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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE
QUARTERLY PERIOD ENDED September 30, 1996 OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD
FROM ____________TO____________
Commission file number 2-81353
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CENTER BANCORP, INC.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
NEW JERSEY 52-1273725
------------------------------- -------------------
(State or other jurisdiciton of (I.R.S. Employer
incorporation or organization) Identification No.)
2455 MORRIS AVENUE, UNION, NEW JERSEY 07083
----------------------------------------------------
(Address of principal executives offices) (Zip Code)
(908) 688-9500
----------------------------------------------------
(Registrant's telephone number, including area code)
______________________________________________
(Former name, former address and former fiscal
year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Shares outstanding on September 30, 1996
---------------------------------------------
Common stock no par value -- 2,234,344 shares
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<PAGE>
CENTER BANCORP, INC.
INDEX TO FORM 10-Q
PAGE
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements of Condition
at September 30, 1996 (Unaudited) and December 31, 1995 .... 2
Consolidated Statements of Income
Three and Nine Months Ended September 30, 1996 and 1995
(Unaudited) ................................................ 3
Consolidated Statements of Cash Flows
Nine Months Ended September 30, 1996 and 1995
(Unaudited) ................................................ 4
In the opinion of Management, all adjustments necessary for a fair
presentation of the financial position and results of operations for
the interim periods have been made. Such adjustments are of a normal
recurring nature. All share and per share amounts have been restated
to reflect the 3-for-2 stock split paid to shareholders of record May
1, 1996 on May 31, 1996. Results for the period ended September 30,
1996 are not necessarily indicative of results for any other interim
period or for the entire fiscal year. Reference is made to the
Company's Annual Report on Form 10-K for the year ended December 31,
1995 for information regarding accounting principles.
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations ................ 5-13
PART II. OTHER INFORMATION ................................................ 14
SIGNATURES ........................................................... 15
Page 1
<PAGE>
CONSOLIDATED STATEMENT OF CONDITION
(Dollars in thousands)
September 30, December 31,
1996 1995
------------- ------------
unaudited
ASSETS:
Cash and due from banks .......................... $ 15,158 $ 14,172
Federal funds purchased and securities
purchased under agreement to resell ............ 13,300 16,000
-------- --------
Total cash and cash equivalents ............ 28,458 30,172
Investment securities held to maturity
(approximate market value of $216,649
in 1996 and $159,702 in 1995) .................. 218,648 156,030
Investment securities available for sale ......... 66,884 53,662
-------- --------
Total investment securities ................ 285,532 209,692
Loans, Net ......................................... 113,773 97,570
Less -- Allowance for loan losses ................ 1,293 1,073
-------- --------
Net loans .................................. 112,480 96,497
Premises and equipment, net ...................... 9,898 7,462
Accrued interest receivable ...................... 4,898 3,643
Other assets ..................................... 5,401 311
-------- --------
Total assets ............................... $446,667 $347,777
======== ========
LIABILITIES
Deposits:
Non-interest bearing ........................... 67,109 60,635
Interest bearing:
Certificates of deposit $100,000 and over .... 86,015 39,521
Other ........................................ 261,496 195,510
-------- --------
Total deposits ............................. 414,620 295,666
Federal funds purchased and securities sold
under agreements to repurchase ................. 303 22,326
Accounts payable and accrued liabilities ......... 2,350 2,106
-------- --------
Total liabilities .......................... 417,273 320,098
-------- --------
STOCKHOLDERS' EQUITY
Common stock, no par value:
Authorized 20,000,000 shares; issued 2,533,396
and 1,918,291 shares in 1996 and 1995 ........ 4,414 4,199
Appropriated surplus ............................. 3,510 3,510
Retained earnings ................................ 23,263 21,368
-------- --------
31,187 29,077
Less -- Treasury stock at cost (299,052 shares
in 1996 and 1995 respectively) ................. 1,814 1,814
Net unrealized gain on investment securities
available-for-sale, net of taxes ............... 21 416
-------- --------
Total stockholders' equity ................. 29,394 27,679
-------- --------
Total liabilities and stockholders' equity . $446,667 $347,777
======== ========
Page 2
<PAGE>
<TABLE>
CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------ ------------------------
1996 1995 1996 1995
---------- ---------- ---------- ----------
(in thousands, except per share data)
<S> <C> <C> <C> <C>
Interest income:
Interest and fees on loans ........................... $ 2,356 $ 1,937 $ 6,309 $ 5,573
Interest and dividends on investment securities:
Taxable interest income ............................ 4,640 3,177 12,133 9,300
Nontaxable interest income ......................... 276 323 850 1,055
Interest on Federal funds sold ....................... 0 37 96 105
---------- ---------- ---------- ----------
Total interest income .......................... 7,272 5,474 19,388 16,033
---------- ---------- ---------- ----------
Interest expense:
Interest on certificates of deposit $100,000 or more.. 1,094 712 3,075 1,880
Interest on other deposits ........................... 2,118 1,494 5,016 4,517
Interest on short-term borrowings .................... 26 0 369 93
---------- ---------- ---------- ----------
Total interest expense ......................... 3,238 2,206 8,460 6,490
---------- ---------- ---------- ----------
Net interest income ............................ 4,034 3,268 10,928 9,543
Provision for loan losses .............................. 0 0 0 0
---------- ---------- ---------- ----------
Net interest income after provision for loan
losses ....................................... 4,034 3,268 10,928 9,543
---------- ---------- ---------- ----------
Other income:
Service charges, commissions and fees ................ 142 122 378 379
Other income ......................................... 35 28 98 161
Gain on securities sold .............................. 0 0 80 17
---------- ---------- ---------- ----------
Total other income ............................. 177 150 556 557
---------- ---------- ---------- ----------
Other expense:
Salaries and employee benefits ....................... 1,340 992 3,714 3,098
Occupancy expense, net ............................... 252 180 667 520
Premises and equipment expense ....................... 325 211 747 593
Stationery and printing expense ...................... 136 57 371 208
Other expenses ....................................... 799 351 1,600 1,509
---------- ---------- ---------- ----------
Total other expense ............................ 2,852 1,791 7,099 5,928
---------- ---------- ---------- ----------
Income before income tax expense ............... 1,359 1,627 4,385 4,172
Income tax expense ..................................... 358 486 1,146 1,117
---------- ---------- ---------- ----------
Net income ..................................... $ 1,001 $ 1,141 $ 3,239 $ 3,055
========== ========== ========== ==========
Earnings per share:
Net income ..................................... $ 0.45 $ 0.51 $ 1.45 $ 1.39
========== ========== ========== ==========
Average weighted common shares outstanding ............. 2,232,952 2,216,256 2,229,341 2,214,866
========== ========== ========== ==========
</TABLE>
- --------------
* All share and per share amounts have been restated to reflect the 3-for-2
stock split paid in May of 1996.
Page 3
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
September 30,
--------------------
1996 1995
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ............................................ $ 3,239 $ 1,914
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization ..................... 740 355
Provision for loan losses ......................... 0 0
(Increase) decrease in accrued interest
receivable ...................................... (1,255) 359
Increase in other assets .......................... (5,172) (113)
Increase (decrease) in other liabilities .......... 244 (146)
Amortization of premium and accretion of
discount on investment securities, net .......... 364 342
-------- --------
Net cash provided by (used in)
operating activities ........................ (1,840) 2,711
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturities of securities
available-for-sale .................................. 15,797 5,277
Proceeds from maturities of securities
held-to-maturity .................................... 20,743 17,321
Proceeds from sales of securities available-for-sale .. 36,086 1,029
Purchase of securities available-for-sale ............. (65,624) (2,000)
Purchase of securities held-to-maturity ............... (83,601) (14,649)
Net decrease in loans ................................. (15,983) (5,655)
Property and equipment expenditures, net .............. (3,094) (564)
-------- --------
Net cash provided by (used in)
investing activities ........................ (95,676) 759
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposits .............................. 118,954 22,312
Dividends paid ........................................ (1,344) (886)
Proceeds from issuance of common stock ................ 215 103
Net decrease in short term borrowings ................. (22,023) (9,745)
-------- --------
Net cash provided by financing activities ..... 95,802 11,784
-------- --------
Net increase(decrease) in cash and
cash equivalents ............................ (1,714) 15,254
-------- --------
Cash and cash equivalents at beginning of period ........ 30,172 18,305
-------- --------
Cash and cash equivalents at end of period .............. $ 28,458 $ 33,559
======== ========
Supplemental disclosures of cash flow information:
Interest paid on deposits and short-term borrowings ... $ 5,233 $ 4,220
Income taxes .......................................... $ 1,193 $ 990
Cash paid for the acquisition of Lehigh Savings ......... $ 5,550 $ 0
Page 4
<PAGE>
MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
OVERVIEW
On June 28, 1996, the Corporation consummated the acquisition of Lehigh
Savings Bank, a state-chartered savings bank, which, as of June 28, 1996, had
consolidated assets, deposits, and stockholders' equity of $70.9 million, $68.1
million, and $2.7 million, respectively. Lehigh also had a net loss of $1.1
million for the fiscal period ended July 1, 1995 to June 27, 1996, the period
preceding The acquisition was effected as a series of mergers pursuant to which
the Corporation paid a total of $5.5 million in cash and Lehigh ultimately was
merged into the Corporation's Union Center National Bank subsidiary. This
acquisition was accounted for as a purchase. Accordingly, Lehigh's results of
operations and average balances are not reflected herein for periods prior to
the effective date of the acquisition. The resulting goodwill amounted to $4.2
million and will be amortized over a 15 year period.
Net income for the nine months ended September 30, 1996 increased 6.0
percent to $3,239,000 as compared to $3,055,000 earned for the comparable nine
month period of 1995. On a per share basis, earnings increased 5.07 percent to
$1.45 as compared to $1.38 earned for the nine months ended September 30, 1995.
All share and per share amounts have been restated to reflect the 3-for-2 stock
split declared by the Corporation payable May 31, 1996. The annualized return on
average assets was 1.06 percent for the nine months ended September 30, 1996 as
compared with 1.18 percent for the comparable period ended September 30, 1995,
while the annualized return on average stockholders' equity was 15.2 percent and
15.6 percent, respectively. The improvements in performance for the nine months
ended September 30, 1996 was primarily due to the increased volume of
net-earning assets, offset by the increase in operating overhead.
Net income for the three months ended September 30, 1996 amounted to
$1,001,000 as compared to $1,141,000 earned for the comparable period of 1995.
On a per share basis, earnings declined 12.2 percent to $.45 as compared to $.51
earned for the comparable three month period in 1995. The annualized return on
average assets for the three months ended September 30, 1996 was .88 percent as
compared with 1.29 percent for the comparable period ended September 30, 1995,
while the annualized return on average stockholders' equity for the three months
ended September 30 was 13.6 percent and 17.1 percent, in 1996 and 1995,
respectively. Earnings performance for the three months ended September 30, 1996
reflected narrowed margins coupled with an increase in operating overhead
associated with the Corporation's acquisition of Lehigh Savings Bank.
Net interest income is the difference between the interest earned on the
portfolio of earnings assets (principally loans and investments) and the
interest paid for deposits and short-term borrowings which support these assets.
Net interest income is presented below first in accordance with the Company's
consolidated financial statements and then on a fully tax-equivalent basis by
adjusting tax-exempt income (primarily interest earned on various obligations of
state and political subdivisions) by the amount of income tax which would have
been paid had the assets been invested in taxable issues. The tax-equivalent
adjustment was computed based on an assumed statutory Federal income tax rate of
34 percent.
Page 5
<PAGE>
<TABLE>
NET INTEREST INCOME
(Dollars in thousands)
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
----------------- Percent ------------------- Percent
1996 1995 Change 1996 1995 Change
------ ------ ------ ------- ------- ------
<S> <C> <C> <C> <C> <C> <C>
Interest income:
Investments ...................... $4,916 $3,500 40.5 $12,983 $10,355 25.4
Loans, including fees ............ 2,356 1,937 21.6 6,309 5,573 13.2
Federal funds sold ............... 0 37 -100.0 96 105 -8.6
Total interest income .......... 7,272 5,474 32.8 19,388 16,033 20.9
------ ------ ------- -------
Interest expense:
Certificates $100,000 or more .... 1,094 712 53.7 3,075 1,880 63.6
Deposits ......................... 2,118 1,494 41.8 5,016 4,517 11.0
Short-term borrowings ............ 26 0 96.9 369 93 72.9
Total interest expense ......... 3,238 2,206 46.8 8,460 6,490 30.4
------ ------ ------- -------
Net Interest Income ............ 4,034 3,268 23.4 10,928 9,543 14.5
------ ------ ------- -------
Tax-equivalent adjustment ......... 142 166 -14.5 437 543 -19.5
Net interest income on a fully
tax-equivalent basis ............. $4,176 $3,434 21.6 $11,365 $10,086 12.7
====== ====== ======= =======
</TABLE>
Net interest income on a fully tax-equivalent basis for the nine months
ended September 30, 1996 increased $1,279,000 or 12.7 percent as compared with
the nine months ended September 30, 1995. The overall yield on average
earning-assets increased by 6 basis points, to 6.96 percent during the nine
month period ended September 30, 1996. This resulted primarily from an increased
average volume of loans and investments. This was offset by an increase of 23
basis points, to 3.53 percent, in the average cost of interest-bearing
liabilities, reflecting both increased volume of such liabilities and higher
rates.
For the three months ended September 30, 1996 net interest income on a
fully tax-equivalent basis increased $742,000 or 21.6 percent over the
comparable period in 1995. This increase was again primarily driven by the
increased volume of average earning-assets of $47.8 million offset in part by a
$32.1 million increase in the volume of average interest bearing liabilities and
compression of margins during the period. Average interest rates on
interest-bearing deposit liabilities increased by 98 basis points while the
average yield on interest-earning assets increased by only 13 basis points.
Interest income on a fully tax-equivalent basis increased by $3,249,000 or
19.6 percent for the first nine months of 1996, as compared with the nine months
ended September 30, 1995. The key factor in this change was increased income
from the investment securities portfolio (principally attributable to a $62.8
million increase in the average volume of taxable investment securities) coupled
with increases in the average volume of other interest-earning assets, such as
loans. This change was offset in part by a $5.9 million decline in the average
volume of tax-exempt investment securities.
For the three months ended September 30, 1996, interest income on a fully
tax-equivelent basis increased by $1,774,000 or 31.4 percent as compared with
the three months ended September 30, 1995. This change was also primarily due to
an increase in investment and loan income reflecting a $62.9 million increase in
the average volume of taxable investment securities and a $5.7 million increase
in the average volume of loans offset in part by a $6.2 million decrease in the
average volume of tax-exempt investment securties as compared with the
comparable three month period ended September 30, 1995.
Investment income generated from the Corporation's securities portfolio for
both the nine and three month periods ended September 30, 1996 and 1995,
respectively, improved due to the increased average volume of the securities
portfolio, and to a lesser extent, by the positive impact of higher yields
available on the new increased volume in the portfolio. These factors were
sufficient to sustain an average portfolio yield, for the nine months ended
September 30, of 6.60 percent in 1996 compared with 6.48 percent in 1995, while
for the three month periods ended September 30, yields were 6.80 percent
compared with 6.43 percent in 1996 and 1995, respectively.
Page 6
<PAGE>
For the nine months ended September 30, 1996 average loan volume increased
$10.7 million, while the portfolio yield increased by 11 basis points, as
compared with the nine months ended September 30, 1995. Total average loan
volume increased to $105.1 million with a net interest yield of 7.99 percent
during the first nine months of 1996, as compared to $94.4 million with a yield
of 7.88 percent for the nine-month period ended September 30, 1995. The
stabilization in portfolio yield was primarily a result of a competitive rate
structure designed to attract new loan business in the market to increase the
average volume of the portfolio. The results of the increased volume were
lessened by the negative effects of sporadic and continued refinancing activity
in the mortgage portfolio. For the three months ended September 30, 1996 total
average loan volume increased by $17.7 million to $115.3 million, with a net
interest yield of 8.13 percent as compared to $97.6 million with an average
yield of 7.87 percent for the three month period ended September 30, 1995.
Interest expense increased during the first nine months of 1996, both as a
result of increased deposit volumes and continued pressure on the cost of funds
in the short-term market. Short-term market rates continued to climb or hold
steady at disproportionate levels to other sectors of the yield curve. Banks as
a result became more competitive to retain and attract new deposits, within the
entire financial industry, as a result of these deposit pricing pressures and
increased competition from "non-bank" competitors, such as brokerages and mutual
funds. For the nine months ended September 30, 1996, interest expense increased
by $1,970,000 or 30.4 percent as compared with the nine months ended September
30, 1995. The average cost of funds increased by 23 basis points, reflecting the
rise in interest rates and changes in the liability mix, (i.e., increased
volumes of more costly interest-bearing liabilities). The growth in
interest-bearing liabilities has been primarily in jumbo certificates of deposit
and interest rate sensitive public fund deposits.
For the three months ended September 30, 1996 interest expense increased by
$1,032,000 or 46.8 percent as compared with the comparable three month period
ended September 30, 1995. The primary factor reflected in the third quarter was
the $48.9 average increase in interest-bearing liabilities. This deposit growth
was due to the acquisition of Lehigh Savings. The Corporation's average cost of
fundsincreased by 32 basis points, reflecting pressure on core deposit rates as
well as general funding costs.
Economic uncertainty coupled with continued inflation fears maintained
short-term interest rates at a higher level. This disparity in investment rates
in turn has affected the cost of funds associated with a number of the Bank's
funding products, including municipal deposits tied to the Federal funds index,
jumbo certficates of deposit, and short-term repurchase agreements.
For the nine and three month periods ended September 30, 1996, the
Corporation's net interest spread on a tax- equivalent basis (i.e. the average
yield on average interest-earning assets, calculated on a tax-equivelent basis,
minus the average rate paid on interest-bearing liabilities) declined to 3.36
and 3.39 percent annualized, repectively, as compared to 3.57 and 3.58 percent
annualized for the nine and three month periods ended September 30, 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 supporting interest-earning assets, primarily the
increased loan volumes; however, this was offset by 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) however; has declined slightly to approximately 60
basis points during the nine and three month periods of 1996, from 66 basis
points respectively, during the comparable nine and three month periods of 1995.
This change has contributed to increased deposit pricing pressure exerted on
interest margins.
Short-term borrowings can be used to satisfy daily funding needs. Balances
in these accounts fluctuate significantly 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 the first nine
months of 1996 were $8.6
Page 7
<PAGE>
million, an increase from $2.2 million in average short-term borrowings during
the comparable nine months ended September 30, 1995. This change was due
primarily to insufficient funding liquidity from deposit activity.
For the three months ended September 30, 1996 average short-term borrowings
increased by approximately $1.0 million as compared with the three month period
ended September 30, 1995. The increase in volume was in part due to funding
needs coupled with customer demand for overnight and short-term repurchase
agreements.
The average volume of the investment securities portfolio increased by
$56.8 million for the nine month period ended September 30, 1996, as compared to
the comparable period ended September 30, 1995. The tax-equivalent yield on
investments increased to 6.60 percent or by 12 basis points from a yield of 6.48
percent during the nine month period ended September 30, 1995. For the three
month period ended September 30, 1996 the average volume of the investment
portfolio increased by $69.2 million as compared with the three months ended
September 30, 1995. The yield on the portfolio increased by 37 basis points for
the three months ended September 30, 1996, as compared with the comparable three
month period ended September 30, 1995. The increase in yields on the investment
portfolio, for both the three and nine month comparison periods, were primarily
due to a change in the portfolio mix, shortening of the duration of the portolio
and the associated market rates that were available for shorter-term high
quality purchases made with coupon cashflows and investments which had matured.
Volume related factors were driven in the third quarter by the acquisition of
Lehigh Savings.
The impact of repricing activity on yields was affected by shorter
investment maturities sought and the current disparity in the yield curve,
resulting in narrowed spreads, due to the change in investment strategies
brought about by the current uncertainty of the economy and overall direction of
rates. 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.
At September 30, 1996, the net unrealized loss carried as a component of
shareholders' equity amounted to $21,000. The change in market value is a direct
result of the change in interest rates that has occured since December 31, 1995,
coupled with changes in the composition of the available-for-sale portfolio and
the volume changes that have also occured in the portfolio.
At September 30, 1996, the total investment portfolio excluding overnight
investments, was $285.5 million, or 66.8 percent of earning-assets, as compared
to $201.2 million or 66.8 percent at September 30, 1995. The principal
components of the investment portfolio are U.S. Government Treasury and Federal
Agency and Agency-backed bonds.
NONINTEREST INCOME
The following table presents the principal categories of noninterest income
for each of the three and nine month periods ended September 30, 1996 and 1995.
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
-------------- --------------
1996 1995 % change 1996 1995 % change
---- ---- -------- ---- ---- --------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Other income:
Service charges, commissions and fees .. $142 $122 16.4% $378 $379 -0.3%
Other income ........................... 35 28 25.0% 98 161 -39.1%
Gain on securities sold ................ 0 0 0.0% 80 17 170.0%
---- ---- ---- ----
Total other income ............... $177 $150 18.0% $556 $557 -0.2%
==== ==== ==== ====
</TABLE>
Page 8
<PAGE>
For the first nine months of 1996, total other (noninterest) income, net of
gains on securities sold, reflects a decline of $64,000 or 11.8 percent compared
to the nine months ended September 30, 1995. The $63,000 decline in other income
was a direct result of a nonrecurring dividend payment from Prudential Insurance
for approximately $70,000 in 1995.
For the three months ended September 30, 1996, total other (noninterest)
income, net of gains on securities sold, increased $27,000 or 18.0 percent as
compared to the three months ended September 30, 1995. The increase in service
charges, commissions and fees for the three month period is due to the increased
customer base and resulting business activity associated with this component of
fee income.
NONINTEREST EXPENSE
The following table presents the principal categories of noninterest
expense for each of the three and nine month periods ended September 30, 1996
and 1995.
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
----------------- -----------------
1996 1995 % change 1996 1995 % change
------ ------ -------- ------ ------ --------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Other expense:
Salaries and employee benefits ...... $1,340 $ 992 35.1% $3,714 $3,098 19.9%
Occupancy expense, net .............. 252 180 40.0% 667 520 28.3%
Premise & equipment expense ......... 325 211 54.0% 747 593 26.0%
Stationery and printing expense ..... 136 57 138.6% 371 208 78.4%
Other expenses ...................... 799 351 127.6% 1,600 1,509 6.0%
------ ------ ------ ------
Total other expense ........... $2,852 $1,791 59.2% $7,099 $5,928 19.8%
====== ====== ====== ======
</TABLE>
For the nine month period ended September 30, 1996 total other
(noninterest) expenses increased $1,171,000 or 19.8 percent over the comparable
nine months ended September 30, 1995. For the three months ended September 30,
1996 total other noninterest expense increased $1,061,000 or 59.2 percent over
the comparable three month period in 1995. Salaries and employee benefits
accounted for the majority of the total increase for both periods. Other factors
contibuting to the increase were primarily in net occupancy expense and premise
and equipment expense, increased stationery and printing costs and other
operating expense. Salaries and employees benefits increased $616,000 or 19.9
percent in 1996 over the comparable nine month period ended September 30, 1995.
This increase is primarily attributed to increases related to increased staffing
levels, and from merit and promotional raises and higher benefit costs. Staffing
levels increased 31.6 percent to 175 at September 30, 1996 as compared to 133
full-time equivalent employees at September 30, 1995.
For the three months ended September 30, 1996, salaries and employees
benefits increased by $348,000 or 35.1. percent. This change is also primarily
attributable to staffing increases as discussed above.
Occupancy and bank premise expense for the nine month period ended
September 30, 1996 increased by $301,000 or 27.0 percent as compared with the
nine months ended September 30, 1995. The increase in occupancy and bank premise
expense reflects the severe weather conditions experienced in the first quarter
of 1996 as compared to 1995, coupled with increased depreciation changes
resulting from the expanded branch network, the Lehigh acquisition, and capital
expenditures. Maintenance costs on both facilities and equipment have also
increased in connection with the branch expansion.
For the three months ended September 30, 1996, the increase of $186,000 in
occupancy and premise expense is primarily related to the increased costs of
expanded branch facilities, depreciation and related expenses, as compared with
the three months ended September 30, 1995.
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), to provide funding to
Page 9
<PAGE>
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
Corporation's acquisition of Lehigh Savings the Corporation is obligated to pay
a one-time assessment on Lehigh's deposits. The special assessment calculation
for the Corporation was estimated based on those deposits Lehigh Savings
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 will be paid to the
Federal Deposit Insurance Corporation on November 27, 1996. Their was no
material affect to the Corporation's finanacial statements, in as much as such
funds were fully reserved at the time of acqusition.
Future Federal Deposit Insurance expense will be affected by the FICO bond
payments 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. This assessment is estimated to be
1.3 cents per $100.00 for BIF-insured deposits. The estimated assessment for
SAIF-insured deposits is 6.5 cents per $100.00 of deposits. 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 Savings SLA are classified as Oakar deposits
for premium assessments and represent less than 50 percent of the Corporation's
total insured deposits.
Stationery and printing costs increased by $163,000 and $79,000 for the
nine and three months ended September 30, 1996 as compared with the same periods
in 1995. These increases reflect nonrecurring expenses incurred as a result of
the Corporation's acquisition of Lehigh Savings.
Other operating expense for both the nine and three months ended September
30, 1996 reflect the increased costs associated with the expansion of the
Corporation in 1996, including the acqusition of Lehigh Savings. The substantial
increase reflected for the third quarter is as a result of the acquisition of
Lehigh Savings and the timing of associated costs.
The Lehigh Savings acquisition impacted the Corporation's efficiency ratio
(other expenses less other income as a percentage of net interest income on a
tax-equivalent basis). That ratio was 66.3% for the three month period ended
September 30, 1996 as compared to 50.0% for the comparable three months ended
September 30, 1995.
PROVISION FOR INCOME TAXES
The effective tax rate for the nine month period ended September 30, 1996
decreased to 26.1 percent as compared to 26.8 percent for the nine months ended
September 30, 1995. For the three months ended September 30, 1996 the effective
tax rate decreased to 26.3 percent compared to 29.9 percent for the comparable
three months ended September 30, 1995. The effective tax rate continues to be
substantially less than the statutory Federal tax rate of 34 percent. The
difference between the statutory and the effective tax rates primarily reflects
the tax-exempt status of interest income on obligations of states and political
subdivisions. The change for both the three and nine month periods ended
September 30, 1996 reflects State taxes paid and a change in the TEFRA
adjustment of tax-exempt securities of states and political subdivisions. This
change in TEFRA relates to the proportion of interest expense associated with
the cost of funds incurred to carry these securities that is only 80 percent tax
deductible.
RISK ELEMENTS
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 level of the allowance is determined
at an amount that the Corporation believes is adequate to cover losses in the
loan portfolio. In establishing an appropriate allowance, an assessment of the
individual borrower, a determination of the value of the underlying collateral,
a review of
Page 10
<PAGE>
historical loss experience and an analysis of the levels and trends of loan
categories, delinquencies, and questionable loans are considered. Such factors
as the level and trend of interest rates and current economic conditions are
also reviewed. Additionally, various regulatory agencies, as an integral part of
their examination process, periodically review the Corporation's allowance for
such loan losses. Such agencies may require the Corporation to increase the
allowance based on their judgments of information available to them at the time
of their examination. Historically, the Corporation's allowance for loan losses
has been more than adequate to meet the volume of charge-offs and problem
credits. At September 30, 1996, the allowance for loan losses amounted to
$1,293,000 or 1.14 percent of total loans. In management's view, the level of
the allowance during 1996 has been more than adequate to cover any loss
experience and therefore has not warranted any additions to the allowance during
1996.
Changes in the allowance for possible loans losses for the period ended
September 30, 1996, and September 30, 1995, are set forth below.
ALLOWANCE FOR LOAN LOSSES
(in thousands)
Nine months ending
September 30,
--------------------
1996 1995
-------- --------
Average loans outstanding ................................ $105,074 $ 92,755
-------- --------
Total loans at end of period ............................. 113,773 98,769
-------- --------
Analysis of the allowance for loan losses
Balance at the beginning of year ......................... 1,073 1,073
Charge-offs:
Commercial ............................................ 0 0
Real estate-mortgage .................................. 302 0
Installment loans ..................................... 6 10
-------- --------
Total charge-offs ................................... 308 10
Recoveries:
Commercial ............................................. 0 0
Real estate-mortgage ................................... 0 0
Installment loans ...................................... 3 4
-------- --------
Total recoveries .................................... 3 4
Net Charge-offs: ......................................... 305 6
-------- --------
Adjustments from acquisition of Lehigh Savings SLA ..... 525 0
-------- --------
Additions charged to Operations ........................ 0 0
-------- --------
Balance at end of period ............................... $ 1,293 $ 1,067
======== ========
Ratio of net charge-offs during the period to
average loans outstanding during the period ............ .29% .56%
-------- --------
Allowance for loan losses as a percentage of total loans . 1.14% 1.08%
-------- --------
The charge-off of $302,000 in Real-estate-mortgage loans was a result of
the acquisition of Lehigh Savings. The charge-of amount represented the fair
market value of these loans.
ASSET QUALITY
The Corporation manages asset quality and credit risk by maintaining
diversification in its loan portfolio and through review processes that include
careful analysis of credit requests and ongoing examination of outstandings and
delinquencies, with particular attention to portfolio dynamics. 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, and to maintain an adequate allowance for loan losses
at all times.
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 90
days.
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<PAGE>
At September 30, 1996, the Corporation had $316,000 in non-accrual loans.
This amount is entirely comprised of 1-4 family residential properties. Loans
past due 90 days or more amounted to $34,000 and are comprised primarily of
guaranteed student loans. The Corporation's delinquency ratio, exluding past due
loans 30-89 days, was .31 percent at September 30, 1996. Additionally, the
Corporation did not have any other real estate owned (OREO) at September 30,
1996.
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 accomodate possible
deposit outflows and to meet customers' requests for loans. Such needs can be
satisfied by scheduled principal loan prepayments, maturing investments and
short-term liquid assets. Cash flows at September 30, 1996 which provide the
Bank with liquidity remain strong with approximately $103.1 million in scheduled
repayments and maturities over the next 12 months, with a net surplus of $19.5
million after projected investing and balance sheet activity.
The Corporation derives a significant proportion of its liquidity from its
stable core deposit base. For the nine month period ended September 30, 1996,
average core deposits (comprised of total demand and savings accounts plus money
market accounts under $100,000) represented 53.6 percent of total deposits. More
volatile rate sensitive deposits, concentrated in certificates of deposit
$100,000 and greater, comprised on average during the first nine months of 1996,
20.7 percent of total deposits, as compared with 12.4 percent during the
comparable nine month period months of 1995. This change has resulted primarily
from the rise in short-term rates during the first nine months of 1996.
The increase in funding sources during the nine months ended September 30,
1996 resulted primarily from the completion of the Corporation's acquisition of
Lehigh Savings SLA. The aquisition added $68.1 million in deposits. Other
factors relating to the overall increase of $96.9 million in funding sources
related to an increase in business and public fund deposits offset by a decrease
of $20.0 million in Federal funds purchased and securities sold under agreement
to repurchase. Noninterest-bearing funding sources as a percentage of the
funding mix declined to 16.2 percent as compared to 19.8 percent for the nine
month period ended September 30, 1995. Although noninterest-bearing funding
sources continue to remain stable, the growth in the deposit base during 1996,
including the aquisition of Lehigh Savings, was concentrated in savings and
certificate of deposit balances.
The consolidated statements of cash flows present the changes in cash and
cash equivalents from operating, investing and financing activites. During the
nine months ended September 30, 1996, cash and cash equivalents (which decreased
overall by $1.7 million) were provided (on a net basis) by financing activities
and used in operating and investing activities. The cash flow provided by the
$118.9 million increase in deposits, offset by a reduction in short-term
borrowings at period end, supported the net increase in both the investment and
the loan portfolio. With respect to cash flow from operating activities, net
income and adjustments due to amortization of premiums and accretions of
discounts were offset by the increase in other assets which is primarily
comprised of $3.8 million in goodwill from the acquisition of Lehigh Savings.
The resulting net increase in cash and cash equivalents was also due to the
acquisition of Lehigh Savings.
SHAREHOLDERS' EQUITY AND CAPITAL
SHAREHOLDERS' EQUITY
Shareholders' equity averaged $28.4 million for the nine month period ended
September 30, 1996, an increase of $2.4 million, or 9.2 percent, as compared to
1995. The Corporation's dividend reinvestment and optional stock purchase plan
has raised $215,000 in new capital for the nine months ended September 30, 1996.
Book value per common share was $11.45 at September 30, 1996 as compared to
$10.75 at September 30, 1995, as adjusted to reflect the 3-for-2 stock split
paid on May 31, 1996.
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<PAGE>
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 shareholders with an attractive long
term return on their investment.
The Federal Reserve Board has established a minimum leverage test which
requires banking institutions to maintain a 3.00 percent minimum ratio of Tier I
(defined as tangible Stockholders' Equity for common stock and perpetual
preferred stock) capital to total assets. The 3.00 percent minimum applies only
to the most highly rated banks. All other institutions are expected to maintain
an additional percentage of at least 100 to 200 basis points above the minimum.
At September 30, 1996, Stockholders' Equity amounted to $29.4 million.
Total Tier I capital as a percentage of average total assets for the nine months
ended September 30, 1996 was 6.59 percent, as compared with 7.48 percent for the
comparable nine month period in 1995. The reduction primarily reflects the
Corporation's acquisition of Lehigh Savings for cash. At September 30, 1996,
total capital (defined as Tier I capital and Tier II capital, which includes a
portion of the Allowance for Loan Losses, certain qualifying long term debt and
preferred stock which does not qualify as Tier I capital) as a percentage of
total assets amounted to approximately 5.69 percent.
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
categorize 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 September 30, 1996, the Company's estimated Tier I to
risk-adjusted assets and total risk-based capital ratios were 16.4 percent and
17.3 percent, respectively. These ratios are well above the minimum
guidelines(in effect as of September 30, 1996) of 4 percent for Tier I capital
to risk-adjusted assets and 8 percent for the aggregate of Tier I and Tier II
capital to risk adjusted assets.
Page 13
<PAGE>
II. OTHER INFORMATION
Item 1 Legal Proceedings
None
Item 2 Changes in Securities
None
Item 3 Defaults Upon Senior Securities
None
Item 4 Submission of Matters to Vote of Security Holders
None
Item 5 Other Information
None
Item 6 Exhibits and Reports on Form 8-K
a) Exhibits
None
b) Reports on Form 8-K
A current report on Form 8-K discloses the Lehigh Savings
SLA acquisition was filed on July 12, 1996 and amended on
September 11, 1996 to include certain financial information
relating to that acquisition.
Page 14
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
CENTER BANCORP, INC.
Date: November 13, 1996 /s/ ANTHONY C. WEAGLEY
------------------------------------
Anthony C. Weagley, Treasurer
(Chief Financial Officer)
Page 15
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> SEP-30-1996
<CASH> 15,158
<INT-BEARING-DEPOSITS> 347,511
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 66,884
<INVESTMENTS-CARRYING> 218,648
<INVESTMENTS-MARKET> 283,533
<LOANS> 113,773
<ALLOWANCE> (1,203)
<TOTAL-ASSETS> 446,667
<DEPOSITS> 414,620
<SHORT-TERM> 303
<LIABILITIES-OTHER> 2,350
<LONG-TERM> 0
0
0
<COMMON> 4,414
<OTHER-SE> 26,773
<TOTAL-LIABILITIES-AND-EQUITY> 446,667
<INTEREST-LOAN> 2,356
<INTEREST-INVEST> 4,916
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 7,272
<INTEREST-DEPOSIT> 3,212
<INTEREST-EXPENSE> 3,238
<INTEREST-INCOME-NET> 4,034
<LOAN-LOSSES> 0
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 2,852
<INCOME-PRETAX> 6,090
<INCOME-PRE-EXTRAORDINARY> 1,359
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,001
<EPS-PRIMARY> 0.45
<EPS-DILUTED> 0.45
<YIELD-ACTUAL> 6.60
<LOANS-NON> 0
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1,073
<CHARGE-OFFS> 0
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 1,293
<ALLOWANCE-DOMESTIC> 679
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 614
</TABLE>
