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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
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FORM 10-K
(Mark One)
X Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the fiscal year ended December 31, 1996.
__ 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 jurisdiction of IRS Employer
incorporation or organization) identification No.)
2455 Morris Avenue, Union, NJ 07083-0007
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(Address of Principal Executive Offices, Including Zip Code)
(908) 688-9500
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(Registrant's telephone number, including area code)
Securities registered
pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, NO PAR VALUE
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes _X_ or No ___
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation 5K is not contained herein, and will not be contained, to the best
of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of the Form 10-K or any amendment to the
Form 10-K. _X_
Aggregate Market value of voting stock held by non-affiliates based on the
average of Bid and Asked prices on February 28, 1997 was approximately $51.0
million
Shares outstanding on February 28, 1997
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Common stock no par value - 2,240,160 shares
Parts of Form 10-K in which
Documents Incorporated by reference document is incorporated
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Definitive proxy statement dated March 16, 1997,
in connection with the 1997 Annual Stockholders
Meeting filed with the Commission pursuant to
Regulation 14A ............................................ Part III
Annual Report to Stockholders for the fiscal year
ended December 31, 1996 ................................... Part I and Part II
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<PAGE>
INDEX TO FORM 10-K
PART I.
ITEM 1 BUSINESS 1
ITEM 2 PROPERTIES 11
ITEM 3 LEGAL PROCEEDINGS 11
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 11
ITEM 4A EXECUTIVE OFFICERS OF THE REGISTRANT 12
PART II
ITEM 5 MARKET FOR THE REGISTRANTS COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS 12
ITEM 6 SELECTED FINANCIAL DATA 12
ITEM 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 12
ITEM 8 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 12
ITEM 9 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE 12
PART III
ITEM 10 DIRECTORS OF THE REGISTRANT 12
ITEM 11 EXECUTIVE COMPENSATION 13
ITEM 12 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT 13
ITEM 13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 13
PART IV
ITEM 14 EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND
REPORTS ON FORM 8-K 13
SIGNATURES 15
<PAGE>
CENTER BANCORP INC
FORM 10 K
PART I
ITEM I--BUSINESS
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A) HISTORICAL DEVELOPMENT OF BUSINESS
Center Bancorp, Inc., a one-bank holding company, was incorporated in the
state of New Jersey on November 12, 1982. Center Bancorp, Inc. commenced
operations on May 1, 1983, upon the acquisition of all outstanding shares
of The Union Center National Bank (the "Bank"). The holding company's sole
activity, at this time, is to act as a holding company for the Bank. As
used herein, the term "Corporation" shall refer to Center Bancorp, Inc. and
its subsidiaries and the term "Parent Company" shall refer to Center
Bancorp, Inc. on an unconsolidated basis.
The Bank was organized in 1923 under the law of the United States of
America. The Bank operates six offices in Union Township, Union County, New
Jersey, one office in Springfield Township, Union County, New Jersey and
one office in Berkeley Heights, Union County, New Jersey and currently
employs 132 persons. A ninth office, located in Madison, Morris County, New
Jersey is scheduled to open in May 1998. The Bank is a full service
commercial bank offering a complete range of individual and commercial
services.
On June 28, 1996, the Corporation completed its acquisition of Lehigh
Savings Bank SLA ("Lehigh"), a New Jersey chartered savings & loan
association, in a transaction accounted for under the purchase method of
accounting. At June 28, 1996, Lehigh Savings Bank SLA had assets of $70.9
million (primarily cash and cash equivalents of $53.0 million and loans of
$15.0 million), deposits of $68.2 million and stockholders' equity of $2.7
million. Lehigh had a net loss of $1.1 million for the fiscal period of
July 1, 1995 to June 27, 1996. The acquisition was effected as a series of
mergers pursuant to which the Corporation paid a total of approximately
$5.5 million in cash and Lehigh ultimately was merged into the Bank . The
resulting goodwill amounted to $3.8 million and will be amortized over a 15
year period. The December 31, 1996 financial data set forth in this annual
report and the December 31, 1996 consolidated financial statements of the
Corporation include the assets, liabilities, and results of operations of
Lehigh since the acquisition date.
B) NARRATIVE DESCRIPTION OF BUSINESS
The Bank offers a broad range of lending, depository and related financial
services to commercial, industrial and governmental customers. In the
lending area, these services include short and medium term loans, lines of
credit, letters of credit, working capital loans, real estate construction
loans and mortgage loans. In the depository area, the Bank offers demand
deposits, savings accounts and time deposits. In addition, the Bank offers
collection service, wire transfers, night depository and lock box services.
The Bank offers a broad range of consumer banking services, including
checking accounts, savings accounts, NOW accounts, money market accounts,
certificates of deposit, IRA accounts, Automated Teller Machines ("ATM")
accessibility using Money Access[TM] service, secured and unsecured loans,
mortgage loans, home equity lines of credit, safe deposit boxes, Christmas
club accounts, vacation club accounts, collection services, money orders
and traveler's checks.
The Bank offers various money market services. It deals in U.S. Treasury
and U.S. Governmental agency securities, certificates of deposits,
commercial paper and repurchase agreements.
Competitive pressures affect the Corporation's manner of conducting
business. Competition stems not only from other commercial banks but also
from other financial institutions such as savings banks, savings and loan
associations, mortgage companies, leasing companies and various other
financial service and advisory
31 March 97 Page 1
Center Bancorp, Inc. Form 10-K
<PAGE>
companies. Many of the financial institutions operating in the
Corporation's primary market are substantially larger and offer a wider
variety of products and services than the Corporation.
The Parent Company is subject to regulation by the Board of Governors of
the Federal Reserve System and the New Jersey Department of Banking. As a
national bank, the Bank is subject to regulation and periodic examination
by the Comptroller of the Currency. Deposits in the Bank are insured by the
Federal Deposit Insurance Corporation (the "FDIC").
The Parent Company is required to file with the Federal Reserve Board an
annual report and such additional information as the Federal Reserve Board
may require pursuant to the Bank Holding Company Act of 1956, as amended
(the "Act"). In addition, the Federal Reserve Board makes examinations of
bank holding companies and their subsidiaries. The Act requires each bank
holding company to obtain the prior approval of the Federal Reserve Board
before it may acquire substantially all of the assets of any bank, or
before it may acquire ownership or control of any voting shares of any
bank, if, after such acquisition, it would own or control, directly or
indirectly, more than 5 percent of the voting shares of such bank. The Act
also restricts the types of businesses and operations in which a bank
holding company and its subsidiaries may engage.
The operations of the Bank are subject to requirements and restrictions
under federal law, including requirements to maintain reserves against
deposits, restrictions on the types and amounts of loans that may be
granted, limitations on the types of investments that may be made and the
types of services which may be offered. Various consumer laws and
regulations also affect the operations of the Bank. Approval of the
Comptroller of the Currency is required for branching, bank mergers in
which the continuing bank is a national bank and in connection with certain
fundamental corporate changes affecting the Bank. Federal law also limits
the extent to which the Parent Company may borrow from the Bank and
prohibits the Parent Company and the Bank from engaging in certain tie-in
arrangements.
FDICIA
The Federal Deposit Insurance Corporation Improvement Act of 1991
("FDICIA") substantially revised the bank regulatory provisions of the
Federal Deposit Insurance Act and several other federal banking statutes.
Among other things, FDICIA requires federal banking agencies to broaden the
scope of regulatory corrective action taken with respect to banks that do
not meet minimum capital requirements and to take such actions promptly in
order to minimize losses to the FDIC. Under FDICIA, federal banking
agencies have established five capital tiers: "well capitalized",
"adequately capitalized", "undercapitalized", "significantly
undercapitalized" and "critically undercapitalized".
FDICIA imposes significant restrictions on the operations of a depository
institution that is not in either of the first two of such categories. A
depository institution's capital tier will depend upon the relationship of
its capital to various capital measures. A depository institution will be
deemed to be "well capitalized" if it significantly exceeds the minimum
level required by regulation for each relevant capital measure, "adequately
capitalized" if it meets each such measure, "undercapitalized" if it fails
to meet any such measure, "significantly undercapitalized" if it is
significantly below any such measure and "critically undercapitalized" if
it fails to meet any critical capital level set forth in the regulations.
An institution may be deemed to be in a capitalization category that is
lower than is indicated by its actual capital position if it receives an
unsatisfactory examination rating or is deemed to be in an unsafe or
unsound condition or to be engaging in unsafe or unsound practices.
Under regulations adopted under these provisions, for an institution to be
well capitalized it must have a total risk-based capital ratio of at least
10 percent, a Tier I risk-based capital ratio of at least 6 percent and a
Tier I leverage ratio of at least 5 percent and not be subject to any
specific capital order or directive. For an institution to be adequately
capitalized, it must have a total risk-based capital ratio of at least 8
percent, a Tier I risk-based capital ratio of at least 4 percent and a Tier
I leverage ratio of at least 4 percent (or in some cases 3 percent). Under
the regulations, an institution will be deemed to be undercapitalized if
the bank has a total risk-based capital ratio that is less than 8 percent ,
a Tier I risk-based capital ratio that is less than 4 percent or a Tier I
leverage ratio of less than 4 percent (or in some cases 3 percent). An
institution will be deemed to be significantly undercapitalized if the bank
has a total risk-based capital ratio that is less than 6 percent, a Tier I
risk-based capital ratio that is less than 3 percent, or a Tier I leverage
31 March 97 Page 2
Center Bancorp, Inc. Form 10-K
<PAGE>
ratio of less than 3 percent and will be deemed to be critically
undercapitalized if it has a ratio of tangible equity to total assets that
is equal to or less than 2 percent. FDICIA generally prohibits a depository
institution from making a capital distribution (including payment of
dividends) or paying management fees to any entity that controls the
institution if it thereafter would be undercapitalized. If an institution
becomes undercapitalized, it will be generally restricted from borrowing
from the Federal Reserve, increasing its average total assets, making any
acquisitions, establishing any branches or engaging in any new line of
business. An undercapitalized institution must submit an acceptable capital
restoration plan to the appropriate federal banking agency, which plan
must, in the opinion of such agency, be based on realistic assumptions and
be "likely to succeed" in restoring the institution's capital. In
connection with the approval of such a plan, the holding company of the
institution must guarantee that the institution will comply with the plan,
subject to a limitation of liability equal to a proportion of the
institution's assets. If an undercapitalized institution fails to submit an
acceptable plan or fails to implement such a plan, it will be treated as if
it is significantly undercapitalized.
Under FDICIA, bank regulators are directed to require "significantly
undercapitalized" institutions, among other things, to restrict business
activities, raise capital through a sale of stock, merge with another
institution and/or take any other action which the agency determines would
better carry out the purposes of FDICIA.
Within 90 days after an institution is determined to be "critically
undercapitalized", the appropriate federal banking agency must, in most
cases, appoint a receiver or conservator for the institution or take such
other action as the agency determines would better achieve the purposes of
FDICIA. In general, "critically undercapitalized" institutions will be
prohibited from paying principal or interest on their subordinated debt and
will be subject to other substantial restrictions.
Under FDICIA, an institution that is not well capitalized is generally
prohibited from accepting brokered deposits. Undercapitalized institutions
are prohibited from offering interest rates on deposits significantly
higher than prevailing rates.
FDICIA also directs that each federal banking agency prescribe standards
for depository institutions and depository institution holding companies
relating to internal controls, information systems, internal audit systems,
loan documentation, credit underwriting, interest rate exposure, asset
growth, a maximum ratio of classified assets to capital, a minimum ratio of
market value to book value for publicly traded shares (if feasible) and
such other standards as the agency deems appropriate.
FDICIA also contains a variety of other provisions that could affect the
operations of the Corporation, including reporting requirements, regulatory
standards for real estate lending, "truth in savings" provisions, the
requirement that depository institutions give 90 days notice to customers
and regulatory authorities before closing any branch, limitations on credit
exposure between banks, restrictions on loans to a bank's insiders and
guidelines governing regulatory examinations.
31 March 97 Page 3
Center Bancorp, Inc. Form 10-K
<PAGE>
BIF PREMIUMS
The Corporation is a member of the Bank Insurance Fund ("BIF") of the FDIC.
The FDIC also maintains another insurance fund, the Savings Association
Insurance Fund ("SAIF"), which primarily cover savings and loan association
deposits but also covers deposits that are acquired by a BIF-insured
institution from a savings and loan association. The Corporation has
approximately $412.4 million of deposits at December 31, 1996, with respect
to which the Corporation pays insurance premiums.
The Omnibus Spending Bill (H.R. 3610) that President Clinton signed on
September 30, 1996 included provisions for a special assessment to
recapitalize the SAIF, provisions to provide funding to meet the Financing
Corporation (FICO) bond obligations, and to merge BIF with SAIF fund on
January 1, 1999. As a result of the acquisition of Lehigh, the Corporation
was obligated to pay a one-time assessment on Lehigh's deposits. The total
assessment amounted to $469,606 and was paid to the Federal Deposit
Insurance Corporation on November 27, 1996.
Effective January 1, 1997, Federal legislation separates FICO assessment to
service the interest on its bond obligations from the SAIF assessment. The
amount assessed on individual institutions by the FICO will be in addition
to the amount paid for deposit insurance according to the FDIC's
risk-related assessment rate schedules. However, between October 1, 1996,
and January 1, 1997, any amount required by the FICO was deducted from the
amounts the FDIC was authorized to assess SAIF-member savings associations,
and could not be assessed against certain institutions. FICO assessment
rates for the first semiannual period of 1997 were set at 1.30 basis points
annually for BIF-assessable deposits and 6.48 basis points annually for
SAIF-assessable deposits. (These rates may be adjusted quarterly to reflect
changes in assessment bases for the BIF and the SAIF by law; the FICO rate
on BIF-assessable deposits must be one-fifth the rate on SAIF-assessable
deposits until the insurance funds are merged or until January 1, 2000,
whichever occurs first.)
Future Federal Deposit Insurance expense will be affected by the FICO bond
payment and continued expense on Lehigh's acquired deposits. The FICO
obligation is to be shared by both SAIF and BIF insured institutions. For
the years 1997-1999, BIF-assessable deposits will be assessed at a rate of
1/5 of the rate imposed on SAIF-assessable deposits. This assessment is
estimated to be 1.3 cents per $100.00 for BIF-insured deposits. The
estimated assessments should be completely phased out by the year 2019.
The SAIF-assessable deposits of "Oakar" banks are reduced by 20 percent for
the purpose of the special assessment where the Bank's BIF deposits exceed
50 percent of the total insured deposits. In addition, the SAIF-assessable
deposits of Oakar banks are reduced by 20 percent for the purposes of
ongoing regular premium assessments. The deposits acquired from Lehigh are
classified as "Oakar deposits" for premium assessments.
PROPOSED LEGISLATION
From time to time proposals are made in the U.S. Congress and before
various bank regulatory authorities which would alter the policies of and
place restrictions on different types of banking operations. It is
impossible to predict the impact if any, of potential legislative trends on
the business of the Corporation and the Bank.
C) DIVIDEND RESTRICTIONS
Most of the revenue of the Corporation available for payment of dividends
on its capital stock will result from amounts paid to the Parent Company by
the Bank. There are a number of statutory and regulatory restrictions
applicable to the payment of dividends by national banks and bank holding
companies. First, the Bank must obtain the approval of the Comptroller of
the Currency (the "Comptroller") if the total dividends declared by the
Bank in any year will exceed the total of the Bank's net profits (as
defined and interpreted by regulation) for that year and retained profits
(as defined) for the preceding two years, less
31 March 97 Page 4
Center Bancorp, Inc. Form 10-K
<PAGE>
any required transfers to surplus. Second, the Bank cannot pay dividends
except to the extent that net profits then on hand exceed statutory bad
debts. Third, the authority of federal regulators to monitor the levels of
capital maintained by the Corporation and the Bank (see Item 7 of this
Annual Report on Form 10-K and the discussion of FDICIA above), as well as
the authority of such regulators to prohibit unsafe or unsound practices,
could limit the amount of dividends which the Parent Company and the Bank
may pay. Regulatory pressures to reclassify and charge off loans to
establish additional loan loss reserves also can have the effect of
reducing current operating earnings and thus impacting an institution's
ability to pay dividends. Regulatory authorities have indicated that bank
holding companies which are experiencing high levels of non-performing
loans and loan charge-offs should review their dividend policies. Reference
is also made to Note 13 of the Notes to the Company's Consolidated
Financial Statements.
D) STATISTICAL INFORMATION
(Reference is also made to Item 7 of this Annual Report on Form 10-K)
Information regarding interest sensitivity is incorporated by reference to
pages 25-27 of the 1996 Annual Report.
The gap results noted on pages 26 and 27 of the 1996 Annual Report take
into consideration repricing and maturities of assets and liabilities, but
fail to consider the interest sensitivities of those asset and liability
accounts. Management has prepared for its use an income simulation model to
forecast future net interest income, in light of the current gap position.
Management has also prepared for its use alternative scenarios to measure
levels of next interest income associated with various changes in interest
rates. Results have reflected that an interest rate increase of 200 basis
points and a decline of 50 basis resulted in an impact on future net
interest income which is consistent with target levels contained in the
Corporation's Asset/Liability Policy. Management cannot provide any
assurances about the actual effect of changes in interest rates on the
Corporations net income.
I. INVESTMENT PORTFOLIO
a) For information regarding the carrying value of the investment
portfolio, see page 40 of the 1996 Annual Report to Shareholders (the
"1996 Annual Report") which is incorporated herein by reference.
b) The following table illustrates the maturity distribution and
weighted average yield on a tax-equivalent basis for investment
securities at December 31, 1996, on a contractual maturity basis.
31 March 97 Page 5
Center Bancorp, Inc. Form 10-K
<PAGE>
<TABLE>
<CAPTION>
Obligations
of US Obligations Federal Reserve
Treasury & of States and Federal
Government & Political Home Loan
(Dollars in Thousands) Agencies Subdivisions Bank Stock Total
============================================================================================================
<S> <C> <C> <C> <C>
Due in 1 year or less
Book Value $ 82,770 $ 10,929 $ 284 $ 93,983
Market Value 82,618 10,987 285 93,890
Weigh Average Yield 6.874% 5.278% 6.608% 6.688%
Due after one year through five years
Book Value $ 96,099 $ 19,161 $ 6,576 $ 121,836
Market Value 96,614 19,352 6,679 122,645
Weigh Average Yield 6.566% 5.424% 6.985% 6.409%
Due after five years through ten years
Book Value $ 28,562 $ 9,263 $ 3,509 $ 41,334
Market Value 28,529 9,295 3,507 41,331
Weigh Average Yield 6.906% 5.392% 6.687% 6.548%
Due after ten years
Book Value $ 20,905 $ 0 $ 801 $ 21,706
Market Value 20,914 0 801 21,715
Weigh Average Yield 6.443% 0.000% 6.816% 6.456%
No Maturity
Book Value $ 0 $ 0 $ 746 $ 746
Market Value 0 0 746 746
Weigh Average Yield 0.000% 0.000% 6.330% 6.330%
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Total
Book Value $ 228,336 $ 39,353 $ 11,916 $ 279,605
Market Value 228,675 39,634 12,018 280,327
Weigh Average Yield 6.709% 5.376% 6.836% 6.527%
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</TABLE>
c) For information regarding securities of a single issuer exceeding 10
percent of stockholders' equity and for other information regarding the
Corporation's investment securities portfolio, see Page 18 of the 1996
Annual Report.
II. LOAN PORTFOLIO
The following table presents information regarding the components of the
Corporation's loan portfolio on the dates indicated.
<TABLE>
<CAPTION>
Years Ended December 31,
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(Dollars in thousands) 1996 1995 1994 1993 1992
================================================================================================
<S> <C> <C> <C> <C> <C>
Commercial $ 25,950 $ 21,302 $ 18,674 $ 18,692 $ 20,873
Real estate-mortgage 78,347 69,954 64,666 40,005 34,078
Installment Loan 14,231 7,012 6,250 7,378 4,729
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Total 118,528 98,268 89,590 66,075 59,680
Less:
Unearned discount 698 698 785 330 163
Allowance for loan losses 1,293 1,073 1,073 943 821
================================================================================================
Net total $ 116,537 $ 96,497 $ 87,732 $ 64,802 $ 58,696
================================================================================================
</TABLE>
The reduction in outstanding loans from December 31, 1991 to December 31,
1993 primarily reflects lessened demand for loans and the then current
economic conditions. In 1994, demand for the Bank's real estate mortgage
products improved substantially, and new products in conjunction with a new
marketing program coupled with positive market trends supported the growth
in 1995 and 1996. The Lehigh acquisition also accounted for a portion of
1996 loan growth approximating $15.2 million.
The maturities of commercial loans at December 31, 1996 are listed below.
All such loans which are due after one year have fixed interest rates ( in
thousands).
31 March 97 Page 6
Center Bancorp, Inc. Form 10-K
<PAGE>
1 Year 1 - 5
(Dollars in thousands) or less Years Total
========================================================================
Commercial $ 19,969 $ 5,981 $ 25,950
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Lending is one of Center Bancorp's primary business activities. The
Corporation's loan portfolio consists of both retail and commercial loans,
serving the diverse customer base in its market area. In 1996, average
total loans comprised 28.02 percent of average interest-earning assets. The
Corporation has experienced a compound growth rate in average loans since
1994 of 44.2 percent. Average loans amounted to $107.9 million in 1996,
$95.2 million in 1995 and $72.8 million 1994. The composition of Center
Bancorp's loan portfolio continues to change due to the local economy.
Factors such as the economic climate, interest rates, real estate values
and employment all contribute to these changes. Loan growth has been
generated through marketing and business development efforts.
Average commercial loans rose $3.4 million or 44.2 percent in 1996 as
compared with 1995. The Corporation seeks to create growth in commercial
lending by offering new products, lowering pricing and capitalizing on the
positive trends in its market area. Specialized products are offered to
meet the financial requirements of the Corporation's clients. It is the
objective of the Corporation's credit procedures to diversify the
commercial loan portfolio to limit concentrations in any single industry.
The Corporation's commercial loan portfolio includes, in addition to real
estate development, loans to the manufacturing, services, automobile,
professional and retail trade sectors, and to specialized borrowers,
including high technology businesses. A large proportion of the
Corporation's commercial loans have interest rates which reprice with
changes in short-term market interest rates or mature in one year or less.
Average mortgage loans, which amounted to $71.6 million in 1996, increased
$1.7 million or 2.43 percent as compared with average mortgage loans of
$69.9 million in 1995 (reflecting an 8.18 percent increase over 1994). The
Corporation's long-term mortgage portfolio includes both residential and
commercial financing. Growth during the past two years largely reflected
brisk activity in mortgage financing. Although a portion of the
Corporation's commercial mortgages adjust to changes in the prime rate,
most of these loans and residential mortgage loans have fixed interest
rates.
Residential loans increased steadily since 1994, but began to slow
considerably in the beginning of 1995 as economic interest rates began to
rise in 1995. During 1996 growth increased as rates stabilized.
Construction loans and other temporary mortgage financing increased on
average by $1.0 million to $14.6 million in 1996. Such loans grew an
average by $ 1.2 million from 1994 to 1995. The growth in construction and
other temporary mortgage lending has been generated by increased
residential and commercial development throughout New Jersey. Interest
rates on such mortgages are generally tied to key short-term market
interest rates. Funds are typically advanced to the builder or developer
during various stages of construction and upon completion of the project it
is contemplated that the loans will be repaid by cash flows derived from
the ongoing project.
Loans to individuals include personal loans, student loans, home equity
loans, home improvement loans and secondary mortgages, as well as financing
for automobiles and other vehicles. Such loans averaged $14.2 million in
1996, as compared with $7.0 million in 1995 and 6.2 million in 1994. The
growth in loans to individuals, during 1996, was buoyed by increases in
automobile loans, while fixed rate home equity loans comprised the majority
of the growth in 1996. Home equity loans, which the Corporation began
actively promoting in 1994 and 1995 , as well as traditional secondary
mortgage loans, have become popular with consumers due to their tax
advantages over other forms of consumer borrowing vehicles. Home equity
loans and secondary mortgages averaged $15.3 million in 1996. At the end of
1996, automobile loans amounted to 60.8 percent of total loans to
individuals excluding home equity and secondary mortgage financing.
Interest rates on floating rate home equity loans are generally tied to the
prime rate while most other loans to individuals, including fixed rate home
equity loans, are medium-term (ranging between one-to-five years) and carry
fixed interest rates.
31 March 97 Page 7
Center Bancorp, Inc. Form 10-K
<PAGE>
At December 31, 1996, the Corporation has total unused lending commitments
outstanding of $23.9 million, of which approximately 66.8 percent and 9.2
percent were for commercial loans and construction loans, respectively.
Credit risks are an inherent part of the lending function. The Corporation
has set in place specific policies and guidelines to limit credit risks to
the degree possible. The following describes the Corporation's credit
management policy and describes certain risk elements in its earning assets
portfolio.
CREDIT MANAGEMENT. The maintenance of comprehensive and effective credit
policies is a paramount objective of the Corporation. Credit procedures are
enforced at each individual branch office and are maintained at the senior
administrative level as well as through internal control procedures.
Prior to extending credit, the Corporation's credit policy generally
requires a review of the borrower's credit history, collateral and purpose
of each loan. Requests for most commercial and financial loans are to be
accompanied by financial statements and other relevant financial data for
evaluation. After the granting of a loan or lending commitment, this
financial data is typically updated and evaluated by the credit staff on a
periodic basis for the purpose of identifying potential problems.
Construction financing requires a periodic submission by the borrowers of
sales/leasing status reports regarding their projects, as well as, in some
case, inspections of the project sites by independent engineering firms.
Advances are normally made only upon the satisfactory completion of
periodic phases of construction.
Certain lending authorities are granted to loan officers based upon each
officer's position and experience. However, large dollar loans and lending
lines are reported to and are subject to the approval of the Bank's loan
committee and/or board of directors. Loan committees are chaired by either
the president or a senior officer of the Bank.
Real Estate lending policies must include changes implemented by FDICIA,
more specifically the requirement to monitor and report the aggregate of
any loans with loan-to-value ratios in excess of the supervisory limits set
forth in the Interagency Guidelines for Real Estate Lending Policies. The
Corporation has established its own internal loan-to-value limits for real
estate loans. In general, except as described below, these internal limits
are not permitted to exceed the following supervisory limits:
LOAN CATEGORY LOAN-TO-VALUE LIMIT
------------- -------------------
Raw Land 65%
Land Development 75%
Construction:
Commercial, Multifamily*,
and other Nonresidential 80%
1 to 4 Family Residential 85%
Improved Property 85%
Owner-occupied 1 to 4 family and home equity **
* Multifamily construction includes condominiums and cooperatives.
** A loan-to-value limit has not been established for permanent mortgage
or home equity loans on owner-occupied, 1 to 4 family residential
property. However, for any such loan with a loan-to-value ratio that
equals or exceeds 90 percent at origination, an institution is
expected to require appropriate credit enhancement in the form of
either mortgage insurance or readily marketable collateral.
It may be appropriate in individual cases to originate loans with
loan-to-value ratios in excess of the supervisory loan-to-value limits,
based on the support provided by other credit factors. The President or
Board of Directors must approve such exceptions. These loans must be
identified by the Bank as exceptions to the supervisory limits and their
aggregate amount must be reported at least quarterly to the
31 March 97 Page 8
Center Bancorp, Inc. Form 10-K
<PAGE>
Board of Directors. Non-conforming loans should not exceed 100% of capital,
with a 30% sublimit for non 1 to 4 family residential loans.
Collateral margin guidelines are based on cost, market, or other appraised
value to maintain a reasonable amount of collateral protection in relation
to the inherent risk in the loan. This does not mitigate the fundamental
analysis of cash flow from the conversion of assets in the normal course of
business or from operations to repay the loan. It is merely designed to
provide a cushion to minimize the risk of loss if the ultimate collection
of the loan becomes dependent on the liquidation of security pledged.
The Corporation also seeks to minimize lending risk through loan
diversification. The composition of the Corporation's commercial loan
portfolio reflects and is highly dependent upon the economy and industrial
make-up of the region it serves. Effective loan diversification spreads
risk to many different industries, thereby reducing the impact of downturns
in any specific industry on overall loan profitability.
Weakening credits are monitored through a loan review process which
requires that, on a regular basis, a classified loan report is prepared.
Classified loans are categorized into one of several categories depending
upon the condition of the borrower and the strength of the underlying
collateral. "Other assets especially mentioned" is an early warning signal
consisting of loans with only modest deficiencies in documentation or with
potentially weakening credit features.
A consolidated classified loan report is prepared on a monthly basis and is
examined by both the senior management of the Bank and the Corporation's
Board of Directors. The review of classified loan reports is designed to
enable management to take such action as is considered necessary to remedy
problems on a timely basis.
Regularly scheduled audits performed by the Corporation's internal and
external credit review staff further the integrity of the credit monitoring
process. Any noted deficiencies are expected to be corrected within a
reasonable period of time.
RISK ELEMENTS. Risk elements include non-performing loans, loans past due
ninety days or more as to interest or principal payments but not placed on
a non-accrual status, potential problem loans, other real estate owned,
net, and other non-performing, interest-earning assets.
NON-PERFORMING AND PAST DUE LOANS Non-performing loans include non accrual
loans and troubled debt restructurings. Non-accrual loans represent loans
on which interest accruals have been suspended. It is the Corporation's
general policy to consider the charge-off of loans when they become
contractually past due ninety days or more as to interest or principal
payments or when other internal or external factors indicate that
collection of principal or interest is doubtful. Troubled debt
restructurings represent loans on which a concession was granted to a
borrower, such as a reduction in interest rate which is lower than the
current market rate for new debt with similar risks.
Loans accounted for on a non-accrual basis at December 31, 1996, 1995,
1994, 1993, and 1992 are as follows.
(Dollars in thousands) 1996 1995 1994 1993 1992
=======================================================================
Mortgage Real Estate $ 298 $ 0 $ 0 $ 0 $ 0
Commercial 0 0 0 0 0
Installment 0 0 0 0 0
=======================================================================
Net loans $ 298 $ 0 $ 0 $ 0 $ 0
=======================================================================
31 March 97 Page 9
Center Bancorp, Inc. Form 10-K
<PAGE>
Accruing loans which are contractually past due 90 days or more as to
principal or interest payments are as follows:
December 31,
---------------------------------------------------
(Dollars in thousands) 1996 1995 1994 1993 1992
===========================================================================
Commercial $ 11 $ 0 $ 0 $ 0 $ 0
Installment 110 48 0 5 23
===========================================================================
Net loans $ 121 $ 48 $ 0 $ 5 $ 23
===========================================================================
There were no loans which are "troubled debt restructurings" as of the last
day of each of the last five years.
In general, it is the policy of management to consider the charge-off of
loans at the point that they become past due in excess of 90 days, with the
exception of loans that are secured by cash or marketable securities or
mortgage loans which are in the process of foreclosure.
There were no other known "potential problem loans" (as defined by SEC
regulations) as of December 31, 1996 that have not been identified and
classified. Such loans, consisting of other assets especially mentioned and
substandard loans, amounted to $994,000 and $942,000, respectively, at
December 31, 1996. At December 31, 1995 these loans amounted to $994,000
and $942,000 respectively.
The Corporation has no foreign loans.
As of December 31, 1996, $8.2 million of the commercial loan portfolio, or
31.6 percent of $25.9, represents outstanding working capital loans to
various real estate developers. All but $2.8 million of these loans are
secured by mortgages on land and on buildings under construction.
III. ALLOWANCE FOR LOAN LOSSES
Implicit in the lending function is the fact that loan losses will be
experienced and that the risk of loss will vary with the type of loan being
made, the creditworthiness of the borrower and prevailing economic
conditions. The allowance for loan losses is at the maximum amount
allowable for Federal income tax purposes and has been allocated below
according to the estimated amount deemed to be reasonably necessary to
provide for the possibility of losses being incurred within the following
categories of loans at December 31, for each of the past five years. The
following table shows, for three types of loans, the amounts of the
allowance allocable to such loans and the percentage of such loans to total
loans. The percentage of loans to total loans is based upon the
classification of loans shown in Table II-A (Types of Loans) on page 6 of
this report.
<TABLE>
<CAPTION>
COMMERCIAL REAL ESTATE MORTGAGE INSTALLMENT UNALLOCATED
--------------------- --------------------- ---------------------- -----------
Amount Loans to Amount Loans to Amount Loans to Amount
Total Loans Total Loans Total Loans
(Dollars in thousands) % % %
===================================================================================================================
<S> <C> <C> <C> <C> <C> <C> <C>
1996 $415 21.9 $220 66.1 $62 12.0 $596
1995 $467 21.7 $187 71.2 $22 7.1 $397
1994 $399 20.2 $185 72.8 $55 7.0 $434
1993 $408 23.4 $140 69.4 $87 7.2 $308
1993 $358 27.8 $174 65.1 $77 7.1 $212
</TABLE>
IV. DEPOSITS
Information regarding average amounts/rates of deposits is incorporated by
reference to page 31 of the 1996 Annual Report. Information regarding the
amount of time certificates of deposits of $100,000 or more is presented on
page 28 of the 1996 annual report.
31 March 97 Page 10
Center Bancorp, Inc. Form 10-K
<PAGE>
V. RETURN ON EQUITY AND ASSETS
Information regarding the return on average assets, return on average
equity and dividend payout ratio is incorporated by reference to pages 10
and 11 of the 1996 Annual Report. Return on average assets was 1.00
percent, 1.15 percent and 1.27 percent for the years ended December 31,
1996, 1995 and 1994, respectively. The dividend payout ratio was 43.0
percent, 44.0 percent and 41.0 percent for the years ended December 31,
1996, 1995, and 1994, respectively.
VI. SHORT-TERM BORROWINGS
Information regarding the amount outstanding of short-term borrowings is
incorporated by reference to page 28 of the 1996 Annual Report.
ITEM 2--PROPERTIES
- --------------------------------------------------------------------------------
The Bank's operations are located at six sites in Union Township, one in
Springfield Township, one in Berkeley Heights, and one in Vauxhall, Union
County, New Jersey. The Bank also has one site in Madison, Morris County,
New Jersey. The principal office is located at 2455 Morris Avenue, Union,
Union County, New Jersey. The principal office is a two story building
constructed in 1993.
All but four of the thirteen locations are owned by the Bank. The lease of
the Five Points Branch located at 356 Chestnut Street, Union, New Jersey
expires November 30, 1997 and is subject to renewal at the Bank's option.
The Career Center Branch located in Union High School expires December 31,
2002 and is also subject to renewal at the Bank's option and the lease of
the Madison office located at 300 Main Street, Madison, New Jersey expires
June 6, 2005 and is subject to renewal at the Bank's option. The lease of
the Millburn Mall Branch located at 2933 Vauxhall Road, Vauxhall, New
Jersey expires January 31, 1997 and is subject to renewal at the Bank's
option. (See the back inside cover of the 1996 Annual Report for a complete
listing of all branches and locations. The Drive In/walk Up located at 2022
Stowe Street, Union, New Jersey is adjacent to a part of the Main Office
facility.) The Bank has two off-site ATM's, one at Union Hospital, 100
Galloping Hill Road, Union, New Jersey and one at Union County College,
1033 Springfield Avenue, Cranford, New Jersey.
ITEM 3--LEGAL PROCEEDINGS
- --------------------------------------------------------------------------------
Not applicable.
ITEM 4--SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- --------------------------------------------------------------------------------
The Corporation had no matter submitted to a vote of security holders
during the fourth quarter of 1996.
ITEM 4--AEXECUTIVE OFFICERS
- --------------------------------------------------------------------------------
The following table sets forth the name and age of each executive officer
of the Parent Company, the period during which each such person has served
as an officer of the Parent Company or the Bank and each such person's
business experience (including all positions with the Parent Company and
the Bank) for the past five years:
31 March 97 Page 11
Center Bancorp, Inc. Form 10-K
<PAGE>
<TABLE>
<CAPTION>
Name and Age Officer Since Business Experience
=================================================================================================
<S> <C> <C>
John J. Davis 1982 the Parent Company: President & Chief Executive Officer
Age - 54 1977 the Bank of the Parent Company and the Bank
Donald Bennetti 1996 the Parent Company: Vice President of the Parent Company
Age - 53 1993 the Bank Vice President of the Bank
Anthony C. Weagley 1996 the Parent Company: Vice President & Treasurer of the Parent
Age - 35 1985 the Bank Company Senior Vice President & Cashier
(1996-Present),Vice President & Cashier
(1991 - 1996) and Assistant Vice President
prior years of the Bank
</TABLE>
PART II
ITEM 5--MARKET INFORMATION FOR THE REGISTRANT'S STOCK AND RELATED
STOCKHOLDER MATTERS
- --------------------------------------------------------------------------------
The information required by Item 5 of Form 10-K appears on page 30 of the
1996 Annual Report and is incorporated herein by reference. As of December
31, 1996, there were 629 holders of record of the Parent Company's Common
Stock.
ITEM 6--SELECTED FINANCIAL DATA
- --------------------------------------------------------------------------------
The information required by Item 6 of Form 10-K appears on pages 10 - 11 of
the 1996 Annual Report and is incorporated herein by reference.
ITEM 7--MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
- --------------------------------------------------------------------------------
The information required by Item 7 of Form 10-K appears on pages 12-31 of
the 1996 Annual Report and is incorporated herein by reference.
ITEM 8--FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
- --------------------------------------------------------------------------------
The information required by Item 8 of Form 10-K appears on pages 32-52 of
the 1996 Annual Report and is incorporated herein by reference.
ITEM 9--CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURES
- --------------------------------------------------------------------------------
None
PART III
ITEM 10--DIRECTORS OF THE REGISTRANT
- --------------------------------------------------------------------------------
The Corporation responds to this item by incorporating herein by reference
the material responsive to such item in the Corporation's definitive proxy
statement for its 1997 Annual Meeting of Stockholders.
31 March 97 Page 12
Center Bancorp, Inc. Form 10-K
<PAGE>
ITEM 11--EXECUTIVE COMPENSATION
- --------------------------------------------------------------------------------
The Corporation responds to this item by incorporating herein by reference
the material responsive to such item in the Corporation's definitive proxy
statement for its 1997 Annual Meeting of Stockholders.
ITEM 12--SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
- --------------------------------------------------------------------------------
The Corporation responds to this item by incorporating herein by reference
the material responsive to such item in the Corporation's definitive proxy
statement for its 1997 Annual Meeting of Stockholders.
ITEM 13--CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
- --------------------------------------------------------------------------------
The Corporation responds to this item by incorporating herein by reference
the material responsive to such item in the Corporation's definitive proxy
statement for its 1997 Annual Meeting of Stockholders.
PART IV
ITEM 14--EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND
REPORTS ON FORM 8 -K
- --------------------------------------------------------------------------------
A1. Financial Statements
<TABLE>
<CAPTION>
Page in Annual Report
---------------------
<S> <C>
Consolidated Statements of Condition -December 31, 1996, and 1995 32
--------------------------------------------------------------------------------------------
Consolidated Statements of Income for the years ended December 31, 1996, 33
1995 and 1994
--------------------------------------------------------------------------------------------
Consolidated Statements of Changes in Stockholders' Equity for the years 34
ended December 31, 1996, 1995 and 1994
--------------------------------------------------------------------------------------------
Consolidated Statements of Cash Flows for the years ended December 31, 1996, 35
1995 and 1994
--------------------------------------------------------------------------------------------
Notes to Consolidated Financial Statements 36-52
--------------------------------------------------------------------------------------------
Report of Independent Auditors 53
--------------------------------------------------------------------------------------------
</TABLE>
A2. Financial Statement Schedules
All Schedules have been omitted as inapplicable, or not required, or
because the required information is included in the Consolidated Financial
Statements or the notes thereto.
A3. Exhibits
3.1 Certificate of Incorporation of the Registrant is incorporated by
reference to Exhibit 3.1 to the Registrant's Annual Report on Form 10-K for
the year ended December 31, 1992
3.2 Bylaws of the Registrant is incorporated by reference to Exhibit 3.2 to
the Registrant's Annual Report on Form 10-K for the year ended December 31,
1992
31 March 97 Page 13
Center Bancorp, Inc. Form 10-K
<PAGE>
10.1 Employment agreement between the Registrant and Don Bennetti.
10.2 Employment agreement between the Registrant and John J. Davis is
incorporated by reference to exhibit 10.2 to the Registrant's Annual Report
on Form 10-K for the year ended December 31, 1995
10.3 The Registrant's Employee Stock Option Plan is incorporated by
reference to exhibit 10.3 to the Registrant's Annual Report on Form 10-K
for the year ended December 31, 1993
10.4 The Registrant's Outside Director Stock Option Plan is incorporated by
reference to exhibit 10.3 to the Registrant's Annual Report on Form 10-K
for the year ended December 31, 1993
10.5 Supplemental Executive Retirement Plans ("SERPS") are incorporated by
reference to exhibit 10.5 to the Registrant's Annual Report on Form 10-K
for the year ended December 31, 1994
10.6 Executive Split Dollar Life Insurance Plan is incorporated by
reference to exhibit 10.5 to the Registrant's Annual Report on Form 10-K
for the year ended December 31, 1994
10.7 Employment agreement between the Registrant and Anthony Weagley, dated
as of January 1, 1996 is incorporated by reference to exhibit 10.7 to the
Registrant's Annual Report on Form 10-K for the year ended December 31,
1995
10.8 Agreement and Plan of Merger, by and between the Registrant and Lehigh
Savings Bank, SLA., dated as of February 14, 1996, as amended is
incorporated by reference to exhibit 2 to the Registrant's Annual Report on
Form 10-K for the year ended December 31, 1995
10.9 Inducement Agreement, dated February 14, 1996 by and between the
Registrant and the trustee under a trust agreement applicable to the
majority shareholder of Lehigh Savings Bank, SLA is incorporated by
reference to exhibit 10.2 of the Registrant's for 10Q for the period ended
March 31, 1996.
11.1 Statement regarding computation of per share earnings is omitted
because the computation can be clearly determined from the material
incorporated by reference in this Report.
13.1 Registrant's Annual Report to Shareholders for the year ended December
31, 1995 (parts not incorporated by reference are furnished for information
purposes only and are not to be deemed to be filed herewith.)
21.1 Subsidiaries of the Registrant is incorporated by reference to exhibit
22.1 to the Registrant's Annual Report on Form 10-K for the year ended
December 31, 1992
23.1 Consent of KPMG Peat Marwick LLP
27.1 Financial Data Schedule
B. Reports on Form 8-K
There were no reports on Form 8-K filed by the Registrant during the fourth
quarter of 1996.
31 March 97 Page 14
Center Bancorp, Inc. Form 10-K
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, Center Bancorp, Inc. has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
CENTER BANCORP, INC.
/s/ JOHN J. DAVIS
--------------------------------------
John J. Davis
President and Chief Executive Officer
Dated March 31, 1997
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant, in
the capacities described below and on the date indicated above:
/s/ CHARLES P. WOODWARD /s/ HUGO BARTH, III
- ---------------------------------- -----------------------------------
Charles P. Woodward, Hugo Barth, III
Director and Chairman of the Board Director
/s/ ROBERT L. BISCHOFF /s/ ALEXANDER BOL
- ---------------------------------- -----------------------------------
Robert L. Bischoff Alexander Bol
Director Director
/s/ BRENDA CURTIS /s/ DONALD G. KEIN
- ---------------------------------- -----------------------------------
Brenda Curtis Donald G. Kein
Director Director
/s/ JOHN J. DAVIS /s/ HERBERT SCHILLER
- ---------------------------------- -----------------------------------
John J. Davis Herbert Schiller
President and Chief Executive officer Director
/s/ PAUL LOMAKIN, JR. /s/ STAN R. SOMMER
- ---------------------------------- -----------------------------------
Paul Lomakin, Jr. Stan R. Sommer
Director Director
/s/ WILLIAM THOMPSON /s/ ANTHONY C. WEAGLEY
- ---------------------------------- -----------------------------------
William Thompson Anthony C. Weagley
Director Vice President & Treasurer (Chief
Accounting and Financial Officer)
31 March 97 Page 15
Center Bancorp, Inc. Form 10-K
<PAGE>
EXHIBIT INDEX
Exhibit No. Description
- ----------- -----------
13.1 Registrant's Annual Report to Shareholders for the year
ended December 31, 1995 (parts not incorporated by
reference are furnished for information purposes only and
are not to be deemed to be filed herewith.)
23.1 Consent of KPMG Peat Marwick LLP
27.1 Financial Data Schedule
EXHIBIT 10.1
AGREEMENT
THIS AGREEMENT ("Agreement"), dated as of January 1, 1996, by and among
UNION CENTER NATIONAL BANK, a bank chartered under the laws of Congress (the
"BANK"), CENTER BANCORP INC., a New Jersey corporation that owns all of the
capital stock of the Bank (the "Company"), and DONALD BENNETTI ("Employee"),
WITNESSETH:
WHEREAS, the Company, the Bank and the Employee desires to enter into an
employment agreement providing for the Employee's employment;
WHEREAS, the Bank and/or the Company have adopted certain benefit plans,
including the following plans: (i) an Achievement Incentive Plan (as it may be
amended from time to time, the "AIP"), (ii) a split dollar insurance plan (as it
may be amended from time to time, the "SDIP") and (iii) a 401(k) Savings Plan
(as it may be amended from time to time, the "401(k)Plan" and, together with the
AIP and the SDIP, the "Plans");
WHEREAS, it is understood that the Company shall remain fully liable
hereunder, regardless of the extent to which the Bank is liable hereunder; and
WHEREAS, the Bank and the Company desire to cause Employee to be employed
so as to devote his full time to the business of the Bank, and Employee desires
to be so employed,
NOW, THEREFORE, in consideration of the mutual covenants set forth herein,
the parties hereto hereby agree as follows:
1. EMPLOYMENT. Bank and the Company agree that Employee shall be employed,
and Employee agrees to be so employed, in the capacity of a Vice President of
the Bank. Except as otherwise provided in the next sentence of this Section 1,
employment shall be for a term of three years (3) years, effective as of January
1, 1996 and terminating December 31, 1998 (the "Initial Term"). Notwithstanding
the foregoing, this Agreement shall automatically be extended (i) at the end of
the Initial Term, for successive one year renewal terms unless, at least two
years prior to the commencement of any such renewal term, notice of termination
of this Agreement is given by any party hereto to the other parties hereto and
(ii) if a "Change in Control Event" (as defined in Section 8(a) hereof) occurs
at any time during the Initial Term or during any such renewal term, for a
period of three years from the date of such Change in Control Event. It is
understood that the effect of the immediately preceding sentence is to assure
Employee that in the event that he receives notice of termination of employment
pursuant to Section 8(a) hereunder, he will be entitled to severance benefits
covering at least two full years of employment in the absence of a Change in
Control Event or covering at least three full years of employment in the case
of a Change in Control Event.
<PAGE>
2. TIME AND EFFORTS. Employee shall diligently and conscientiously devote
his full and exclusive time and attention and best efforts in discharging his
duties as a Vice President of the Bank.
3. BOARD OF DIRECTORS. Employee shall at all times discharge his duties in
consultation with and under the supervision of the President and the Boards of
Directors of the Bank and the Company. In the performance of his duties,
Employee shall make his principal office in such place as the President of the
Bank and the Company and Employee may from time to time mutually agree.
4. COMPENSATION.
(a) Salary-Initial Period. During the period from January 1, 1996 through
December 31, 1996 (the "Initial Period"), Employee shall receive, pursuant to
the determination of the Executive Compensation Committee of the Bank's Board of
Directors (the "Executive Compensation Committee"), as compensation for his
services hereunder, a salary at the rate of sixty eight thousand dollars
($68,000) per annum. This amount shall be paid in twenty-four (24) equal
semi-monthly installments on the 15th and 30th day of each month, or as near
thereto as practicable.
(b) SALARY-SUBSEQUENT YEARS. During each twelve month period following the
Initial Period, Employee shall receive, as compensation for his services, his
salary set forth for the immediately preceding twelve month period plus such
salary increment as shall be determined by the Executive Compensation Committee,
with reference to the Bank's salary guide. During each such twelve month period,
Employee's salary shall be paid in twenty-four (24) equal semi-monthly
installments on the 15th and 30th day of each month, or as near thereto as
practicable.
(c) BONUSES. Employee shall be entitled to participate in the Alp and shall
receive incentive compensation in accordance with the terms of the Alp. In the
event that the Alp is terminated, Employee shall receive such incentive
compensation as shall be awarded to him by the Executive Compensation Committee.
5. EXPENSES: BENEFITS.
(a) REIMBURSEMENT. The Bank and the Company shall reimburse Employee for
all reasonable and necessary expenses incurred in carrying out his duties under
this Agreement. Employee shall either (i) present to the Bank from time to time
an itemized account of such expenses in any form reasonably required by the Bank
and the Company for reimbursement; or (ii) post such expenses to a credit card
or other payment means issued to Employee by the Bank and the Company.
(b) AUTOMOBILE. The Bank and the Company recognize the Employee's need for
an automobile for business purposes. The Bank and the Company, therefore, shall
provide
-2-
<PAGE>
(without expense to Employee) the Employee with an automobile, including all
related maintenance, repairs, insurance, and other costs, for business and
personal use and shall reimburse the Employee for all taxes payable by him as a
result of the provision of this benefit to the Employee. The automobile shall be
the automobile provided to the Employee in December 1995 and the related costs
shall be comparable to those which the Bank provided to the Employee as of
December 31, 1995.
(c) MISCELLANEOUS BENEFITS. The Bank and the Company shall provide Employee
with all benefits that are generally provided officers of the Bank and/or the
Company, other than the President.
6. HEALTH INSURANCE; LIFE INSURANCE; DISABILITY INSURANCE; PENSION; AND
OTHER PLANS. The Bank and the Company shall provide Employee with life
insurance, disability insurance, health insurance, pension benefits and benefits
under the SDIP and the 401(k) Plan to the extent that such benefits are provided
to Employee on the date hereof, together with any benefit enhancements that may
be added to such plans in the future. The monetary amount of such benefits
received by Employee shall be in accordance with the terms and conditions of
such plans.
7. VACATION. Employee shall receive annual vacations in conformity with
Bank and Company policies on vacations.
8. TERMINATION BY THE BANK WITHOUT CAUSE OR BY THE EMPLOYEE WITH AND
WITHOUT GOOD REASON; DEATH.
(a) The Bank and the Company may, without 'Cause" (as defined herein),
terminate this Agreement at any time by giving 30 days' written notice to the
Employee. In such event, (i) the Employee, if requested by either the Bank or
the Company, shall continue to render services, and regardless of whether such
request is made shall be paid his regular compensation and shall continue to
participate in all benefit plans of the Company and the Bank, up to the date of
termination, (ii) the Employee shall be paid in a single sum, on the date of
termination, a severance allowance equal to Employee's regular compensation for
the duration of the term of this Agreement, as theretofore renewed pursuant to
Section 1 hereof, less all amounts required to be withheld and deducted, (iii)
the Employee shall be paid in a single sum, on the date of termination, an
amount equal to the largest annual benefit received by Employee under the Alp
since the commencement of the ALP (the "Largest Bonus") multiplied by the number
of years (rounded to the nearest tenth of a year) remaining in the term of this
Agreement, as theretofore renewed pursuant to Section 1 hereof; (iv) the
Employee shall be entitled to receive, during the period commencing on the date
of termination and ending on the last day of the term (as theretofore renewed
pursuant to Section 1 hereof) (the "Extension Period"), the same benefits (or
the economic equivalent thereof) that he would have received under the SDIP, the
401(k) Plan and the other benefit plans described in Section 6 hereof had he
remained employed by the Bank during the Extension Period (assuming a salary
equal to the salary in effect on the date of termination and an annual incentive
under the ALP equal to the Largest Bonus), (v) the Bank and the Company shall
fund the obligations set forth in the immediately preceding clause (iv) and
(vi)
-3-
<PAGE>
all stock options granted to Employee by the Company shall be exercisable in
full, effective as of the date of termination.
(b) The Employee shall have the right to resign (and thereby terminate this
Agreement) with "Good Reason" (as defined herein) by delivering notice of such
resignation to the Bank and the Company at least 30 days prior to the effective
date of such resignation. If; prior to the expiration of the term hereof (as
theretofore renewed pursuant to Section 1 hereof), the Employee shall resign for
Good Reason, the Employee shall be entitled to the same benefits that he would
have received pursuant to Section 8(a) hereof had his employment been terminated
(on the effective date of such resignation) by the Bank or the Company without
Cause.
(c) The Employee shall have no obligation to seek substitute employment or
otherwise mitigate the Company's obligation to make the payments and provide the
benefits described in Sections 8(a) and 8(b) hereof; provided, however, that in
the event that (i) Employee's employment terminates prior to a Change in Control
Event and (ii) Employee obtains other employment, then the salary and benefits
which he actually receives pursuant to such other employment shall be offset
against the Employer's obligations hereunder.
(d) For purposes of this Agreement, the term "Good Reason" shall mean a
resignation by the Employee within 180 days after (i) a materially adverse
change in the Employee's duties or title, (ii) a material breach of this
Agreement by the Bank or the Company, (iii) the consummation of an acquisition
by a third party of a majority of the voting capital stock of the Company or the
Bank or substantially all of the assets of the Company or the Bank or (iv) a
change in the composition of the Board of Directors of the Company such that the
"Continuing Directors" (as defined herein) no longer constitute a majority of
the Board (the events referred to in clauses "ii" and "iv" being referred to
herein as "Change in Control Events"). For purposes of this Agreement, the term
"Continuing Director" shall mean (i) each current member of the Company's Board
of Directors and (ii) each person who is hereinafter first nominated to such
Board by unanimous vote of the persons who then constitute Continuing Directors.
(e) The Employee may, without Good Reason, terminate this Agreement by
giving 60 days' written notice to the Bank and the Company. In such event the
Employee shall contmue to render his services, shall be paid his regular
compensation and shall continue to participate in all benefit plans of the
Company and the Bank up to the date of termination, but he shall not receive any
severance allowance pursuant to this Agreement.
(f) In the event that the Employee dies during the term of this Agreement
as theretofore renewed pursuant to Section 1 hereof, this Agreement shall
terminate as of the date of his death, subject to the obligations of the Company
and the Bank that have accrued through the date of death and subject to the
terms of all applicable benefit plans (including insurance plans) implemented by
the Bank and the Company.
-4-
<PAGE>
9. TERMINATION WITH CAUSE.
(a) The Bank and Company may terminate this Agreement for "Cause" by giving
Employee 30 days' written notice. In such event, the Bank and the Company shall
pay Employee his compensation, and Employee shall continue to participate in all
benefit plans of the Company and the Bank up to the date of termination, but the
Bank and the Company shall not be required to provide the Employee with any
severance allowance pursuant to this Agreement. For purposes of this Agreement,
"Cause" shall consist of the following:
(i) disloyal, dishonest or felonious conduct of Employee that materially
adversely affects the Bank or the Company; or
(ii) termination of the Bank's business due to unprofitability, insolvency,
bankruptcy or directive by governmental regulators.
Termination for "Cause" shall not be construed to include the takeover of the
Bank or the Company, in either a hostile or voluntary manner, by another person,
firm or corporation.
(b) Notwithstanding the foregoing, in the event that termination is
intended as a result of alleged disloyal or dishonest conduct, the Boards of
Directors of the Bank and the Company shall give the Employee written notice of
the occurrence of (and the facts and circumstances surrounding) the acts
allegedly constituting "Cause" and a fair opportunity to present his position to
such Boards. Such event shall not constitute "Cause" if; no later than ten (10)
business days following Employee's receipt of such notice, the Employee
establishes that either the alleged acts did not occur that such acts did not:
constitute dishonest or disloyal conduct, that such acts did not materially
adversely affect the Company and the Bank or that such acts have been fully
corrected and shall not be repeated.
10. NOTICES. All notices required or permitted to be given under this
Agreement shall be given by certified mail, return receipt requested, to the
parties at the following addresses, or to such other addresses as either may
designate in writing to the other party:
-5-
<PAGE>
If to the Bank or the Company:
Union Center National Bank
2455 Morris Avenue
Union, New Jersey 07083
Attention: President
If to Employee:
Donald Bennetti
29 Oakland Avenue
Edison, New Jersey 08817
11. INDEMNIFICATION: LIABILITY. Employee shall be indemnified by the Bank
and the Company to the maximum extent permitted by law (and shall be entitled to
receive advances to the maximum extent permitted by law) with respect to all
actions and all decisions not to act taken by Employee during the term of this
Agreement. The Bank and Company shall be jointly and severally liable under this
Agreement with respect to all obligations of either such party hereunder. Any
defense available to the Bank that this Agreement is not enforceable against it
shall not constitute a defense for the Company. The obligations of this Section
11 shall survive termination of this Agreement with respect to acts or omissions
occurring prior to such termination.
12. GOVERNING LAW. This Agreement shall be construed and enforced in
accordance with the laws of the State of New Jersey.
13. ENTIRE CONTRACT. This Agreement constitutes the entire understanding
and agreement among the Bank, the Company and Employee with regard to all
matters set forth herein. There are no other agreements, conditions or
representations, oral or written, express or implied, with regard thereto. This
Agreement may be amended only in writing, signed by all parties.
14. NON-WAIVER. A delay or failure by any party to exercise a right under
this partial or single exercise of that right, shall not constitute a waiver of
that or any other right.
15. HEADINGS. Headings in this Agreement are for convenience only and shall
not be useD To interpret or construe its provisions.
16. TAXES. In the event that either the Company's independent public
accountants or the Internal Revenue Service determines that any payment,
coverage or benefit provided to Employee is subject to the excise tax imposed by
Section 4999 (or any successor provision) of the Internal Revenue Code of 1986,
as amended ("Section 4999"), the Company and the Bank, within 30 days
thereafter, shall pay to Employee, in addition to any other payment,
-6-
<PAGE>
coverage or benefit due and owing hereunder, an amount determined by multiplying
the rate of excise tax then imposed by Section 4999 by the amount of the "excess
parachute payment" received by Employee (determined without regard to any
payments made to Employee pursuant to this Section 16) and dividing the product
so obtained by the amount obtained by subtracting the aggregate local, state and
Federal income tax rate applicable to the receipt by Employee of the "excess
parachute payment" (taking into account the deductibility for Federal income tax
purposes of the payment of state and local income taxes thereon) from the amount
obtained by subtracting from 1.00 the rate of excise tax then imposed by Section
4999 of the Code, it being the intention of the parties hereto that Employee's
net after tax position be identical to that which would have obtained had
Sections 2800 and 4999 not been part of the Internal Revenue Code of 1986, as
amended.
17. COUNTERPARTS. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same Agreement.
18. BINDING EFFECT. The provisions of this Agreement shall be binding upon
and inure to the benefit of both parties and their respective successors and
assigns.
IN WITNESS WHEREOF, the Bank and the Company each have, by its appropriate
officers, signed and affixed its seal and Employee has signed and sealed this
Agreement.
UNION CENTER NATIONAL BANK
By: /s/ JOHN J. DAVIS
------------------------------
John J. Davis, President
CENTER BANCORP INC.
By: /s/ JOHN J. DAVIS
------------------------------
John J. Davis, President
By: /s/ DONALD BENNETTI
------------------------------
Donald Bennetti
-7-
CENTER BANCORP INC.
SUMMARY OF SELECTED STATISTICAL INFORMATION AND FINANCIAL DATA
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------------------------------------------------------------------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA) 1996 1995 1994 1993 1992 1991
------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
SUMMARY OF INCOME
Interest income $ 26,430 $ 21,749 $ 18,983 $ 18,341 $ 17,492 $ 17,269
Interest expense 11,586 8,787 5,914 6,762 7,328 8,815
Net interest income 14,844 12,962 13,069 11,579 10,164 8,454
Provision (credit) for loan losses (132) 0 10 200 461 117
Net interest income after provision
(credit) for loan losses 14,976 12,962 13,059 11,379 9,703 8,337
Other income 727 732 668 820 1,159 878
Other expense 9,910 8,138 8,116 7,384 6,753 5,480
Income before income tax expense 5,793 5,556 5,611 4,815 4,109 3,735
Income tax expense 1,636 1,516 1,434 1,014 916 1,046
Net income $ 4,157 $ 4,040 $ 4,177 $ 3,801 $ 3,193 $ 2,689
------------------------------------------------------------------------------------------------------------------------
STATEMENT OF FINANCIAL CONDITION DATA
Investments $280,123 $209,692 $207,483 $206,844 $208,928 $136,877
Total loans 117,830 97,570 88,805 65,745 59,517 59,443
Total assets 459,218 347,777 325,113 318,607 309,664 237,428
Deposits 426,654 295,666 290,175 294,469 286,665 215,714
Stockholders' equity 30,213 27,679 24,211 22,203 19,975 18,327
------------------------------------------------------------------------------------------------------------------------
DIVIDENDS
Cash dividends $ 1,787 $ 1,775 $ 1,730 $ 1,623 $ 1,570 $ 1,395
Dividend payout ratio 43% 44% 41% 43% 49% 52%
------------------------------------------------------------------------------------------------------------------------
CASH DIVIDENDS PER SHARE
Cash dividends $0.80 $0.80 $0.78 $0.74 $0.71 $0.63
------------------------------------------------------------------------------------------------------------------------
EARNINGS PER SHARE
Net income $1.86 $1.82 $1.89 $1.73 $1.45 $1.23
------------------------------------------------------------------------------------------------------------------------
AVERAGE WEIGHTED COMMON SHARES
OUTSTANDING 2,231,113 2,218,331 2,210,506 2,202,807 2,196,784 2,196,546
------------------------------------------------------------------------------------------------------------------------
OPERATING RATIOS
Return on average assets 1.00% 1.15% 1.27% 1.18% 1.19% 1.21%
Return on tangible average equity 15.21% 15.32% 17.59% 17.93% 16.35% 15.37%
------------------------------------------------------------------------------------------------------------------------
BOOK VALUE PER COMMON SHARE $13.50 $12.46 $10.93 $10.57 $9.53 $8.76
Tangible book value (at year end) $11.86 $12.46 $10.93 $10.57 $9.53 $8.76
------------------------------------------------------------------------------------------------------------------------
NON-FINANCIAL INFORMATION
Common stockholders 633 629 598 586 562 551
Staff--Full time equivalent 170 132 132 133 118 101
------------------------------------------------------------------------------------------------------------------------
<FN>
Footnote: All per share amounts have been restated to reflect the three-for-two stock split paid on May 8, 1996,
and all prior stock dividends.
</FN>
</TABLE>
-----------------------------------------------------------------------------
10
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------------------------------------------------------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA) 1990 1989 1988 1987 1986 1985
-----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
SUMMARY OF INCOME
Interest income $16,975 $15,981 $14,713 $13,371 $11,459 $10,797
Interest expense 8,827 8,253 6,773 5,995 4,795 4,698
Net interest income 8,148 7,728 7,940 7,376 6,664 6,099
Provision (credit) for loan losses 119 27 40 15 28 31
Net interest income after provision (credit)
for loan losses 8,029 7,701 7,900 7,361 6,636 6,068
Other income 723 525 379 369 353 302
Other expense 5,094 4,509 3,950 3,427 3,162 3,001
Income before income tax expense 3,658 3,717 4,329 4,303 3,827 3,369
Income tax expense 1,135 1,165 1,345 1,501 1,485 1,248
Net income $ 2,523 $ 2,552 $ 2,984 $ 2,802 $ 2,342 $ 2,121
-----------------------------------------------------------------------------------------------------------------------
STATEMENT OF FINANCIAL CONDITION DATA
Investments $96,361 $80,963 $94,558 $97,983 $73,683 $62,965
Total loans 68,778 70,348 63,720 49,760 40,560 44,183
Total assets 209,912 191,277 182,459 176,712 157,937 128,218
Deposits 186,828 168,909 161,195 161,917 145,523 115,091
Stockholders' equity 17,033 15,905 14,729 13,137 11,426 10,500
-----------------------------------------------------------------------------------------------------------------------
DIVIDENDS
Cash dividends $ 1,393 $1,393 $ 1,356 $1,165 $1,085 $ 927
Dividend payout ratio 55% 55% 45% 42% 46% 45%
-----------------------------------------------------------------------------------------------------------------------
CASH DIVIDENDS PER SHARE
Cash dividends $0.63 $0.63 $0.61 $0.53 $0.49 $0.41
-----------------------------------------------------------------------------------------------------------------------
EARNINGS PER SHARE
Net income $1.15 $1.17 $1.35 $1.28 $1.06 $0.93
-----------------------------------------------------------------------------------------------------------------------
AVERAGE WEIGHTED COMMON SHARES
OUTSTANDING 2,196,546 2,192,984 2,202,807 2,189,647 2,209,026 2,293,068
-----------------------------------------------------------------------------------------------------------------------
OPERATING RATIOS
Return on average assets 1.26% 1.38% 1.65% 1.70% 1.78% 1.26%
Return on tangible average equity 15.34% 16.43% 22.52% 20.92% 20.35% 15.34%
-----------------------------------------------------------------------------------------------------------------------
BOOK VALUE PER COMMON SHARE $8.15 $6.65 $6.15 $5.49 $4.77 $4.75
Tangible Book value (at year end) $8.15 $6.65 $6.15 $5.49 $4.77 $4.75
-----------------------------------------------------------------------------------------------------------------------
NON-FINANCIAL INFORMATION
Common stockholders 511 504 499 480 490 480
Staff 100 92 92 86 95 95
-----------------------------------------------------------------------------------------------------------------------
</TABLE>
------------------------------------------------------------------------------
11
<PAGE>
CENTER BANCORP INC.
ACQUISITION OF LEHIGH SAVINGS SLA
On June 28, 1996, the Corporation completed its acquisition of Lehigh
Savings Bank SLA, ("Lehigh") a New Jersey chartered Savings & Loan, in a
transaction accounted for under the purchase method of accounting. At June 28,
1996, Lehigh Savings Bank SLA had assets of $70.9 million (primarily cash and
cash equivalents of $53.0 million and loans of $15.0 million), deposits of
$68.1 million and stockholders' equity of $2.7 million. Lehigh had a net loss
of $1.1 million for the fiscal period of July 1, 1995 to June 27, 1996. The
acquisition was effected as a series of mergers pursuant to which the
Corporation paid a total of approximately $5.5 million in cash and Lehigh
ultimately was merged into the Corporation's Union Center National Bank
subsidiary. The resulting goodwill amounted to $3.8 million and is being
amortized over a 15 year period. The December 31, 1996 financial pages of this
annual report and consolidated financial statements of the Corporation include
the assets, liabilities, and results of operations of Lehigh since the
acquisition date.
FINANCIAL REVIEW
TABLE OF CONTENTS
Management's Discussion & Analysis ................................ 13-31
Consolidated Statements of Condition .............................. 32
Consolidated Statements of Income ................................. 33
Consolidated Statements of Changes in Stockholders' Equity ........ 34
Consolidated Statements of Cash Flows ............................. 35
Notes to Consolidated Financial Statements ........................ 36-52
Independent Auditors' Report ...................................... 53
- -------------------------------------------------------------------------------
12
<PAGE>
MANAGEMENT'S DISCUSSION & ANALYSIS
OF FINANCIAL CONDITION & RESULTS OF OPERATIONS
The following introduction to Management's Discussion and Analysis
highlights the principal activities of Center Bancorp, Inc. that have
contributed to its earnings performance in 1996.
Center Bancorp's performance for 1996 was highlighted by loan growth,
principally in the mortgage and consumer loan portfolios, and consistent asset
quality which resulted in a credit to the allowance for loan loss reserves and
no other real estate owned (OREO) at December 31, 1996. This marked another year
of solid earnings. As a result of sustained earnings and capital growth,
dividends were maintained at over a 40 percent dividend payout ratio. At the
annual stockholders' meeting on April 16, 1996, the Board of Directors announced
a declaration of a three-for-two stock split of Center Bancorp's common stock.
The split was effective May 31, 1996, and constituted the third time in the last
five years that the Corporation has either declared a stock split or paid a
stock dividend.
Net income for the twelve months ended December 31, 1996, amounted to
$4,157,000 as compared to $4,040,000 and $4,177,000 earned for the comparable
periods in 1995 and 1994, respectively. The resulting earnings per share
amounted to $1.86 as compared to $1.82 and $1.89 earned in 1995 and 1994,
respectively. These figures have been restated to reflect the three-for-two
stock split in 1996 and the five percent stock dividend in 1994.
Earnings performance for 1996 remained consistent with the 1995 period as a
result of increased net interest income being offset by an increase, and higher
than expected operating expenses. These expenses were a direct result of the
acquisition of Lehigh on June 28, 1996. The increased net interest income was
primarily a result of a change in the asset mix, and an increased volume of
earnings-assets, offset in part by an increased volume of interest-bearing
liabilities that partially funded earning-asset growth. The expanded level of
net average earning-assets was primarily supported by the acquired deposit base
of Lehigh and increased time related interest-bearing deposits.
The Corporation's total assets grew to an all time year-end high of $459.2
million at December 31, 1996, increasing $111.4 million or 32 percent over
December 1995 levels. The return on average assets was 1.00 percent in 1996, as
compared with 1.15 percent and 1.27 percent in 1995 and 1994, respectively.
A continuing key element of the Corporation's consistent performance is its
strong capital base. The Corporation's risk-based capital ratios at December 31,
1996 were 15.6 percent for Tier I capital and 16.4 percent for total risk-based
capital. These ratios substantially exceed the minimum of 4 percent for Tier I
capital and 8 percent for total capital under regulatory guidelines. From a
performance viewpoint, return on tangible average shareholder's equity was 15.2
percent in 1996, compared with 15.3 percent for 1995.
The following sections discuss the Corporation's Results of Operations,
Asset and Liability Management, Liquidity and Capital Resources.
RESULTS OF OPERATIONS
The most significant component of Center Bancorp's earnings is net interest
income, which is the difference between the interest earned on the portfolio of
earning assets (principally investments and loans) and the interest paid for
deposits and short-term borrowings which support these assets. Net
- -------------------------------------------------------------------------------
13
<PAGE>
MANAGEMENT'S DISCUSSION & ANALYSIS
OF FINANCIAL CONDITION & RESULTS OF OPERATIONS (CONTINUED)
interest income is directly affected by changes in the volume and mix of
earning-assets and interest-bearing liabilities which support those assets, as
well as changes in the rates earned and paid. Net interest income is presented
in this financial review on a fully tax-equivalent basis, which is a standard
analytical technique designed to adjust 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. As a result, the net interest income data presented in this financial
review differ from the Corporation's net interest income components of the
consolidated financial statements presented elsewhere in this report.
The following table presents the components of net interest income (on a
tax equivalent basis) for the past three years.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
- -----------------------------------------------------------------------------------------------------------------------
1996 1995 1994
- -----------------------------------------------------------------------------------------------------------------------
INCREASE INCREASE
(DECREASE) FROM PERCENT (DECREASE) FROM PERCENT
(DOLLARS IN THOUSANDS) AMOUNT PRIOR YEAR CHANGE AMOUNT PRIOR YEAR CHANGE AMOUNT
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
INTEREST INCOME:
Investments $17,324 $4,043 30.4 $13,281 $ 823 6.6 $12,458
Loans, including fees 8,625 1,099 14.6 7,526 1,827 32.1 5,699
Federal funds sold and securities
purchased under agreement
to resell 481 (461) (48.9) 942 116 14.0 826
- -----------------------------------------------------------------------------------------------------------------------
Total interest income 26,430 4,681 21.5 21,749 2,766 14.6 18,983
- -----------------------------------------------------------------------------------------------------------------------
INTEREST EXPENSE:
- -----------------------------------------------------------------------------------------------------------------------
Certificates $100,000 or more 4,113 1,349 48.8 2,764 2,303 499.6 461
Deposits 7,097 1,176 19.9 5,921 556 10.4 5,365
Short-term borrowings 376 274 268.6 102 14 15.9 88
- -----------------------------------------------------------------------------------------------------------------------
Total interest expense 11,586 2,799 31.9 8,787 2,873 48.6 5,914
- -----------------------------------------------------------------------------------------------------------------------
Net interest income* 14,844 1,882 14.5 12,962 (107) (0.8) 13,069
Tax-equivalent adjustment 578 (112) (16.2) 690 (175) (20.2) 865
- -----------------------------------------------------------------------------------------------------------------------
Net interest income on a fully
tax-equivalent basis $15,422 $1,770 13.0 $13,652 $ (282) (2.0) $13,934
=======================================================================================================================
</TABLE>
* Before the provision for loan losses.
NOTE: The tax-equivalent adjustment was computed based on an assumed statutory
Federal income tax rate of 34 percent. Adjustments were made for interest
accrued on securities of state and political subdivisions.
NET INTEREST INCOME
Net interest income on a fully tax-equivalent basis increased $1.8 million
or 13.0 percent to approximately $15.4 million during 1996 from approximately
$13.7 million for 1995. The net interest margin decreased from 4.21 percent to
3.72 percent for 1996 due to the effect of the increased cost of funds
reflecting the rise in short-term interest rates that prevailed throughout most
of 1996. This was offset in part by an increase in the average volume of
interest-earning assets in 1996 as compared to 1995. The average balance of
interest-earning assets and interest-bearing liabilities increased from $324.3
- --------------------------------------------------------------------------------
14
<PAGE>
million and $260.5 million, respectively, in 1995 to $385 million and $321.3
million, respectively, in 1996. Net average interest-earning-assets remained
unchanged at $63.8 million in 1995 and 1996. The 1996 changes in average
balances was primarily due to increased volumes of taxable investments funded
with increased volumes of time deposits. An increase in the average yield on
interest-earning assets was offset by a more substantial increase in the average
cost of interest-bearing liabilities (3.61 percent in 1996 versus 3.37 percent
in 1995). The increase in the average yield on interest-earning assets was only
9 basis points (6.92 percent in 1995 versus 7.01 percent in 1996).
These various factors are reflected in the following table presenting a
rate/volume analysis of changes in net interest income which indicates, for
1996, a net increase of $692,000 from rate-related factors and a net increase of
$1,078,000 from volume related factors.
The table on page 31 (Average Balance Sheet with Interest and Average
Rates) shows the Corporation's consolidated average balance of assets,
liabilities and stockholders' equity, the amount of average interest-earning
assets and interest-bearing liabilities, and net interest income as a percentage
of average interest-earning assets.
The factors underlying the year-to-year changes in net interest income are
reflected in the tables appearing below and on page 31, both of which have been
presented on a tax-equivalent basis (assuming a 34 percent tax rate). The table
presented below (Analysis of Variance in Net Interest Income Due to Volume and
Rates) describes the impact on net interest income resulting from changes in
average balances and average rates over the past three years. Any change in
interest income or expense attributable to both changes in volume and changes in
rate has been allocated in proportion to the relationship of the absolute dollar
amount of change in each category.
ANALYSIS OF VARIANCE IN NET INTEREST INCOME DUE TO VOLUME AND RATES
<TABLE>
<CAPTION>
1996/1995 1995/1994
INCREASE (DECREASE) INCREASE (DECREASE)
DUE TO CHANGE IN: DUE TO CHANGE IN:
- -----------------------------------------------------------------------------------------------------------------------
AVERAGE AVERAGE NET AVERAGE AVERAGE NET
(DOLLARS IN THOUSANDS) VOLUME RATE CHANGE VOLUME RATE CHANGE
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS:
INVESTMENT SECURITIES:
Taxable $3,984 $ 276 $4,260 $ 463 $ 700 $1,163
Non-taxable (337) 8 (329) (595) 80 (515)
Federal funds sold and securities
purchased under agreement to resell (426) (35) (461) 36 80 116
Loans, net of unearned discounts 1,013 86 1,099 1,775 52 1,827
- -----------------------------------------------------------------------------------------------------------------------
Total interest-earning assets 4,234 335 4,569 1,679 912 2,591
- -----------------------------------------------------------------------------------------------------------------------
INTEREST-BEARING LIABILITIES:
Money market deposits (80) 129 49 (285) 338 53
Savings deposits 123 (136) (13) (184) 275 91
Time deposits 2,874 (76) 2,798 1,670 963 2,633
Other interest-bearing deposits (29) (280) (309) (35) 117 82
Short-term borrowings 268 6 274 (2) 16 14
- -----------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 3,156 (357) 2,799 1,164 1,709 2,873
- -----------------------------------------------------------------------------------------------------------------------
Change in net interest income $1,078 $ 692 $1,770 $ 515 $ (797) $ (282)
========================================================================================================================
</TABLE>
- --------------------------------------------------------------------------------
15
<PAGE>
MANAGEMENT'S DISCUSSION & ANALYSIS
OF FINANCIAL CONDITION & RESULTS OF OPERATIONS (CONTINUED)
Interest income (tax-equivalent) increased by $4.6 million from 1995 to
1996 and by $2.6 million from 1994 to 1995. The primary factor on the
improvement in interest income during 1996 was the increased levels of
earning-assets, as previously noted. The Corporation's loan portfolio increased
on average by $12.7 million, primarily as a result of increased volumes of
residential mortgages and home equity and consumer loans. This increase was
primarily achieved through deposit growth and acquired loans. The loan portfolio
(traditionally the highest yielding type of interest-earning asset) represented
28.0 percent of the Corporation's interest-earning assets (on average) during
1996 as compared with 29.4 percent of such assets (on average) during 1995.
Interest income generated from the loan portfolio in 1996 was affected by
declines in market demand coupled with continued refinancing activity in the
portfolio as borrowers continued to capitalize on the lower interest rates
available during the first half of the year.
Investments contributed the most significant change in the earning-asset
mix in 1996. Investment volume was driven by the increased deposit volume gained
with the acquisition of Lehigh, which was offset in cash received on June 28,
1996. The cash, approximately $53 million, was used in investing activity and in
interest rate-risk management strategies in restructuring the balance sheet.
Within the investment portfolio, volume increases in taxable securities far
outweighed (decreases) in the non-taxable portfolio. The substantial
preponderance of taxable security growth reflects the change in interest rates,
making the yields on taxable instruments more attractive.
Interest expense increased during 1996, primarily as a result of the
increased deposit volumes, and the continued pressure of the cost of funds in
the short-term market. Short-term market rates increased and then leveled off at
disproportionate levels to other sectors of the yield curve during 1996, as the
curve flattened. As a result, banks became more competitive to retain and
attract new deposits, within the entire financial industry, given deposit
pricing pressures and increased competition from "non-bank" competitors, such as
brokerages and mutual funds. For the twelve months ended December 31, 1996,
interest expense increased by $2.8 million or 31.8 percent as compared with the
twelve months ended December 31, 1995. The average cost of funds increased by 24
basis points, reflecting the rise in interest rates, and changes in the
liability mix, (i.e., increased volumes of more costly interest-bearing
liabilities).
During 1995 interest expense increased $2.9 million or 48.6 percent as
compared with the twelve months ended December 31, 1994. This was primarily a
result of higher average funding costs, as short-term interest rates moved
higher throughout most of 1995. The resulting average cost of funds to the
Corporation increased by 95 basis points. This cost was further impacted by a
change in the liability mix, as the Corporation had increased volumes of more
costly interest-bearing liabilities and funding sources. During 1995, less
expensive deposits such as NOW checking, Savings and Money Market accounts were
replaced by more costly time deposits of $100,000 and over.
Inflationary fears and the expanding economy have pushed short-term
interest rates up. There continues to be a disintermediation of rates in the
short-term interest rate market. This in turn has effected the cost of funds
associated with a number of the Corporation's funding products. i.e. municipal
deposits tied to market indices, "Jumbo" Certificates of Deposit, and short-term
repurchase agreements. Management believes that this pressure and continued
disparity in the level of interest
- -------------------------------------------------------------------------------
16
<PAGE>
rates in the short-term end of the yield curve will continue to exert upward
pressure on the cost of funds into the beginning of 1997. Deposit growth
continued to be impacted by the depositors' desire for higher-yielding
investment alternatives, such as mutual funds, equity securities, tax-free
instruments, and a variety of insurance products. As interest rates remained
high in the short term market in 1995, and into 1996, depositors started to
shift funds from lower yielding savings and money market accounts into higher
yielding certificates of deposit. This shift continued throughout 1996. The
impact of this volume change in the deposit mix, coupled with the increased
deposit volume acquired from Lehigh, gave rise to the net change in the cost of
funds.
For the twelve months ended December 31, 1996, the Corporation's net
interest yield on a tax-equivalent basis (i.e., net interest income on a tax
equivalent basis as a percent of average interest-earning assets) declined to
3.72 from 4.21 percent, and 4.62 percent for 1995 and 1994, 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 to some extent 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) declined approximately 32 basis points during 1996
from 66 basis points in 1995. During the comparable periods of 1995 and 1994
there was an increase of 19 basis points, from 47 basis points to 66 basis
points. This change has contributed to increased deposit pricing pressure
exerted on interest margins, due to a shifting of these deposits to
interest-bearing accounts.
The Corporation's net interest rate spread (i.e., the average yield on
average interest-earning assets, calculated on a tax-equivalent basis, minus the
average rate paid on interest-bearing liabilities) declined to 3.40 percent in
1996 from 3.55 percent in 1995 and 4.15 percent in 1994. The decline in net
interest spreads is primarily a result of the increased cost of interest-bearing
liabilities and the Corporation's inability to fund a greater portion of the
increase in earning-assets through increases in noninterest-bearing sources and
core deposits.
INVESTMENTS
The average volume of investment securities increased by $55.6 million in
1996 as compared to 1995. The tax-equivalent yield on investments increased to
6.64 percent or by 11 basis points from a yield of 6.53 percent during 1995. The
increased yield on the investment portfolio in 1996 was achieved through higher
market rates on purchases made to replace lower yielding investments which had
matured.
The impact of repricing activity on yields was lessened by shorter
investment maturities, resulting in narrowed spreads, due to the change in
investment strategies brought about by the current uncertainty of rates and the
constraints imposed by SFAS No. 115. Securities available-for-sale are a part of
the Corporation's interest rate risk management strategy and may be sold in
response to changes in interest rates, changes in prepayment risk, liquidity
management and other factors.
On January 3, 1994, the Corporation adopted SFAS No. 115. In connection
with this policy, management reviewed the composition of the investment
portfolio and designated all municipal securities, certain fixed rate
collateralized mortgage obligations, federal agency securities and U.S. treasury
- -------------------------------------------------------------------------------
17
<PAGE>
MANAGEMENT'S DISCUSSION & ANALYSIS
OF FINANCIAL CONDITION & RESULTS OF OPERATIONS (CONTINUED)
bonds as held-to-maturity. These securities are being carried at amortized
cost. All other securities, comprised primarily of U.S. treasury notes and
certain Federal Agency and CMO securities, with an amortized cost amounting to
approximately $65.8 million, were designated as available-for-sale and marked to
their estimated market values. Prior to the adoption of SFAS No. 115, the
Corporation did not maintain an available-for-sale portfolio and all investment
securities were carried at amortized cost.
Pursuant to the provisions and implementation guidance contained within the
special report "A Guide to Implementation of Statement 115 on Accounting for
Certain Investments in Debt and Equity Securities", on November 27, 1995, the
Corporation reassessed the classification of all securities within its portfolio
and transferred $17.8 million from its held-to-maturity investment portfolio to
its available-for-sale portfolio. These securities had a market value of $17.9
million, which resulted in the Corporation's recording an unrealized gain on
securities available-for-sale, net of tax, within stockholders' equity of
$60,000. During 1996, the Corporation had no such transfers. Sales from the
Available-for-Sale portfolio were made in the normal course of business.
At December 31, 1996, the total investment portfolio excluding overnight
investments, was $280.1 million, or 66.5 percent of earning assets, as compared
to $209.7 million or 62.1 percent at December 31, 1995. The principal components
of the investment portfolio are U.S. government Treasury and Federal Agency
securities. For additional information regarding the Corporation's investment
portfolio, see Note 4 of the Notes to the Corporation's Consolidated Financial
Statements.
The amortized cost and market values of investment securities, (excluding
U.S. Government and Agency Bonds,) with an amortized cost in excess of ten
percent of stockholders' equity at December 31, 1996 and 1995, were as follows:
<TABLE>
<CAPTION>
1996 1995
- ------------------------------------------------------------------------------------------------
AMORTIZED MARKET AMORTIZED MARKET
(DOLLARS IN THOUSANDS) COST VALUE COST VALUE
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
State of Texas General Obligation $ 0 $ 0 $3,747 $3,940
================================================================================================
</TABLE>
LOANS
Loan growth during 1996 occurred primarily in the real-estate mortgage and
consumer loan portfolios. This growth resulted primarily from the acquisition of
Lehigh on June 28, 1996, coupled with successful marketing programs and new
product lines. The stabilization of yield in the portfolio was a result of a
stable prime rate environment coupled with a competitive rate structure to
attract new loans. The results of increased volume were lessened by continued
re-financing activity in the mortgage portfolios and by the demand in the
lending markets that exists.
Analyzing the portfolio for the twelve months ended December 31, 1996,
average loan volume increased $12.7 million, while the portfolio yield increased
9 basis points as compared with 1995. The volume related factors contributed
increased earnings of $3.7 million enhanced by the rate related changes. Total
average loan volume increased to $107.9 million with a net interest yield of
7.99 percent, as compared to $95.2 million with a yield of 7.90% for December
31, 1995.
The stabilization of yield in the portfolio was a result of a stable prime
rate environment coupled with a competitive rate structure to attract new loans.
The results of increased volume were lessened
- -------------------------------------------------------------------------------
18
<PAGE>
by continued re-financing activity in the mortgage portfolios and by the limited
demand in the Company's lending markets.
For additional information regarding loans, please see note 5 of the notes
to the Corporation's Consolidated Financial Statements.
ALLOWANCE FOR LOAN LOSSES AND RELATED PROVISION
The purpose of the allowance for loan losses is to absorb the impact of
losses inherent in the loan portfolio. Additions to the allowance are made
through provisions charged against current operations and through recoveries
made on loans previously charged off. The allowance for loan losses is
maintained at an amount considered adequate by management to provide for
potential credit losses based upon a periodic evaluation of the risk
characteristics of the loan portfolio. In establishing an appropriate allowance,
an assessment of the individual borrowers, a determination of the value of the
underlying collateral, a review of historical loss experience and an analysis of
the levels and trends of loan categories, delinquencies and problem loans are
considered. Such factors as the level and trend of interest rates and current
economic conditions are also reviewed. At year-end 1996, the level of allowance
was $1,293,000 as compared to a level of $1,073,000 at December 31, 1995. The
Corporation had a credit to earnings (through the provision of loan losses) in
1996 of $132,000.
At December 31, 1996, the allowance for loan losses amounted to $1,293,000
or 1.10 percent of total loans. In management's view, the level of the allowance
during 1996 has been adequate to cover any loss experience and therefore has not
warranted any additions to the allowance during 1996. The increased balance of
$220,000, in 1996, represented the net allowance acquired from Lehigh on June
28, 1996, less net charge-offs.
Various regulatory agencies, as an integral part of their examination
process, periodically review the Corporation's allowance for loan losses. Such
agencies may require the Corporation to increase the allowance based on their
analysis of information available to them at the time of their examination. The
allowance for loan losses as a percentage of total loans amounted to 1.10
percent, 1.10 percent and 1.21 percent at December 31, 1996, 1995 and 1994,
respectively. The Corporation's provision (credit) for loan losses required to
reach these levels was ($132,000), $0 and $10,000 for 1996, 1995 and 1994,
respectively.
During 1996 the Corporation did not experience any substantial problems
within its loan portfolio. Net charge-offs were $341,000 in 1996, coupled with
an increase in the allowance of $220,000, resulting from the acquisition of
Lehigh. Net charge-offs exclusive of amounts related to Lehigh were $3,000. The
Corporation had non-performing loans amounting to $298,000 at December 31, 1996,
and no non-performing loans at year-end for the prior four years. The
Corporation continues to aggressively pursue collections of principal and
interest on loans previously charged off.
- -------------------------------------------------------------------------------
19
<PAGE>
MANAGEMENT'S DISCUSSION & ANALYSIS
OF FINANCIAL CONDITION & RESULTS OF OPERATIONS (CONTINUED)
Effective January 1, 1995 the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 114, "Accounting by Creditors for Impairment of
a Loan" and its subsequent amendment SFAS No. 118, "Accounting by Creditors for
Impairment of a Loan-Income Recognition and Disclosures." SFAS No. 114, as
amended, addresses the accounting for impaired loans and requires that impaired
loans be measured based on the present value of expected future cash flows
discounted at the loan's effective interest rate or, as a practical expedient,
at the 1oan's observable market price or at the fair value of the collateral if
the loan is collateral dependent. Impaired loans consist of non-accrual loans
and loans internally classified as substandard or below, in each instance above
an established dollar threshold. All loans below the established dollar
threshold are considered homogenous and are collectively evaluated for
impairment. Since the Corporation did not have any impaired loans and
sufficiently evaluates the adequacy of the allowance for loan losses, there was
no impact of adopting SFAS No. 114, as amended and these statements did not have
an effect on the existing income recognition and charge-off policies for
nonperforming loans.
The Corporation's statements herein regarding the adequacy of the allowance
for loan losses may constitute forward looking statements on the Private
Securities Reform Litigation Act of 1995. Actual results may indicate that the
amount of the Corporation's allowance was inadequate. Factors that could cause
the allowance to be inaccurate are the same factors that are analyzed by the
Corporation in establishing the amount of the allowance.
- -------------------------------------------------------------------------------
20
<PAGE>
FIVE YEAR STATISTICAL ALLOWANCE FOR LOAN LOSSES
The following table reflects the relationship of loan volume, the provision
and allowance for loan losses and net charge-offs for the past five years:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
- -----------------------------------------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS) 1996 1995 1994 1993 1992
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Average loans outstanding $107,897 $95,216 $72,752 $66,656 $60,856
=======================================================================================================================
Total loans at end of period $117,830 $97,570 $88,805 $65,745 $59,517
=======================================================================================================================
Analysis of the Allowance for Loan Losses
Balance at the beginning of year $ 1,073 $ 1,073 $ 973 $ 821 $ 507
Charge-offs:
Commercial 0 0 0 20 120
Real estate-mortgage 470 0 0 58 21
Installment loans 9 10 12 20 32
- -----------------------------------------------------------------------------------------------------------------------
Total charge-offs 479 10 12 98 173
- -----------------------------------------------------------------------------------------------------------------------
Recoveries:
Commercial 0 0 110 0 0
Real estate-mortgage 132 5 20 19 23
Installment loan 6 5 2 1 3
- -----------------------------------------------------------------------------------------------------------------------
Total recoveries 138 10 132 20 26
- -----------------------------------------------------------------------------------------------------------------------
NET CHARGE OFFS: 341 0 (120) 78 147
=======================================================================================================================
Adjustments from acquisition of Lehigh 693 0 0 0 0
=======================================================================================================================
Provision (credit) for loan losses (132) $ 0 $ 10 $ 200 $ 461
=======================================================================================================================
Balance at end of year $ 1,293 $ 1,073 $ 1,073 $ 943 $ 821
=======================================================================================================================
Ratio of net charge-offs during the year to
average loans outstanding during the year 0.32% 0.00% (.16%) 0.12% 0.24%
=======================================================================================================================
Allowance for Loan Losses as a percentage
of total loans at end of year 1.10% 1.10% 1.21% 1.43% 1.38%
=======================================================================================================================
</TABLE>
The charge-off of $470,000 in real-estate mortgage loans occured on loans
acquired from Lehigh, which were subsequently sold. Similarly, the $132,000 loan
loss recovery was on a loan that had been previously part of Lehigh's portfolio.
ASSET QUALITY
The Corporation manages asset quality and credit risk by maintaining
diversification in its loan portfolio and through review processes that include
analysis of credit requests and ongoing examination of outstanding loans and
delinquencies, with particular attention to portfolio dynamics and mix. The
Corporation strives to identify loans experiencing difficulty early enough to
correct the problems, to record charge-offs promptly based on realistic
assessments of current collateral values, and to maintain an adequate allowance
for loan losses at all times. These practices have protected the Corporation
during economic downturns and periods of uncertainty.
It is generally the Corporation's policy to discontinue interest accruals
once a loan is past due as to interest or principal payments for a period of
ninety days. When a loan is placed on non-accrual, interest accruals cease and
uncollected accrued interest is reversed and charged against current income.
- -------------------------------------------------------------------------------
21
<PAGE>
MANAGEMENT'S DISCUSSION & ANALYSIS
OF FINANCIAL CONDITION & RESULTS OF OPERATIONS (CONTINUED)
Payments received on non-accrual loans are applied against principal. A loan
may only be restored to an accruing basis when it again becomes well secured
and in the process of collection or all past due amounts have been collected.
Loan origination fees and certain direct loan origination costs are deferred
and recognized over the life of the loan as an adjustment to the loan's yield.
At December 31, 1996 and 1995, the Corporation had no restructured loans.
Non-accrual loans amounted to $298,000 at December 31, 1996, and were comprised
of two residential mortgage loans and one home equity loan on 1-4 family
properties. There were no non-accrual loans as of December 31, 1995. Past due
loans 90 days or more and still accruing amounted to $121,000 as of December 31,
1996 and $48,000 as of 1995. Of the balance, respectively in each period,
$119,000 and $48,000 were comprised of student loans, which are wholly
guaranteed by the U.S. Government. Additionally, the Corporation did not have
any other real estate owned (OREO) at December 31, 1996.
NONINTEREST INCOME
The following table presents the principal categories of noninterest income
for each of the years in the three year period ended December 31, 1996.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
- -------------------------------------------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS) 1996 1995 % CHANGE 1995 1994 % CHANGE
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
OTHER INCOME:
Service charges, commissions and fees $516 $570 (9.5) $570 $556 2.5
Other income 136 113 20.4 113 112 0.9
Gain on securities sold 75 49 53.1 49 0 100.0
- -------------------------------------------------------------------------------------------------------------------------
Total other noninterest-income $727 $732 (0.7) $732 $668 9.6
=========================================================================================================================
</TABLE>
Total other (noninterest) income, exclusive of gains on securities sold,
reflects a decrease of $31,000 or 4.51 percent in 1996. The primary component of
the decrease was the reduction of fee revenue reflected in service charges,
commissions and fees. This decrease of $54,000 or 9.5 percent in such fees, was
a result of reduced fee income derived from checking account activity. The
decline in service charge income reflected the Corporation's efforts to provide
the consumer with value, keeping its service charge rates unchanged over the
last several years. For the 1995 period, total other (noninterest) income,
exclusive of gains on securities sold, reflects an increase of $15,000 or 2.2
percent. The primary component of the increase was the improvement made in fee
revenue reflected in service charges, commissions and fees. This increase of
$14,000, or 2.5 percent in such fees, was derived from checking account
activity. Other less significant factors contributing to the decline in service
charges in 1996 were reductions in other fee income sources resulting from
fluctuating levels of business activity, and a reduction to zero in the cost of
automated teller fees to the customer.
During 1996 there were sales from the Corporation's available-for-sale
portfolio with a net gain of approximately $75,000. These sales were made as
part of the Corporation's investment strategy. In 1995 there were $49,000 in net
gains on securities sold. These sales were made from the Corporation's
available-for-sale investment portfolio and were made as part of structuring the
Corporation's interest rate risk position.
- --------------------------------------------------------------------------------
22
<PAGE>
NONINTEREST EXPENSE
The following table presents the principal categories of noninterest
expense for each of the years in the three-year period ended December 31, 1996.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
- -------------------------------------------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS) 1996 1995 % CHANGE 1995 1994 % CHANGE
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
OTHER NONINTEREST-EXPENSE:
Salaries and employee benefits $5,168 $4,323 19.5 $4,323 $3,846 12.4
Occupancy expense, net 910 712 27.8 712 773 (7.9)
Premises and equipment expense 1,141 794 43.7 794 692 14.7
Stationery and printing expense 525 295 78.0 295 331 (10.9)
Marketing & Advertising 422 217 94.5 217 240 (9.6)
Other expenses 1,744 1,797 (2.9) 1,797 2,234 (3.8)
- -------------------------------------------------------------------------------------------------------------------------
Total other noninterest-expense $9,910 $8,138 21.8 $8,138 $8,116 0.3
=========================================================================================================================
</TABLE>
Total other (noninterest) expense increased $1.8 million or 21.8 percent in
1996 as compared to an increase of $22,000 or .3 percent from 1994 to 1995.
Salaries and employee benefits accounted for 52.1 percent of total other expense
for 1996, as compared to 53.1 percent and 47.4 percent for the years 1995 and
1994, respectively. Strict control over other expenses has been a key objective
of Management to maximize earnings efficiency. The Corporation's
efficiency/overhead ratio (other expenses less non-recurring expense and other
income as a percentage of net interest income on a tax-equivalent basis) was
57.4 percent, 54.2 percent and 53.3 percent, respectively, for 1996, 1995 and
1994. The ratio of other expenses to average assets improved to 2.39 percent in
1996 from 2.50 percent in 1995 which had increased from 2.48 percent in 1994.
The level of operating expense during 1996 was impacted by the acquisition of
Lehigh and the opening of the Madison office. These ratios, however, from year
to year continue to remain relatively stable and were maintained notwithstanding
the addition of new expenses related to facilities expense, primarily the Bank's
Madison office and Corporate headquarters in prior years.
Salaries and employees benefits increased $845,000 or 19.5 percent in 1996.
This increase is primarily attributed to the increased expense arising from
increased staffing levels associated with the Lehigh acquisition, merit and
promotional raises and higher benefit costs. The increase of $477,000 or 12.4
percent in such expense in 1995 was due to an increase in personnel as well as
employee promotions, merit increases and the higher cost of benefits. Staffing
levels overall increased to 170 at December 31, 1996 from 132 full-time
equivalent employees at December 31, 1995. Employees' longevity has continued to
be significant. As of December 31, 1996, the Corporation's employees, excluding
officers, have been employed by the Corporation for an average of 218.31 weeks
or 4.23 years. This factor contributes to the Corporation's continued
productivity, as evidenced by the ratio of average assets, in millions, per full
time-equivalent employee, which amounted to $2.4 million, $2.6 million and $2.5
million in 1996, 1995 and 1994, respectively.
Occupancy and bank premises and equipment expense increased by $545,000 or
36.2 percent in 1996 over 1995. This increase in 1996 expense reflects the
ongoing impact on operating costs of expanded facilities and operations coupled
with the Lehigh acquisition, a full year's depreciation expense on 1995's fixed
asset purchases, and technology expenditures. The increase in such expenses of
$41,000 or 2.8 percent in 1995 from 1994, reflect the increased costs associated
with the expansion of
- --------------------------------------------------------------------------------
23
<PAGE>
MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION
& RESULTS OF OPERATIONS (CONTINUED)
new facilities, primarily the new corporate headquarters building, offset by
operating overhead efficiencies achieved during the period.
The Omnibus spending bill (h.R. 3610) President Clinton signed on September
30, 1996 included provisions for a special assessment to recapitalize the
Savings Association Insurance Fund (SAIF), provisions to provide funding to meet
the Financing Corporation (FICO) bond obligations, and to merge the The Bank
Insurance Fund (BIF) with SAIF fund on January 1, 1999. As a result of the
acquisition of Lehigh, we were obligated to pay a one-time assessment on
Lehigh's deposits. The Special Assessment calculation for our institution was
estimated based on those deposits Lehigh reported at March 31, 1995, at an
assessment rate of $65.7 cents per $100.00 of deposits. The total assessment
amounted to $469,606 and was paid to the Federal Deposit Insurance Corporation
on November 27, 1996.
The Funds Act also separates, effective January 1, 1997, the Financing
Corporation (FICO) assessment to service the interest on its bond obligations
from the SAIF assessment. The amount assessed on individual institutions by the
FICO will be in addition to the amount paid for deposit insurance according to
the FDIC's risk-related assessment rate schedules. However, between October 1,
1996, and January 1, 1997, any amount required by the FICO will be deducted from
the amounts the FDIC is authorized to assess SAIF-member savings associations,
and must not be assessed against Sasser and BIF-member Oakar institutions. FICO
assessment rates for the first semiannual period of 1997 were set at 1.30 basis
points annually for BIF-assessable deposits and 6.48 basis points annually for
SAIF-assessable deposits. (These rates may be adjusted quarterly to reflect
changes in assessment bases for the BIF and the SAIF. By law, the FICO rate on
BIF-assessable deposits must be one-fifth the rate on SAIF-assessable deposits
until the insurance funds are merged or until January 1, 2000, whichever occurs
first.)
Future Federal Deposit Insurance expense will be affected by the FICO bond
payment and continued expense on Lehigh 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 assessments should
be completely phased out by the year 2019.
The SAIF-assessable deposits of "Oakar" banks are reduced by 20 percent for
the purpose of the special assessment where the Bank's BIF deposits exceed 50
percent of the total insured deposits. In addition, the SAIF-assessable deposits
of Oakar banks are reduced by 20 percent for the purposes of ongoing regular
premium assessments. The deposits acquired from Lehigh Savings SLA are
classified as Oakar deposits for premium assessments.
In March 1995 the FASB issued SFAS No. 121, "Accounting for the Impairment
Of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." This
Statement requires that long-lived assets and certain identifiable intangibles
be reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. Goodwill is
included in the scope of SFAS No. 121 while core deposit intangibles and
mortgage servicing rights are
- --------------------------------------------------------------------------------
24
<PAGE>
specifically excluded. SFAS No. 121 is effective for fiscal years beginning
after December 15, 1995, and was adopted in 1996. The effect of adopting SFAS
No. 121 was immaterial to the Corporation.
In May 1995 the FASB issued SFAS No. 122, "Accounting for Mortgage
Servicing Rights." This Statement requires capitalization of the value of rights
to service mortgage loans for others, whether those rights were acquired through
purchase or origination. SFAS No. 122 also requires that capitalized mortgage
servicing rights be evaluated for impairment based on their fair value with any
adjustments recognized through a valuation allowance. Effective January 1, 1996,
SFAS No. 122 was adopted by the Corporation, and has had no effect, as the
Corporation does not originate or purchase servicing rights at this time.
In June 1996, the FASB issued SFAS No. 125. "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities" (SFAS 125).
SFAS 125 amends portions of SFAS 115, amends and extends to all servicing assets
and liabilities the accounting standards for mortgage servicing rights now in
SFAS 65, and supersedes SFAS 122. The statement provides consistent standards
for distinguishing transfers of financial assets which are sales from transfers
that are secured borrowings. Those standards are based upon consistent
application of a financial components approach that focuses on control. The
statement also defines accounting treatment for servicing assets and other
retained interest in the assets that are transferred. SFAS 125 is effective for
transfers and servicing of financial assets and extinguishments of liabilities
occurring after December 31, 1996 and is to be applied prospectively. The
adoption of the statement is not expected to have a material effect on the
Corporation's financial condition or results of operations.
INCOME TAXES
The Corporation's provision for income taxes increased from 1994 to 1995
and from 1995 to 1996 primarily as a result of increased state taxes and a
reduction of tax-exempt income. The effective tax rate for the Corporation for
the periods ended December 31, 1996, 1995 and 1994 were 28.2 percent, 27.3
percent and 25.6 percent, respectively. The effective tax rate continues to be
substantially less than the statutory Federal tax rate of 34 percent. The
difference between the statutory and effective tax rates primarily reflects the
tax-exempt status of interest income on obligations of states and political
subdivisions. Tax-exempt interest income, on a tax-equivalent basis, decreased
by $329,000 or 16.2 percent from 1995 to 1996, while this income also declined
by $515,000 or 20.2 percent from 1994 to 1995.
ASSET AND LIABILITY MANAGEMENT
The composition of the Corporation's statement of condition is planned and
monitored by the Asset and Liability Committee (ALCO). Asset and Liability
management encompasses the control of interest rate risk (interest sensitivity
management) and the ongoing maintenance and planning of liquidity and capital.
In general, management's objective is to optimize net interest income and
minimize interest rate risk by monitoring these components of the statement of
condition.
INTEREST SENSITIVITY
The management of interest rate risk is also important to the profitability
of the Corporation. Interest rate risk arises when an earning-asset matures or
when its interest rate changes in a time period
- ------------------------------------------------------------------------------
25
<PAGE>
MANAGEMENT'S DISCUSSION &
ANALYSIS OF FINANCIAL CONDITION & RESULTS OF OPERATIONS (CONTINUED)
different from that of a supporting interest- bearing liability, or when an
interest-bearing liability matures or when its interest rate changes in a time
period different from that of an earning- asset that it supports. While the
Corporation matches only a small portion of specific assets and liabilities,
total earning assets and interest bearing liabilities are grouped to determine
the overall interest rate risk within a number of specific time frames.
Interest sensitivity analysis attempts to measure the responsiveness of net
interest income to changes in interest rate levels. The difference between
interest sensitive assets and interest sensitive liabilities is referred to as
the interest sensitivity gap. At any given point in time, the Corporation may be
in an asset-sensitive position, whereby its interest-sensitive assets exceed its
interest-sensitive liabilities, or in a liability-sensitive position, whereby
its interest-sensitive liabilities exceed its interest-sensitive assets,
depending on management's judgment as to projected interest rate trends.
The Corporation's rate sensitivity position in each time frame may be
expressed as assets less liabilities, as liabilities less assets, or as the
ratio between rate sensitive assets (RSA) and rate sensitive liabilities (RSL).
For example, a short funded position (liabilities repricing before assets) would
be expressed as a net negative position, when period gaps are computed by
subtracting repricing liabilities from repricing assets. When using the ratio
method, a RSA/RSL ratio of 1 indicates a balanced position, a ratio greater than
1 indicates an asset sensitive position, and a ratio less than 1 indicates a
liability sensitive position.
A negative gap and/or a rate sensitivity ratio less than 1 tends to expand
net interest margins in a falling rate environment and to reduce net interest
margins in a rising rate environment. Conversely, when a positive gap occurs,
generally margins expand in a rising rate environment and contract in a failing
rate environment.
From time to time, the Corporation may elect to deliberately mismatch
liabilities and assets in a strategic gap position.
At December 31, 1996, the Corporation reflects a negative interest
sensitivity gap (or an interest sensitivity ratio) of .52.:1.00 at the
cumulative one year position. During much of 1996 the Corporation had a negative
interest sensitivity gap. The maintenance of a liability-sensitive position
during 1996 has had an adverse impact on the Corporation's net interest margins;
however, based on management's perception that interest rates will continue to
be volatile, emphasis has been and will continue to be placed on
interest-sensitivity matching with the objective of achieving a stable net
interest spread during 1997.
- --------------------------------------------------------------------------------
26
<PAGE>
The following table depicts the Corporation's interest rate sensitivity
position at December 31, 1996:
INTEREST SENSITIVITY ANALYSIS
<TABLE>
<CAPTION>
DECEMBER 31, 1996
- ------------------------------------------------------------------------------------------------------------------------------
DAILY DUE AFTER DUE AFTER
FLOATING AND THREE MONTHS ONE YEAR
DUE WITHIN BUT WITHIN THROUGH DUE AFTER
(DOLLARS IN THOUSANDS) THREE MONTHS ONE YEAR FIVE YEARS FIVE YEARS TOTAL
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS:
Loans $ 20,398 $ 1,240 $ 12,350 $ 83,842 $117,830
Investments 24,148 69,896 122,290 63,789 280,123
Other 23,300 0 0 0 23,300
- ------------------------------------------------------------------------------------------------------------------------------
Total interest-earning assets $ 67,846 $ 71,136 $134,640 $147,631 $421,253
- ------------------------------------------------------------------------------------------------------------------------------
INTEREST-BEARING LIABILITIES:
Time certificates of deposit of $100,000 or greater $ 94,237 $ 4,835 $ 746 0 $ 99,818
Time certificates of deposit of less than $100,000 $ 30,447 32,017 8,980 0 71,444
Other interest-bearing deposits $ 105,337 0 22,951 59,018 187,306
Securities sold under agreements
to repurchase 0 0 0 0 0
- ------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities $ 230,021 $ 36,852 $ 32,677 $ 59,018 $358,568
- ------------------------------------------------------------------------------------------------------------------------------
Cumulative interest-earning assets $ 67,846 $ 138,982 $273,622 $421,253 $421,253
- ------------------------------------------------------------------------------------------------------------------------------
Cumulative interest-earning liabilities $ 230,021 $ 266,873 $299,550 $358,568 $358,568
- ------------------------------------------------------------------------------------------------------------------------------
Interest sensitivity gap $(162,175) $ 34,284 $101,963 $ 88,613 $147,114
- ------------------------------------------------------------------------------------------------------------------------------
Cumulative interest-sensitivity gap (162,175) (127,891) (25,928) 62,685 62,685
- ------------------------------------------------------------------------------------------------------------------------------
Interest-sensitive assets to interest
sensitive liabilities 0.29 1.93 4.12 2.50 1.17
- ------------------------------------------------------------------------------------------------------------------------------
Cumulative ratio of interest-sensitive
assets to interest-sensitive liabilities 0.29 0.52 0.91 1.17 1.17
==============================================================================================================================
</TABLE>
The table above indicates the time period in which interest-earning assets
and interest-bearing liabilities will mature or may reprice in accordance with
their contractual terms. However, this table does not necessarily indicate the
impact of general interest rate movements on the Corporation's net interest
yield because the repricing of various categories of assets and liabilities is
discretionary and is subject to competitive and other pressures. As a result,
various assets and liabilities indicated as repricing within the same period may
in fact reprice at different times and at different rate levels.
LIQUIDITY
The liquidity position of the Corporation is dependent on successful
management of its assets and liabilities so as to meet the needs of both deposit
and credit customers. Liquidity needs arise principally to accommodate possible
deposit outflows and to meet customers' requests for loans. Such needs can be
satisfied by scheduled principal loan repayments, maturing investments,
short-term liquid assets and deposit in-flows. The objective of liquidity
management is to enable the Corporation to maintain sufficient liquidity to meet
its obligations in a timely and cost-effective manner.
- --------------------------------------------------------------------------------
27
<PAGE>
MANAGEMENT'S DISCUSSION &
ANALYSIS OF FINANCIAL CONDITION & RESULTS OF OPERATIONS (CONTINUED)
Management monitors current and projected cashflows, and adjusts positions as
necessary to maintain adequate levels of liquidity. By using a variety of
potential funding sources and staggering maturities, the risk of potential
funding pressure is significantly reduced. Management also maintains a detailed
liquidity contingency plan designed to adequately respond to situations which
could lead to liquidity concerns.
The Corporation derives a significant proportion of its liquidity from its
core deposit base. At December 31, 1996, core deposits (comprised of total
demand and savings accounts plus money market accounts under $100,000)
represented 53.5 percent of total deposits. More volatile rate sensitive
deposits, concentrated in Certificates of deposit $100,000 and greater,
increased to 23.2 percent of total deposits from 13.6 percent at December 31,
1995. This change has been brought about due to the sharp rise in short-term
rates during the latter part of 1995 which continued into 1996.
CORE DEPOSITS MIX
<TABLE>
<CAPTION>
DECEMBER 31,
- ------------------------------------------------------------------------------------------------------------------------
1996 1995 NET CHANGE
(DOLLARS IN THOUSANDS) AMOUNT PERCENTAGE AMOUNT PERCENTAGE VOLUME 96 VS. 95
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Demand Deposits $ 68,086 29.8 $ 60,635 30.0 12.2% 7,413
Interest Bearing Demand 43,485 19.1 42,811 21.1 1.6% 674
Regular Savings 81,969 35.9 71,075 35.0 15.3% 10,894
Money Market Deposits under $100 34,548 15.2 28,035 13.8 23.2 6,513
- ------------------------------------------------------------------------------------------------------------------------
Total core deposits $228,050 100.0 $202,836 100.0 52.3 25,214
- ------------------------------------------------------------------------------------------------------------------------
Total deposits $426,654 $295,666 44.30 130,988
- ------------------------------------------------------------------------------------------------------------------------
Core deposits to total deposits 53% 68% 8%
========================================================================================================================
</TABLE>
Short-term borrowings can be used to satisfy daily funding needs. Balances
in those 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 of approximately $6.6
million increased $4.7 million or 250.3 percent from the 1995 period.
The following table is a summary of securities sold under repurchase
agreements for each of the last three years.
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS) 1996 1995 1994
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
SECURITIES SOLD UNDER REPURCHASE AGREEMENTS:
Average interest rate:
At year end -- 5.25% 4.56%
For the year 5.69 5.65% 5.16%
Average amount outstanding during the year: $ 6,610 $ 1,887 $1,928
Maximum amount outstanding at any month end $21,145 $22,326 $9,745
Amount outstanding at year end $0 $22,326 $9,745
================================================================================================
</TABLE>
- --------------------------------------------------------------------------------
28
<PAGE>
CASHFLOW
The consolidated statements of cash flows present the changes in cash and
cash equivalents from operating, investing and financing activities. During 1996
cash and cash equivalents (which increased overall by $12.9 million) were
provided (on a net basis) by financing activities and used (on a net basis) in
investing and operating activities. The cash flow provided by the increase in
deposits less decreases in short-term borrowings, supported the overall net
investing activities, primarily investments, with an additional net increase in
the loan portfolio coupled with property and equipment expenditures. Cash flow
from operating activities, primarily net income, was almost sufficient to
support the net changes within operating activities.
STOCKHOLDERS' EQUITY AND DIVIDENDS--STOCKHOLDERS' EQUITY
Stockholders' equity averaged $28.6 million during 1996, an increase of
$2.4 million, or 9.30 percent, as compared to 1995. At December 31, 1996,
stockholders' equity totaled $30.2 million, a 9.15 percent increase over the
prior year. The Corporation's dividend reinvestment and optional stock purchase
plan, which contributed $269,000 in new capital during 1996, together with
internal capital generation, is expected to enhance the Corporation's equity
position. Book value per share increased at year end 1996 from the prior year.
CAPITAL
The maintenance of a solid capital foundation continues to be a primary
goal for the Corporation. Accordingly, capital plans and dividend policies are
monitored on an ongoing basis. The most important objective of the capital
planning process is to balance effectively the retention of capital to support
future growth and the goal of providing stockholders with an attractive
long-term return on their investment.
RISK-BASED CAPITAL/LEVERAGE
At December 31, 1996, total Tier l capital (defined as tangible
stockholders' equity for common stock and certain perpetual preferred stock)
amounted to $26.2 million or 5.82 percent of total assets. The total Tier I
leverage capital ratio was 5.76 percent of total assets. Tier I capital excludes
the effect of SFAS No. 115, which amounted to $311,000 of net unrealized gains,
after tax, on securities available-for-sale (included as a component of
stockholders' equity) and goodwill of $3,681,000 as of December 31, 1996. For
information on Goodwill, see note 2 of the Consolidated Financial Statements.
United States bank regulators have additionally issued guidelines
establishing minimum capital standards related to the level of assets and off
balance-sheet exposures adjusted for credit risk. Specifically, these guidelines
categorized assets and off balance-sheet items into four risk-weightings and
require banking institutions to maintain a minimum ratio of capital to
risk-weighted assets. At December 31, 1996, the Corporation's estimated Tier I
and total risk-based capital ratios were 15.6 percent and 16.4 percent,
respectively. These ratios are well above the minimum guidelines of capital to
risk-adjusted assets in effect as of December 31, 1996.
CAPITAL
For information on Risk-Based Capital on Regulatory Guidelines, see Note 7
to the Consolidated Financial Statements.
- --------------------------------------------------------------------------------
29
<PAGE>
MANAGEMENT'S DISCUSSION & ANALYSIS
OF FINANCIAL CONDITION & RESULTS OF OPERATIONS (CONTINUED)
SECURITY MARKET INFORMATION
The common stock of the Corporation is traded on the NASDAQ National Market
Exchange, effective as of June 24, 1996. The Company's symbol is (CNBC). As of
December 31, 1996, the Corporation had 633 common stockholders of record. This
does not include beneficial owners for whom CEDE & Company or others act as
nominees. On December 31, 1996, the closing market bid and ask price was
$21.00-$21.50 respectively. Since June 24, 1996, prices were reported by NASDAQ.
For prior years the high and low bid prices were reported by National Quotation
Bureau. Dividends declared on common stock per share and stock prices, have been
adjusted for the 3-for-2 stock split paid on May 31, 1996.
<TABLE>
<CAPTION>
COMMON STOCK PRICE COMMON
1996 1995 DIVIDENDS DECLARED
- ----------------------------------------------------------------------------------------------------------------
HIGH LOW HIGH LOW
BID BID BID BID 1996 1995
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Fourth Quarter 22.00 19.00 20.67 17.33 $0.20 $0.20
Third Quarter 21.50 19.00 17.67 16.67 .20 0.20
Second Quarter 23.00 19.00 17.67 17.00 .20 0.20
First Quarter 22.00 20.00 20.00 16.67 .20 0.20
- ----------------------------------------------------------------------------------------------------------------
$0.80 $0.80
================================================================================================================
</TABLE>
These quotations reflect inter-dealer prices, without retail mark-up,
mark-down or commission and may not necessarily represent actual transactions.
For information on dividend restrictions and capital requirements which may
limit the ability to pay dividends, see Note 13 to the consolidated financial
statements.
INFLATION
Inflation, as measured by the Consumer Price Index, has been relatively
steady during the last three years, with a slight increase reflected in 1996 as
the economy grew: 4.3% in 1996, 2.8% in 1995, and 2.7% in 1994. Since the
Corporation's assets and liabilities are predominantly monetary, the effects of
inflation on the Corporation's performance are primarily measured by the level
and volatility of interest rates earned and paid. During the past three years,
the prime rate changed several times, ranging from 6.25 percent to 9.00 percent,
with a stabilization of this index in 1996. The prime rate was lowered to 8.25%
in March of this year and continues to remain at that level. During this period,
the Corporation was able to control interest rate risk, as a result of its
continuing policy of managing its interest-sensitive assets and liabilities.
- --------------------------------------------------------------------------------
30
<PAGE>
AVERAGE STATEMENT OF CONDITION WITH INTEREST AND AVERAGE RATES
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
- -------------------------------------------------------------------------------------------------------------------------------
1996 1995 1994
- -------------------------------------------------------------------------------------------------------------------------------
INTEREST AVERAGE INTEREST AVERAGE INTEREST AVERAGE
(TAX EQUIVALENT BASIS, AVERAGE INCOME/ YIELD/ AVERAGE INCOME/ YIELD/ AVERAGE INCOME/ YIELD/
DOLLARS IN THOUSANDS) BALANCE EXPENSE RATE BALANCE EXPENSE RATE BALANCE EXPENSE RATE
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS
INTEREST-EARNING ASSETS:
INVESTMENT SECURITIES:
Taxable $244,939 $16,201 6.61% $184,626 $11,941 6.47% $177,203 $10,778 6.08%
Non-taxable 23,655 1,701 7.19% 28,343 2,030 7.16% 36,688 2,545 6.94%
Federal funds sold and
securities purchased
under agreement to resell 8,551 481 5.63% 16,103 942 5.85% 15,449 826 5.35%
Loans, net of unearned
income 107,897 8,625 7.99% 95,216 7,526 7.90% 72,752 5,699 7.83%
- -------------------------------------------------------------------------------------------------------------------------------
Total interest-earning
assets 385,042 27,008 7.01% 324,288 22,439 6.92% 302,092 19,848 6.57%
- -------------------------------------------------------------------------------------------------------------------------------
NONINTEREST-EARNING ASSETS:
Cash and due from banks 14,942 16,628 15,069
Other assets 16,229 11,420 11,443
Allowance for possible
loan losses (1,236) (1,070) (974)
- -------------------------------------------------------------------------------------------------------------------------------
Total noninterest-
earning assets 29,935 26,978 25,538
- -------------------------------------------------------------------------------------------------------------------------------
Total assets $414,977 $351,266 $327,630
- -------------------------------------------------------------------------------------------------------------------------------
LIABILITIES & STOCKHOLDERS' EQUITY
INTEREST-BEARING LIABILITIES:
Money market deposits $61,168 1,832 3.00% $63,971 1,783 2.79% $75,375 1,730 2.30%
Savings deposits 77,835 1,904 2.45% 72,995 1,917 2.63% 80,649 1,826 2.26%
Time deposits 127,452 6,620 5.19% 72,143 3,822 5.30% 35,674 1,189 3.33%
Other interest-bearing
deposits 48,226 854 1.77% 49,469 1,163 2.35% 51,087 1,081 2.12%
Short-term borrowings 6,610 376 5.69% 1,887 102 5.41% 1,928 88 4.56%
- -------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing
liabilities 321,291 11,586 3.61% $260,465 8,787 3.37% $244,713 5,914 2.42%
- -------------------------------------------------------------------------------------------------------------------------------
NONINTEREST-BEARING LIABILITIES:
Demand deposits 62,910 62,878 57,200
Other noninterest-bearing
deposits 320 310 331
Other liabilities 1,863 1,454 1,543
- -------------------------------------------------------------------------------------------------------------------------------
Total noninterest-bearing
liabilities 65,093 64,642 59,074
Stockholders' equity 28,593 26,159 23,843
- -------------------------------------------------------------------------------------------------------------------------------
Total liabilities and
stockholders' equity $414,977 $351,266 $327,630
- -------------------------------------------------------------------------------------------------------------------------------
Net interest income
(tax equivalent basis) $15,422 $13,652 $13,934
- -------------------------------------------------------------------------------------------------------------------------------
Net interest spread 3.40% 3.55% 4.15%
- -------------------------------------------------------------------------------------------------------------------------------
Net interest income as percent
of earning assets 3.72% 4.21% 4.62%
- -------------------------------------------------------------------------------------------------------------------------------
Tax-equivalent adjustment (578) (690) (865)
- -------------------------------------------------------------------------------------------------------------------------------
Net interest income 14,844 $12,962 $13,069
===============================================================================================================================
</TABLE>
- --------------------------------------------------------------------------------
31
<PAGE>
CONSOLIDATED STATEMENTS OF CONDITION
<TABLE>
<CAPTION>
DECEMBER 31,
- ----------------------------------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS) 1996 1995
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Cash and due from banks (Note 3) $ 19,761 $ 14,172
Federal funds sold 10,000 16,000
Securities purchased under agreement to resell 13,300 0
- ----------------------------------------------------------------------------------------------------------------
Total cash and cash equivalents 43,061 30,172
Investment securities held to maturity
(approximate market value of $218,788 in 1996 and $157,449 in 1995) 218,584 156,030
Investment securities available for sale 61,539 53,662
Total investment securities (Note 4) 280,123 209,692
Loans, net of unearned income (Note 5) 117,830 97,570
Less--Allowance for loan losses (Note 5) 1,293 1,073
- ----------------------------------------------------------------------------------------------------------------
Net loans 116,537 96,497
Premises and equipment, net (Note 6) 10,104 7,462
Accrued interest receivable 4,371 3,643
Other assets 1,341 311
Goodwill (note 2) 3,681 0
- ----------------------------------------------------------------------------------------------------------------
Total assets $459,218 $347,777
================================================================================================================
LIABILITIES
DEPOSITS:
Non-interest bearing $ 68,086 $ 60,635
Interest bearing:
Certificates of deposit $100,000 and over 99,818 39,521
Other 258,750 195,510
- ----------------------------------------------------------------------------------------------------------------
Total Deposits 426,654 295,666
Federal funds purchased and securities sold under agreements to repurchase 0 22,326
Accounts payable and accrued liabilities (Notes 8 and 9) 2,351 2,106
- ----------------------------------------------------------------------------------------------------------------
Total Liabilities 429,005 320,098
- ----------------------------------------------------------------------------------------------------------------
Commitments and contingencies (Note 14)
STOCKHOLDERS' EQUITY (Notes 4, 12 and 13) COMMON STOCK, NO PAR VALUE:
Authorized 20,000,000 shares; issued 2,536,343 and 2,523,452 shares in 1996
and 1995 respectively 4,468 4,199
Appropriated surplus 3,510 3,510
Retained earnings 23,738 21,368
- ----------------------------------------------------------------------------------------------------------------
31,716 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 availble for sale, net of taxes 311 416
- ----------------------------------------------------------------------------------------------------------------
Total stockholders' equity 30,213 27,679
- ----------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $459,218 $347,777
================================================================================================================
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
32
<PAGE>
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
- ------------------------------------------------------------------------------------------------------------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA) 1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
INTEREST INCOME:
Interest and fees on loans $8,625 $7,526 $5,699
Interest and dividends on investment securities:
Taxable interest income 16,172 11,931 10,768
Nontaxable interest income 1,123 1,340 1,680
Dividends 29 10 10
Interest on Federal funds sold and securities purchased under
agreement to resell 481 942 826
- ------------------------------------------------------------------------------------------------------------------------
Total interest income 26,430 21,749 18,983
- ------------------------------------------------------------------------------------------------------------------------
INTEREST EXPENSE:
Interest on certificates of deposit $100,000 or more 4,113 2,764 461
Interest on other deposits 7,097 5,921 5,365
Interest on short-term borrowings 376 102 88
- ------------------------------------------------------------------------------------------------------------------------
Total interest expense 11,586 8,787 5,914
- ------------------------------------------------------------------------------------------------------------------------
Net interest income 14,844 12,962 13,069
Provision (credit) for loan losses (Note 5) (132) 0 10
- ------------------------------------------------------------------------------------------------------------------------
Net interest income after provision (credit) for loan losses 14,976 12,962 13,059
- ------------------------------------------------------------------------------------------------------------------------
OTHER INCOME:
Service charges, commissions and fees 516 570 556
Other income 136 113 112
Gain on securities sold (Note 4) 75 49 0
- ------------------------------------------------------------------------------------------------------------------------
Total other income 727 732 668
- ------------------------------------------------------------------------------------------------------------------------
OTHER EXPENSE:
Salaries and employee benefits (Note 8) 5,168 4,323 3,846
Occupancy expense, net 910 712 773
Premises and equipment expense 1,141 794 692
Stationery and printing expense 525 295 331
Marketing and advertising expense 422 217 240
Other expenses 1,744 1,797 2,234
- ------------------------------------------------------------------------------------------------------------------------
Total other expense 9,910 8,138 8,116
- ------------------------------------------------------------------------------------------------------------------------
Income before income tax expense 5,793 5,556 5,611
Income tax expense (Note 9) 1,636 1,516 1,434
- ------------------------------------------------------------------------------------------------------------------------
Net income $4,157 $4,040 $4,177
- ------------------------------------------------------------------------------------------------------------------------
EARNINGS PER SHARE:
Average weighted common shares outstanding: 2,231,113 2,218,331 2,210,507
- ------------------------------------------------------------------------------------------------------------------------
Net income $1.86 $1.82 $1.89
========================================================================================================================
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
33
<PAGE>
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
- -------------------------------------------------------------------------------------------------------------------------------
UNREALIZED GAIN TOTAL
COMMON COMMON (LOSS) ON SECURITIES STOCK-
(IN THOUSANDS, STOCK STOCK APPROPRIATED RETAINED TREASURY AVAILABLE FOR SALE HOLDERS'
EXCEPT SHARE DATA) SHARES AMOUNT SURPLUS EARNINGS STOCK NET OF TAXES EQUITY
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1993 2,100,948 $2,000 $3,510 $18,507 $(1,814) $ 0 $22,203
YEAR 1994
Unrealized gain on
investment securities
available for sale as
of January 1, 1994 756 756
Net Income 4,177 4,177
Cash dividend (1,730) (1,730)
Common stock dividend 105,081 1,851 (1,851) 0
Issuance of common stock 5,627 116 116
Net change in unrealized loss
on investment securities
available for sale (1,311) (1,311)
- -----------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1994 2,211,656 $3,967 $3,510 $19,103 $(1,814) $ (555) $24,211
YEAR 1995
Net income 4,040 4,040
Cash dividend (1,775) (1,775)
Issuance of common stock 12,744 232 232
Net change in unrealized gain
(loss) on investment securities
available for sale 971 971
- -----------------------------------------------------------------------------------------------------------------------------
Balance December 31, 1995 2,224,400 $4,199 $3,510 $21,368 $(1,814) $ 416 $27,679
YEAR 1996
Net income 4,157 4,157
Cash dividend (1,787) (1,787)
Issuance of common stock 12,892 269 269
Net change in unrealized gain
(loss) on investment
securities available for sale (105) (105)
- -----------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1996 2,237,291 $4,468 $3,510 $23,738 $(1,814) $ 311 $30,213
=============================================================================================================================
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
34
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
- ------------------------------------------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS) 1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 4,157 $ 4,040 $ 4,177
ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH
PROVIDED BY OPERATING ACTIVITIES:
Depreciation and amortization 1,117 728 672
Provision (credit) for loan losses (132) 0 10
Provision for deferred taxes (286) 118 (125)
Gain on sale of investment securities 75 49 0
(Increase) decrease in accrued interest receivable (728) 295 (266)
(Decrease) increase in other assets (4,567) (99) 330
Increase (decrease) in other liabilities 245 1,186 (670)
Amortization of premium and accretion of discount
on investment securities, net 445 674 904
- ------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activites 326 6,991 5,032
- ------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturities of securities available for sale 22,236 7,691 7,027
Proceeds from maturities of securities held to maturity 33,483 84,335 42,628
Proceeds from sales of investment securities available for sale 45,273 7,629 0
Purchase of securities available-for-sale (75,715) (6,435) (2,750)
Purchase of securities held to maturity (96,333) (95,361) (49,349)
Net increase in loans (19,908) (8,765) (22,940)
Property and equipment expenditures, net (3,617) (747) (856)
- ------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (94,581) (11,653) (26,240)
- ------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in deposits 130,988 5,491 (4,294)
Dividends paid (1,787) (1,775) (1,730)
Proceeds from issuance of common stock 269 232 116
Net (decrease) increase in short-term borrowing (22,326) 12,581 9,745
- ------------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 107,144 16,529 3,837
- ------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 12,889 11,867 (17,371)
- ------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at beginning of year 30,172 18,305 35,676
- ------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $43,061 $30,172 $18,305
- ------------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Interest paid on deposits and short-term borrowings $11,547 $8,641 $5,869
Income taxes $1,627 $1,397 $1,495
Transfers from securities held to maturity to
securities available for sale $0 $17,819 $63,244
Transfers from securities available for sale to
securities held to maturity $0 $0 $16,992
========================================================================================================================
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
35
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements of Center Bancorp Inc. (the
Corporation) are prepared on the accrual basis and include the accounts of the
Corporation and its wholly-owned subsidiary, Union Center National Bank (the
Bank). All significant intercompany accounts and transactions have been
eliminated from the accompanying consolidated financial statements.
BUSINESS
The Bank provides a full range of banking services to individual and
corporate customers through branch locations in Union and Morris Counties, New
Jersey. The Bank is subject to competition from other financial institutions and
is subject to the regulations of certain federal agencies and undergoes periodic
examinations by those regulatory authorities.
BASIS OF FINANCIAL STATEMENT PRESENTATION
The consolidated financial statements have been prepared in conformity with
generally accepted accounting principles. In preparing the consolidated
financial statements, management is required to make estimates and assumptions
that affect the reported amounts of assets and liabilities as of the date of the
statement of condition and revenues and expenses for that period. Actual results
could differ significantly from those estimates.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include cash and due from banks, Federal funds
sold, and securities purchased under agreement to resell. Generally, Federal
funds and securities purchased under agreement to resell are sold for one-day
periods.
INVESTMENT SECURITIES
The Corporation adopted Statement of Financial Accounting Standards
("SFAS") No. 115 "Accounting for Certain Investments in Debt and Equity
Securities," on April 1, 1994. SFAS No. 115 establishes the accounting and
reporting for investments in equity securities that have readily determinable
fair values and for all investments in debt securities. Under the provisions of
SFAS No. 115, those investments will be classified into three categories: (1)
held to maturity securities, for which the Corporation has both the positive
intent and ability to hold until maturity, will be reported at amortized cost;
(2) trading securities, which are purchased and held principally for the purpose
of selling in the near term, will be reported at fair value with unrealized
gains and losses included in earnings; and (3) available for sale securities,
which do not meet the criteria of the other two categories, will be reported at
fair value with unrealized gains and losses, net of applicable income taxes,
reported as a separate component of stockholders' equity and excluded from
earnings.
Investment securities that the Corporation both intends and has the ability
to hold until maturity are stated at cost, adjusted for amortization of premiums
and accretion of discounts which are recognized on a level yield method, as
adjustments to interest income. Investment securities identified
- --------------------------------------------------------------------------------
36
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
for sale prior to their contractual maturities in order to meet asset and
liability management objectives are classified as available for sale and carried
at fair value. Investment securities gains or losses are determined using the
specific identification method.
INCOME TAXES
The Corporation recognizes deferred tax liabilities and assets for the
expected future tax consequences of events that have been included in the
financial statements or tax returns. Under this method, deferred tax liabilities
and assets are determined based on the difference between the financial
statement and tax bases of assets and liabilities using enacted tax rates in
effect for the first year in which the differences are expected to be settled.
LOANS
Loans are stated at their principal amounts less net deferred loan
origination fees. Interest income is credited as earned except when a loan
becomes past due 90 days or more and doubt exists as to the ultimate collection
of interest or principal; in those cases the recognition of income is
discontinued. When a loan is placed on non-accrual, interest accruals cease and
uncollected accrued interest is reversed and charged against current income.
Payments received on non-accrual loans are applied against principal. A loan may
only be restored to an acruing basis when it again becomes well secured and in
the process of collection or all past due amounts have been collected. Loan
origination fees and certain direct loan origination costs are deferred and
recognized over the life of the loan as an adjustment to the loan's yield.
Effective January 1, 1995, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 114, "Accounting by Creditors for Impairment of
a Loan" and its subsequent amendment SFAS No. 118, "Accounting by Creditors for
Impairment of a Loan-Income Recognition and Disclosures." SFAS No. 114, as
amended, addresses the accounting for impaired loans and requires that impaired
loans be measured based on the present value of expected future cash flows
discounted at the loan's effective interest rate or, as a practical expedient,
at the loan's observable market price or at the fair value of the collateral if
the loan is collateral dependent. The determination of impaired loans consists
of non-accrual loans and loans internally classified as substandard or below in
each instance above an established dollar threshold. All loans below the
established dollar threshold are considered homogenous and are considered in the
Bank's normal credit evaluation process. Since the Corporation did not have any
impaired loans and sufficiently evaluates the adequacy of the allowance for loan
losses, there was no impact of adopting SFAS No. 114, as amended and these
statements did not have an effect on the existing income recognition and
charge-off policies for nonperforming loans.
ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses is maintained at a level determined adequate
to provide for potential loan losses. The allowance is increased by provisions
charged to operations and reduced by loan charge-offs, net of recoveries. The
allowance is based on Management's evaluation of the loan portfolio considering
economic conditions, the volume and nature of the loan portfolio, historical
loan loss experience and individual credit situations.
- --------------------------------------------------------------------------------
37
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Material estimates that are particularly susceptible to significant change
in the near-term relate to the determination of the allowance for loan losses.
In connection with the determination of the allowance for loan losses,
management obtains independent appraisals for significant properties.
The ultimate collectibility of a substantial portion of the Bank's loan
portfolio is susceptible to changes in market conditions in the state of New
Jersey.
Management believes that the allowance for loan losses is adequate. While
management uses available information to recognize loan losses, future additions
to the allowance may be necessary based on changes in economic conditions,
particularly in New Jersey. In addition, various regulatory agencies, as an
integral part of their examination process, periodically review the Bank's
allowance for loan losses. Such agencies may require the Bank to recognize
additions to the allowance based on their judgments about information available
to them at the time of their examinations.
BANK PREMISES AND EQUIPMENT
Land is carried at cost and bank premises and equipment at cost less
accumulated depreciation based on estimated useful lives of assets, computed
principally on the straight-line basis. Expenditures for maintenance and repairs
are charged to operations as incurred; major renewals and betterments are
capitalized. Gains and losses on sales or other dispositions are recorded as
other income or other expenses.
RECLASSIFICATIONS
Certain reclassifications have been made in the consolidated financial
statements for 1995 and 1994 to conform to the classifications presented in
1996.
PENSION PLAN
The Corporation has a non-contributory pension plan covering all eligible
employees. The Corporation's policy is to fund at least the minimum contribution
required by the Employee Retirement Income Security Act of 1974.
STOCK BASED COMPENSATION
In October, 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" (SFAS 123), which is effective beginning in 1996. SFAS 123 allows
companies either to continue to account for stock-based employee compensation
plans under existing accounting standards or adopt a fair value based method of
accounting for stock options as compensation expense over the service period as
defined in the new standard. SFAS 123 requires that if a company continues to
account for stock options under APB opinion No. 25, it must provide proforma net
income and earnings per share information as if the new fair value approach had
been adopted. Center Bancorp will continue to follow the existing accounting
standards for these plans and will make the required disclosures. However, no
options were granted in 1996 or 1995.
- --------------------------------------------------------------------------------
38
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
EARNINGS PER SHARE
All share and per share amounts have been restated to reflect the 3-for-2
stock split paid on May 8, 1996 and the 5% stock dividend on August 1, 1994.
TREASURY STOCK
Treasury stock is recorded using the cost method and accordingly is
presented as an unallocated reduction of stockholders' equity.
NOTE 2: ACQUISITION
On June 28, 1996, the Corporation acquired Lehigh Savings Bank SLA,
(Lehigh), a New Jersey chartered savings and loan in a transaction accounted for
under the purchase method of accounting. At June 28, 1996, Lehigh had assets of
$70.9 million (primarily cash and cash equivalents of $53.0 million, loans of
$15.0 million) and deposits and stockholders' equity of $68.2 million and $2.7
million, respectively. The Corporation paid $5.5 million for Lehigh, resulting
in goodwill of $3.8 million. The goodwill is being amortized on a straight-line
basis over 15 years. The December 31, 1996 consolidated financial statements of
the Corporation includes assets, liabilities and results of operations of Lehigh
since the acquisition date.
The following supplemental schedule presents the pro forma results of
operations for 1996 and 1995 as though the companies had combined at the
beginning of each respective year. The pro forma results of operations does not
necessarily reflect the results of operations that would have occurred had the
Corporation and Lehigh constituted a single entity during such periods. The 1996
pro forma net income includes a $1.8 million net loss for Lehigh, primarily due
to a loss of sale of securities of $942,000 million from the repositioning of
Lehigh's investment portfolio.
(DOLLARS IN THOUSANDS) 1996 1995
- --------------------------------------------------------------------------------
Net interest income $15,808 $14,869
Net income $2,139 $3,897
Earnings per share $0.96 $1.76
================================================================================
NOTE 3: CASH AND DUE FROM BANKS
The subsidiary bank, Union Center National Bank, maintained average cash
balances reserved to meet regulatory requirements of the Federal Reserve Board
of approximately $4,547,000 and $2,900,000 at December 31, 1996 and 1995,
respectively.
- --------------------------------------------------------------------------------
39
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 4: INVESTMENT SECURITIES
The following table presents information related to the Corporation's
portfolio of securities held for maturity and available for sale at December 31,
1996 and 1995.
<TABLE>
<CAPTION>
DECEMBER 31, 1996
- -----------------------------------------------------------------------------------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED MARKET
(DOLLARS IN THOUSANDS) COST GAINS LOSSES VALUE
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
SECURITIES HELD TO MATURITY:
U.S. government and federal agency obligations $168,061 $ 862 $1,041 $167,882
Obligations of U.S. states and political subdivisions 39,353 333 52 39,634
Other securities 11,170 117 15 11,272
- -----------------------------------------------------------------------------------------------------------------------
$218,584 $1,312 $1,108 $218,788
=======================================================================================================================
<CAPTION>
DECEMBER 31, 1996
- -----------------------------------------------------------------------------------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED MARKET
(DOLLARS IN THOUSANDS) COST GAINS LOSSES VALUE
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
SECURITIES AVAILABLE FOR SALE:
U.S. government and federal agency obligations $60,275 $550 $32 $60,793
Obligations of US states and political subdivisions 0 0 0 0
Federal Reserve and Federal Home Loan Bank stock 746 0 0 746
- -----------------------------------------------------------------------------------------------------------------------
$61,021 $550 $32 $61,539
=======================================================================================================================
<CAPTION>
DECEMBER 31, 1995
- -----------------------------------------------------------------------------------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED MARKET
(DOLLARS IN THOUSANDS) COST GAINS LOSSES VALUE
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
SECURITIES HELD TO MATURITY:
U.S. government and federal agency obligations $107,446 $ 0 $69 $107,377
Obligations of U.S. states and political subdivisions 42,877 639 0 43,516
Other securities 5,707 849 0 6,556
- -----------------------------------------------------------------------------------------------------------------------
$156,030 $1,488 $69 $157,449
=======================================================================================================================
<CAPTION>
DECEMBER 31, 1995
- -----------------------------------------------------------------------------------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED MARKET
(DOLLARS IN THOUSANDS) COST GAINS LOSSES VALUE
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
SECURITIES AVAILABLE FOR SALE:
U.S. government and federal agency obligations $52,804 $693 $0 $53,497
Federal Reserve Bank stock 165 0 0 165
- -----------------------------------------------------------------------------------------------------------------------
$52,969 $693 $0 $53,662
=======================================================================================================================
</TABLE>
- --------------------------------------------------------------------------------
40
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The following table presents information for investments in securities held
to maturity and securities available for sale at December 31, 1996, based on
scheduled maturities. Actual maturities can be expected to differ from scheduled
maturities due to prepayment or early call privileges of the issuer.
<TABLE>
<CAPTION>
HELD TO MATURITY AVAILABLE FOR SALE
- ----------------------------------------------------------------------------------------------------------------------
ESTIMATED
AMORTIZED MARKET AMORTIZED BOOK/MARKET
(DOLLARS IN THOUSANDS) COST VALUE COST VALUE
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Due in one year or less $ 78,097 $ 77,943 $15,886 $15,947
Due after one year through five years 87,923 88,278 33,913 34,367
Due after five years through ten years 52,564 52,567 11,222 11,225
- ----------------------------------------------------------------------------------------------------------------------
$218,584 $218,788 $61,021 $61,539
======================================================================================================================
</TABLE>
Pursuant to the provisions and implementation guidance contained within the
special report "A Guide to Implementation of Statement 115 on Accounting for
Certain Investments in Debt and Equity Securities", on November 27, 1995, the
Corporation reassessed the classification of all securities within its portfolio
and transferred $17.8 million from its held-to-maturity investment portfolio to
its available-for-sale portfolio. These securities had a market value of $17.9
million which resulted in the Corporation recording an unrealized gain on
securities available-for-sale, net of tax, within stockholders' equity of
$60,000. There were no transfers in 1996.
Securities sold from the Corporation's Available-for-Sale portfolio during
1996 amounted to $14.4 million, with resulting gains on securities sold of
approximately $121,000 offset by losses on securities sold of approximately
$46,000. These securities were sold in the ordinary course of business. During
1995 the Corporation recorded net gains of $49,000 on sales of $7.6 million In
1994 the Corporation had no sales.
Investment securities having a carrying value of approximately $63.7
million and $33.5 million at December 31, 1996 and 1995, respectively, were
pledged to secure public deposits, short-term borrowings and for other purposes
required or permitted by law.
NOTE 5: LOANS AND THE ALLOWANCE FOR LOAN LOSSES
The following table sets forth the composition of the Corporation's loan
portfolio at December 31, 1996 and 1995, respectively.
(dollars in thousands) 1996 1995
- --------------------------------------------------------------------------------
Real estate--residential mortgage $78,347 $69,954
Real estate--commercial 14,575 13,603
Commercial and industrial 11,375 7,699
Installment 14,002 6,841
All other 229 171
Less unearned income (698) (698)
- --------------------------------------------------------------------------------
Loans, net of unearned income $117,830 $97,570
================================================================================
At December 31, 1996 and 1995 loans to officers and directors aggregated
approximately $3,078,000 and $3,039,000 respectively. During the year ended
December 31, 1996, the Corporation made new loans to officers and directors in
the amount of $1,999,000; payments by such persons during 1996 aggregated
$1,960,000. Management is of the opinion that the above loans were made on the
same terms and conditions as those prevailing for comparable transactions with
non-related borrowers.
During the years ended 1996 and 1995, the Corporation had no impaired loans
and related allocations to the allowance for loan losses, as defined by SFAS
114.
- --------------------------------------------------------------------------------
41
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 5: LOANS AND THE ALLOWANCE FOR LOAN LOSSES (continued)
A summary of the activity in the allowance for loan losses is as follows:
(DOLLARS IN THOUSANDS) 1996 1995 1994
- --------------------------------------------------------------------------------
Balance at the beginning of the year $1,073 $1,073 $ 943
Provision (credit) for loan losses (132) 0 10
Loans charged off (479) (10) (12)
Recoveries on loans previously charge off 138 10 132
Adjustments from acquisition of Lehigh 693 0 0
- --------------------------------------------------------------------------------
Balance at the end of the year $1,293 $1,073 $1,073
================================================================================
The allowance for loan losses for Federal income tax purposes amounted to
$993,000 and $758,000 at December 31, 1996 and 1995, which is the maximum
allowable.
The outstanding balances of accruing loans which are 90 days or more past
due as to principal or interest payments and non-performing assets at December
31, 1996 and 1995 were as follows:
(DOLLARS IN THOUSANDS) 1996 1995
- --------------------------------------------------------------------------------
Loans past due in excess of 90 days and still accruing $121 $48
Non-accrual loans 298 0
- --------------------------------------------------------------------------------
Total non-performing assets $419 $48
================================================================================
The amount of interest income that would have been recorded on non-accrual
loans in 1996 and 1995, had payments remained in accordance with the original
contractual terms, approximated $23,000 and $0, while no interest income was
received on these types of assets in 1996 and 1995, resulting in a loss of
interest income of $23,000 and $0, respectively.
At December 31, 1996, there were no committments to lend additional funds
to borrowers whose loans were non-accrual or contractually past due in excess of
90 days and still accruing interest.
The Bank's policy is to grant commercial, mortgage, and installment loans
to New Jersey residents and businesses within its trading area. The borrowers'
abilities to repay their obligations are dependent upon various factors
including the borrowers' income and net worth, cash flows generated by the
borrowers' underlying collateral, value of the underlying collateral, and
priority of the Bank's lien on the property. Such factors are dependent upon
various economic conditions and individual circumstances beyond the Bank's
control. The Bank is therefore subject to risk of loss. The Bank believes its
lending policies and procedures adequately minimize the potential exposure to
such risks and that adequate provisions for loan losses are provided for all
known and inherent risks. Collateral and personal guarantees are required for
virtually all loans.
- --------------------------------------------------------------------------------
42
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 6: BANK PREMISES AND EQUIPMENT
A summary of the Corporation's premises and equipment at December 31, 1996
and 1995 follows:
(DOLLARS IN THOUSANDS) 1996 1995
- --------------------------------------------------------------------------------
Land $ 1,892 $1,463
Buildings 5,499 4,965
Furniture, fixtures and equipment 6,780 4,201
Leasehold improvements 848 288
================================================================================
Subtotal 15,019 10,917
Less accumulated depreciation and amortization 4,915 3,455
- --------------------------------------------------------------------------------
$10,104 $7,462
================================================================================
NOTE 7: REGULATORY CAPITAL REQUIREMENTS
FDIC regulations require banks to maintain minimum levels of regulatory
capital. Under the regulations in effect at December 31, 1996, the Bank was
required to maintain (i) a minimum leverage ratio of Tier 1 capital to total
adjusted assets of 4.0%, and (ii) minimum ratios of Tier 1 and total capital to
risk-weighted assets of 4.0% and 8.0%, respectively.
Under its prompt corrective action regulations, the FDIC is required to
take certain supervisory actions (and may take additional discretionary actions)
with respect to an undercapitalized institution. Such actions could have a
direct material effect on the institution's financial statements. The
regulations establish a framework for the classification of savings institutions
into five categories: well capitalized, adequately capitalized,
undercapitalized, significantly undercapitalized, and critically
undercapitalized. Generally, an institution is considered well capitalized if it
has a leverage (Tier 1) capital ratio of at least 5.0%; a Tier 1 risk-based
capital ratio of at least 6.0%; and a total risk-based capital ratio of at least
10.0%.
The foregoing capital ratios are based in part on specific quantitative
measures of assets, liabilities and certain off-balance sheet items as
calculated under regulatory accounting practices. Capital amounts and
classifications are also subject to qualitative judgments by the FDIC about
capital components, risk weightings and other factors.
As of December 31, 1996, management believes that the Bank meets all
capital adequacy requirements to which it is subject. Further, the most recent
FDIC notification categorized the Bank as a well-capitalized institution under
the prompt corrective action regulations. There have been no conditions or
events since that notification that management believes have changed the Bank's
capital classification.
- --------------------------------------------------------------------------------
43
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 7: REGULATORY CAPITAL REQUIREMENTS (continued)
The following is a summary of the Bank's actual capital amounts and ratios
as of December 31, 1996 and 1995, compared to the FDIC minimum capital adequacy
requirements and the FDIC requirements for classification as a well-capitalized
institution:
<TABLE>
<CAPTION>
FDIC REQUIREMENTS
- -------------------------------------------------------------------------------------------------------------------------
UNION CENTER NATIONAL MINIMUM CAPITAL FOR CLASSIFICATION
BANK ACTUALS ADEQUACY AS WELL CAPITALIZED
- -------------------------------------------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS) AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
DECEMBER 31, 1996
Leverage (Tier 1) capital $26,221 5.76% $18,209 4.00% $22,761 5.00%
- -------------------------------------------------------------------------------------------------------------------------
RISK-BASED CAPITAL:
- -------------------------------------------------------------------------------------------------------------------------
Tier 1 26,221 15.61% 6,720 4.00% 10,080 6.00%
Total 27,514 16.38% 13,440 8.00% 16,801 10.00%
- -------------------------------------------------------------------------------------------------------------------------
DECEMBER 31, 1995
Leverage (Tier 1) capital $27,263 7.84% $13,894 4.00% $17,368 5.00%
- -------------------------------------------------------------------------------------------------------------------------
RISK-BASED CAPITAL:
- -------------------------------------------------------------------------------------------------------------------------
Tier 1 27,263 23.36% 4,669 4.00% 7,003 6.00%
Total 27,514 24.28% 9,337 8.00% 11,671 10.00%
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
NOTE 8: PENSION AND BENEFITS
The Corporation maintains a non-contributory pension plan for substantially
all its employees. The benefits are based on years of service and the employee's
compensation over the prior five-year period. The plan's assets consist
primarily of an insurance annuity. In addition, the Corporation has a new
non-qualified retirement plan which is designed to supplement the pension plan
for key employees.
The following table sets forth the funded status and amounts recognized in
the consolidated statements of condition for the Corporation's pension plans at
December 31, 1996 and 1995.
(DOLLARS IN THOUSANDS) 1996 1995
- --------------------------------------------------------------------------------
Actuarial present value of benefit obligations
Vested $2,901 $2,700
Non-Vested 55 117
- --------------------------------------------------------------------------------
Accumulated benefit obligation 2,956 2,817
Effect of projected future compensation levels 1,099 865
- --------------------------------------------------------------------------------
Projected benefit obligation 4,055 3,682
Plan assets at fair value 3,569 3,318
- --------------------------------------------------------------------------------
Assets less than projected benefit obligation (486) (364)
Unrecognized net asset (20) (25)
Unamortized Prior Service Cost 170 184
Deferred gain (518) (574)
- --------------------------------------------------------------------------------
Accrued expense ($854) ($779)
================================================================================
- --------------------------------------------------------------------------------
44
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The net periodic pension cost for 1996, 1995 and 1994 include the following
components.
(DOLLARS IN THOUSANDS) 1996 1995 1994
- --------------------------------------------------------------------------------
Service cost $199 $208 $187
Interest 262 251 226
Actual return on plan assets (308) (275) (196)
Net amortization and deferral 39 21 (11)
- --------------------------------------------------------------------------------
Net periodic pension expense $192 $205 $206
================================================================================
The following table presents the assumptions used to calculate the
projected benefit obligation and pension expense in each of the last three
years.
1996 1995 1994
- --------------------------------------------------------------------------------
Discount rate 7.50% 7.50% 8.00%
Rate of compensation increase 6.50% 6.50% 6.75%
Expected long-term rate of return on plan assets 8.00% 8.00% 7.00%
================================================================================
401K BENEFIT PLAN
During 1994, the Corporation established a 401K employee savings plan to
provide for defined contributions which covers substantially all employees of
the Bank. The Corporation's contributions to the plan are limited to fifty
percent of a matching percentage of each employee's contribution up to six
percent of the employee's salary. The plan was effective January 1, 1995. For
1996, 1995, and 1994, employer contributions amounted to $43,928, $43,050, and
$0, respectively.
STOCK OPTION PLANS
The Stock Option Plans permit Center Bancorp common stock to be issued to
key employees and directors of the Corporation and its subsidiary. The options
granted under the Plan are intended to be either Incentive Stock Options or
Non-Qualified Options.
Options have been granted to purchase common stock principally at the fair
market value of the stock at the date of grant. Options are exercisable starting
one year after the date of grant and generally expire ten years from the date of
grant. Upon the exercise of options, proceeds received in excess of par value of
the shares are credited to surplus.
There were no options granted or exercised during 1996.
- --------------------------------------------------------------------------------
45
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 8: PENSION AND BENEFITS (CONTINUED)
Changes in options outstanding during the past three years were as
follows:
EXERCISE PRICE RANGE
STOCK OPTION PLAN SHARES PER SHARE
- --------------------------------------------------------------------------------
Outstanding, December 31, 1993
(6,300 shares exercisable) 100,800 7.93 to 19.52
Granted during 1994 18,900 19.52
Exercised during 1994 (6,300) 7.93
Expired or canceled during 1994 (787) 19.52
- --------------------------------------------------------------------------------
Outstanding, December 31, 1994,
(35,122 shares exercisable) 112,613 19.52
Granted during 1995 0
Exercised during 1995 0
Expired or canceled during 1995 (10,238) 19.52
- --------------------------------------------------------------------------------
Outstanding, December 31, 1995,
(51,030 shares exercisable) 102,375 19.52
Granted during 1996 0
Exercised during 1996 0
Expired or canceled during 1996 (3,150) 19.52
- --------------------------------------------------------------------------------
OUTSTANDING, DECEMBER 31, 1996
(80,955 shares exercisable) 99,225 19.52
================================================================================
NOTE 9: INCOME TAXES
The current and deferred amounts of income tax expense for the years
ended December 31, 1996, 1995 and 1994 are as follows:
(DOLLARS IN THOUSANDS) 1996 1995 1994
- --------------------------------------------------------------------------------
CURRENT:
Federal $1,203 $1,273 $1,241
State 147 125 68
- --------------------------------------------------------------------------------
1,350 1,398 1,309
DEFERRED:
Federal 286 118 125
- --------------------------------------------------------------------------------
Income tax expense 1,636 1,516 1,434
================================================================================
A reconciliation between the amount of reported income tax expense and the
amount computed by applying the statutory Federal income tax rate is as follows:
(DOLLARS IN THOUSANDS) 1996 1995 1994
- --------------------------------------------------------------------------------
Income before income tax expense $5,793 $5,556 $5,611
Federal statutory rate 34% 34% 34%
- --------------------------------------------------------------------------------
Computed "expected" Federal income
tax expense 1,970 1,889 1,907
State tax net of Federal tax benefit 64 82 45
Tax-exempt interest and dividends (359) (429) (526)
Decrease in valuation allowance 0 0 (22)
Other, net (39) (26) 30
- --------------------------------------------------------------------------------
Income tax expense 1,636 1,516 $1,434
================================================================================
- --------------------------------------------------------------------------------
46
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The tax effects of temporary differences that give rise to significant
portions of the deferred tax asset and deferred tax liability at December 31,
1996 and 1995 are presented below.
(DOLLARS IN THOUSANDS) 1996 1995
- --------------------------------------------------------------------------------
DEFERRED TAX ASSETS:
Allowance for loan losses $120 $ 126
Pension Expense 342 295
Deferred fee income-Mortgages 23 61
Operating loss carry forward 284 0
Depreciation 64 0
- --------------------------------------------------------------------------------
Total gross deferred tax asset 833 482
Valuation allowance (58) (58)
- --------------------------------------------------------------------------------
Net deferred tax asset $775 $ 424
- --------------------------------------------------------------------------------
DEFERRED TAX LIABILITIES:
Depreciation $0 $ 141
Market discount accretion 37 199
Premium amortization 13 0
Deferred fee expense-Mortgages 143 126
Unrealized gains on securities available
for sale 207 277
- --------------------------------------------------------------------------------
Total gross deferred tax liabilities 400 743
- --------------------------------------------------------------------------------
Net deferred tax asset (liability) $375 $(319)
================================================================================
Based on the Corporation's historical and current pre-tax earnings and the
availability of net operating loss carrybacks on a federal basis, management
believes it is more likely than not that the Company will realize the benefit of
the net deductible temporary differences existing at December 31, 1996 and 1995,
respectively.
The valuation allowance is due to the state tax effect of the net
deductible temporary difference calculated on a separate company basis. The
valuation allowance for deferred tax assets as of December 31, 1996 and 1995 was
$58,000 and $58,000 respectively.
NOTE 10: (UNAUDITED)
QUARTERLY FINANCIAL INFORMATION
CENTER BANCORP, INC.
<TABLE>
<CAPTION>
1996
- -------------------------------------------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) 4TH QUARTER 3RD QUARTER 2ND QUARTER 1ST QUARTER
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Total interest income $7,084 $7,272 $6,114 $5,960
Total interest expense 3,170 3,238 2,674 2,504
Net interest income 3,914 4,034 3,440 3,456
Provision (credit) for loan losses (132) 0 0 0
Other income 173 177 232 145
Other expense 2,810 2,852 2,254 1,994
Income before income taxes 1,409 1,359 1,418 1,607
Net income 919 1,001 1,002 1,235
Earnings per share $.41 $.45 $.45 $.55
Weighted average common shares outstanding 2,236,329 2,232,952 2,228,824 2,225,718
=========================================================================================================================
</TABLE>
- --------------------------------------------------------------------------------
47
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<CAPTION>
1995
- -------------------------------------------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) 4TH QUARTER 3RD QUARTER 2ND QUARTER 1ST QUARTER
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Total interest income $5,716 $5,474 $5,353 $5,206
Total interest expense 2,297 2,206 2,214 2,070
Net interest income 3,419 3,268 3,139 3,136
Provision for loan losses 0 0 0 0
Other income 175 150 248 159
Other expense 2,210 1,791 2,164 1,973
Income before income taxes 1,384 1,627 1,223 1,322
Net income 985 1,141 914 1,000
Earnings per share $0.44 $0.51 $0.41 $0.45
Weighted average common shares outstanding 2,217,535 2,216,256 2,214,835 2,213,506
=========================================================================================================================
</TABLE>
NOTE 11: FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107, "Disclosures about
Fair Value of Financial Instruments" (SFAS 107), requires that the Bank disclose
estimated fair values for its financial instruments. Fair value estimates,
methods, and assumptions are set forth below for the Corporation's financial
instruments:
The carrying amounts for cash and cash equivalents approximate fair value
because they mature in 90 days or less and do not present unanticipated credit
concerns. The fair value of investment securities is estimated based on bid
quotations received from securities dealers.
Fair values are estimated for portfolios of loans with similar financial
characteristics. Loans are segregated by type such as commercial, real
estate-mortgage, and installment loans. The fair value of performing loans,
except residential mortgages, is calculated by discounting scheduled cash flows
through the estimated maturity using estimated market discount rates that
reflect the credit and interest rate risk inherent in the loan. The estimate of
maturity is based on the Bank's historical experience with prepayments for each
loan classification, modified as required by an estimate of the effect of
current economic and lending conditions. For performing residential mortgage
loans, fair value is estimated by discounting contractual cash flows adjusted
for prepayment estimates using discount rates based on secondary market sources
adjusted to reflect differences in servicing and credit costs.
Under SFAS 107, the fair value of deposits with no stated maturity, such as
noninterest-bearing demand deposits, savings and NOW accounts, and money market
and checking accounts, is equal to the amount payable on demand as of December
31, 1996 and 1995. The fair value of certificates of deposit is based on the
discounted value of contractual cash flows. The discount rate is estimated using
the rates currently offered for deposits of similar remaining maturities.
The fair value estimates of commitments to extend credit and standby
letters of credit are estimated at the fee charged by the bank for similar
transactions. This amount is deemed to be immaterial.
Short-term borrowings that mature within six months have fair values equal
to their carrying value.
Fair value estimates are made at a specific point in time, based on
relevant market information and information about the financial instrument.
These estimates do not reflect any premium or discount that could result from
offering for sale at one time the Corporation's entire holdings of a particular
- --------------------------------------------------------------------------------
48
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
financial instrument. Because no market exists for a significant portion of
the Bank's financial instruments, fair value estimates are based on judgments
regarding future expected loss experience, current economic conditions, risk
characteristics of various financial instruments, and other factors. These
estimates are subjective in nature and involve uncertainties and matters of
significant judgment and therefore cannot be determined with precision. Changes
in assumptions could significantly affect the estimates.
Fair value estimates are based on existing on-and-off-balance sheet
financial instruments without attempting to estimate the value of anticipated
future business and the value of assets and liabilities that are not considered
financial instruments. Other significant assets and liabilities that are not
considered financial assets or liabilities include deferred tax liabilities,
goodwill, and premises and equipment. In addition, the tax ramifications related
to the realization of the unrealized gains and losses can have a significant
effect on fair value estimates and have not been considered.
The estimated fair value of the Corporation's financial instruments are as
follows:
<TABLE>
<CAPTION>
DECEMBER 31,
- ---------------------------------------------------------------------------------------------------------------------
1996 1995
- ---------------------------------------------------------------------------------------------------------------------
CARRYING FAIR Carrying Fair
(DOLLARS IN THOUSANDS) AMOUNT VALUE Amount Value
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
FINANCIAL ASSETS:
Cash and cash equivalents $ 43,061 $ 43,061 $ 30,172 $ 30,172
Investments Available-for-Sale 61,539 61,539 53,662 53,662
Investments Held-to-Maturity 218,584 218,788 156,030 157,449
Net loans 116,537 118,195 96,497 94,497
FINANCIAL LIABILITIES:
Noninterest-bearing deposits $ 68,086 $ 68,086 $ 60,635 $ 60,635
Interest-Bearing deposits 358,568 358,568 235,031 235,031
Federal funds purchased and securities sold under
agreement to repurchase 0 0 22,326 22,326
=====================================================================================================================
</TABLE>
- --------------------------------------------------------------------------------
49
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 12: PARENT COMPANY ONLY FINANCIAL STATEMENTS
Center Bancorp, Inc., operates its wholly-owned subsidiary, Union Center
National Bank. The earnings of this subsidiary are recognized by the Corporation
using the equity method of accounting. Accordingly, earnings are recorded as
increases in the Corporation's investment in the subsidiary and dividends paid
reduce the investment in the subsidiary. Dividends payable by the Corporation
are unrestricted, although the ability of the Corporation to pay dividends will
largely depend upon the dividends paid to it by the Bank. Dividends payable by
the Bank to the Corporation are restricted under supervisory regulations (see
Note 13). Condensed financial statements of the Parent Company only follow:
CONDENSED STATEMENTS OF CONDITION
<TABLE>
<CAPTION>
FOR YEARS ENDED DECEMBER 31,
- --------------------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS) 1996 1995
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Cash and cash equivalents $253 $890
Investment in subsidiary 29,957 27,357
Other Assets 465 0
- --------------------------------------------------------------------------------------------------
$30,675 $28,247
==================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Other liabilities $462 $567
Stockholders' equity $30,213 27,679
- --------------------------------------------------------------------------------------------------
$30,675 $28,246
==================================================================================================
</TABLE>
<TABLE>
<CAPTION>
CONDENSED STATEMENT OF INCOME
FOR YEARS ENDED DECEMBER 31,
- --------------------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS) 1996 1995 1994
- --------------------------------------------------------------------------------------------------
Income
<S> <C> <C> <C>
Dividend income from subsidiary $7,337 $1,775 $1,727
Management fees 38 48 45
Other 0 0 3
- --------------------------------------------------------------------------------------------------
7,375 1,823 1,775
Expenses 133 95 140
- --------------------------------------------------------------------------------------------------
Net income before equity in earnings of subsidiary 7,242 1,728 1,635
Equity in earnings of subsidiary (3,085) 2,312 2,542
- --------------------------------------------------------------------------------------------------
Net Income $4,157 $4,040 $4,177
==================================================================================================
</TABLE>
- --------------------------------------------------------------------------------
50
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR YEARS ENDED DECEMBER 31,
- ----------------------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS) 1996 1995 1994
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income $ 4,157 $ 4,040 $ 4,177
Adjustments to reconcile net income to net cash
provided by operating activities:
Equity in earnings of subsidiary 3,085 (2,312) (2,542)
Other, net (571) 76 (260)
- ----------------------------------------------------------------------------------------------------
Net cash provided by operating activities $ 6,671 $ 1,804 $ 1,375
- ----------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES:
Investments (in) and advances to subsidiaries $(5,790) $ 0 $ 0
- ----------------------------------------------------------------------------------------------------
Net cash used in financing activities $(5,790) $ 0 $ 0
- ----------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES:
Cash Dividends $(1,787) $(1,775) $(1,730)
Proceeds from exercise of stock options 0 0 0
Proceeds from issuance of common stock 269 232 116
- ----------------------------------------------------------------------------------------------------
Net cash used in financing activities $(1,518) $(1,543) $(1,614)
- ----------------------------------------------------------------------------------------------------
Increase (decrease) in cash $ (637) $ 261 $ (239)
Cash at the beginning of year 890 629 868
- ----------------------------------------------------------------------------------------------------
Cash at the end of year $ 253 $ 890 $ 629
====================================================================================================
</TABLE>
NOTE 13: DIVIDENDS AND OTHER RESTRICTIONS
Certain restrictions, including capital requirements, exist on the
availability of undistributed net profits of the subsidiary bank for the future
payment of dividends to the Corporation. A dividend may not be paid if it would
impair the Bank's capital. Furthermore, prior approval by the Comptroller of the
Currency is required if the total of dividends declared in a calendar year
exceeds the total of the Bank's net profits for that year combined with its
retained profits for the two preceding years. At December 31, 1996, $1,769,000
was available for the payment of dividends.
NOTE 14: COMMITMENTS, CONTINGENCIES AND CONCENTRATIONS OF CREDIT RISK
In the normal course of business, the Corporation has outstanding
commitments and contingent liabilities such as commitments to extend credit,
including loan commitments of $23,910,000, ($17,971,729 subject to variable rate
indices and $2,024,000 fixed rate commitments) and $20,467,000 as of December
31, 1996 and 1995, respectively. Standby letters of credit, which are not
reflected in the accompanying consolidated financial statements, totaled
$7,407,000 and $9,439,000 as of December 31, 1996 and 1995, respectively.
Commitments to extend credit and standby letters of credit generally do not
exceed one year. These financial instruments involve, to varying degrees,
elements of credit risk in excess of the amounts recognized in the consolidated
financial statements. The commitment or contract amount of these financial
instruments is an indicator of the Corporation's level of involvement in each
type of instrument as well as the exposure to credit loss in the event of
non-performance by the other party to the financial instrument. The Corporation
controls credit risk of these financial instruments through credit approvals,
limits and monitoring procedures. To minimize potential credit risk the
Corporation generally requires collateral and other credit related
- --------------------------------------------------------------------------------
51
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
terms and conditions from the customer. In the opinion of management the
financial condition of the Corporation will not be materially affected by the
final outcome of these commitments and contingent liabilities.
A substantial portion of the Bank's loans are one to four family
residential first mortgage loans secured by real estate located in New Jersey.
Accordingly, the collectibility of a substantial portion of the Bank's loan
portfolio is susceptible to changes in the real estate market.
Non-interest expenses include rentals for premises and equipment of
$135,068 in 1996, $49,412 in 1995, and $51,412 in 1994. At December 31, 1996,
Center Bancorp and its subsidiaries were obligated under a number of
non-cancellable leases for premises and equipment, many of which provide for
increased rentals based upon increases in real estate taxes and the cost of
living index. These leases, most of which have renewal provisions, are
principally non-financing leases. Minimum rentals under the terms of these
leases for the years 1997 through 2001 are $235,385, $94,508, $92,480, $99,478,
and $107,036, respectively. Minimum rentals due after 2001 are $479,162.
The Corporation is subject to claims and lawsuits which arise primarily in
the ordinary course of business. Based upon the information currently available
and advice received from legal counsel representing the Corporation in
connection with such claims, it is the opinion of management that the
disposition or ultimate determination of such claims will not have a material
adverse impact on the consolidated financial position or results of operations,
or liquidity of the Corporation.
- --------------------------------------------------------------------------------
52
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
The Board of Directors
Center Bancorp Inc.:
We consent to the incorporation by reference in the Registration Statement
No.33-72176 on Form S-8 and Registration Statement No.33-72178 on Form S-3 of
Center Bancorp Inc. of our report dated January 31, 1997, relating to the
consolidated statements of condition of Center Bancorp Inc. as of December 31,
1996 and 1995 and the related consolidated statements of income, changes in
stockholders' equity, and cash flows for each of the years in the three-year
period ended December 31, 1996, which report is incorporated by reference in the
December 31, 1996 Annual Report on Form 10-K of Center Bancorp Inc.
Our report refers to a change in accounting for certain investments in debt and
equity securities in 1994.
/s/ KPMG Peat Marwick LLP
--------------------------
KPMG Peat Marwick LLP
Short Hills, New Jersey
March 26, 1997
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 33,061
<INT-BEARING-DEPOSITS> 358,568
<FED-FUNDS-SOLD> 10,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 61,539
<INVESTMENTS-CARRYING> 218,584
<INVESTMENTS-MARKET> 218,788
<LOANS> 117,830
<ALLOWANCE> (1,293)
<TOTAL-ASSETS> 459,218
<DEPOSITS> 426,654
<SHORT-TERM> 0
<LIABILITIES-OTHER> 2,351
<LONG-TERM> 0
0
0
<COMMON> 4,468
<OTHER-SE> 25,745
<TOTAL-LIABILITIES-AND-EQUITY> 459,218
<INTEREST-LOAN> 8,625
<INTEREST-INVEST> 17,324
<INTEREST-OTHER> 481
<INTEREST-TOTAL> 26,430
<INTEREST-DEPOSIT> 11,210
<INTEREST-EXPENSE> 11,586
<INTEREST-INCOME-NET> 14,844
<LOAN-LOSSES> (132)
<SECURITIES-GAINS> 75
<EXPENSE-OTHER> 9,910
<INCOME-PRETAX> 5,793
<INCOME-PRE-EXTRAORDINARY> 4,157
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,157
<EPS-PRIMARY> 1.86
<EPS-DILUTED> 1.86
<YIELD-ACTUAL> 7.01
<LOANS-NON> 298
<LOANS-PAST> 121
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1,073
<CHARGE-OFFS> 479
<RECOVERIES> 138
<ALLOWANCE-CLOSE> 1,293
<ALLOWANCE-DOMESTIC> 463
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 830
</TABLE>
