categories of the loan portfolio.
This growth occurred from the volume acquired in the Lehigh acquisition
enhanced by the Corporation's marketing and business development programs and
new product lines. The stabilization of yield in the loan portfolio was the
result of a stable prime rate environment coupled with a competitive rate
structure to attract new loans. The effect of additions to the loan portfolio
were lessened by continued refinancing activity and by the heightened
competition for borrowers that exists in the lending markets. The
Corporation's desire to grow this component of the earning-asset mix is
reflected in its current business development plan and marketing plans, as
well as its short-term strategic plan.
Analyzing the portfolio for the twelve months ended December 31, 1997,
average loan volume increased $17.6 million, while the portfolio yield
decreased 3 basis points as compared with 1996. Total average loan volume
increased to $125.5 million with an average yield of 7.96 percent, as compared
to $107.9 million with an average yield of 7.99% for December 31, 1996. For
additional information regarding loans, see Note 5 to the Consolidated
Financial Statements.
- ------------------------------------------------------------------------------
20
ALLOWANCE FOR LOAN LOSSES AND RELATED PROVISION
The purpose of the allowance for loan losses is to absorb the impact of
losses inherent in the loan portfolio. Additions to the allowance are made
through provisions charged against current operations and through recoveries
made on loans previously charged-off. The allowance for loan losses is
maintained at an amount considered adequate by management to provide for
potential credit losses based upon a periodic evaluation of the risk
characteristics of the loan portfolio. In establishing an appropriate
allowance, an assessment of the individual borrowers, a determination of the
value of the underlying collateral, a review of historical loss experience and
an analysis of the levels and trends of loan categories, delinquencies and
problem loans are considered. Such factors as the level and trend of interest
rates and current economic conditions are also reviewed. At year-end 1997, the
level of the allowance was $1,269,000 as compared to a level of $1,293,000 at
December 31, 1996. The Corporation had a credit to earnings (through the
provision for loan losses) in 1996 of $132,000 and no provision charged to
operations in 1997.
At December 31, 1997, the allowance for loan losses amounted to
$1,269,000 or 0.96 percent of total loans. In management's view, the level of
the allowance during 1997 has been adequate to cover any loss experience and
therefore has not warranted any additions to the allowance during 1997. The
increased balance of $220,000, in 1996, represented the allowance acquired
from Lehigh on June 28, 1996, less net charge-offs.
Various regulatory agencies, as an integral part of their examination
process, periodically review the Corporation's allowance for loan losses. Such
agencies may require the Corporation to increase the allowance based on their
analysis of information available to them at the time of their examination.
The allowance for loan losses as a percentage of total loans amounted to 0.96
percent, 1.10 percent and 1.10 percent at December 31, 1997, 1996 and
1995, respectively. The Corporation's provision (credit) for loan losses
required to reach these levels was $0, ($132,000), and $0 for 1997, 1996 and
1995, respectively.
During 1997 the Corporation did not experience any substantial problems
within its loan portfolio. Net charge-offs were $24,000 in 1997, $341,000 in
1996. The Corporation had no net charge-offs in 1995. The Corporation had
non-accrual loans amounting to $27,000 at December 31, 1997, $298,000 at
December 31, 1996, and no non-accrual loans at year-end for the prior three
years. The Corporation continues to aggressively pursue collections of
principal and interest on loans previously charged-off.
The accounting for impaired loans requires 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. Impaired loans consist of non-accrual loans and
loans internally classified as substandard or below, in each instance above an
established dollar threshold. All loans below the established dollar threshold
are considered homogenous and are collectively evaluated for impairment. The
Corporation does not have any impaired loans.
- ------------------------------------------------------------------------------
21
CENTER BANCORP INC.
MANAGEMENT'S DISCUSSION & ANALYSIS
OF FINANCIAL CONDITION & RESULTS OF OPERATIONS (continued)
The Corporation's statements herein regarding the adequacy of the
allowance for loan losses may constitute forward looking statements under the
Private Securities Reform Litigation Act of 1995. Actual results could
indicate that the amount of the Corporation's allowance was inadequate.
Factors that could cause the allowance to be inaccurate are the same factors
that are analyzed by the Corporation in establishing the amount of the
allowance.
FIVE YEAR STATISTICAL ALLOWANCE FOR LOAN LOSSES
The following table reflects the relationship of loan volume, the
provision and allowance for loan losses and net charge-offs for the past five
years:
Years Ended December 31,
- ----------------------------------------------------------------------------------------------------------------------------------
(dollars in thousands) 1997 1996 1995 1994 1993
- ----------------------------------------------------------------------------------------------------------------------------------
Average loans outstanding $ 125,476 $ 107,897 $ 95,216 $ 72,752 $ 66,656
- ----------------------------------------------------------------------------------------------------------------------------------
Total loans at end of period $ 132,424 $ 117,830 $ 97,570 $ 88,805 $ 65,745
- ----------------------------------------------------------------------------------------------------------------------------------
Analysis of the Allowance for Loan Losses
Balance at the beginning of year $ 1,293 $ 1,073 $ 1,073 $ 943 $ 821
Charge-offs:
Commercial 2 0 0 0 20
Real estate-mortgage 0 470 0 0 58
Installment loans 29 9 10 12 20
- ----------------------------------------------------------------------------------------------------------------------------------
Total charge-offs 31 479 10 12 98
- ----------------------------------------------------------------------------------------------------------------------------------
Recoveries:
Commercial 0 0 0 110 0
Real estate-mortgage 0 132 5 20 19
Installment loan 7 6 5 2 1
- ----------------------------------------------------------------------------------------------------------------------------------
Total recoveries 7 138 10 132 20
- ----------------------------------------------------------------------------------------------------------------------------------
Net charge offs: 24 341 0 (120) 78
- ----------------------------------------------------------------------------------------------------------------------------------
Adjustments from acquisition of Lehigh 0 693 0 0 0
- ----------------------------------------------------------------------------------------------------------------------------------
Provision (credit) for loan losses 0 (132) 0 10 200
- ----------------------------------------------------------------------------------------------------------------------------------
Balance at end of year $ 1,269 $ 1,293 $ 1,073 $ 1,073 $ 943
- ----------------------------------------------------------------------------------------------------------------------------------
Ratio of net charge-offs during the year to
average loans outstanding during the year 0.02% 0.32% 0.00% (.16%) 0.12%
- ----------------------------------------------------------------------------------------------------------------------------------
Allowance for Loan Losses as a percentage
of total loans at end of year 0.96% 1.10% 1.10% 1.21% 1.43%
- ----------------------------------------------------------------------------------------------------------------------------------
The 1996 charge-off of $470,000 in real-estate mortgage loans occurred on
loans acquired from Lehigh, which were subsequently sold. Similarly, the
$132,000 loan loss recovery, in 1996, was on a loan that had been previously
part of Lehigh's portfolio.
ASSET QUALITY
The Corporation manages asset quality and credit risk by maintaining
diversification in its loan portfolio and through review processes that
include analysis of credit requests and ongoing examination of outstanding
loans and delinquencies, with particular attention to portfolio dynamics and
mix. The Corporation strives to identify loans experiencing difficulty early
enough to correct the problems, to record charge-offs promptly based on
realistic assessments of current collateral values,
- ------------------------------------------------------------------------------
22
and to maintain an adequate allowance for loan losses at all times. These
practices have protected the Corporation during economic downturns and periods
of uncertainty.
It is generally the Corporation's policy to discontinue interest accruals
once a loan is past due as to interest or principal payments for a period of
ninety days. When a loan is placed on non-accrual, interest accruals cease
and uncollected accrued interest is reversed and charged against current
income.
Payments received on non-accrual loans are applied against principal. A
loan may only be restored to an accruing basis when it again becomes well
secured and in the process of collection or all past due amounts have been
collected. Loan origination fees and certain direct loan origination costs are
deferred and recognized over the life of the loan as an adjustment to the
loan's yield.
The following table sets forth, as of the dates indicated, the amount of
the Corporations non-accrual loans, restructured loans, accruing loans past
due 90 days or more and other real estate owned.
At December 31,
- ----------------------------------------------------------------------------------------------------
(dollars in thousands) 1997 1996 1995 1994 1993
- ----------------------------------------------------------------------------------------------------
Non-accrual loans 327 $298 $ 0 $ 0 $ 0
Restructured loans 0 0 0 0 0
Accruing loans past due 90 days or more 73 121 48 0 0
Other Real Estate Owned 0 0 0 0 0
- ----------------------------------------------------------------------------------------------------
Total non-performing assets $100 $419 $ 48 $ 0 $ 0
- ----------------------------------------------------------------------------------------------------
At December 31, 1997, other than the loans set forth above, the
Corporation is not aware of any loans which present serious doubts as to the
ability of its borrowers to comply with present loan repayment terms and which
are expected to fall into one of the categories set forth in the table above.
NONINTEREST INCOME
The following table presents the principal categories of noninterest
income for each of the years in the three year period ended December 31, 1997.
Years Ended December 31,
- --------------------------------------------------------------------------------------------------------------------------
(dollars in thousands) 1997 1996 % change 1996 1995 % change
- --------------------------------------------------------------------------------------------------------------------------
Other Income:
Service charges, commissions and fees $ 638 $ 516 23.6 $ 516 $ 570 (9.5)
Other income 139 136 2.2 136 113 20.4
Gain on securities sold 334 75 345.3 75 49 53.1
- --------------------------------------------------------------------------------------------------------------------------
Total other noninterest-income $1,111 $ 727 52.8 $ 727 $ 732 (0.7)
- --------------------------------------------------------------------------------------------------------------------------
23
CENTER BANCORP INC.
MANAGEMENT'S DISCUSSION & ANALYSIS
OF FINANCIAL CONDITION & RESULTS OF OPERATIONS (continued)
Total other (noninterest) income, exclusive of gains on securities sold,
reflects an increase of $125,000 or 19.2 percent in 1997. The primary
component of the increase was the rise of fee revenue reflected in service
charges, commissions and fees. This increase of $122,000 or 23.6 percent in
such fees, was a result of increased fee income derived from ATM fees and
checking account activity. For the 1996 period, total other (noninterest)
income, exclusive of gains on securities sold, reflects a decrease of $54,000
or 9.5 percent. The primary component of the decrease was the result of
reduced fee income derived from checking account activity. Other less
significant factors contributing to the decline in service charges in 1996
were reductions in other fee income sources resulting from fluctuating levels
of business activity, and a reduction to zero in the cost of automated teller
fees to the customer.
During 1997 there were sales from the Corporation's available-for-sale
portfolio with a net gain of approximately $334,000. These sales were made as
part of the Corporation's investment strategy. In 1996 there were $75,000 in
net gains on securities sold. These sales were made from the Corporation's
available-for-sale investment portfolio and were made as part of structuring
the Corporation's interest rate risk position.
NONINTEREST EXPENSE
The following table presents the principal categories of noninterest
expense for each of the years in the three-year period ended December 31,
1997.
Years Ended December 31,
- -----------------------------------------------------------------------------------------------------------------------
(dollars in thousands) 1997 1996 % change 1996 1995 % change
- -----------------------------------------------------------------------------------------------------------------------
Other noninterest-expense:
Salaries and employee benefits $ 5,487 $ 5,168 6.2 $ 5,168 $ 4,323 19.5
Occupancy expenses net 1,015 910 11.5 910 712 27.8
Premises and equipment expense 1,341 1,141 17.5 1,141 794 43.7
Stationery and printing expense 254 525 (51.6) 525 295 78.0
Marketing & Advertising 337 422 (20.1) 422 217 94.5
Other expenses 2,162 1,744 24.0 1,744 1,797 (2.9)
- -----------------------------------------------------------------------------------------------------------------------
Total other noninterest-expense $10,596 $ 9,910 6.9 $ 9,910 $ 8,138 21.8
- -----------------------------------------------------------------------------------------------------------------------
Total other (noninterest) expense increased $686,000 or 6.9 percent in
1997 as compared to an increase of $1.8 million or 21.8 percent from 1995 to
1996. Salaries and employee benefits accounted for 51.8 percent of total other
expense for 1997, as compared to 52.1 percent and 53.1 percent for the years
1996 and 1995, respectively. Strict control over other expenses has been a key
objective of Management to maximize earnings efficiency. The Corporation's
efficiency/overhead ratio (other expenses less non-recurring expense and other
income as a percentage of net interest income on a tax-equivalent basis) was
56.8 percent, 57.4 percent and 54.2 percent, respectively, for 1997, 1996 and
1995. The ratio of other expenses to average assets improved to 2.21 percent
in 1997 from 2.39 percent in 1996 which had decreased from 2.50 percent in
1995. The level of operating expense during 1997 was favorably impacted by
lower marketing and advertising expenditures as well as the reduction of
stationery and printing expense resulting from recording a one-time inventory
adjustment. The level of operating expense during 1996 was impacted by the
acquisition of Lehigh and the opening of the Madison office. However, the
Corporation's non-interest expense ratios from year to year continue to remain
relatively stable and were maintained
- ------------------------------------------------------------------------------
24
notwithstanding the addition of new expenses related to facilities expense,
primarily the Bank's Madison office and Corporate headquarters in prior years,
as well as technological initiatives such as check imaging and PC Banking.
Salaries and employees benefits increased $319,000 or 6.2 percent in
1997, primarily the result of higher benefits costs and merit and promotional
raises. In 1996 these expenses increased $845,000 primarily due to the
increased expense arising from increased staffing levels associated with the
Lehigh acquisition, merit and promotional raises and higher benefit costs.
Staffing levels overall decreased to 140 at December 31, 1997 from 151
full-time equivalent employees at December 31, 1996. Employees' longevity has
continued to be significant. As of December 31, 1997, the Corporation's
employees, excluding officers, have been employed by the Corporation for an
average of 217.23 weeks or 4.18 years. This factor contributes to the
Corporation's continued productivity, as evidenced by the ratio of average
assets, in millions, per full time-equivalent employee, which amounted to $3.4
million, $2.7 million and $2.6 million in 1997, 1996 and 1995, respectively.
Occupancy and bank premises and equipment expense increased by $305,000
or 14.9 percent in 1997 over 1996. This increase in 1997 expense reflects the
ongoing impact on operating costs of expanded facilities and operations
coupled with the Lehigh acquisition, a full year's depreciation expense on
1996's fixed asset purchases, and technology expenditures. The increase in
such expenses of $545,000 or 36.2 percent in 1996 from 1995, reflect the
increased costs associated with the expansion of new facilities, primarily the
new corporate headquarters building, offset by operating overhead efficiencies
achieved during the period.
The Omnibus spending bill (H.R. 3610) President Clinton signed on
September 30, 1996 included provisions for a special assessment to
recapitalize the Savings Association Insurance Fund (SAIF), provisions to
provide funding to meet the Financing Corporation (FICO) bond obligations, and
to merge the Bank Insurance Fund (BIF) with the SAIF Fund on January 1, 1999.
As a result of the acquisition of Lehigh, the Corporation was obligated to pay
a one-time assessment on Lehigh's deposits. The special assessment calculation
for the Corporation was based on those deposits Lehigh reported at March 31,
1995, at an assessment rate of 65.7 cents per $100.00 of deposits. The total
assessment amounted to $469,606 and was paid to the Federal Deposit Insurance
Corporation on November 27, 1996.
The Funds Act also separated, effective January 1, 1997, the Financing
Corporation (FICO) assessment to service the interest on its bond obligations
from the SAIF assessment. In general, the amount assessed on individual
institutions by the FICO will be in addition to the amount paid for deposit
insurance according to the FDIC's risk-related assessment rate schedules.
Future Federal Deposit Insurance expense will be affected by the FICO bond
payment and continued expense on Lehigh Saving's acquired deposits. The FICO
obligation is to be shared by both SAIF and BIF insured institutions. For the
years 1997-1999, BIF-assessable deposits will be assessed at a rate of 1/5 of
the rate imposed on SAIF-assessable deposits. The deposits acquired from
Lehigh Savings SLA are classified as SAIF assessable Oakar deposits.
- ------------------------------------------------------------------------------
25
CENTER BANCORP INC.
MANAGEMENT'S DISCUSSION & ANALYSIS
OF FINANCIAL CONDITION & RESULTS OF OPERATIONS (continued)
INCOME TAXES
The Corporation's provision for income taxes increased from 1995 to 1996
and from 1996 to 1997 primarily as a result of increased state taxes and a
reduction of tax-exempt income. The effective tax rates for the Corporation
for the periods ended December 31, 1997, 1996 and 1995 were 33.0 percent, 28.2
percent and 27.3 percent, respectively. The effective tax rate continues to be
less than the combined statutory Federal tax rate of 34 percent and the New
Jersey state tax rate of 9 percent. The difference between the statutory and
effective tax rates primarily reflects the tax-exempt status of interest
income on obligations of states and political subdivisions and disallowed
expense items for tax purposes, such as travel and entertainment expense, as
well as amortization of goodwill. Tax-exempt interest income, on a
tax-equivalent basis, decreased by $252,000 or 14.8 percent from 1996 to 1997,
and declined by $329,000 or 16.2 percent from 1995 to 1996.
RECENT ACCOUNTING PRONOUNCEMENTS
FASB Statement No. 130, "Reporting Comprehensive Income" (Statement 130)
establishes standards for reporting and display of comprehensive income and
its components (revenues, expenses, gains, and losses) in a full set of
general-purpose financial statements. Statement 130 requires that all items
that are required to be recognized under accounting standards as components of
comprehensive income be reported in a financial statement that is displayed
with the same prominence as other financial statements. Statement 130 does not
require a specific format for that financial statement but requires that an
enterprise display an amount representing total comprehensive income for the
period in that financial statement.
Statement 130 requires that an enterprise (a) classify items of other
comprehensive income by their nature in a financial statement and (b) display
the accumulated balance of other comprehensive income separately from retained
earnings and additional paid-in capital in the equity section of a statement
of financial position. This statement is effective for fiscal years beginning
after December 15, 1997. Reclassification of financial statements for earlier
periods provided for comparative purposes is required.
FASB Statement No. 131 "Disclosures about Segments of an Enterprise and
Related Information" (Statement 131) requires public companies to report
information about business segments in their annual financial statements and
selected business segment information in quarterly reports issued to
shareholders. Statement 131 requires entity-wide disclosures about the
products and services an entity provides, the material countries in which it
holds assets and reports revenues, and its major customers. This statement
Supersedes FASB Statement No. 14, "Financial Reporting for Segments of a
Business Enterprise." Statement 131 is effective for fiscal years beginning
after December 15, 1997.
- ------------------------------------------------------------------------------
26
YEAR 2000 CENTURY DATE CHANGE
In May 1997, the Federal Financial Institutions Examination Council
(FFIEC) issued a joint statement updating its prior statement, issued in June
of 1996, addressing the assessment and preparedness for the Year 2000 Century
date change. Regulators have defined a formal year 2000 management process to
assist the financial industry in dealing with this issue on a timely basis.
The year 2000 century date change poses a significant challenge for
financial institutions, as well as all businesses, because many computer
programs and applications will cease to function normally as a result of the
way that date fields have been programmed historically. This date problem
exists because the two-digit representation of the year will be interpreted in
many applications to mean the year 1900, not 2000, unless the date or program
logic is changed. The result could be a number of errors, including incorrect
mathematical calculations and lost system files.
The Corporation has implemented a strategic plan for Year 2000
compliance. The project objectives include assessment of the full effect of
the Year 2000 issue, system development for testing and implementing
solutions, determining how the Corporation will coordinate processing
capabilities with its customer, vendor, and payment partners, and determining
internal control requirements.
By June 1998, management expects to have completed the first several
phases of the plan, including identification, modification, and preliminary
testing. Management's goal is to be compliant with regulatory guidelines by
December 1998, although no assurances can be given that the Corporation will
be able to satisfy this objective. At present, management is unable to make a
reliable estimate of the total costs to the Corporation of achieving Year 2000
compliance. However, management does not believe that such costs will be
material to the Corporation's consolidated financial condition, full-year
results of operations or liquidity. The immediately preceding sentence
constitutes a forward-looking statement under the Private Securities
Litigation Reform Act of 1995. Actual results could differ materially from the
Corporation's forward-looking statement as a result of a variety of factors,
including potential unavailability of technological resources, increased
expenses associated with obtaining such resources and unanticipated
technological difficulties.
ASSET AND LIABILITY MANAGEMENT
Asset and Liability management encompasses an analysis of market risk,
the control of interest rate risk (interest sensitivity management) and the
ongoing maintenance and planning of liquidity and capital. The composition of
the Corporation's statement of condition is planned and monitored by the Asset
and Liability Committee (ALCO). In general, management's objective is to
optimize net interest income and minimize market risk and interest rate risk
by monitoring these components of the statement of condition.
- ------------------------------------------------------------------------------
27
CENTER BANCORP INC.
MANAGEMENT'S DISCUSSION & ANALYSIS
OF FINANCIAL CONDITION & RESULTS OF OPERATIONS (continued)
INTEREST SENSITIVITY
MARKET RISK
"Market risk" represents the risk of loss from adverse changes in market
prices and rates. The Corporation's market rate risk arises primarily from
interest rate risk inherent in its investing, lending and deposit taking
activities. To that end, management actively monitors and manages its interest
rate risk exposure.
The Corporation's profitability is affected by fluctuations in interest
rates. A sudden and substantial increase in interest rates may adversely
impact the Corporation's earnings to the extent that the interest rates borne
by assets and liabilities do not similarly adjust. The Corporation's primary
objective in managing interest rate risk is to minimize the adverse impact of
changes in interest rates on the Corporation's net interest income and
capital, while structuring the Corporation's asset-liability structure to
obtain the maximum yield-cost spread on that structure. The Corporation relies
primarily on its asset-liability structure to control interest rate risk. The
Corporation continually evaluates interest rate risk management opportunities,
including the use of derivative financial instruments. The management of the
Corporation believes that hedging instruments currently available are not
cost-effective, and therefore, has focused its efforts on increasing the
Corporation's yield-cost spread through wholesale and retail growth
opportunities.
The Corporation monitors the impact of changes in interest rates on its
net interest income using several tools. One measure of the Corporation's
exposure to differential changes in interest rates between assets and
liabilities is the Corporation's analysis of its interest rate sensitivity.
This test measures the impact on net interest income and on net portfolio
value of an immediate change in interest rates in 100 basis point increments.
Net portfolio value is defined as the net present value of assets,
liabilities, and off-balance sheet contracts.
The primary tool used by management to measure and manage interest rate
exposure is a simulation model. Use of the model to perform simulations
reflecting changes in interest rates over one and two-year time horizons has
enabled management to develop and initiate strategies for managing exposure to
interest rate risk. In its simulations, management estimates the impact on net
interest income of various changes in interest rates. Projected net interest
income sensitivity to movements in interest rates is modeled based on both an
immediate rise or fall in interest rates ("rate shock"), as well as gradual
changes in interest rates over a 12 month time period. The model is based on
the actual maturity and repricing characteristics of interest-rate sensitive
assets and liabilities. The model incorporates assumptions regarding
earning-asset and deposit growth, prepayments, interest rates and other
factors. Management believes that both individually and in the aggregate these
assumptions are reasonable, but the complexity of the simulation modeling
process results in a sophisticated estimate, not an absolutely precise
calculation of exposure. For example, estimates of future cash flows must be
made for instruments without contractual maturity or payment schedules.
Based on the information and assumptions in effect at December 31, 1997,
management of the Corporation believes that rate shocks of up 100 and 200
basis points, respectively, would result in a change to net interest income of
6 percent and 12 percent, respectively. Conversely, rate shocks down 100 and
200 basis points are neutral, not materially affecting the Corporation's
financial statement, with increases to net interest income of approximately 1
percent.
- ------------------------------------------------------------------------------
28
Short term interest rate exposure analysis is supplemented with an
interest sensitivity gap ("Gap") model. The Corporation utilizes interest
sensitivity analysis to measure the responsiveness of net interest income to
changes in interest rate levels. Interest rate risk arises when an
earning-asset matures or when its interest rate changes in a time period
different from that of a supporting interest-bearing liability, or when an
interest-bearing liability matures or when its interest rate changes in a time
period different from that of an earning-asset that it supports. While the
Corporation matches only a small portion of specific assets and liabilities,
total earning assets and interest bearing liabilities are grouped to determine
the overall interest rate risk within a number of specific time frames. The
difference between interest sensitive assets and interest sensitive
liabilities is referred to as the interest sensitivity gap. At any given point
in time, the Corporation may be in an asset-sensitive position, whereby its
interest-sensitive assets exceed its interest-sensitive liabilities, or in a
liability-sensitive position, whereby its interest-sensitive liabilities
exceed its interest-sensitive assets, depending on management's judgment as to
projected interest rate trends.
The Corporation's rate sensitivity position in each time frame may be
expressed as assets less liabilities, as liabilities less assets, or as the
ratio between rate sensitive assets (RSA) and rate sensitive liabilities
(RSL). For example, a short funded position (liabilities repricing before
assets) would be expressed as a net negative position, when period gaps are
computed by subtracting repricing liabilities from repricing assets. When
using the ratio method, a RSA/RSL ratio of 1 indicates a balanced position, a
ratio greater than 1 indicates an asset sensitive position, and a ratio less
than 1 indicates a liability sensitive position.
A negative gap and/or a rate sensitivity ratio less than 1 tends to
expand net interest margins in a falling rate environment and to reduce net
interest margins in a rising rate environment. Conversely, when a positive gap
occurs, generally margins expand in a rising rate environment and contract in
a failing rate environment.
From time to time, the Corporation may elect to deliberately mismatch
liabilities and assets in a strategic gap position.
At December 31, 1997, the Corporation reflects a negative interest
sensitivity gap (or an interest sensitivity ratio) of .49:1.00 at the
cumulative one year position. During much of 1997 the Corporation had a
negative interest sensitivity gap. The maintenance of a liability-sensitive
position during 1997 has had an adverse impact on the Corporation's net
interest margins; however, based on management's perception that interest
rates will continue to be volatile, emphasis has been, and is expected to
continue to be placed on interest-sensitivity matching with the objective of
achieving a stable net interest spread during 1998.
- ------------------------------------------------------------------------------
29
CENTER BANCORP
MANAGEMENT'S DISCUSSION & ANALYSIS
OF FINANCIAL CONDITION & RESULTS OF OPERATIONS (continued)
The following table depicts the Corporation's interest rate sensitivity
position at December 31, 1997:
Expected Maturity/Principal Repayment December 31,
- -------------------------------------------------------------------------------------------------------------------------------
Average Year Year Year Year
Interest End End End End
(dollars in thousands) Rate 1998 1999 2000 2001
- -------------------------------------------------------------------------------------------------------------------------------
INTEREST-EARNING ASSETS:
Loans 7.91% $ 37,417 $ 11,141 $ 7,844 $ 6,604
Investments 6.50% 125,309 34,360 27,461 32,898
Federal Funds Sold 5.61% 10,900 0 0 0
- -------------------------------------------------------------------------------------------------------------------------------
Total interest-earning assets $ 173,626 $ 45,501 $ 35,305 $ 39,502
- -------------------------------------------------------------------------------------------------------------------------------
INTEREST-BEARING
LIABILITIES:
Time certificates of deposit of
$100,000 or greater 5.41% $ 116,746 $ 0 $ 0 $ 0
Time certificates of deposit of less
than $100,000 5.44% 66,470 2,994 0 0
Other interest-bearing deposits 2.27% 171,321 0 0 0
Securities sold under agreements to
repurchase 5.43% 700 0 0 0
- -------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities $ 355,237 $ 2,994 $ 0 $ 0
- -------------------------------------------------------------------------------------------------------------------------------
Cumulative interest-earning assets $ 173,626 $ 219,127 $ 254,432 $ 293,934
- -------------------------------------------------------------------------------------------------------------------------------
Cumulative interest-earning
liabilities $ 355,237 $ 358,231 $ 358,231 $ 358,231
- -------------------------------------------------------------------------------------------------------------------------------
Interest sensitivity gap $(181,611) $ 42,507 $ 35,305 $ 39,502
- -------------------------------------------------------------------------------------------------------------------------------
Cumulative interest-sensitivity gap $(181,611) $(139,104) $(103,799) $ (64,297)
- -------------------------------------------------------------------------------------------------------------------------------
Cumulative ratio of interest-sensitive
assets to interest-sensitive liabilities (0.49%) (0.61%) (0.71%) (0.82%)
- -------------------------------------------------------------------------------------------------------------------------------
RESTUBED TABLE
Expected Maturity/Principal Repayment December 31,
- ----------------------------------------------------------------------------------------------------------------------
Year 2003 Total Estimated
End and Balance Fair
(dollars in thousands) 2002 Thereafter Value
- ----------------------------------------------------------------------------------------------------------------------
INTEREST-EARNING ASSETS:
Loans $ 6,395 $ 63,023 $ 132,424 133,842
Investments 23,961 54,309 298,298 300,278
Federal Funds Sold 0 0 10,900 10,900
- ----------------------------------------------------------------------------------------------------------------------
Total interest-earning assets $ 30,356 $ 117,332 $ 441,622 $ 445,020
- ----------------------------------------------------------------------------------------------------------------------
INTEREST-BEARING
LIABILITIES:
Time certificates of deposit of
$100,000 or greater $ 0 $ 0 $ 116,746 $ 116,746
Time certificates of deposit of less
than $100,000 0 658 70,122 70,559
Other interest-bearing deposits 0 0 171,321 181,244
Securities sold under agreements to
repurchase 0 0 700 700
- ----------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities $ 0 $ 658 $ 358,889 $ 369,249
- ----------------------------------------------------------------------------------------------------------------------
Cumulative interest-earning assets $ 324,290 $ 441,622 $ 441,622
- ----------------------------------------------------------------------------------------------------------------------
Cumulative interest-earning
liabilities $ 358,231 $ 358,889 $ 358,889
- ----------------------------------------------------------------------------------------------------------------------
Interest sensitivity gap $ 30,356 $ 116,674 $ 82,733
- ----------------------------------------------------------------------------------------------------------------------
Cumulative interest-sensitivity gap $ (33,941) $ 82,733 $ 82,733
- ----------------------------------------------------------------------------------------------------------------------
Cumulative ratio of interest-sensitive
assets to interest-sensitive liabilities (0.90%) 1.23%
- ----------------------------------------------------------------------------------------------------------------------
The table above indicates the time period in which interest-earning
assets and interest-bearing liabilities will mature or may reprice in
accordance with their contractual terms. However, this table does not
necessarily indicate the impact of general interest rate movements on the
Corporation's net interest yield because the repricing of various categories
of assets and liabilities is discretionary and is subject to competitive and
other pressures. As a result, various assets and liabilities indicated as
repricing within the same period may in fact reprice at different times and at
different rate levels.
Expected maturities are contractual maturities adjusted for prepayments
of principal based on current market indices. The Corporation uses certain
assumptions to estimate fair values and expected maturities. For assets,
expected maturities are based upon contractual maturity, projected repayments
and prepayments of principal. For deposits, contractual maturities are assumed
for certificates of deposit while other interest-bearing deposits were treated
as if subject to immediate withdrawal.
- ------------------------------------------------------------------------------
30
LIQUIDITY
The liquidity position of the Corporation is dependent on successful
management of its assets and liabilities so as to meet the needs of both
deposit and credit customers. Liquidity needs arise principally to accommodate
possible deposit outflows and to meet customers' requests for loans. Such
needs can be satisfied by scheduled principal loan repayments, maturing
investments, short-term liquid assets and deposit in-flows. The objective of
liquidity management is to enable the Corporation to maintain sufficient
liquidity to meet its obligations in a timely and cost-effective manner.
Management monitors current and projected cash flows, and adjusts
positions as necessary to maintain adequate levels of liquidity. By using a
variety of potential funding sources and staggering maturities, the risk of
potential funding pressure is significantly reduced. Management also maintains
a detailed liquidity contingency plan designed to adequately respond to
situations which could lead to liquidity concerns.
The Corporation derives a significant proportion of its liquidity from
its core deposit base. At December 31, 1997, core deposits (comprised of total
demand and savings accounts plus money market accounts under $100,000)
represented 51.0 percent of total deposits. More volatile rate sensitive
deposits, concentrated in Certificates of deposit $100,000 and greater,
increased to 26.8 percent of total deposits from 23.2 percent at December 31,
1996. This change was due to the sharp rise in short-term rates during the
latter part of 1996 which continued into 1997 and customer preferences for
such certificates.
The following table depicts the Company's core deposit mix at December
31, 1997 and 1996:
CORE DEPOSITS MIX
December 31,
- ------------------------------------------------------------------------------------------------------------------------------
1997 1996 Net Change
(dollars in thousands) Amount Percentage Amount Percentage Volume 97 vs. 96
- ------------------------------------------------------------------------------------------------------------------------------
Demand Deposits $ 77,821 34.9 $ 68,086 29.8 $ 9,735
Interest Bearing Demand 43,135 19.3 43,485 19.1 (350)
Regular Savings 77,602 34.8 81,969 35.9 (4,367)
Money Market Deposits under $100 24,548 11.0 34,548 15.2 (10,000)
- ------------------------------------------------------------------------------------------------------------------------------
Total core deposits $223,106 100.0 $228,088 100.0 ($4,982)
- ------------------------------------------------------------------------------------------------------------------------------
Total deposits $436,010 $426,654 $ 9,356
- ------------------------------------------------------------------------------------------------------------------------------
Core deposits to total deposits 51% 53%
- ------------------------------------------------------------------------------------------------------------------------------
Short-term borrowings can be used to satisfy daily funding needs.
Balances in those accounts fluctuate on a day-to-day basis. The Corporation's
principal short-term funding sources are securities sold under agreement to
repurchase. Average short-term borrowings during 1997 amounted to
approximately $10.9 million, an increase of $4.2 million or 64.3 percent from
the 1996 period.
- ------------------------------------------------------------------------------
31
CENTER BANCORP
MANAGEMENT'S DISCUSSION & ANALYSIS
OF FINANCIAL CONDITION & RESULTS OF OPERATIONS (continued)
The following table is a summary of securities sold under repurchase
agreements for each of the last three years.
December 31,
- -------------------------------------------------------------------------------------------
(dollars in thousands) 1997 1996 1995
- -------------------------------------------------------------------------------------------
Securities sold under repurchase agreements:
Average interest rate:
At year end 6.75% -- 5.25%
For the year 5.68% 5.69% 5.65%
Average amount outstanding during the year $10,858 $ 6,610 $ 1,887
Maximum amount outstanding at any month end $27,320 $21,145 $22,326
Amount outstanding at year end $ 700 $ 0 $22,326
- -------------------------------------------------------------------------------------------
CASHFLOW
The consolidated statements of cash flows present the changes in cash and
cash equivalents from operating, investing and financing activities. During
1997 cash and cash equivalents (which decreased overall by $17.0 million) were
provided (on a net basis) by operating and financing activities and used (on a
net basis) in investing activities. The cash flow provided by net increases in
deposits and in short-term borrowings, supported the overall net investing
activities, primarily investments and loans and supported property and
equipment expenditures. Cash flow from operating activities, primarily net
income, was used in investing activities primarily the purchase of securities
available-for-sale.
STOCKHOLDERS' EQUITY AND DIVIDENDS-STOCKHOLDERS'EQUITY
Stockholders' equity averaged $31.9 million during 1997, an increase of
$3.3 million, or 11.40 percent, as compared to 1996. At December 31, 1997,
stockholders' equity totaled $33.4 million, a 10.62 percent increase over the
prior year. The Corporation's dividend reinvestment and optional stock
purchase plan contributed $271,000 in new capital during 1997. Book value per
share increased at year end 1997 to $14.15 from the prior year amount of
$12.86. Tangible book value at year end 1997 was $12.72 compared to $11.29 for
1996.
CAPITAL
The maintenance of a solid capital foundation continues to be a primary
goal for the Corporation. Accordingly, capital plans and dividend policies are
monitored on an ongoing basis. The most important objective of the capital
planning process is to balance effectively the retention of capital to support
future growth and the goal of providing stockholders with an attractive
long-term return on their investment.
RISK-BASED CAPITAL/LEVERAGE
At December 31, 1997, total Tier I capital (defined as tangible
stockholders' equity for common stock and certain perpetual preferred stock)
amounted to $30.0 million or 6.35 percent of total assets. The Tier I leverage
capital ratio was 6.19 percent of total average assets. Tier I capital
excludes the effect of SFAS No. 115, which amounted to $592,000 of net
unrealized gains, after tax, on securities available-for-sale (included as a
component of stockholders' equity) and goodwill of $3,382,000 as of December
31, 1997. For information on goodwill, see Note 2 to the Consolidated
Financial Statements.
- ------------------------------------------------------------------------------
32
United States bank regulators have additionally issued guidelines
establishing minimum capital standards related to the level of assets and off
balance-sheet exposures adjusted for credit risk. Specifically, these
guidelines categorized assets and off balance-sheet items into four
risk-weightings and require banking institutions to maintain a minimum ratio
of capital to risk-weighted assets. At December 31, 1997, the Corporation's
estimated Tier I and total risk-based capital ratios were 15.5 percent and
16.2 percent, respectively. These ratios are well above the minimum
guidelines of capital to risk-adjusted assets in effect as of December 31,
1997. For information on risk-based capital and regulatory guidelines, see
Note 7 to the Consolidated Financial Statements.
SECURITY MARKET INFORMATION
The common stock of the Corporation is traded on the NASDAQ National
Market System, effective as of June 24, 1996. The Corporation's symbol is
CNBC. As of December 31, 1997, the Corporation had 609 common stockholders of
record. This does not include beneficial owners for whom CEDE & Company or
others act as nominees. On December 31, 1997, the closing market bid and ask
price was $23.50-$24.50 respectively. Since June 24, 1996, prices were
reported by NASDAQ. For prior years the high and low bid prices were reported
by National Quotation Bureau. Dividends declared on common stock, per share
and stock prices, have been adjusted for the 3-for-2 stock split paid on May
31, 1996 and the 5 percent stock dividend paid May 27, 1997. The following
table sets forth the high and low bid prices for the Corporation's common
stock.
Common Stock Price Common
1997 1996 Dividends Declared
- ---------------------------------------------------------------------------------------------------
High Low High Low
Bid Bid Bid Bid 1997 1996
- ---------------------------------------------------------------------------------------------------
Fourth Quarter $ 25.00 $ 23.50 $ 20.95 $ 18.10 $ 0.20 $ 0.19
Third Quarter 25.00 24.75 20.48 18.10 .20 .19
Second Quarter 24.75 20.95 21.90 18.10 .20 .19
First Quarter 20.95 20.00 20.95 19.05 .19 .19
- ---------------------------------------------------------------------------------------------------
$ 0.79 $ 0.76
- ---------------------------------------------------------------------------------------------------
These quotations reflect inter-dealer prices, without retail mark-up,
mark-down or commission and may not necessarily represent actual transactions.
For information on dividend restrictions and capital requirements which may
limit the ability to pay dividends, see Note 13 to the Consolidated Financial
Statements.
LOOKING FORWARD
One of the Corporation's primary objectives is to achieve balanced asset
and revenue growth, and at the same time expand market presence and diversify
its financial products. However, it is recognized that objectives, no matter
how focused, are subject to factors beyond the control of the Corporation
which can impede its ability to achieve these goals. The following factors
should be considered when evaluating the Corporation's ability to achieve its
objectives:
- ------------------------------------------------------------------------------
33
CENTER BANCORP INC.
MANAGEMENT'S DISCUSSION & ANALYSIS
OF FINANCIAL CONDITION & RESULTS OF OPERATIONS (continued)
The financial market place is rapidly changing. Banks are no longer the
only place to obtain loans, nor the only place to keep financial assets. The
banking industry has lost market share to other financial service providers.
The future is predicated on the Corporation's ability to adapt its products,
provide superior customer service and compete in an ever-changing marketplace.
Net interest income, the primary source of earnings, is impacted
favorably or unfavorably by changes in interest rates. Although the impact of
interest rate fluctuations is mitigated by ALCO strategies, significant
changes in interest rates can have an adverse impact on profitability.
The ability of customers to repay their obligations is often impacted by
changes in the regional and local economy. Although the Corporation sets aside
loan loss provisions toward the allowance for loan losses, significant
unfavorable changes in the economy could impact the assumptions used in the
determination of the adequacy of the allowance.
Technological changes will have a material impact on how financial
service companies compete for and deliver services. It is recognized that
these changes will have a direct impact on how the marketplace is approached
and ultimately on profitability. The Corporation has already taken steps to
improve its traditional delivery channels. However, continued success will be
measured by the ability to react to future technological changes.
- ------------------------------------------------------------------------------
34
AVERAGE STATEMENTS OF CONDITION WITH INTEREST AND AVERAGE RATES
Years Ended December 31,
- ---------------------------------------------------------------------------------------------------------
1997 1996
Interest Average Interest
Average Income/ Yield/ Average Income/
Balance Expense Rate Balance Expense
- ---------------------------------------------------------------------------------------------------------
ASSETS
Interest-earning assets:
Investment securities:(1)
Taxable $ 290,002 $ 19,211 6.62% $ 244,939 $16,201
Non-taxable 19,847 1,448 7.30% 23,655 1,701
Federal funds sold and
securities purchased
under agreement to resell 9,866 548 5.55% 8,551 481
Loans, net of unearned
income(2) 125,476 9,980 7.96% 107,897 8,625
- ---------------------------------------------------------------------------------------------------------
Total interest-earning
assets 445,191 31,187 7.01% 385,042 27,008
- ---------------------------------------------------------------------------------------------------------
Noninterest-earning assets:
Cash and due from banks 15,570 14,942
Other assets 19,432 16,229
Allowance for possible
loan losses (1,280) (1,236)
- ---------------------------------------------------------------------------------------------------------
Total noninterest-
earning assets 33,722 29,935
- ---------------------------------------------------------------------------------------------------------
Total assets $ 478,913 $ 414,977
- ---------------------------------------------------------------------------------------------------------
LIABILITIES & STOCKHOLDERS' EQUITY
Interest-bearing liabilities:
Money market deposits $ 56,668 1,562 2.76% $ 61,168 1,832
Savings deposits 80,635 1,961 2.43% 77,835 1,904
Time deposits 177,739 9,507 5.35% 127,452 6,620
Other interest-bearing
deposits 45,687 840 1.84% 48,226 854
Short-term borrowings 10,858 617 5.68% 6,610 376
- ---------------------------------------------------------------------------------------------------------
Total interest-bearing
liabilities 371,587 14,497 3.90% 321,291 11,586
- ---------------------------------------------------------------------------------------------------------
Noninterest-bearing liabilities:
Demand deposit 71,974 62,910
Other noninterest-bearing
deposits 364 320
Other liabilities 3,134 1,863
- ---------------------------------------------------------------------------------------------------------
Total noninterest-bearing
liabilities 75,472 65,093
- ---------------------------------------------------------------------------------------------------------
Stockholders' equity 31,854 28,593
- ---------------------------------------------------------------------------------------------------------
Total liabilities and
stockholders' equity $ 478,913 $ 414,977
- ---------------------------------------------------------------------------------------------------------
Net interest income
(tax-equivalent basis) $ 16,700 $ 15,422
- ---------------------------------------------------------------------------------------------------------
Net interest spread 3.11%
- ---------------------------------------------------------------------------------------------------------
Net interest income as percent
of earning assets 3.75%
- ---------------------------------------------------------------------------------------------------------
Tax-equivalent adjustment (481) (578)
- ---------------------------------------------------------------------------------------------------------
Net interest income $ 16,219 $ 14,844
- ---------------------------------------------------------------------------------------------------------
AVERAGE STATEMENTS OF CONDITION WITH INTEREST AND AVERAGE RATES
Years Ended December 31,
1996 1995
Average Interest Average
Yield/ Average Income/ Yield
Rate Balance Expense Rate
- ---------------------------------------------------------------------------------------------
ASSETS
Interest-earning assets;
Investment securities
Taxable 6.61% $ 184,626 $ 11,941 6.47%
Non-taxable 7.19% 28,343 2,030 7.16%
Federal funds sold and
securities purchased
under agreement to resell 5.63% 16,103 942 5.85%
Loans, net of unearned
income(2) 7.99% 95,216 7,526 7.90%
- ---------------------------------------------------------------------------------------------
Total interest-earning
assets 7.01% 324,288 22,439 6.92%
- ---------------------------------------------------------------------------------------------
Noninterest-earning assets:
Cash and due from banks 16,628
Other assets 11,420
Allowance for possible
loan losses (1,070)
- ---------------------------------------------------------------------------------------------
Total noninterest-
earning assets 26,978
- ---------------------------------------------------------------------------------------------
Total assets $ 351,266
- ---------------------------------------------------------------------------------------------
LIABILITIES & STOCKHOLDERS' EQUITY
Interest-bearing liabilities:
Money market deposits 3.00% $ 63,971 1,783 2.79%
Savings deposits 2.45% 72,995 1,917 2.63%
Time deposits 5.19% 72,143 3,822 5.30%
Other interest-bearing
deposits 1.77% 49,469 1,163 2.35%
Short-term borrowings 5.69% 1,887 102 5.41%
- ---------------------------------------------------------------------------------------------
Total interest-bearing
liabilities 3.61% $ 260,465 8,787 3.37%
- ---------------------------------------------------------------------------------------------
Noninterest-bearing liabilities:
Demand deposits 62,878
Other noninterest-bearing
deposits 310
Other liabilities 1,454
- ---------------------------------------------------------------------------------------------
Total noninterest-bearing
liabilities 64,642
- ---------------------------------------------------------------------------------------------
Stockholders' equity 26,159
- ---------------------------------------------------------------------------------------------
Total liabilities and
stockholders' equity $351,266
- ---------------------------------------------------------------------------------------------
Net Interest income
(tax-equivalent basis) $ 13,652
- ---------------------------------------------------------------------------------------------
Net interest spread 3.40% 3.55%
- ---------------------------------------------------------------------------------------------
Net interest income as percent
of earning assets 4.01% 4.21%
- ---------------------------------------------------------------------------------------------
Tax-equivalent adjustment (690)
- ---------------------------------------------------------------------------------------------
Net interest income $ 12,962
- ---------------------------------------------------------------------------------------------
(1) Average balances for available-for-sale securities are based on amortized
cost
(2) Average balances for loans include loans on non-accrual status
- ------------------------------------------------------------------------------
35
CENTER BANCORP INC.
CONSOLIDATED STATEMENTS OF CONDITION
December 31,
- -----------------------------------------------------------------------------------------------------------------------
(dollars in thousands) 1997 1996
- -----------------------------------------------------------------------------------------------------------------------
ASSETS
Cash and due from banks (Note 3) $15,210 $ 19,761
Federal funds sold 10,900 10,000
Securities purchased under agreement to resell 0 13,300
- -----------------------------------------------------------------------------------------------------------------------
Total cash and cash equivalents 26,110 43,061
Investment securities held to maturity
(approximate market value of $198,960 in 1997 and $218,788 in 1996) 196,980 218,584
Investment securities available-for-sale 101,318 61,539
- -----------------------------------------------------------------------------------------------------------------------
Total investment securities (Note 4) 298,298 280,123
Loans, net of unearned income (Note 5) 132,424 117,830
Less--Allowance for loan losses (Note 5) 1,269 1,293
- -----------------------------------------------------------------------------------------------------------------------
Net loans 131,155 116,537
Premises and equipment, net (Note 6) 9,130 10,104
Accrued interest receivable 4,350 4,371
Other assets (Note 9) 687 1,341
Goodwill (Note 2) 3,382 3,681
- -----------------------------------------------------------------------------------------------------------------------
Total assets $473,112 $459,218
- -----------------------------------------------------------------------------------------------------------------------
LIABILITIES
Deposits:
Non-interest bearing $77,821 $68,086
Interest bearing:
Certificates of deposit $100,000 and over 116,746 99,818
Savings and Time Deposits 241,443 258,750
- -----------------------------------------------------------------------------------------------------------------------
Total Deposits 436,010 426,654
Federal funds purchased and securities sold under agreements to repurchase 700 0
Accounts payable and accrued liabilities (Notes 8 and 9) 2,980 2,351
- -----------------------------------------------------------------------------------------------------------------------
Total Liabilities 439,690 429,005
- -----------------------------------------------------------------------------------------------------------------------
Commitments and contingencies (Note 14)
STOCKHOLDERS' EQUITY (Notes 4, 7, 12 and 13)
Common stock, no par value:
Authorized 20,000,000 shares; issued 2,674,915 and 2,536,343 shares in 1997
and 1996, respectively 7,296 4,468
Appropriated surplus 3,513 3,510
Retained earnings 23,829 23,738
- -----------------------------------------------------------------------------------------------------------------------
34,638 31,716
Less--Treasury stock at cost (313,468 and 299,052 shares in 1997 and 1996, respectively) 1,808 1,814
Net unrealized gain on investment securities available for sale, net of taxes 592 311
- -----------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 33,422 30,213
- -----------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $473,112 $459,218
=======================================================================================================================
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
36
CONSOLIDATED STATEMENTS OF INCOME
Years Ended December 31,
- -----------------------------------------------------------------------------------------------------------------------
(in thousands, except per share data) 1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------------
Interest income:
Interest and fees on loans $9,980 $8,625 $7,526
Interest and dividends on investment securities:
Taxable interest income 19,173 16,172 11,931
Nontaxable interest income 967 1,123 1,340
Dividends 38 29 10
Interest on Federal funds sold and securities purchased under
agreement to resell 548 481 942
- -----------------------------------------------------------------------------------------------------------------------
Total interest income 30,706 26,430 21,749
- -----------------------------------------------------------------------------------------------------------------------
Interest expense:
Interest on certificates of deposit $100,000 or more 5,836 4,113 2,764
Interest on other deposits 8,034 7,097 5,921
Interest on short-term borrowings 617 376 102
- -----------------------------------------------------------------------------------------------------------------------
Total interest expense 14,487 11,586 8,787
- -----------------------------------------------------------------------------------------------------------------------
Net interest income 16,219 14,844 12,962
Provision (credit) for loan losses (Note 5) 0 (132) 0
- -----------------------------------------------------------------------------------------------------------------------
Net interest income after provision (credit) for loan losses 16,219 14,976 12,962
- -----------------------------------------------------------------------------------------------------------------------
Other income:
Service charges, commissions and fees 638 516 570
Other income 139 136 113
Gain on securities sold (Note 4) 334 75 49
- -----------------------------------------------------------------------------------------------------------------------
Total other income 1,111 727 732
- -----------------------------------------------------------------------------------------------------------------------
Other expense:
Salaries and employee benefits (Note 8) 5,487 5,168 4,323
Occupancy expense, net (Note 14) 1,015 910 712
Premises and equipment expense (Note 14) 1,341 1,141 794
Stationery and printing expense 254 525 295
Marketing and advertising expense 337 422 217
Other expenses 2,162 1,744 1,797
- -----------------------------------------------------------------------------------------------------------------------
Total other expense 10,596 9,910 8,138
- -----------------------------------------------------------------------------------------------------------------------
Income before income tax expense 6,734 5,793 5,556
Income tax expense (Note 9) 2,223 1,636 1,516
- -----------------------------------------------------------------------------------------------------------------------
Net income $4,511 $4,157 $4,040
- -----------------------------------------------------------------------------------------------------------------------
Earnings per share:
Basic $1.91 $1.77 $1.73
Diluted $1.90 $1.77 $1.73
Weighted average common shares outstanding:
Basic 2,356,066 2,342,504 2,329,247
Diluted 2,373,483 2,348,386 2,329,247
=======================================================================================================================
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
37
CENTER BANCORP INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Years Ended December 31, 1997, 1996 and 1995
- -------------------------------------------------------------------------------------------------------------------------
Unrealized Gain
Common (Loss) on Total
Stock Common Securities Stock-
(in thousands, Shares Stock Appropriated Retained Treasury Available for Sale, holders'
Except share data) Outstanding Amount Surplus Earnings Stock Net of Taxes Equity
- -------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1994 2,211,656 $3,967 $3,510 $19,103 $(1,814) $(555) $24,211
YEAR 1995
Net income 4,040 4,040
Cash dividend (1,775) (1,775)
Issuance of common stock 12,744 232 232
Net change in unrealized
gain
(loss) on securities
available for sale, net 971 971
of taxes
- -------------------------------------------------------------------------------------------------------------------------
Balance December 31, 1995 2,224,400 $4,199 $3,510 $21,368 $(1,814) $ 416 $27,679
YEAR 1996
Net income 4,157 4,157
Cash dividend (1,787) (1,787)
Issuance of common stock 12,891 269 269
Net change in unrealized
gain
(loss) on securities
available for sale, net (105) (105)
of taxes
- -------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1996 2,237,291 $4,468 $3,510 $23,738 $(1,814) $ 311 $30,213
YEAR 1997
Net income 4,511 4.511
Cash dividend (1,863) (1,863)
Common stock dividend 111,908 2,557 (2,557) -
Issuance of common stock 11,711 271 271
Exercise of stock option 537 3 6 9
Net change in unrealized
gain
(loss) on securities
available for sale, net 281 281
of taxes
- -------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1997 2,361,447 $7,296 $3,513 $23,829 $(1,808) $ 592 $33,422
=========================================================================================================================
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
38
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31,
- -----------------------------------------------------------------------------------------------------------------------
(dollars in thousands) 1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $4,511 $ 4,157 $ 4,040
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 1,484 1,117 728
Provision (credit) for loan losses 0 (132) 0
Provision for deferred taxes 433 286 118
Gain on sale of investment securities 334 75 49
Decrease (increase) in accrued interest receivable 21 (728) 295
Decrease (increase) in other assets 197 (5,139) (99)
Increase in other liabilities 629 245 1,186
Amortization of premium and accretion of discount
on investment securities, net 217 445 674
- -----------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 7,826 326 6,991
- -----------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturities of securities available for sale 10,321 22,236 7,691
Proceeds from maturities of securities held to maturity 69,813 64,356 84,335
Proceeds from sales of investment securities available-for-sale 26,153 14,400 7,629
Purchase of securities available-for-sale (84,256) (75,715) (6,435)
Purchase of securities held to maturity (40,468) (96,333) (95,361)
Net increase in loans (14,618) (19,908) (8,765)
Property and equipment expenditures, net (186) (3,617) (747)
- -----------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (33,241) (94,581) (11,653)
- -----------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposits 9,356 130,988 5,491
Dividends paid (1,863) (1,787) (1,775)
Proceeds from issuance of common stock 271 269 232
Net increase (decrease) in short-term borrowing 700 (22,326) 12,581
- -----------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 8,464 107,144 16,529
- -----------------------------------------------------------------------------------------------------------------------
Net (decrease) increase in cash and cash equivalents (16,951) 12,889 11,867
- -----------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at beginning of year 43,061 30,172 18,305
- -----------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $26,110 $43,061 $30,172
- -----------------------------------------------------------------------------------------------------------------------
Supplemental disclosures of cash flow information:
Interest paid on deposits and short-term borrowings $14,433 $11,547 $8,641
Income taxes $2,002 $1,627 $1,397
Transfers from securities held to maturity to
securities available-for-sale $0 $0 $17,819
Cash paid for the acquisition of Lehigh $0 $5,550 $0
=======================================================================================================================
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
39
CENTER BANCORP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements of Center Bancorp Inc. (the
Corporation) are prepared on the accrual basis and include the accounts of the
Corporation and its wholly-owned subsidiary, Union Center National Bank (the
Bank). All significant intercompany accounts and transactions have been
eliminated from the accompanying consolidated financial statements.
BUSINESS
The Bank provides a full range of banking services to individual and
corporate customers through branch locations in Union and Morris Counties, New
Jersey. The Bank is subject to competition from other financial institutions
and is subject to the regulations of certain federal agencies and undergoes
periodic examinations by those regulatory authorities.
BASIS OF FINANCIAL STATEMENT PRESENTATION
The consolidated financial statements have been prepared in conformity
with generally accepted accounting principles. 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 statement of condition and revenues and expenses for that period. Actual
results could differ significantly from those estimates.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include cash and due from banks, Federal funds
sold, and securities purchased under agreement to resell. Generally, Federal
funds and securities purchased under agreement to resell are sold for one-day
periods.
INVESTMENT SECURITIES
The Corporation classifies investments into the following categories: (1)
held to maturity securities, for which the Corporation has both the positive
intent and ability to hold until maturity, will be reported at amortized cost;
(2) trading securities, which are purchased and held principally for the
purpose of selling in the near term, will be reported at fair value with
unrealized gains and losses included in earnings; and (3) available for sale
securities, which do not meet the criteria of the other two categories, will
be reported at fair value with unrealized gains and losses, net of applicable
income taxes, reported as a separate component of stockholders' equity and
excluded from earnings.
Investment securities held to maturity are adjusted for amortization of
premiums and accretion of discounts which are recognized on a level yield
method, as adjustments to interest income. Investment securities gains or
losses are determined using the specific identification method.
- --------------------------------------------------------------------------------
40
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
INCOME TAXES
The Corporation recognizes deferred tax liabilities and assets for the
expected future tax consequences of events that have been included in the
financial statements or tax returns. Under this method, deferred tax
liabilities and assets are determined based on the difference between the
financial statement and tax bases of assets and liabilities using enacted tax
rates expected to apply to taxable income in the years in which the
differences are expected to be settled.
LOANS
Loans are stated at their principal amounts less net deferred loan
origination fees. Interest income is credited as earned except when a loan
becomes past due 90 days or more and doubt exists as to the ultimate
collection of interest or principal; in those cases the recognition of income
is discontinued. When a loan is placed on non-accrual, interest accruals cease
and uncollected accrued interest is reversed and charged against current
income. Payments received on non-accrual loans are applied against principal.
A loan may only be restored to an accruing basis when it again becomes well
secured and in the process of collection or all past due amounts have been
collected. Loan origination fees and certain direct loan origination costs are
deferred and recognized over the life of the loan as an adjustment to the
loan's yield.
The accounting for impaired loans requires 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. The determination of impaired loans consists of
non-accrual loans and loans internally classified as substandard or below in
each instance above an established dollar threshold. All loans below the
established dollar threshold are considered homogenous and are considered in
the Bank's normal credit evaluation process. The Corporation does not have any
impaired loans.
ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses is maintained at a level determined
adequate to provide for potential loan losses. The allowance is increased by
provisions charged to operations and reduced by loan charge-offs, net of
recoveries. The allowance is based on Management's evaluation of the loan
portfolio considering economic conditions, the volume and nature of the loan
portfolio, historical loan loss experience and individual credit situations.
Material estimates that are particularly susceptible to significant
change in the near-term relate to the determination of the allowance for loan
losses. In connection with the determination of the allowance for loan losses,
management obtains independent appraisals for significant properties.
The ultimate collectibility of a substantial portion of the Bank's loan
portfolio is susceptible to changes in market conditions in the state of New
Jersey.
- --------------------------------------------------------------------------------
41
CENTER BANCORP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Management believes that the allowance for loan losses is adequate. While
management uses available information to recognize loan losses, future
additions to the allowance may be necessary based on changes in economic
conditions, particularly in New Jersey. In addition, various regulatory
agencies, as an integral part of their examination process, periodically
review the Bank's allowance for loan losses. Such agencies may require the
Bank to recognize additions to the allowance based on their judgments about
information available to them at the time of their examinations.
BANK PREMISES AND EQUIPMENT
Land is carried at cost and bank premises and equipment at cost less
accumulated depreciation based on estimated useful lives of assets, computed
principally on the straight-line basis. Expenditures for maintenance and
repairs are charged to operations as incurred; major renewals and betterments
are capitalized. Gains and losses on sales or other dispositions are recorded
as other income or other expenses.
RECLASSIFICATIONS
Certain reclassifications have been made in the consolidated financial
statements for 1996 and 1995 to conform to the classifications presented in
1997.
PENSION PLAN
The Corporation has a non-contributory pension plan covering all eligible
employees. The Corporation's policy is to fund at least the minimum
contribution required by the Employee Retirement Income Security Act of 1974.
STOCK BASED COMPENSATION
In October, 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation" (SFAS 123), which is effective beginning in 1996.
SFAS 123 allows companies either to continue to account for stock-based
employee compensation plans under existing accounting standards (APB Opinion
No. 25) which results in no compensation expense since the options have an
exercise price equal to the market price on the date of the grant, or adopt a
fair value based method of accounting for stock options as compensation
expense over the service period as defined in the new standard. SFAS 123
requires that if a company continues to account for stock options under APB
opinion No. 25, it must provide proforma net income and earnings per share
information as if the new fair value approach had been adopted. Center Bancorp
will continue to follow the existing accounting standard.
EARNINGS PER SHARE
All share and per share amounts have been restated to reflect the 5%
stock dividend paid on May 27, 1997 and the 3-for-2 stock split paid on May
31, 1996.
- --------------------------------------------------------------------------------
42
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
On March 3, 1997, The Financial Accounting Standards board (the "FASB")
issued statement of Financial Accounting Standards ("SFAS") No. 128 "Earnings
Per Share". SFAS No. 128 established new standards for the computation of
earnings per share ("EPS") by simplifying the standards prescribed in APB
Opinion No. 15. Under the new requirements, the Company is required to present
both basic and diluted EPS on the face of the income statement. Basic EPS
replaced the current EPS terminology and is computed by dividing income
available to common shareholders by the weighted-average number of common
shares outstanding. Diluted EPS includes any additional common shares as if
all potentially dilutive common shares were issued (e.g. stock options). The
Company was required to adopt SFAS No. 128 for the period ended December 31,
1997. All prior-period EPS data is restated as required. The Corporations
weighted average common shares outstanding for diluted EPS include the effect
of stock options outstanding using the Treasury Stock Method, which are not
included in the calculation of basic EPS.
TREASURY STOCK
Treasury stock is recorded using the cost method and accordingly is
presented as an unallocated reduction of stockholders' equity.
NOTE 2: ACQUISITION
On June 28, 1996, the Corporation acquired Lehigh Savings Bank SLA
(Lehigh), a New Jersey chartered savings and loan in a transaction accounted
for under the purchase method of accounting. At June 28, 1996, Lehigh had
assets of $70.9 million (primarily cash and cash equivalents of $53.0 million
and loans of $15.0 million) and deposits and stockholders' equity of $68.2
million and $2.7 million, respectively. The Corporation paid $5.5 million in
cash for Lehigh, resulting in goodwill of $3.8 million. The goodwill is being
amortized on a straight-line basis over 15 years. The consolidated financial
statements of the Corporation include assets, liabilities and results of
operations of Lehigh since the acquisition date.
NOTE 3: CASH AND DUE FROM BANKS
The subsidiary bank, Union Center National Bank, maintained average cash
balances reserved to meet regulatory requirements of the Federal Reserve Board
of approximately $86,000 and $4,547,000 at December 31, 1997 and 1996,
respectively.
- --------------------------------------------------------------------------------
43
CENTER BANCORP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 4: INVESTMENT SECURITIES (continued)
The following tables present information related to the Corporation's
portfolio of securities held to maturity and available-for-sale at
December 31, 1997 and 1996.
December 31, 1997
- -----------------------------------------------------------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
(dollars in thousands) Cost Gains Losses Value
- -----------------------------------------------------------------------------------------------------------------------
SECURITIES HELD TO MATURITY:
U.S. government and federal agency obligations $152,388 $1,376 $181 $153,583
Obligations of U.S. states and political subdivisions 33,542 612 4 34,150
Other securities 11,050 195 18 11,227
- -----------------------------------------------------------------------------------------------------------------------
$196,980 $2,183 $203 $198,960
- -----------------------------------------------------------------------------------------------------------------------
December 31, 1997
- -----------------------------------------------------------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
(dollars in thousands) Cost Gains Losses Value
- -----------------------------------------------------------------------------------------------------------------------
SECURITIES AVAILABLE-FOR-SALE:
U.S. government and federal agency obligations $ 81,465 $ 846 $ 29 $ 82,282
Obligations of U.S. states and political subdivisions 5,775 83 0 5,858
Other securities 11,486 91 5 11,572
Federal Reserve and Federal Home Loan Bank stock 1,606 0 0 1,606
- -----------------------------------------------------------------------------------------------------------------------
$100,332 $1,020 $34 $101,318
- -----------------------------------------------------------------------------------------------------------------------
December 31, 1996
- -----------------------------------------------------------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
(dollars in thousands) Cost Gains Losses Value
- -----------------------------------------------------------------------------------------------------------------------
SECURITIES HELD TO MATURITY:
U.S. government and federal agency obligations $168,061 $ 862 $ 1,041 $167,882
Obligations of U.S. states and political subdivisions 39,353 333 52 39,634
Other securities 11,170 117 15 11,272
- -----------------------------------------------------------------------------------------------------------------------
$218,584 $1,312 $1,108 $218,788
- -----------------------------------------------------------------------------------------------------------------------
December 31, 1996
- -----------------------------------------------------------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
(dollars in thousands) Cost Gains Losses Value
- -----------------------------------------------------------------------------------------------------------------------
SECURITIES AVAILABLE-FOR-SALE:
U.S. government and federal agency obligations $60,275 $550 $32 $60,793
Obligations of U.S. states and political subdivisions 0 0 0 0
Federal Reserve and Federal Home Loan Bank stock 746 0 0 746
- -----------------------------------------------------------------------------------------------------------------------
$61,021 $550 $32 $61,539
- -----------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
44
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 4: INVESTMENT SECURITIES (continued)
The following table presents information for investments in securities
held to maturity and securities a1available-for-sale at December 31, 1997,
based on scheduled maturities. Actual maturities can be expected to differ
from scheduled maturities due to prepayment or early call privileges of the
issuer.
Held to Maturity Available-for-Sale
- -----------------------------------------------------------------------------------------------------------------------
Estimated
Amortized Market Amortized Book/Market
(dollars in thousands) Cost Value Cost Value
- -----------------------------------------------------------------------------------------------------------------------
Due in one year or less $ 76,907 $ 77,055 $13,967 $13,968
Due after one year through five years 67,716 68,750 67,143 67,946
Due after five years through ten years 52,357 53,155 19,222 19,404
- -----------------------------------------------------------------------------------------------------------------------
$196,980 $198,960 $100,332 $101,318
- -----------------------------------------------------------------------------------------------------------------------
Securities sold from the Corporation's Available-for-Sale portfolio
during 1997 and 1996 amounted to $26.2 and $14.4 million respectively. The
gains on securities sold amounted to approximately $334,000 in 1997 and
$121,000 in 1996 which were offset by losses on securities sold of
approximately $46,000 in 1996. These securities were sold in the ordinary
course of business. During 1995 the Corporation recorded net gains of $49,000
on sales of $7.6 million.
Investment securities having a carrying value of approximately $36.6
million and $63.7 million at December 31, 1997 and 1996, respectively, were
pledged to secure public deposits, short-term borrowings and for other
purposes required or permitted by law.
NOTE 5: LOANS AND THE ALLOWANCE FOR LOAN LOSSES
The following table sets forth the composition of the Corporation's loan
portfolio at December 31, 1997 and 1996, respectively.
(dollars in thousands) 1997 1996
- ------------------------------------------------------------------------------------------------------------------------
Real estate--residential mortgage $88,067 $85,994
Real estate--commercial 20,136 14,575
Commercial and industrial 19,261 11,375
Installment 5,135 6,355
All other 430 229
Less unearned income (605) (698)
- ------------------------------------------------------------------------------------------------------------------------
Loans, net of unearned income $132,424 $117,830
- ------------------------------------------------------------------------------------------------------------------------
At December 31, 1997 and 1996 loans to officers and directors aggregated
approximately $3,133,000 and $3,078,000 respectively. During the year ended
December 31, 1997, the Corporation made new loans to officers and directors in
the amount of $1,323,000; payments by such persons during 1997 aggregated
$1,277,000. Management is of the opinion that the above loans were made on the
same terms and conditions as those prevailing for comparable transactions with
non-related borrowers.
- --------------------------------------------------------------------------------
45
CENTER BANCORP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 5: LOANS AND THE ALLOWANCE FOR LOAN LOSSES (continued)
A summary of the activity in the allowance for loan losses is as follows:
(dollars in thousands) 1997 1996 1995
- ----------------------------------------------------------------------------------------------------------------------
Balance at the beginning of the year $1,293 $1,073 $1,073
Provision (credit) for loan losses 0 (132) 0
Loans charged off (31) (479) (10)
Recoveries on loans previously charge off 7 138 10
Adjustments from acquisition of Lehigh 0 693 0
- ----------------------------------------------------------------------------------------------------------------------
Balance at the end of the year $1,269 $1,293 $1,073
- ----------------------------------------------------------------------------------------------------------------------
The allowance for loan losses for Federal income tax purposes amounted to
$801,000 and $993,000 at December 31, 1997 and 1996, which is the maximum
allowable.
The outstanding balances of accruing loans which are 90 days or more past
due as to principal or interest payments and non-performing assets at December
31, 1997 and 1996 were as follows:
(dollars in thousands) 1997 1996
- ------------------------------------------------------------------------------------------------------------------------
Loans past due in excess of 90 days and still accruing $73 $121
Non-accrual loans 27 298
- ------------------------------------------------------------------------------------------------------------------------
Total non-performing assets $100 $419
- ------------------------------------------------------------------------------------------------------------------------
The amount of interest income that would have been recorded on
non-accrual loans in 1997 and 1996, had payments remained in accordance with
the original contractual terms, approximated $2,800 and $23,000, respectively,
while no interest income was received on these types of assets in 1997 and
1996, resulting in a loss of interest income of $2,800 and $23,000,
respectively.
At December 31, 1997, there were no commitments to lend additional funds
to borrowers whose loans were non-accrual or contractually past due in excess
of 90 days and still accruing interest.
The Bank's policy is to grant commercial, mortgage, and installment loans
to New Jersey residents and businesses within its trading area. The borrowers'
abilities to repay their obligations are dependent upon various factors
including the borrowers' income and net worth, cash flows generated by the
borrowers' underlying collateral, value of the underlying collateral, and
priority of the Bank's lien on the property. Such factors are dependent upon
various economic conditions and individual circumstances beyond the Bank's
control. The Bank is therefore subject to risk of loss. The Bank believes its
lending policies and procedures adequately minimize the potential exposure to
such risks and that adequate provisions for loan losses are provided for all
known and inherent risks. Collateral and personal guarantees are required for
virtually all loans.
- --------------------------------------------------------------------------------
46
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 6: BANK PREMISES AND EQUIPMENT
A summary of the Corporation's premises and equipment at December 31, 1997 and
1996 follows:
(dollars in thousands) 1997 1996
- ------------------------------------------------------------------------------------------------------------------------
Land $1,678 $ 1,892
Buildings 5,395 5,499
Furniture, fixtures and equipment 7,166 6,780
Leasehold improvements 934 848
- ------------------------------------------------------------------------------------------------------------------------
Subtotal 15,173 15,019
Less accumulated depreciation and amortization 6,043 4,915
- ------------------------------------------------------------------------------------------------------------------------
$9,130 $10,104
- ------------------------------------------------------------------------------------------------------------------------
NOTE 7: REGULATORY CAPITAL REQUIREMENTS
FDIC regulations require banks to maintain minimum levels of regulatory
capital. Under the regulations in effect at December 31, 1997, the Bank was
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 savings
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 FDIC about
capital components, risk weightings and other factors.
As of December 31, 1997, management believes that the Bank meets all
capital adequacy requirements to which it is 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.
- --------------------------------------------------------------------------------
47
CENTER BANCORP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 7: REGULATORY CAPITAL REQUIREMENTS (continued)
The following is a summary of the Bank's actual capital amounts and
ratios as of December 31, 1997 and 1996, compared to the FDIC minimum capital
adequacy requirements and the FDIC requirements for classification as a
well-capitalized institution:
FDIC Requirements
- -----------------------------------------------------------------------------------------------------------------------
Union Center National Minimum Capital For Classification
Bank Actuals Adequacy as Well Capitalized
- -----------------------------------------------------------------------------------------------------------------------
(dollars in thousands) Amount Ratio Amount Ratio Amount Ratio
- -----------------------------------------------------------------------------------------------------------------------
December 31, 1997
Leverage (Tier 1) capital $29,215 6.15 $18,900 4.00% $23,456 5.00%
- -----------------------------------------------------------------------------------------------------------------------
Risk-based capital:
- -----------------------------------------------------------------------------------------------------------------------
Tier 1 29,215 15.90% 7,349 4.00% 11,023 6.00%
Total 30,484 16.59% 14,697 8.00% 18,372 10.00%
- -----------------------------------------------------------------------------------------------------------------------
December 31, 1996
Leverage (Tier 1) capital $26,221 5.76% $18,209 4.00% $22,761 5.00%
- -----------------------------------------------------------------------------------------------------------------------
Risk-based capital:
- -----------------------------------------------------------------------------------------------------------------------
Tier 1 26,221 15.61% 6,720 4.00% 10,080 6.00%
Total 27,514 16.38% 13,440 8.00% 16,801 10.00%
- -----------------------------------------------------------------------------------------------------------------------
NOTE 8: PENSION AND BENEFITS
The Corporation maintains a non-contributory pension plan for
substantially all its employees. The benefits are based on years of service
and the employee's compensation over the prior five-year period. The plan's
assets consist primarily of an insurance annuity. In addition, the Corporation
has a non-qualified retirement plan which is designed to supplement the
pension plan for key employees.
The following table sets forth the funded status and amounts recognized
in the consolidated statements of condition for the Corporation's pension
plans at December 31, 1997 and 1996.
(dollars in thousands) 1997 1996
- ------------------------------------------------------------------------------------------------------------------------
Actuarial present value of benefit obligations
Vested $3,155 $2,901
Non-Vested 101 55
- ------------------------------------------------------------------------------------------------------------------------
Accumulated benefit obligation 3,256 2,956
Effect of projected future compensation levels 1,243 1,099
- ------------------------------------------------------------------------------------------------------------------------
Projected benefit obligation 4,499 4,055
Plan assets at fair value 3,981 3,569
- ------------------------------------------------------------------------------------------------------------------------
Assets less than projected benefit obligation (518) (486)
Unrecognized net asset (16) (20)
Unamortized Prior Service Cost 155 170
Deferred gain (564) (518)
- ------------------------------------------------------------------------------------------------------------------------
Accrued expense $(943) $(854)
- ------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
48
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 8: PENSION AND BENEFITS (continued)
The net periodic pension cost for 1997, 1996 and 1995 include the
following components.
(dollars in thousands) 1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------------
Service cost $246 $199 $208
Interest 296 262 251
Actual return on plan assets (446) (308) (275)
Net amortization and deferral 168 39 21
- -----------------------------------------------------------------------------------------------------------------------
Net periodic pension expense $264 $192 $205
- -----------------------------------------------------------------------------------------------------------------------
The following table presents the assumptions used to calculate the
projected benefit obligation in each of the last three years.
1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------------
Discount rate 7.50% 7.50% 7.50%
Rate of compensation increase 6.50% 6.50% 6.50%
Expected long-term rate of return on plan assets 8.00% 8.00% 8.00%
- -----------------------------------------------------------------------------------------------------------------------
401K BENEFIT PLAN
During 1994, the Corporation established a 401K employee savings plan to
provide for defined contributions which covers substantially all employees of
the Bank. The Corporation's contributions to the plan are limited to fifty
percent of a matching percentage of each employee's contribution up to six
percent of the employee's salary. The plan was effective January 1, 1995. For
1997, 1996, and 1995, employer contributions amounted to $60,777, $43,928 and
$43,050, respectively.
STOCK OPTION PLANS
The Stock Option Plans permit Center Bancorp common stock to be issued to
key employees and directors of the Corporation and its subsidiary. The options
granted under the Plan are intended to be either Incentive Stock Options or
Non-Qualified Options.
Options have been granted to purchase common stock principally at the
fair market value of the stock at the date of grant. Options are exercisable
starting one year after the date of grant and generally expire ten years from
the date of grant. Upon the exercise of options, proceeds received in excess
of par value of the shares are credited to surplus.
- --------------------------------------------------------------------------------
49
Center Bancorp Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 8: PENSION AND BENEFITS (continued)
Changes in options outstanding during the past three years were as
follows:
Exercise Price Range
Stock Option Plan Shares Per Share
- -----------------------------------------------------------------------------------------------------------------------
Outstanding, December 31, 1994,
(36,878 shares exercisable) 118,244 $17.30 to 18.59
Granted during 1995 0
Exercised during 1995 0
Expired or canceled during 1995 (10,750) 18.59
- -----------------------------------------------------------------------------------------------------------------------
Outstanding, December 31, 1995,
(53,582 shares exercisable) 107,494 17.30 to 18.59
Granted during 1996 0
Exercised during 1996 0
Expired or canceled during 1996 (3,308) 18.59
- -----------------------------------------------------------------------------------------------------------------------
Outstanding, December 31, 1996,
(85,003 shares exercisable) 104,186 17.30 to 18.59
Granted During 1997 9,923 20.71
Exercised during 1997 (537) 17.30
Expired or canceled during 1997 0
- -----------------------------------------------------------------------------------------------------------------------
Outstanding, December 31, 1997,
(97,404 Shares Exercisable) 113,572 $17.30 to 20.71
- -----------------------------------------------------------------------------------------------------------------------
Fair Value of Stock Options Grants
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 1997:
o Dividend yield of 3.70%
o Expected volatility of 44.3%
o Risk-free interest rates based upon equivalent-term Treasury Rates
o Expected options lives were the contractual lives at the date of grant
The following table summarizes the fair value of the stock options
granted during the year ended December 31, 1997. There were no stock options
granted in 1996 or 1995.
1997
--------------------------------
Options Weighted
Granted Average Fair
Value
Incentive stock options 0 $ 0
Non-qualifying stock options 0 $ 0
Directors' plan 9,923 $8.75
- ----------------------------------------------------------------------
Total 9,923 $8.75
Under APB Opinion 25, compensation cost for the stock options is not
recognized because the exercise price of the stock options equals the market
price of the underlying stock on the date of the grant. Had compensation
expense been recorded for stock options granted as determined under SFAS 123,
net income would have been reduced by approximately $19,000 in 1997 which
would not have changed the Corporation's basic earnings per share, but which
would have reduced the diluted earnings per share by $.01.
- --------------------------------------------------------------------------------
50
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 9: INCOME TAXES
The current and deferred amounts of income tax expense for the years
ended December 31, 1997, 1996 and 1995, respectively, are as follows:
(dollars in thousands) 1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------------
CURRENT:
Federal $1,569 $1,203 $1,273
State 221 147 125
- -----------------------------------------------------------------------------------------------------------------------
1,790 1,350 1,398
DEFERRED:
Federal 433 286 118
- -----------------------------------------------------------------------------------------------------------------------
Income tax expense $2,223 $1,636 $1,516
- -----------------------------------------------------------------------------------------------------------------------
A reconciliation between the amount of reported income tax expense and
the amount computed by applying the statutory Federal income tax rate is as
follows:
(dollars in thousands) 1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------------
Income before income tax expense $6,734 $5,793 $5,556
Federal statutory rate 34% 34% 34%
- -----------------------------------------------------------------------------------------------------------------------
Computed "expected" Federal income
tax expense 2,289 1,970 1,889
State tax net of Federal tax benefit 144 64 82
Tax-exempt interest and dividends (298) (359) (429)
Decrease in valuation allowance 0 0 0
Other, net 88 (39) (26)
- -----------------------------------------------------------------------------------------------------------------------
Income tax expense $2,223 $1,636 $1,516
- -----------------------------------------------------------------------------------------------------------------------
The tax effects of temporary differences that give rise to significant
portions of the deferred tax asset and deferred tax liability at December 31,
1997 and 1996 are presented below.
(dollars in thousands) 1997 1996
- -----------------------------------------------------------------------------------------------------------------------
Deferred tax assets:
Allowance for loan losses $214 $120
Pension Expense 332 342
Deferred fee income-Mortgages 0 23
Operating loss carry forward 144 284
Depreciation 0 64
- -----------------------------------------------------------------------------------------------------------------------
Total gross deferred tax asset 690 833
Valuation allowance (58) (58)
- -----------------------------------------------------------------------------------------------------------------------
Net deferred tax asset $632 $775
- -----------------------------------------------------------------------------------------------------------------------
Deferred tax liabilities:
Depreciation $293 $0
Market discount accretion 55 37
Premium amortization 0 13
Deferred fee expense-Mortgages 135 143
Unrealized gains on securities available-
for-sale 393 207
- -----------------------------------------------------------------------------------------------------------------------
Total gross deferred tax liabilities 876 400
- -----------------------------------------------------------------------------------------------------------------------
Net deferred tax asset (liability) ($244) $375
- -----------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
51
Center Bancorp Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 9: INCOME TAXES (continued)
Based on the Corporation's historical and current pre-tax earnings and
the availability of net operating loss carrybacks on a federal basis,
management believes it is more likely than not that the 950506953Corporation
will realize the benefit of the net deductible temporary differences existing
at December 31, 1997 and 1996, respectively.
The valuation allowance is due to the state tax effect of the net
deductible temporary difference calculated on a separate company basis. The
valuation allowance for deferred tax assets as of December 31, 1997 was
$58,000 unchanged from 1996.
NOTE 10: (unaudited)
QUARTERLY FINANCIAL INFORMATION
CENTER BANCORP INC.
1997
- -----------------------------------------------------------------------------------------------------------------------
(dollars in thousands, except per share data) 4th Quarter 3rd Quarter 2nd Quarter 1st Quarter
- -----------------------------------------------------------------------------------------------------------------------
Total interest income $7,708 $7,899 $7,736 $7,362
Total interest expense 3,590 3,812 3,696 3,389
Net interest income 4,118 4,087 4,040 3,973
Provision for loan losses 0 0 0 0
Other income 573 193 176 169
Other expense 2,536 2,872 2,716 2,471
Income before income taxes 2,155 1,408 1,500 1,671
Net income 1,409 916 946 1,240
Earnings per share:
Basic $.59 $.39 $.40 $.53
Diluted $.59 $.38 $.40 $.53
Weighted average common shares outstanding;
Basic 2,360,271 2,357,609 2,355,874 2,349,741
Diluted 2,389,774 2,389,650 2,379,413 2,361,606
- -----------------------------------------------------------------------------------------------------------------------
1996
- -----------------------------------------------------------------------------------------------------------------------
(dollars in thousands, except per share data) 4th Quarter 3rd Quarter 2nd Quarter 1st Quarter
- -----------------------------------------------------------------------------------------------------------------------
Total interest income $7,084 $7,272 $6,114 $5,960
Total interest expense 3,170 3,238 2,674 2,504
Net interest income 3,914 4,034 3,440 3,456
Provision (credit) for loan losses (132) 0 0 0
Other income 173 177 232 145
Other expense 2,810 2,852 2,254 1,994
Income before income taxes 1,409 1,359 1,418 1,607
Net income 919 1,001 1,002 1,235
Earnings per share;
Basic $.39 $.43 $.43 $.52
Diluted $.39 $.43 $.43 $.52
Weighted average common shares outstanding:
Basic 2,348,145 2,344,600 2,340,265 2,337,004
Diluted 2,353,129 2,348,358 2,347,610 2,344,349
- -----------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
52
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 11: FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107, "Disclosures about
Fair Value of Financial Instruments" (SFAS 107), requires that the Bank
disclose estimated fair values for its financial instruments. Fair value
estimates, methods, and assumptions are set forth below for the Corporation's
financial instruments:
The carrying amounts for cash and cash equivalents approximate fair value
because they mature in 90 days or less and do not present unanticipated credit
concerns. The fair value of investment securities is estimated based on bid
quotations received from securities dealers.
Fair values are estimated for portfolios of loans with similar financial
characteristics. Loans are segregated by type such as commercial, real
estate-mortgage, and installment loans. The fair value of performing loans,
except residential mortgages, is calculated by discounting scheduled cash
flows through the estimated maturity using estimated market discount rates
that reflect the credit and interest rate risk inherent in the loan. The
estimate of maturity is based on the Bank's historical experience with
prepayments for each loan classification, modified as required by an estimate
of the effect of current economic and lending conditions. For performing
residential mortgage loans, fair value is estimated by discounting contractual
cash flows adjusted for prepayment estimates using discount rates based on
secondary market sources adjusted to reflect differences in servicing and
credit costs.
Under SFAS 107, the fair value of deposits with no stated maturity, such
as noninterest-bearing demand deposits, savings and NOW accounts, and money
market and checking accounts, is equal to the amount payable on demand as of
December 31, 1997 and 1996. The fair value of certificates of deposit is based
on the discounted value of contractual cash flows. The discount rate is
estimated using the rates currently offered for deposits of similar remaining
maturities.
The fair value estimates of commitments to extend credit and standby
letters of credit are estimated at the fee charged by the bank for similar
transactions. This amount is deemed to be immaterial.
Short-term borrowings that mature within six months have fair values
equal to their carrying value.
Fair value estimates are made at a specific point in time, based on
relevant market information and information about the financial instrument.
These estimates do not reflect any premium or discount that could result from
offering for sale at one time the Corporation's entire holdings of a
particular financial instrument. Because no market exists for a significant
portion of the Bank's financial instruments, fair value estimates are 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.
- --------------------------------------------------------------------------------
53
Center Bancorp Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 11: FAIR VALUE OF FINANCIAL INSTRUMENTS (continued)
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. Other significant assets and liabilities
that are not considered financial assets or liabilities include deferred tax
liabilities, goodwill, and premises and equipment. In addition, the tax
ramifications related to the realization of the unrealized gains and losses
can have a significant effect on fair value estimates and have not been
considered.
The estimated fair value of the Corporation's financial instruments are
as follows:
December 31,
- -----------------------------------------------------------------------------------------------------------------------
1997 1996
- -----------------------------------------------------------------------------------------------------------------------
Carrying Fair Carrying Fair
(dollars in thousands) Amount Value Amount Value
- -----------------------------------------------------------------------------------------------------------------------
FINANCIAL ASSETS:
Cash and cash equivalents $26,110 $26,110 $ 43,061 $ 43,061
Investments Available-for-Sale 101,318 101,318 61,539 61,539
Investments Held to Maturity 196,980 198,960 218,584 218,788
Net loans 131,155 132,573 116,537 118,195
FINANCIAL LIABILITIES:
Noninterest-bearing deposits $77,821 $77,821 $ 68,086 $ 68,086
Interest-Bearing deposits 358,189 368,549 358,568 358,568
Federal funds purchased and securities sold under
agreement to repurchase 700 700 0 0
- -----------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
54
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 12: PARENT CORPORATION ONLY FINANCIAL STATEMENTS
Center Bancorp Inc., operates its wholly-owned subsidiary, Union Center
National Bank. The earnings of this subsidiary are recognized by the
Corporation using the equity method of accounting. Accordingly, earnings are
recorded as increases in the Corporation's investment in the subsidiary and
dividends paid reduce the investment in the subsidiary. Dividends payable by
the Corporation are unrestricted, although the ability of the Corporation to
pay dividends will largely depend upon the dividends paid to it by the Bank.
Dividends payable by the Bank to the Corporation are restricted under
supervisory regulations (see Note 13). Condensed financial statements of the
Parent Corporation only follow:
CONDENSED STATEMENTS OF CONDITION
For years ended December 31,
- -----------------------------------------------------------------------------------------------------------------------
(dollars in thousands) 1997 1996
- -----------------------------------------------------------------------------------------------------------------------
ASSETS
Cash and cash equivalents $195 $253
Investment in subsidiary 33,188 29,957
Other assets 487 465
- -----------------------------------------------------------------------------------------------------------------------
$33,870 $30,675
- -----------------------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Other liabilities $448 $462
Stockholders' equity 33,422 $30,213
- -----------------------------------------------------------------------------------------------------------------------
$33,870 $30,675
- -----------------------------------------------------------------------------------------------------------------------
CONDENSED STATEMENTS OF INCOME
For years ended December 31,
- -----------------------------------------------------------------------------------------------------------------------
(dollars in thousands) 1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------------
Income
Dividend income from subsidiary $1,677 $7,337 $1,775
Management fees 43 38 48
- -----------------------------------------------------------------------------------------------------------------------
Total Income 1,720 7,375 1,823
Expenses 160 133 95
- -----------------------------------------------------------------------------------------------------------------------
Net income before equity in earnings of subsidiary 1,560 7,242 1,728
Equity in earnings of subsidiary 2,951 (3,085) 2,312
- -----------------------------------------------------------------------------------------------------------------------
Net Income $4,511 $4,157 $4,040
- -----------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
55
Center Bancorp Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 12: PARENT CORPORATION ONLY FINANCIAL STATEMENTS (continued)
CONDENSED STATEMENTS OF CASH FLOWS
For years ended December 31,
- -----------------------------------------------------------------------------------------------------------------------
(dollars in thousands) 1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------------
Net income $ 4,511 $ 4,157 $ 4,040
Adjustments to reconcile net income to net cash
provided by operating activities:
Equity in earnings of subsidiary (2,951) 3,085 (2,312)
Other, net (35) (571) 76
- -----------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities $ 1,525 $ 6,671 $ 1,804
- -----------------------------------------------------------------------------------------------------------------------
Investing Activities:
Investments (in) and advances to subsidiaries $0 $(5,790) $0
- -----------------------------------------------------------------------------------------------------------------------
Net cash used in financing activities $0 $(5,790) $0
- -----------------------------------------------------------------------------------------------------------------------
Financing Activities:
Cash Dividends $(1,863) $(1,787) $(1,775)
Proceeds from exercise of stock options 9 0 0
Proceeds from issuance of common stock 271 269 232
- -----------------------------------------------------------------------------------------------------------------------
Net cash used in financing activities $(1,583) $(1,518) $(1,543)
- -----------------------------------------------------------------------------------------------------------------------
(Decrease) increase in cash $ (58) $ (637) $ 261
Cash at the beginning of year 253 890 629
- -----------------------------------------------------------------------------------------------------------------------
Cash at the end of year $ 195 $ 253 $ 890
- -----------------------------------------------------------------------------------------------------------------------
NOTE 13: DIVIDENDS AND OTHER RESTRICTIONS
Certain restrictions, including capital requirements, exist on the
availability of undistributed net profits of the subsidiary bank for the
future payment of dividends to the Corporation. A dividend may not be paid if
it would impair the Bank's capital. Furthermore, prior approval by the
Comptroller of the Currency is required if the total of dividends declared in
a calendar year exceeds the total of the Bank's net profits for that year
combined with its retained profits for the two preceding years. At December
31, 1997, $3,855,000 was available for the payment of dividends.
NOTE 14: COMMITMENTS, CONTINGENCIES AND CONCENTRATIONS OF CREDIT RISK
In the normal course of business, the Corporation has outstanding
commitments and contingent liabilities such as commitments to extend credit,
including loan commitments of $39,418,000, ($38,918,000 subject to variable
rate indices and $500,000 fixed rate commitments) and $23,910,000 as of
December 31, 1997 and 1996, respectively. Standby letters of credit, which are
not reflected in the accompanying consolidated financial statements, totaled
$8,190,000 and $7,407,000 as of December 31, 1997 and 1996, respectively.
Commitments to extend credit and standby letters of credit generally do not
exceed one year. These financial instruments involve, to varying degrees,
elements of credit risk in excess of the amounts recognized in the
consolidated financial statements. The commitment or contract amount of these
financial instruments is an
- --------------------------------------------------------------------------------
56
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 14: COMMITMENTS, CONTINGENCIES AND CONCENTRATIONS OF
CREDIT RISK (continued)
indicator of the Corporation's level of involvement in each type of instrument
as well as the exposure to credit loss in the event of non-performance by the
other party to the financial instrument. The Corporation controls credit risk
of these financial instruments through credit approvals, limits and monitoring
procedures. To minimize potential credit risk the Corporation generally
requires collateral and other credit related terms and conditions from the
customer. In the opinion of management the financial condition of the
Corporation will not be materially affected by the final outcome of these
commitments and contingent liabilities.
A substantial portion of the Bank's loans are one to four family
residential first mortgage loans secured by real estate located in New Jersey.
Accordingly, the collectibility of a substantial portion of the Bank's
loan portfolio is susceptible to changes in the real estate market.
Non-interest expenses include rentals for premises and equipment of
$203,168 in 1997, $135,068 in 1996, and $49,412 in 1995. At December 31, 1997,
Center Bancorp and its 950360413subsidiary were obligated under a number of
non-cancelable leases for premises and equipment, many of which provide for
increased rentals based upon increases in real estate taxes and the cost of
living index. These leases, most of which have renewal provisions, are
principally non-financing leases. Minimum rentals under the terms of these
leases for the years 1998 through 2002 are $202,277, $215,294, $229,921,
$246,385, and $259,947, respectively. Minimum rentals due after 2003 are
$428,952.
The Corporation is subject to claims and lawsuits which arise primarily
in the ordinary course of business. Based upon the information currently
available and advice received from legal counsel representing the Corporation
in connection with such claims, it is the opinion of management that the
disposition or ultimate determination of such claims will not have a material
adverse impact on the consolidated financial position or results of
operations, or liquidity of the Corporation.
- --------------------------------------------------------------------------------
57
INDEPENDENT AUDITORS' REPORT
KPMG Peat Marwick LLP
Certified Public Accountants
The Board of Directors and Stockholders
Center Bancorp Inc.:
We have audited the accompanying consolidated statements of condition of
Center Bancorp Inc. and subsidiary (the Corporation) as of December 31, 1997
and 1996, and the related consolidated statements of income, changes in
stockholders' equity, and cash flows for each of the years in the three-year
period ended December 31, 1997. These consolidated financial statements are
the responsibility of the Corporation'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 the
Corporation as of December 31, 1997 and 1996, and the results of its
operations and its cash flows for each of the years in the three-year period
ended December 31, 1997 in conformity with generally accepted accounting
principles.
KPMG Peat Marwick LLP
Short Hills, New Jersey
January 30, 1998
- --------------------------------------------------------------------------------
58
INDEPENDENT AUDITORS' CONSENT
The Board of Directors
Center Bancorp Inc.:
We consent to the incorporation by reference in the Registration Statement No.
33-72176 on Form S-8 and Registration Statement No. 33-72178 on Form S-3 of
Center Bancorp Inc. of our report dated January 30, 1998, relating to the
consolidated statements of condition of Center Bancorp Inc. as of December 31,
1997 and 1996 and the related consolidated statements of income, changes in
stockholders' equity, and cash flows for each of the years in the three-year
period ended December 31, 1997, which report is incorporated by reference in
the December 31, 1997 Annual Report on Form 10-K of Center Bancorp Inc.
/s/ KPMG Peat Marwick LLP
-------------------------
KPMG Peat Marwick LLP
Short Hills, New Jersey
March 30, 1998