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 June 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
CENTER BANCORP, INC.
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(Exact name of registrant as specified in its charter)
New Jersey 52-1273725
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(State or other jurisdiciton of (I.R.S. Employer
incorporation or organization) Identification No.)
2455 Morris Avenue, Union, New Jersey 07083
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(Address of principal executives offices) (Zip Code)
(908) 688-9500
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(Registrant's telephone number, including area code)
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(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 June 30, 1996
-------------------------------------------------
Common stock no par value - 2,229,610 shares
<PAGE>
CENTER BANCORP, INC.
INDEX TO FORM 10-Q
PART I. FINANCIAL INFORMATION PAGE
Item 1. Financial Statements
Consolidated Statements of Condition at June 30,
1996 (Unaudited) and December 31, 1995 2
Consolidated Statements of Income Three and Six
Months Ended June 30, 1996 and 1995
(Unaudited) 3
Consolidated Statements of Cash Flows Six Months
Ended June 30, 1996 and 1995 (Unaudited) 4
Footnotes to Financial Statements 5
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 June 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 6-13
PART II. OTHER INFORMATION 14
SIGNATURES 15
Page 1
<PAGE>
Consolidated Statement of Condition
<TABLE>
<CAPTION>
June 30, December 31,
----------------------------
1996 1995
(Dollars in thousands) ------------ ------------
=====================================================================================================================
<S> <C> <C>
Assets: unaudited
Cash and due from banks $ 16,711 $ 14,172
Interest-bearing balances due from banks 32,957 0
Federal funds purchased and securities purchased under agreement to resell 0 16,000
- ---------------------------------------------------------------------------------------------------------------------
Total cash and cash equivalents 49,668 30,172
Investment securities held to maturity (approximate
market value of $203,626 in 1996 and $159,702 in 1995) 207,595 156,030
Investment securities available for sale 64,817 53,662
- ---------------------------------------------------------------------------------------------------------------------
Total investment securities 272,412 209,692
Loans, Net 114,820 97,570
Less - Allowance for loan losses 1,595 1,073
- ---------------------------------------------------------------------------------------------------------------------
Net loans 113,225 96,497
Premises and equipment, net 9,436 7,462
Accrued interest receivable 4,536 3,643
Other assets 5,759 311
- ---------------------------------------------------------------------------------------------------------------------
Total assets $ 455,036 $ 347,777
=====================================================================================================================
Liabilities
Deposits:
Non-interest bearing 65,293 $ 60,635
Interest bearing:
Certificates of deposit $100,000 and over 84,269 39,521
Other 265,653 195,510
- ---------------------------------------------------------------------------------------------------------------------
Total deposits 415,215 295,666
Federal funds purchased and securities sold under
agreements to repurchase 9,141 22,326
Accounts payable and accrued liabilities 2,149 2,106
- ---------------------------------------------------------------------------------------------------------------------
Total liabilities 426,505 320,098
- ---------------------------------------------------------------------------------------------------------------------
Stockholders' equity Common stock, no par value:
Authorized 20,000,000 shares; issued 2,030,242 and 1,918,291
shares in 1996 and 1995 4,315 4,199
Appropriated surplus 3,510 3,510
Retained earnings 22,706 21,368
- ---------------------------------------------------------------------------------------------------------------------
30,531 29,077
Less - Treasury stock at cost (199,368 shares in 1996 and 1995
respectively) 1,814 1,814
Net unrealized (loss) gain on investment securities available-for-sale, net of taxes (186) 416
- ---------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 28,531 27,679
- ---------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 455,036 $ 347,777
=====================================================================================================================
</TABLE>
Page 2
<PAGE>
Consolidated Statements of Income
(unaudited)
<TABLE>
<CAPTION>
=====================================================================================================================
Three Months Ended Six Months Ended
June 30, June 30,
--------------------------- ----------------------------
(in thousands, except per share data) 1996 1995 1996 1995
- ------------------------------------------------------ ------------ ------------ ------------ -------------
<S> <C> <C> <C> <C>
Interest income:
Interest and fees on loans $ 1,979 $ 1,856 $ 3,953 $ 3,636
Interest and dividends on investment securities:
Taxable interest income 3,845 3,080 7,493 6,123
Nontaxable interest income 290 363 574 732
Interest on Federal funds sold 0 54 96 68
- ------------------------------------------------------------------------- ------------ ------------ -------------
Total interest income 6,114 5,353 12,116 10,559
- ------------------------------------------------------------------------- ------------ ------------ -------------
Interest expense:
Interest on certificates of deposit $100,000 or more 1,113 645 1,981 1,168
Interest on other deposits 1,397 1,564 2,898 3,023
Interest on short-term borrowings 164 5 343 93
- ------------------------------------------------------------------------- ------------ ------------ -------------
Total interest expense 2,674 2,214 5,222 4,284
Net interest income 3,440 3,139 6,894 6,275
- ------------------------------------------------------------------------- ------------ ------------ -------------
Provision for loan losses 0 0 0 0
Net interest income after provision for loan
losses 3,440 3,139 6,894 6,275
- ------------------------------------------------------------------------- ------------ ------------ -------------
Other income:
Service charges, commissions and fees 122 133 236 257
Other income 30 98 63 133
Gain on securities sold 80 17 80 17
- ------------------------------------------------------------------------- ------------ ------------ -------------
Total other income 232 248 379 407
- ------------------------------------------------------------------------- ------------ ------------ -------------
Other expense:
Salaries and employee benefits 1,280 1,099 2,374 2,106
Occupancy expense, net 180 171 415 340
Premises and equipment expense 228 196 422 382
Stationery and printing expense 168 88 235 151
FDIC Insurance expense 0 163 1 325
Other expenses 398 447 800 833
- ------------------------------------------------------------------------- ------------ ------------ -------------
Total other expense 2,254 2,164 4,247 4,137
- ------------------------------------------------------------------------- ------------ ------------ -------------
Income before income tax expense 1,418 1,223 3,026 2,545
Income tax expense 416 309 788 631
- ------------------------------------------------------------------------- ------------ ------------ -------------
Net income $ 1,002 $ 914 $ 2,238 $ 1,914
========================================================================= ============ ============ =============
Earnings per share $ 0.45 $ 0.41 $ 1.00 $ 0.87
========================================================================= ============ ============ =============
Average weighted common shares outstanding 2,228,824 2,214,835 2,226,843 2,214,340
========================================================================= ============ ============ =============
</TABLE>
Page 3
<PAGE>
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
June 30,
-------------------------------
(Dollars in thousands) 1995 1995
=============================================================- ============= =============
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 2,238 $ 1,914
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 385 355
Provision for loan losses 0 0
(Increase) decrease in accrued interest receivable (893) 359
Increase in other assets (5,448) (113)
Increase (decrease) in other liabilities 43 (146)
Amortization of premium and accretion of
discount on investment securities, net 263 342
- ----------------------------------------------------------------------------------- -------------
Net cash provided by operating activities (3,412) 2,711
- ----------------------------------------------------------------------------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturities of securities available-for-sale 6,834 5,277
Proceeds from maturities of securities held-to-maturity 17,241 17,321
Proceeds from sales of securities available-for-sale 36,086 1,029
Purchase of securities available-for-sale (57,141) (2,000)
Purchase of securities held-to-maturity (66,605) (14,649)
Net decrease in loans (16,728) (5,655)
Property and equipment expenditures, net (2,359) (564)
- ----------------------------------------------------------------------------------- -------------
Net cash used in investing
activities (82,672) 759
- ----------------------------------------------------------------------------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposits 119,549 22,312
Dividends paid (900) (886)
Proceeds from issuance of common stock 116 103
Net decrease in short term borrowings (13,185) (9,745)
- ----------------------------------------------------------------------------------- -------------
Net cash provided by financing activities 105,580 11,784
- ----------------------------------------------------------------------------------- -------------
Net increase in cash and cash equivalents 19,496 15,254
- ----------------------------------------------------------------------------------- -------------
Cash and cash equivalents at beginning of period 30,172 18,305
- ----------------------------------------------------------------------------------- -------------
Cash and cash equivalents at end of period $ 49,668 $ 33,559
=================================================================================== =============
Supplemental disclosures of cash flow information:
Interest paid on deposits and short-term borrowings $ 5,233 $ 4,220
Income taxes $ 728 $ 990
</TABLE>
Page 4
<PAGE>
F o o t n o t e s
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Footnote 1
On June 28, 1996, the Corporation acquired Lehigh Savings Bank, ("Lehigh")
a New Jersey bank in a transaction accounted for under the purchase method of
accounting. At June 28, 1996, had assets, deposits and shareholders' equity of
$70.9 million (primarily cash and cash equivalents of $53.0 million and loans of
$15.0 million), $68.1 million, and $2.7, 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. The transaction has been accounted for as a purchase. The resulting
goodwill amounted to $4.2 million and will be amortized over a 15 year period.
The June 30, 1996 consolidated financial statements of the Corporation includes
the assets, liabilities, and results of operations of Lehigh since the
aquisition date.
Page 5
<PAGE>
Management's Discussion & Analysis of Financial Condition
and Results of Operations
Net income for the six months ended June 30, 1996 increased 16.9 percent to
$2,238,000 as compared to $1,914,000 earned for the comparable six month period
of 1995. On a per share basis, earnings increased 14.9 percent to $1.00 as
compared to $.87 earned for the six months ended June 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 1.16 percent for the six months ended June 30, 1996 as compared with 1.10
percent for the comparable period ended June 30, 1995, while the annualized
return on average stockholders' equity was 16.1 percent and 15.1 percent,
respectively. The improvements in performance for the six months ended June 30,
1996 were achieved notwithstanding an increase in the cost of funds along with
an increase in noninterest expense.
Net income for the three months ended June 30, 1996 amounted to $1,002,000
as compared to $914,000 earned for the comparable period of 1995. On a per share
basis, earnings increased 9.75 percent to $.45 as compared to $.41 earned for
the comparable three month period in 1995. The annualized return on average
assets for the three months ended June 30, 1996 was 1.02 percent as compared
with 1.29 percent for the comparable period ended June 30, 1995, while the
annualized return on average stockholders' equity for the three months ended
June 30 was 14.6 percent and 17.1 percent, in 1996 and 1995, respectively.
Earnings performance for the three months ended June 30, 1996 reflects the
above-mentioned increase in the cost of funds and increase in noninterest
expense.
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.
Net Interest Income
<TABLE>
<CAPTION>
=========================================================================================================================
(dollars in thousands) Three months ended Six months ended
June 30, June 30,
------------------------------ Percent --------------------------- Percent
1996 1995 Change 1996 1995 Change
<S> <C> <C> <C> <C> <C> <C>
Interest income:
Investments $ 4,135 $ 3,443 20.1 $ 8,067 $ 6,855 17.7
Loans, including fees 1,979 1,856 6.6 3,953 3,636 8.7
Federal funds sold 0 54 -100.0 96 68 41.2
Total interest income 6,114 5,353 14.2 12,116 10,559 14.7
- -------------------------------------------------- -------------- ------------ -----------
Interest expense:
Certificates $100,000 or more 1,113 645 72.6 1,981 1,168 69.6
Deposits 1,397 1,564 -10.7 2,898 3,023 -4.1
Short-term borrowings 164 5 96.9 343 93 72.9
Total interest expense 2,674 2,214 20.8 5,222 4,284 21.9
- -------------------------------------------------- -------------- ------------ -----------
NET INTEREST INCOME* 3,440 3,139 9.6 6,894 6,275 9.9
- -------------------------------------------------- -------------- ------------ -----------
Tax-equivalent adjustment 149 187 -20.3 296 377 -21.5
Net interest income on a fully
tax-equivalent basis $ 3,589 $ 3,326 7.9 $ 7,190 $ 6,652 8.1
================================================== ============== ============ ============
</TABLE>
* Before the provision for loan and lease losses
Net interest income on a fully tax-equivalent basis for the six months
ended June 30, 1996 increased $538,000 or 8.1 percent as compared with the six
months ended June 30, 1995. Although there was a favorable increase in earnings,
the overall yield on average earning-assets of 6.90 percent declined 5 basis
points, from 6.95 percent during the first six months of 1995. This resulted
primarily from the increased average volume of
Page 6
<PAGE>
$43.3 million in loans and investments, offset in part by a $29.3 million
increase in the volume of average interest-bearing liabilites, and by a greater
increase in the average cost of these funds of 18 basis points, versus a decline
in the corresponding average yield on interest-earning assets of 5 basis points.
For the three months ended June 30, 1996 net interest income on a fully
tax-equivalent basis increased $737,000 or 7.9 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 115 basis points while the average yield on
interest-earning assets increased by only 49 basis points.
Interest income on a fully tax-equivelent basis increased by $1,476,000 or
13.5 percent for the first six months of 1996, as compared with the six months
ended June 30, 1995. The key factor in this change was increased income from the
investment securities portfolio (principally attributable to a $57.6 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 $8.3 million decline in the average volume
of tax-exempt investment securities.
For the three months ended June 30, 1996, interest income on a fully
tax-equivelent basis increased by $723,000 or 13.1 percent as compared with the
three months ended June 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 June 30, 1995.
Investment income generated from the Corporation's securities portfolio for
both the six and three month periods ended June 30, 1996 and 1995, respectively,
improved due to the increased average volume of the securities portfolio. This
factor coupled with the positive impact of higher interest rates available on
the new increased volume in the portfolio were sufficient to sustain an average
portfolio yield, for the six months ended June 30, of 6.48 percent in 1996
compared with 6.51 percent in 1995, while for the three month periods ended June
30, yields were 6.52 percent compared with 6.54 percent in 1996 and 1995,
respectively.
For the six months ended June 30, 1996 average loan volume increased $7.1
million, while the portfolio yield increased by 3 basis points, as compared with
six months ended June 30, 1995. Total average loan volume increased to $99.9
million with a net interest yield of 7.93 percent during the first six months of
1996, as compared to $92.8 million with a yield of 7.89 percent for the
six-month period ended June 30, 1995. The stabilization in portfolio yield was a
result of a competitive rate structure 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 June
30, 1996 total average loan volume increased by $5.7 million to $99.9 million
with a net interest yield of 7.88 percent as compared to $94.2 million with an
average yield of 7.88 percent for the three month period ended June 30, 1995.
Interest expense increased sharply during the first six months of 1996,
primarily as a result of rising funding costs as short term market rates
climbed, and banks 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 six months ended June 30, 1996, interest
expense increased by $938,000 or 22.0 percent as compared with the six months
ended June 30, 1995. The average cost of funds increased by 18 basis points,
reflecting a 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.
Page 7
<PAGE>
For the three months ended June 30, 1996 interest expense increased by
$460,000 or 20.8 percent as compared with the comparable three month period
ended June 30, 1995. The current trend in the cost of funds, as reflected by the
15 basis point increase in the average cost of funds, reflects the pressure on
core deposit rates as well as general funding costs. Concerns regarding whether
the Federal Reserve would move interest rates during the second quarter coupled
with 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, i.e. municipal deposits
tied to the Federal funds index, jumbo certficates of deposit, and short-term
repurchase agreements.
For the six and three month periods ended June 30, 1996, the Corporation's
net interest spread on a tax-equivelent 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 3.35 and 3.28 percent
annualized, repectively, as compared to 3.58 and 3.52 percent annualized for the
six and three month periods ended June 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 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 remained relatively stable from 62
basis points during the six and three month periods of 1996, to 66 and 70 basis
points respectively, during the comparable six and three month periods of 1995.
This contribution has helped to absorb some of the 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 six
months of 1996 were $12.3 million an increase from $3.1 million in average
short-term borrowings during the comparable six months ended June 30, 1995. This
change was due primarily to insufficient funding liquidity from deposit
activity.
For the three months ended June 30, 1996 average short-term borrowings
increased by approximately $13.0 million as compared with the three month period
ended June 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 investment securities portfolio increased by $36.1
million for the six month period ended June 30, 1996, as compared to the
comparable period ended June 30, 1995. The tax-equivalent yield on investments
however, declined to 6.48 percent or by 3 basis points from a yield of 6.51
percent during the six month period ended June 30, 1995. For the three month
period ended June 30, 1996 the average volume of the investment portfolio
increased by $42.0 million as compared with the three months ended June 30,
1995. The yield on the portfolio declined by 2 basis points for the three months
ended June 30, 1996, as compared with the comparable three month period ended
June 30, 1995. The marginal decline in yields on the investment portfolio, for
both the three and six month comparison periods, were primarily due to a
shortening of the duration of the portfolio and the associated market rates that
were available for shorter term high quality purchases made to invest cashflows
from investments which had matured.
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.
Page 8
<PAGE>
At June 30, 1996, the net unrealized loss carried as a component of
shareholders' equity amounted to ($186,000). 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 June 30, 1996, the total investment portfolio excluding overnight
investments, was $272.4 million, or 65.0 percent of earning-assets, as compared
to $201.2 million or 64.2 percent at June 30, 1995. The principal components of
the investment portfolio are U.S. Government Treasury and Federal Agency and
Agency-backed securities.
Noninterest Income
The following table presents the principal categories of noninterest income
for each of the three and six month periods ended June 30, 1996 and 1995.
<TABLE>
<CAPTION>
==================================================================================================================
(dollars in thousands) Three months ended Six months ended
June 30, June 30,
1996 1995 % change 1996 1995 % change
-------------- --------------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
Other income:
Service charges,
commissions and fees $ 122 $ 133 -8.3% $ 236 $ 257 -8.2%
Other income 30 98 -69.4% 63 133 -52.6%
Gain on securities sold 80 17 170.0% 80 17 170.0%
-------------- --------------- ----------- ------------
Total other income $ 232 $ 248 -6.5% $ 379 $ 407 -6.9%
========================== ============== =============== =========== ============
</TABLE>
For the first six months of 1996, total other (noninterest) income, net of
gains on securities sold, reflects a decline of $28,000 or 6.9 percent compared
to the six months ended June 30, 1995. The $21,000 decline in service charges,
commissions and fees is a result of special marketing promotions during which
time service fees were waived. To a lesser extent the remaining decline is a
result of a decline in business activity associated with this component of fee
income.
For the three months ended June 30, 1996, total other (noninterest) income,
net of gains on securities sold, declined $16,000 or 6.5 percent as compared to
the three months ended June 30, 1995. The increase of $68,000 reflected in other
income is due to a dividend paid on insurance during 1995. The decline in
service charges, commissions and fees for the three month period is also as a
result of waived charges for promotions and a slight decline in 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 six month periods ended June 30, 1996 and
1995.
<TABLE>
<CAPTION>
===================================================================================================================================
(dollars in thousands) Three months ended Six months ended
June 30, June 30,
Other expense: 1996 1995 % change 1996 1995 % change
-------------- --------------- ----------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Salaries and employee benefits $ 1,280 $ 1,099 16.5% $ 2,374 $ 2,106 12.7%
Occupancy expense, net 180 171 5.3% 415 340 22.1%
Premise & equipment expense 228 196 16.3% 422 382 10.5%
Stationery and printing expense 168 88 90.9% 235 151 55.6%
FDIC Insurance expense 0 163 -100.0% 1 325 -99.7%
Other expenses 398 447 -11.0% 800 833 -4.0%
-------------- --------------- ----------- ------------
Total other expense $ 2,254 $ 2,164 4.2% $ 4,247 $ 4,137 2.7%
==================================================== =============== =========== ============
</TABLE>
Page 9
<PAGE>
For the six month period ended June 30, 1996 total other (noninterest)
expenses increased $110,000 or 2.7 percent over the comparable six months ended
June 30, 1995. For the three months ended June 30, 1996 total other noninterest
expense increased $90,000 or 4.2 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, and
increased stationery and printing costs.
Salaries and employees benefits increased $268,000 or 12.7 percent in 1996
over the comparable six month period ended June 30, 1995. This increase is
primarily attributed to increases arising required increased staffing levels,
and from merit and promotional raises and higher benefit costs. Staffing levels
overall amounted to 146 at June 30, 1996 as compared to 133 full time equivalent
employees at June 30, 1995 respectively.
For the three months ended June 30, 1996, salaries and employees benefits
increased by $181,000 or 16.5 percent. This change is also primarily
attributable to the staffing increases as discussed above.
Occupancy and bank premise expense for the six month period ended June 30,
1996 increased by $115,000 or 15.9 percent as compared with the six months ended
June 30, 1995. The increase in occupancy and bank premise expense reflects the
severe weather conditions experienced in 1996 as compared to 1995, coupled with
increased depreciation charges on 1996's capital expenditures.
For the three months ended June 30, 1996, the increase of $41,000 in
occupancy and premise expense is primarily related to increased depreciation and
related expenses, as compared with the three months ended June 30, 1995.
The declines in annual FDIC Insurance Assessments imposed by the Federal
Deposit Insurance Corporation (FDIC) reflects revisions mandated by law reducing
premiums for well capitalized banks.
Stationery and printing costs increased by $84,000 and $30,000 for the six
and three months ended June 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 SLA on June 28, 1996.
The Corporation continues to focus on strict control of operating overhead.
The Corporation's efficiency ratio,(other expenses less other income as a
percentage of net interest income on a tax-equivalent basis) was 53.5% for the
period ended June 30, 1996 as compared to 54.9% for the comparable three months
ended June 30, 1995.
Provision for Income Taxes
The effective tax rate for the six month period ended June 30, 1996
increased to 26.0 percent as compared to 24.8 percent for the six months ended
June 30, 1995. For the three months ended June 30, 1996 the effective tax rate
increased to 29.3 percent compared to 25.3 percent for the comparable three
months ended June 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 six month periods ended June 30, 1996 reflects
an increase in State taxes paid and decreased volumes of tax-exempt securities
of states and political subdivisions.
Page 10
<PAGE>
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 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 June 30, 1996, the allowance for loan losses amounted to
$1,595,000 or 1.39 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. The increased balance of $525,000, reflected to date in 1996, represents
the allowance aquired from Lehigh Savings SLA on June 28, 1996.
Changes in the allowance for possible loans losses for the period ended
June 30, 1996, and June 30, 1995, are set forth below.
Allowance for loan losses
(in thousands)
================================================================================
Six months ending June 30,
--------------------------
1996 1995
Average loans outstanding $ 99,911 $ 92,755
- ------------------------------------------------------------------- --------
Total loans at end of period 114,820 94,458
- ------------------------------------------------------------------- --------
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 0 0
Installment loans 6 6
- ------------------------------------------------------------------- --------
Total charge-offs 6 6
Recoveries:
Commercial 0 0
Real estate-mortgage 0 0
Installment loans 3 4
- ------------------------------------------------------------------- --------
Total recoveries 3 4
Net Charge-offs: 3 2
- ------------------------------------------------------------------- --------
Adjustments from aquisition of Lehigh Savings SLA 525 0
- ------------------------------------------------------------------- --------
Additions charged to Operations 0 0
- ------------------------------------------------------------------- --------
Balance at end of period $ 1,595 $ 1,071
=================================================================== ========
Ratio of net charge-offs during the period to
average loans outstanding during the period .00% .00%
- ------------------------------------------------------------------- --------
Allowance for loan losses as a percentage of total loans 1.39% 1.39%
- ------------------------------------------------------------------- --------
Page 11
<PAGE>
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.
These practices have protected the Corporation during economic downturns;
the Corporation was not significantly impacted by the recent extended recession.
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.
At June 30, 1996, the Corporation had $475,000 in non-accrual loans
resulting from the Lehigh acquisition. This amount is entirly comprised of 1-4
family residential properties, of which $302,000 were sold on July 1, 1996.
Loans past due 90 days or more amounted to $50,000 and are comprised primarily
of guaranteed student loans. Additionally, the Corporation did not have any
other real estate owned (OREO) at June 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 June 30, 1996 which provide the Bank
with liquidity remain strong with approximately $141.5 million in scheduled
repayments and maturities over the next 12 months, with a net surplus of $32.7
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 six month period ended June 30, 1996 average
core deposits (comprised of total demand and savings accounts plus money market
accounts under $100,000) represented 55.6 percent of total deposits. More
volatile rate sensitive deposits, concentrated in certificates of deposit
$100,000 and greater, comprised on average during the first six months of 1996,
20.1 percent of total deposits, as compared with 12.4 percent during the first
six months of 1995. This change has been brought about due to the rise in
short-term rates during the first six months of 1996.
The increase in funding sources during the six months ended June 30, 1996
resulted primarily from the completion of the Corporation's aquisition of Lehigh
Savings SLA. The aquisition added $68.1 million in deposits. Other factors
relating to the overall increase of $106.1 million in funding sources related to
an increase in business and public fund deposits offset by a decrease of $13.2
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 15.9 percent as compared to 20.5 percent for the six month
period ended June 30, 1995. Although noninterest-bearing funding sources
continue to remain stable the growth in the deposit base during 1996, inclusive
of the aquisition of Lehigh Savings SLA, was concentrated in savings and
certificate of deposit balances. Demand deposits as a percentage of the funding
mix continue to be replaced by more expensive interest-bearing core deposits.
The consolidated statements of cash flows present the changes in cash and
cash equivalents from operating, investing and financing activites. During the
six months ended June 30, 1995, cash and cash equivalents (which increased
overall by $19.6 million) were provided (on a net basis) by financing activities
and used in operating
Page 12
<PAGE>
and investing activities. The cash flow provided by the $119.5 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 $4.2 million in
goodwill from the aquisition of Lehigh Savings SLA. The resulting net increase
in cash and cash equivalents was also due to the acquisition of Lehigh Savings
SLA.
Shareholders' Equity and Dividends
Shareholders' Equity
Shareholders' equity averaged $25.7 million for the six month period ended
June 30, 1996, an increase of $2.5 million, or 10.8 percent, as compared to
1995. The Corporation's dividend reinvestment and optional stock purchase plan
has raised $116,000 in new capital for the six months ended June 30, 1996. That
plan together with internal capital generation, may enhance the Corporation's
equity position during 1996. Book value per common share was $10.93 at June 30,
1996 as compared to $11.75 at June 30, 1995, as adjusted to reflect the 3-for-2
stock split paid on May 31, 1996.
C a p i t a l
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 June 30, 1996, Stockholders' Equity amounted to $28.5 million. Total
Tier I capital as a percentage of average total assets for the six months ended
June 30, 1995 was 7.07 percent, as compared with 7.46 percent for the comparable
six month period in 1995. At June 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 5.35 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 June 30, 1996, the Company's estimated Tier I to
risk-adjusted assets and total risk-based capital ratios were 14.7 percent and
15.8 percent, respectively. These ratios are well above the minimum
guidelines (in effect as of June 30, 1996) of 4 percent for Tier I capital and
the 8 percent minimum 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
There were no reports on Form 8-K filed during the
three months ended June 30, 1996
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: August 14, 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> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> JUN-30-1996
<CASH> 49,668
<INT-BEARING-DEPOSITS> 349,922
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 64,817
<INVESTMENTS-CARRYING> 207,595
<INVESTMENTS-MARKET> 272,412
<LOANS> 114,820
<ALLOWANCE> (1,595)
<TOTAL-ASSETS> 455,036
<DEPOSITS> 415,215
<SHORT-TERM> 9,141
<LIABILITIES-OTHER> 2,149
<LONG-TERM> 0
0
0
<COMMON> 4,315
<OTHER-SE> 24,216
<TOTAL-LIABILITIES-AND-EQUITY> 455,036
<INTEREST-LOAN> 1,979
<INTEREST-INVEST> 4,135
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 6,114
<INTEREST-DEPOSIT> 2,510
<INTEREST-EXPENSE> 2,674
<INTEREST-INCOME-NET> 3,440
<LOAN-LOSSES> 0
<SECURITIES-GAINS> 80
<EXPENSE-OTHER> 4,247
<INCOME-PRETAX> 3,026
<INCOME-PRE-EXTRAORDINARY> 3,026
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,238
<EPS-PRIMARY> 0.45
<EPS-DILUTED> 0.45
<YIELD-ACTUAL> 6.90
<LOANS-NON> 0
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1,073
<CHARGE-OFFS> 0
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 1,595
<ALLOWANCE-DOMESTIC> 666
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 929
</TABLE>
