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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM __________TO___________
Commission file number 2-81353
CENTER BANCORP, INC.
-----------------------------------------------------
(Exact name of registrant as specified in its charter)
NEW JERSEY 52-1273725
- ------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2455 MORRIS AVENUE, UNION, NEW JERSEY 07083
----------------------------------------------------
(Address of principal executives offices) (Zip Code)
(908) 688-9500
----------------------------------------------------
(Registrant's telephone number, including area code)
----------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
SHARES OUTSTANDING ON SEPTEMBER 30, 1997
---------------------------------------------
Common stock no par value -- 2,358,479 shares
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<PAGE>
CENTER BANCORP, INC.
INDEX TO FORM 10-Q
PART I. FINANCIAL INFORMATION PAGE
----
ITEM I. Financial Statements
Consolidated Statements of Condition
at September 30, 1997 (Unaudited) and
December 31, 1996 ..................................... 3
Consolidated Statements of Income for the
Three and Nine Months Ended September 30, 1997
and 1996 (Unaudited) .................................. 4
Consolidated Statements of Cash Flows for the
Nine Months Ended September 30, 1997 and 1996
(Unaudited) ........................................... 5
Notes to the Consolidated Financial Statements ........ 6-7
In the opinion of Management, all adjustments necessary for a fair
presentation of the company's financial position and results of
operations for the interim periods have been made. Such adjustments
are of a normal recurring nature. All share and per share amounts have
been restated to reflect a 3 for 2 stock split paid on May 31, 1996 to
shareholders of record on May 1, 1996. Also reflected and restated for
all prior periods is the 5% stock dividend paid on May 31, 1997 to
shareholders of record May 18, 1997. Results for the period ended
September 30, 1997 are not necessarily indicative of results for any
other interim period or for the entire fiscal year. Reference is made
to the Company's Annual Report on Form 10-K for the year ended
December 31, 1996 for information regarding accounting principles.
ITEM 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations ........ 8-18
PART II. OTHER INFORMATION ............................................ 19
SIGNATURES .................................................... 20
2
<PAGE>
<TABLE>
CENTER BANCORP, INC.
CONSOLIDATED STATEMENTS OF CONDITION
<CAPTION>
September 30, December 31,
(DOLLARS IN THOUSANDS) 1997 1996
-------------------- ------------- ------------
(unaudited)
<S> <C> <C>
Assets:
Cash and due from banks ...................................... $ 15,813 $ 19,761
Federal funds sold ........................................... 0 10,000
Securities purchased under agreement to resell ............... 0 13,300
-------- --------
Total cash and cash equivalents .......................... 15,813 43,061
-------- --------
Investment securities held to maturity (approximate
market value of $238,900 in 1997 and $218,788 in 1996) .... 228,062 218,584
Investment securities available for sale ..................... 92,156 61,539
-------- --------
Total investment securities .............................. 320,218 280,123
-------- --------
Loans, net of unearned income ................................ 126,861 117,830
Less - Allowance for loan losses ........................... 1,269 1,293
-------- --------
Net loans .............................................. 125,592 116,537
-------- --------
Premises and equipment, net .................................. 9,362 10,104
Accrued interest receivable .................................. 4,701 4,371
Other assets ................................................. 1,698 1,341
Goodwill ..................................................... 3,462 3,681
-------- --------
Total assets ........................................... $480,846 $459,218
======== ========
Liabilities
Deposits:
Non-interest bearing ....................................... $ 71,308 $ 68,086
Interest bearing:
Certificates of deposit $100,000 and over ................ 116,135 99,818
Savings and Time Deposits ................................ 241,736 258,750
-------- --------
Total deposits ......................................... 429,179 426,654
Federal funds purchased and securities sold under
agreements to repurchase ................................... 16,000 0
Accounts payable and accrued liabilities ..................... 3,231 2,351
-------- --------
Total Liabilities ...................................... 448,410 429,005
Stockholders' equity:
Common stock, no par value: Authorized 20,000,000 shares;
issued 2,672,484 and 2,660,066 in 1997 and 1996 ............. 4,677 4,468
Appropriated surplus ......................................... 3,510 3,510
Retained earnings ............................................ 25,450 23,738
------- --------
33,637 31,716
Less - Treasury stock at cost (314,005 shares in 1997 and 1996
respectively) .............................................. 1,814 1,814
Net unrealized gain on investment securities
available-for-sale, net of taxes............................ 613 311
-------- --------
Total stockholders' equity ............................. 32,436 30,213
======== ========
Total liabilities and stockholders' equity ............. $480,846 $459,218
======== ========
</TABLE>
See Accompanying Notes To Consolidated Financial Statements
3
<PAGE>
<TABLE>
CENTER BANCORP, INC.
CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------ ------------------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) 1997 1996 1997 1996
- --------------------------------------------- ----------- ----------- ---------- -----------
<S> <C> <C> <C> <C>
Interest income:
Interest and fees on loans .............................. $ 2,492 $ 2,356 $ 7,345 $ 6,309
Interest and dividends on investment securities:
Taxable interest income ............................... 5,032 4,473 14,470 11,898
Nontaxable interest income ............................ 228 276 727 850
Interest on Federal funds sold and securities
purchased under agreement to resell .................. 147 167 455 331
---------- ---------- ---------- ----------
Total interest income ............................. 7,899 7,272 22,997 19,388
---------- ---------- ---------- ----------
Interest expense:
Interest on certificates of deposit $100,000 or more .... 1,575 1,094 4,340 3,075
Interest on savings and time deposits ................... 2,043 2,118 6,068 5,016
Interest on short-term borrowings ....................... 194 26 489 369
---------- ---------- ---------- ----------
Total interest expense ............................ 3,812 3,238 10,897 8,460
---------- ---------- ---------- ----------
Net interest income ............................... 4,087 4,034 12,100 10,928
Provision for loan losses ................................. 0 0 0 0
---------- ---------- ---------- ----------
Net interest income after provision for loan losses 4,087 4,034 12,100 10,928
---------- ---------- ---------- ----------
Other income:
Service charges, commissions and fees ................... 166 142 441 378
Other income ............................................ 27 35 97 98
Gain on securities sold ................................. 0 0 0 80
---------- ---------- ---------- ----------
Total other income ................................ 193 177 538 556
---------- ---------- ---------- ----------
Other expense:
Salaries and employee benefits .......................... 1,545 1,340 4,227 3,714
Occupancy expense, net .................................. 243 252 763 667
Premises and equipment expense .......................... 343 325 992 747
Stationery and printing expense ......................... 73 136 269 371
Marketing and advertising ............................... 74 204 282 337
Other expenses .......................................... 594 595 1,526 1,263
---------- ---------- ---------- ----------
Total other expense ............................... 2,872 2,852 8,059 7,099
---------- ---------- ---------- ----------
Income before income tax expense .................. 1,408 1,359 4,579 4,385
Income tax expense ........................................ 492 358 1,477 1,146
---------- ---------- ---------- ----------
Net income ........................................ $ 916 $ 1,001 $ 3,102 $ 3,239
========== ========== ========== ==========
Earnings per share ........................................ $ 0.39 $ 0.43 $ 1.32 $ 1.38
---------- ---------- ---------- ----------
Weighted average common shares outstanding ................ 2,357,609 2,344,600 2,354,678 2,340,808
========== ========== ========== ==========
</TABLE>
* ALL SHARE AND PER SHARE AMOUNTS HAVE BEEN RESTATED TO REFLECT THE
THREE-FOR-TWO STOCK SPLIT IN MAY OF 1996 AND THE 5% STOCK DIVIDEND PAID IN
MAY OF 1997
See Accompanying Notes To Consolidated Financial Statements
4
<PAGE>
<TABLE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
<CAPTION>
SEPTEMBER 30
---------------------
(DOLLARS IN THOUSANDS) 1997 1996
====================== ========= =========
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income .................................................... $ 3,102 $ 3,239
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization .............................. 1,109 740
(Increase) decrease in accrued interest receivable ......... (330) (1,255)
(Increase) decrease in other assets ........................ (298) (5,172)
Increase (decrease) in other liabilities ................... 880 244
Amortization of premium and accretion of
discount on investment securities, net .................... 179 364
-------- --------
Net cash provided by (used in) operating activities ..... 4,642 (1,840)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturities of securities available-for-sale ..... 9,284 15,797
Proceeds from maturities of securities held-to-maturity ....... 32,871 20,743
Proceeds from sales of investment securities available-for-sale 0 36,086
Purchase of securities available-for-sale ..................... (43,183) (65,624)
Purchase of securities held-to-maturity ....................... (39,027) (83,601)
Net (increase) in loans ....................................... (9,055) (15,983)
Property and equipment expenditures, net ...................... (124) (3,094)
-------- --------
Net cash used in investing activities ...................... (49,234) (95,676)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposits ...................................... 2,525 118,954
Dividends paid ................................................ (1,390) (1,344)
Proceeds from issuance of common stock ........................ 209 215
Net increase (decrease) in short term borrowing ............... 16,000 (22,023)
-------- --------
Net cash provided by financing activities ............... 17,344 95,802
-------- --------
Net decrease in cash and cash equivalents ............... (27,248) (1,714)
-------- --------
Cash and cash equivalents at beginning of period ................ 43,061 30,172
-------- --------
Cash and cash equivalents at end of period ...................... $ 15,813 $ 28,458
======== ========
Supplemental disclosures of cash flow information:
Interest paid on deposits and short-term borrowings ........... $ 10,772 $ 8,335
Income taxes .................................................. $ 502 $ 1,193
Cash paid for the acquisition of Lehigh ......................... $ 0 $ 5,550
</TABLE>
See Accompanying Notes To Consolidated Financial Statements
5
<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 the applicable period.
Actual results could differ significantly from those estimates.
NOTE 2
ACQUISITION OF LEHIGH SAVINGS BANK SLA (LEHIGH)
On June 28, 1996, the Corporation acquired Lehigh Savings Bank SLA, (Lehigh), a
New Jersey chartered savings and loan institution in a transaction accounted for
under the purchase method of accounting. At June 28, 1996, Lehigh had assets of
$70.9 million (primarily cash and cash equivalents of $53.0 million and loans of
$15.0 million) and deposits and stockholders' equity of $68.2 million and $2.7
million, respectively. The Corporation paid $5.5 million for Lehigh, resulting
in goodwill of $3.8 million. The goodwill is being amortized on a straight-line
basis over 15 years. The September 30, 1996 and 1997 consolidated financial
statements of the Corporation includes assets, liabilities and results of
operations of Lehigh since the acquisition date on both a current and comparable
basis.
NOTE 3
RECENTLY ISSUED ACCOUNTING STANDARDS
SFAS NO. 128
FASB Statement No. 128, Earnings Per Share (Statement 128) supersedes APB
Opinion No. 15, Earnings Per Share, and specifies the computation, presentation,
and disclosure requirements for earnings per share (EPS) for entities with
publicly held common stock or potential common stock. Statement 128 was issued
to simplify the computation of EPS and to make the U.S. standard more compatible
with the EPS standards of other countries and that of the International
Accounting Standards Committee: (IASC). It replaces Primary EPS and Fully
Diluted EPS with Basic EPS and Diluted EPS, respectively. It also requires dual
presentation of Basic EPS and Diluted EPS on the face of the income statement
for all entities with complex capital structures and requires a reconciliation
of the numerator and denominator of the Basic EPS computation to the numerator
and denominator of the Diluted EPS computation.
6
<PAGE>
Basic EPS, unlike Primary EPS, excludes all dilution while Diluted EPS, like
Fully Diluted EPS, reflects the potential dilution that could occur if
securities or other contracts to issue common stock were exercised or converted
into common stock or resulted in the issuance of common stock that then shared
in the earnings of the entity. For many entities Basic EPS will be higher than
Primary EPS and Diluted EPS will be approximately the same as Fully Diluted EPS.
Statement 128 is applicable to all entities that have issued common stock or
potential common stock (e.g., options, warrants, convertible securities,
contingent stock agreements, etc.) if those securities trade in a public market
either on a stock exchange (domestic or foreign) or in the over-the-counter
market, including securities quoted only locally or regionally. This Statement
also applies to an entity that has made a filing or is in the process of filing
with a regulatory agency in preparation for the sale of those securities in a
public market. However, Statement 128 does not require presentation of EPS for
investment companies or in statements of wholly-owned subsidiaries.
Statement 128 is effective for financial statements for both interim and annual
periods ending after December 15, 1997. Earlier application is not permitted.
After adoption, all prior period EPS data presented shall be restated (including
interim financial statements, summaries of earnings and selected financial data)
to conform with Statement 128.
SFAS NO. 130
FASB Statement No. 130, "Reporting Comprehensive Income" (Statement 130)
establishes standards for reporting and display of comprehensive income and its
components (revenues, expenses, gains, and losses) in a full set of
general-purpose financial statements. Statement 130 requires that all items that
are required to be recognized under accounting standards as components of
comprehensive income be reported in a financial statement that is displayed with
the same prominence as other financial statements. Statement 130 does not
require a specific format for that financial statement but requires that an
enterprise display an amount representing total comprehensive income for the
period in that financial statement.
Statement 130 requires that an enterprise (a) classify items of other
comprehensive income by their nature in a financial statement and (b) display
the accumulated balance of other comprehensive income separately from retained
earnings and additional paid-in capital in the equity section of a statement of
financial position. This statement is effective for fiscal years beginning after
December 15, 1997. Reclassification of financial statements for earlier periods
provided for comparative purposes is required.
SFAS NO. 131
FASB Statement No. 131, "Disclosures about Segments of an Enterprise and Related
Information" (Statement 131) requires public companies to report information
about business segments in their annual financial statements and selected
business segment information in quarterly reports issued to shareholders.
Statement 131 requires entity-wide disclosures about the products and services
an entity provides, the material countries in which it holds assets and reports
revenues, and its major customers. This statement supersedes FASB Statement No.
14, "Financial Reporting for Segments of a Business Enterprise." Statement 131
is effective for fiscal years beginning after December 15, 1997.
7
<PAGE>
MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Net income for the three months ended September 30, 1997 amounted to $916,000 as
compared to $1,001,000 earned for the comparable three month period ended
September 30, 1996. On a per share basis, earnings decreased to $.39 per share
as compared with $.43 per share for the three months ended September 30, 1996.
The annualized return on average assets was .75 percent compared with .89
percent for the comparable three month period in 1996. The annualized return on
average stockholders' equity was 11.4 percent for the three month period ended
September 30, 1997 as compared to 13.7 percent for the comparable three months
ended September 30, 1996. Earnings performance for the third quarter of 1997
primarily reflects a rise in income-tax expense, which was greater than the
change in the net interest margin, an increase of $53 thousand, as compared to
the comparable period in 1996.
Net income and earnings per share declined 4.2 and 4.4 percent respectively for
the first nine months of 1997 compared to the first nine months of 1996. Net
income for the nine months ended September 30, 1997 was $3,102,000 as compared
to $3,239,000 earned for the comparable nine month period of 1996. On a per
share basis, earnings were $1.32 as compared to $1.38 per share for the nine
months ended September 30, 1996. The annualized return on average assets was .86
percent for the nine months ended September 30, 1997 as compared with 1.06
percent for the comparable period in 1996, while the annualized return on
average stockholders' equity was 13.2 percent and 15.2 percent, respectively.
Earnings performance for the nine months ended September 30, 1997, reflected
increased net interest income offset by increases in non-interest expense and
income tax expense. All share and per share amounts have been restated to
reflect the 3 for 2 stock split in May of 1996 and the 5% stock dividend which
was paid on May 31, 1997.
Net interest income is the difference between the interest earned on the
portfolio of earning-assets (principally loans and investments) and the interest
paid for deposits and short-term borrowings which support these assets. Net
interest income is presented below first in accordance with the Corporation's
consolidated financial statements and then on a fully tax-equivalent basis by
adjusting tax-exempt income (primarily interest earned on various obligations of
state and political subdivisions) by the amount of income tax which would have
been paid had the assets been invested in taxable issues.
<TABLE>
<CAPTION>
NET INTEREST INCOME
Three months ended Nine months ended
September 30, September 30,
------------------ Percent ----------------- Percent
(dollars in thousands) 1997 1996 Change 1997 1996 Change
------- ------- ------- ----------------- -------
<S> <C> <C> <C> <C> <C> <C>
Interest income:
Investments ............. $5,260 $4,749 10.8 $15,197 $12,748 19.2
Loans, including fees ... 2,492 2,356 5.8 7,345 6,309 16.4
Federal funds sold ...... 147 167 (12.0) 455 331 37.5
------ ------ ------- -------
Total interest income . 7,899 7,272 8.6 22,997 19,388 18.6
------ ------ ------- -------
Interest expense:
Certificates $100,000 or
more .................. 1,575 1,094 44.5 4,340 3,075 41.1
Savings and Time ......... 2,043 2,118 (3.8) 6,068 5,016 21.0
Short-term borrowings ... 194 26 96.9 489 369 72.9
------ ------ ------- -------
Total interest expense 3,812 3,238 17.7 10,897 8,460 28.8
------ ------ ------- -------
NET INTEREST INCOME* .. 4,087 4,034 1.3 12,100 10,928 10.7
------ ------ ------- -------
Tax-equivalent adjustment. 117 142 (17.6) 375 438 (14.4)
Net interest income on a
fully tax-equivalent
basis ................... $4,204 $4,176 0.7 $12,475 $11,366 9.8
====== ====== ======= =======
</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.
8
<PAGE>
Net interest income on a fully tax-equivalent basis increased $28,000 or .67
percent to approximately $4.2 million for the three months ended September 30,
1997, marginally higher than the comparable period in 1996. For the three months
ended September 30, 1997, the net interest margin decreased to 3.69 percent from
4.02 percent due to the increased cost of funds reflecting the continued
pressure, in general, on short-term interest rates. For the three months ended
September 30,1997, a decrease in the average yield on interest earning-assets of
10 basis points coupled with a more substantial increase in the average cost of
interest-bearing liabilities of 30 basis points accounted for the decline in the
net interest margin. 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 non-interest-bearing sources and core deposits. Average
earning-assets increased by $39.9 million, from the comparable three month
period in 1996. The net increase in average interest-bearing liabilities was
$30.8 million over the comparable three month period in 1996. The 1997 third
quarter changes in average volumes were primarily due to increased volumes of
loans and taxable investments funded with more costly time deposits. The change
further reflects the impact of the Lehigh acquisition on volumes.
Net interest income on a fully tax-equivalent basis for the nine months ended
September 30, 1997 increased $1.1 million or 9.8 percent, to approximately $12.5
million from the comparable nine month period in 1996. The Corporation's net
interest margin in 1997 declined to 3.73 percent from 4.02 due to an increased
cost of funds reflecting the continued pressure, in general, on short-term
interest rates. This trend was consistent with the first two quarters as the
yield curve continues to flatten. For the nine months ended September 30, 1997
earning assets increased by $68.1 million on average as compared with the nine
months ended September 30, 1996. The substantial increase in the average cost of
interest-bearing liabilities of 26 basis points accounted for the decline in the
net interest margin.
For the three month period ended September 30, 1997 interest income on a fully
tax-equivalent basis increased by $602,000 or 8.1 percent over the comparable
three month period in 1996. The primary factor contributing to the increase was
the previously cited growth of average earning-assets. The Corporation's loan
portfolio increased on average $10.0 million to $125.3 million from $115.3
million in the same quarter in 1996, primarily driven by growth in commercial
loans, commercial mortgages and home equity lines of credit. This growth was
funded through deposit growth. The loan portfolio (traditionally the
Corporations highest yielding earning asset) represented approximately 28
percent of the Corporation's interest-earning assets (on average) during the
third quarter of 1997 and 1996.
Interest income for the nine month period ended September 30, 1997 increased by
approximately $3.5 million or 17.9 percent, on a fully taxable equivalent basis
as compared to the comparable period ended September 30, 1996. The primary
factor contributing to the increase was the previously cited growth of average
earning-assets. The Corporation's average loan portfolio increased $18.3 million
to $123.4 million from $105.1 million in the comparable period of 1996. This
growth was primarily driven by growth in commercial loans, commercial mortgages,
and home equity lines of credit, inclusive of the loans acquired from Lehigh.
This growth was funded by deposit growth. The loan portfolio represented
approximately 27.7 percent of the Corporation's interest earning assets (on
average) for the nine months ended September 30, 1997 as compared with 27.8
percent for the comparable period in 1996.
Investments contributed the most significant change in the earning-asset mix for
both the three and nine month periods ended September 30, 1997. Investment
volume was funded by the increased deposit volumes gained through the
Corporation's expanded branch network coupled with growth from existing
depositors. These deposit funds for both the three and nine month periods of
1997 and 1996, which increased approximately $18.9 million and $59.7 million,
respectively on average, were used in investing activities, and interest rate
risk management strategies. Within the investment portfolio the most significant
changes due to increased volumes took place among taxable securities segments
which far outweighed the decreases in the nontaxable portfolio. The continued
growth of taxable investment securities reflects the change in interest rates,
making the yields on taxable investments more attractive.
Interest expense for the three months ended September 30, 1997, increased
$574,000 or 17.7 percent from the comparable three month period ended September
30, 1996, as a result of the continued growth in deposit volumes, coupled with
the changes in deposit mix. Rate pressures brought about by the flattening of
the yield
9
<PAGE>
curve, contributed significantly to the overall increased interest expense, as
compared with the three months ended September 30, 1996.
For the nine months ended September 30, 1997, interest expense increased $2.4
million or 28.8 percent as compared with the comparable nine month period in
1996. Interest expense for the nine months ended September 30, 1997 increased as
a result of the growth in deposit volumes, and the continued upward pressure on
the cost of funds in the short-term market. This pressure was heightened by the
Federal Reserve's action on March 25, 1997, raising the federal funds index to
5.5 percent from the previous targeted level of 5.25 percent. As a result,
pricing pressures have increased within the financial industry to retain and
attract new deposits. The industry, in turn, has experienced increased usage of
money indexed to the federal funds rate and other similar short-term indices
such as U.S. Treasury Bills.
Inflationary concerns and pace of the expanding economy have kept short-term
interest rates at current levels since March 1997, while the long and
intermediate sectors of the curve have flattened. There continues to be
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 Deposits, and short-term repurchase agreements. Management
believes that this pressure and continued disparity in the level of interest
rates in the short-term end of the yield curve is likely to continue to exert
upward pressure on the cost of funds throughout 1997. Deposit growth during the
nine months and third quarter of 1997 continue to be impacted by the depositors'
desire for higher-yielding investment alternatives, such as mutual funds,
stocks, tax-free instruments, and a variety of insurance products. As interest
rates have remained high in the short-term market in the nine and three month
periods of 1997, depositors continued to shift funds from lower yielding savings
and money market accounts into higher yielding certificates of deposit.
Furthermore, the impact of this change in the deposit mix, coupled with the
increased deposit volumes indexed to this end of the curve, was a major factor
in the net change in the cost of funds, during 1997 as compared with 1996.
For the three months ended September 30, 1997, the Corporation's net interest
yield on a tax-equivalent basis (i.e. net interest income on a tax equivalent
basis as a percent of average interest-earning assets) declined to 3.04 percent
from 3.44 percent for the three months ended September 30, 1996. This decline
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 investment and loan
volumes. However, this was offset to some extent by the change in the mix of
interest-bearing liabilities to more costly funding.
For the nine months ended September 30, 1997, the Corporation's net interest
yield on a tax-equivalent basis declined to 3.12 percent from 3.39 percent for
the nine months ended September 30, 1996. This decline reflected a narrowing of
margins due to the previously discussed pressure on rates at the short-end of
the yield curve. The rise in these funding costs continue to change
disproportionately to the rates on new loans and investments. Primarily this is
reflected in the average volumes of time certificates greater than $100,000 in
proportion to fund assets.
The contribution of non-interest-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) remained stable at approximately 61 and 63 basis
points during both nine month periods ended September 30, 1997 and 1996,
respectively, and 65 and 58 basis points for the respective three month periods
ended September 30, 1997 and 1996. This trend reflects the continued deposit
pricing pressure exerted on interest margins, due to a shifting of these
deposits to interest-bearing accounts in relationship to the entire funding
base.
Historically the Corporation has enjoyed more favorable volumes of non-interest
bearing deposits which further underscores the significance of the "Industry"
change to more reliance on interest-bearing funding sources.
10
<PAGE>
INVESTMENTS
For the three months ended September 30, 1997, the average volume of investment
securities increased to $319.8 million or an increase of $32.1 million from
$287.7 million on average for the same three month period in 1996. The
tax-equivalent yield on the investment portfolio declined to 6.72 percent from
6.80 percent for the comparable three month period in 1996. Purchases made to
replace maturing and called investments were not made at comparable rates and in
some cases the monies were not invested in the Investment Portfolio.
For the nine months ended September 30, 1997, the average volume of investment
securities increased by $46.5 million as compared to the same period in 1996.
The tax-equivalent yield on investments increased to 6.68 percent or 3 basis
points from a yield of 6.65 percent during the nine month period ended September
30, 1996. The retention and increased yield on the investment portfolio during
the first nine months of 1997 was achieved by obtaining comparable or higher
rates on purchases made to replace, in some cases, lower yielding investments
which had matured, were prepaid, or were called.
The impact of repricing activity on yields was lessened by a change in bond
segmentation and some extension, where risk is minimal within the portfolio of
investment maturities. This resulted in narrowed spreads and by the current
uncertainty of rates. Securities available-for-sale are a part of the
Corporation's interest rate risk management strategy and may be sold in response
to changes in interest rates, changes in prepayment risk, liquidity management
and other factors.
For the nine months ended September 30, 1997, the total investment portfolio
excluding overnight investments, averaged $311.0 million, or 69.8 percent of
earning-assets, as compared to $264.5 million or 70.1 percent at September 30,
1996. The principal components of the investment portfolio are U.S. Government
Treasury and Federal Agency callable and noncallable securities, including
agency issued Collateralized Mortgage Obligations.
At September 30, 1997 the net unrealized gain/loss carried as a component of
shareholders' equity amounted to a net unrealized gain of $613,000, as compared
with an unrealized gain of $311,000 at December 31, 1996 resulting from an
improvement in the bond market.
LOANS
Modest loan growth during the first nine months of 1997 occurred in all segments
of the loan portfolio. This growth occurred from the volume acquired in the
Lehigh acquisition enhanced by the Corporation's marketing programs and new
product lines. The stabilization of yield in the loan portfolio was the result
of a stable prime rate environment coupled with a competitive rate structure to
attract new loans. The results of increased volume were lessened by continued
re-financing activity and by the heightened competition for borrowers that
exists in the lending markets. The Corporation's desire to grow this segment of
the earning-asset mix is reflected in its current business development plan and
marketing plans, as well as its short-term strategic plan.
Analyzing the loan portfolio for the nine months ended September 30, 1997,
average loan volume increased $18.4 million or 17.5 percent, while portfolio
yield remained relatively flat, declining by 8 basis points as compared with the
same period in 1996. The volume related factors contributed increased earnings
of $1.1 million offset by $57,000 in the rate related change. The increased
total average loan volume was due to increased customer activity and the
purchase of Lehigh. For the three months ended September 30, 1997, average loan
volume increased $10.0 million, while the portfolio yield declined 21 basis
points as compared with the same period in 1996. The volume related factors
contributed increased earnings of $4.1 million offset by a decline of $3.9
million due to rate related changes. Total average loan volume increased to
$125.3 million with a net interest yield of 7.96 percent, as compared to $115.3
million with a yield of 8.17% for the three months ended September 30, 1996.
11
<PAGE>
RISK ELEMENTS
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.
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 September 30, 1997 and 1996, the Corporation had no restructured loans.
Non-accrual loans amounted to $27,000 at September 30, 1997, and were comprised
of one Home Equity loan, as compared to $316,000 at September 30, 1996. Past due
loans 90 days or more and still accruing amounted to $98,000 as of September 30,
1997 and $686,000 as of September 30, 1996. Of the balance, respectively, in
each period, $89,000 and $40,000 were comprised of student loans, which are
wholly guaranteed by the U.S. Government.
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 September 30,
1997 and 1996 were as follows:
(dollars in thousands) 1997 1996
- ---------------------- ---- ------
Loans past due 90 days and still accruing ....... $ 98 $ 686
Non-accrual loans ............................... 27 316
---- ------
Total non-performing assets ..................... $125 $1,002
==== ======
At September 30, 1997, Nonperforming Assets, consisting of loans on nonaccrual
status plus other real estate owned acquired through foreclosure (OREO),
amounted to $152,000 or .12 percent of total loans outstanding as compared to
$316,000 at September 30, 1996.
The Corporation's OREO, previously a nonaccrual residential loan, amounted to
$125,000. The recording of the investment in OREO did not result in any
charge-offs for the period. The Corporation has a Contract of Sale on that
property with an approximate closing date of mid-November 1997. There were no
other properties in OREO.
ALLOWANCE FOR LOAN LOSSES
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 September 30, 1997 the allowance was $1,269,000 as
compared to $1,293,000
12
<PAGE>
at September 30, 1996. There was no provision for loan losses during the nine
and three month periods ended September 30, 1997.
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 examinations. The allowance
for loan losses as a percentage of total loans amounted to 1.01 percent and 1.39
percent at September 30, 1997, and 1996, respectively. In Management's view the
level of allowance during the first nine months of 1997 has been adequate to
cover any loss experience and therefore has not warranted any additions to the
allowance during 1997. The Corporation's statements herein regarding the
adequacy of the allowance for loan losses may constitute forward looking
statements under the Private Securities Reform Litigation Act of 1995. Actual
results 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.
During the nine month period ended September 30, 1997, the Corporation did not
experience any substantial problems within its loan portfolio. Net charge-offs
were approximately $24,000. At September 30, 1997 the Corporation had
non-accrual loans amounting to $27,000, versus $316,000 in non-accrual loans at
September 30, 1996. The Corporation continues to aggressively pursue collections
of principal and interest on loans previously charged-off.
The Corporation defines impaired loans to consist of non-accrual loans and loans
internally classified as substandard or below, in each instance above an
established dollar threshold. All loans below the established dollar threshold
are considered homogenous and are collectively evaluated for impairment. The
Corporation did not have any impaired loans or required allocations to the
allowance for loan loses, as defined by SFAS 114 in either 1997 or 1996.
Changes in the allowance for possible loans losses for the period ended
September 30, 1997 and 1996, respectively, are set forth below.
ALLOWANCE FOR LOAN LOSSES
(in thousands)
Three months ending
September 30,
--------------------
1997 1996
-------- --------
Average loans outstanding ........................ $123,447 $105,077
-------- --------
Total loans at end of period ..................... 126,861 113,773
-------- --------
Analysis of the allowance for loan losses
Balance at the beginning of period ............... 1,293 1,073
Charge-offs:
Commercial ...................................... 1 0
Real estate-mortgage ............................ 0 0
Installment loans ............................... 29 6
-------- --------
Total charge-offs ............................. 30 6
Recoveries:
Commercial ...................................... 0 0
Real estate-mortgage ............................ 0 0
Installment loans ............................... 6 3
-------- --------
Total recoveries .............................. 6 3
Net Charge-offs: ................................. 24 3
Adjustments from the Acquisition of Lehigh Savings
SLA ............................................ 0 525
======== ========
Balance at end of period ........................ $ 1,269 $ 1,293
======== ========
Ratio of net charge-offs during the period to
average loans outstanding during the period ..... 0.02% N.M.
-------- --------
Allowance for loan losses as a percentage of total
loans .......................................... 1.00 1.39
-------- --------
13
<PAGE>
OTHER NON-INTEREST INCOME
The following table presents the principal categories of non-interest income for
the three and nine month periods ended September 30, 1997 and 1996.
<TABLE>
(dollars in thousands)
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
----------------- ------------------
1997 1996 % change 1997 1996 % change
------- ------- -------- ------- ----- --------
<S> <C> <C> <C> <C> <C> <C>
Other income:
Service charges, commissions and
fees ............................ $166 $142 16.9 $441 $378 16.7
Other income....................... 27 35 (22.9) 97 98 (1.0)
Gain on securities sold ........... 0 0 0 0 80 100.0
---- ---- ---- ----
Total other income ........... $193 $177 9.03 $538 $556 (3.2)
==== ==== ==== ====
</TABLE>
For the three months ended September 30, 1997, total other (non-interest)
income, net of gains on securities sold, increased $16,000 or 9.03 percent as
compared to the three months ended September 30, 1996. The increase in other
income is primarily due to the implementation of ATM surcharging on August 16,
1997.
For the nine month period ended September 30, 1997, total other (non-interest)
income, net of gains on securities sold, reflects an increase of $62,000 or 13.0
percent compared with the comparable nine month period ended September 30, 1996.
This overall increase was primarily as a result of increased service charges,
commissions, and fees coupled with the implementation of ATM surcharging which
amounted to $32,000 for the nine month period ended September 30, 1997, as
compared to $0.0 in 1996. Service charge fees increased primarily as a result of
an increase in business activity. Gains on securities sold during 1996 were made
in the available-for-sale portfolio in managing the Bank's investment portfolio,
liquidity and interest rate risk position. These transactions arise on an
"opportunity" basis and are not normal routine transactions. No such
transactions occurred during 1997, for either the three or nine month periods.
OTHER NON-INTEREST EXPENSE
The following table presents the principal categories of non-interest expense
for the three and nine month periods ended September 30, 1997 and 1996.
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
------------------ -----------------
(dollars in thousands) 1997 1996 % change 1997 1996 % change
- --------------------- -------- -------- -------- ------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Other expense:
Salaries and employee benefits
Occupancy expense, net ......... $1,545 $1,340 15.3 $4,227 $3,714 13.8
Premise & equipment expense .... 243 252 (3.6) 763 667 14.4
Stationery and printing ........ 343 325 5.5 992 747 32.8
expense ...................... 73 136 (46.3) 269 371 (27.5)
Marketing & Advertising ........ 74 204 (63.7) 282 337 (16.3)
Other expenses ................. 594 595 (0.1) 1,526 1,263 20.8
------ ------ ----- ------
Total other expense ...... $2,872 $2,852 0.7 $8,059 $7,099 13.5
====== ====== ======= ======
</TABLE>
For the nine month period ended September 30, 1997, total other (non-interest)
expenses increased $960,000 or 13.5 percent over the comparable period ended
September 30, 1996. This was due largely to expansion of the Bank's branch
network coupled with the expense of on-going technological and automation
programs. Included in the 1997 expense figures is the amortization of goodwill,
resulting from the acquisition of Lehigh, which amounted to $243,250 for the
1997 period as compared with $82,251 in 1996.
For the three month period ended September 30, 1997, total other (non-interest)
expense increased $20,000 or 0.7 percent over the comparable three months ended
September 30, 1996.
14
<PAGE>
The increases in salaries and employee benefit costs coupled with premise and
equipment expenses comprised the primary components of the total increase for
both the three and nine month periods. The Corporation's efficiency ratio (other
expenses less nonrecurring expense and other income as a percentage of net
interest income on tax-equivalent basis) for the nine months ended September 30,
1997, was 58.5 percent as compared with 53.8 percent for the nine months ended
September 30, 1996. For the three months ended September 30, 1997 this ratio was
61.0 percent as compared with 56.3 for the similar period ended September 30,
1996. The efficiency ratio was adversely impacted by increased expenses related
directly to the growth and expansion of the company, as well as, technological
initiatives implemented to support such growth.
The increases in employment expense for the periods presented herein are
primarily attributable to merit and promotional raises and higher benefit costs.
The increased staffing levels were required to support the growth and expansion
initiatives of the Bank and reflects maintaining full staffing levels at the
Corporation's office locations. The benefit component of the increase relates to
increased medical and other employee benefit expense.
Occupancy expenses similarly reflect the associated costs of the Corporation's
expanded facilities. For the three month period ended September 30, 1997, rental
expenses increased $45,000 over the comparable three month period in 1996. These
rents are associated with the acquired Millburn Mall Banking Center and the new
Madison Banking Center.
Occupancy and bank premise and equipment expense for the three month period
ended September 30, 1997 increased $9,000 or 1.6 percent over the comparable
three month period in 1996. This increase in bank premise and equipment expense
in 1997 is primarily attributable to normal operating costs of the Corporation's
expanded facilities coupled with a full quarter's depreciation expense on 1996's
fixed asset purchases and technology expenditures; these include check imaging
and PC Banking. Occupancy and Bank premise expense for the nine months ended
September 30, 1997 increased $341,000 or 24.1 percent over the comparable nine
month period in 1996. Included in this expense category is an increase of
$85,000 in rent and real estate taxes, as well as a $207,000 increase in
depreciation charges for Bank premise and equipment, related to properties
acquired as a result of the acquisition of Lehigh Savings SLA, the new Madison
banking center, and other fixed asset purchases.
PROVISION FOR INCOME TAXES
The effective tax rate for the three month period ended September 30, 1997 was
34.9 percent as compared to 26.3 percent for the three months ended September
30, 1996. For the nine month period ended September 30, 1997, the effective tax
rate was 32.2 percent compared to 26.1 percent for the nine month period ended
September 30, 1996. The effective tax rate continues to be less than the
combined statutory Federal tax rate of 34 percent and New Jersey corporate tax
rate of approximately 9 percent. The difference between the statutory and the
effective tax rates, other than increased taxable revenues, primarily reflects
the federal tax-exempt status of interest income on obligations of states and
political subdivisions, disallowed expenses items for tax purposes, such as
travel and entertainment expense, as well as, amortization of Goodwill expense.
The Corporation's provision for income taxes increased for both the three and
nine months from 1996 to 1997 primarily as a result of increased state taxes, a
reduction of tax-exempt income and the increased disallowance amounts associated
with the amortization expense related with goodwill, and travel and
entertainment expense.
ASSET LIABILITY MANAGEMENT
The composition and mix of the Corporation's assets and liabilities 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.
15
<PAGE>
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 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 of less than 1 indicates a
liability sensitive position.
A negative gap and/or a rate sensitivity ratio of 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 falling
rate environment.
From time to time, the Corporation may elect to deliberately mismatch
liabilities and assets in a strategic gap position.
At September 30, 1997, the Corporation reflects a negative interest sensitivity
gap (or an interest sensitivity ratio) of .50:1.00 at the cumulative one year
position. During much of 1997 the Corporation had a negative interest
sensitivity gap. The maintenance of a liability-sensitive position during 1997
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 placed on interest-sensitivity matching with the objective of
achieving a stable net interest spread during 1997.
LIQUIDITY
The liquidity position of the Corporation is dependent on successful management
of its assets and liabilities so as to meet the needs of both deposit and credit
customers. Liquidity needs arise principally to accommodate possible deposit
outflows and to meet customers' requests for loans. Such needs can be satisfied
by scheduled principal loan repayments, maturing investments, short-term liquid
assets and deposit in-flows. The objective of liquidity management is to enable
the Corporation to maintain sufficient liquidity to meet its obligations in a
timely and cost-effective manner. Management monitors current and projected
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.
Anticipated cash-flows at September 30, 1997, projected to September of 1998,
indicates that the Bank's liquidity should remain strong, with an approximate
projection of $62.0 million in anticipated cashflows over the next twelve
months. This projection represents a forward-looking statement under the Private
Securities Litigation Reform Act of 1995. Actual results could differ materially
from this projection depending
16
<PAGE>
upon a number of factors, including the liquidity needs of the Bank's customers,
the availability of sources of liquidity and general economic conditions.
The Corporation derives a significant proportion of its liquidity from its core
deposit base. For the nine month period ended September 30, 1997, average core
deposits (comprised of total demand, savings accounts and money market accounts
under $100,000) represented 50.3 percent of total deposits as compared with 53.5
percent at December 31, 1996. More volatile rate sensitive deposits,
concentrated in time certificates of deposit for the nine month period ended
September 30, 1997, increased to 39.5 percent on average of total deposits from
28.8 percent during the nine months ended September 30, 1996. This change has
resulted from the rise in short-term rates during the latter part of 1996 which
continued into 1997.
The increase in average funding sources during the nine months ended September
30, 1997 resulted primarily from an increase in business and public fund
deposits offset by a decrease of $1.4 million (on average) in Federal funds
purchased and securities sold under agreement to repurchase. Non-interest
bearing funding sources as a percentage of the funding mix decreased to 15.9
percent (on average) as compared to 17.3 percent for the nine month period ended
September 30, 1996. Demand deposits as a percentage of the funding mix continue
to be replaced by more expensive interest-bearing core deposits.
Short-term borrowings can be used to satisfy daily funding needs. Balances in
these accounts fluctuate significantly on a day-to-day basis. The Corporation's
principal short-term funding sources are securities sold under agreement to
repurchase and Federal funds purchased. Average short-term borrowings during the
first nine months of 1997 were $11.7 million, an increase of $3.2 million or
37.7 percent from $8.5 million in average short-term borrowings during the
comparable nine months ended September 30, 1996. This change was due primarily
to insufficient funding from normal deposit activity.
CASH FLOW
The consolidated statements of cash flows present the changes in cash and cash
equivalents from operating, investing and financing activities. During the nine
months ended September 30, 1997, cash and cash equivalents (which decreased
overall by $ 27.2 million) were provided (on a net basis) by the $4.6 million in
cash flow from operating activities and by $17.3 million in cash flows provided
by financing activities. A total of $49.2 million was used in investing
activities principally through net purchases of investment securities and a $9.1
million increase in loans.
SHAREHOLDER'S EQUITY
Total shareholders' equity averaged $31.4 million or 6.53 percent of average
assets for the nine month period ended September 30, 1997, as compared to $26.3
million, or 6.47 percent, during the same period in 1996. The Corporation's
dividend reinvestment and optional stock purchase plan contributed $209,000 in
new capital for the nine months ended September 30, 1997 as compared with
$116,000 for the comparable period in 1996. Tangible book value per common
share, after the 5% stock dividend paid May 31, 1997 and the 3-for-2 stock split
paid May 31, 1996, was $11.83 at September 30, 1997 as compared to $11.29 at
December 31, 1996. Tangible book value per common share was $10.90 at September
30, 1996, as adjusted for the above noted stock split and 5% stock dividend.
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.
17
<PAGE>
RISK-BASED CAPITAL/LEVERAGE
Banking regulations require banks to maintain minimum levels of regulatory
capital. Under the regulations in effect at September 30, 1997, the Bank was
required to maintain (i) a minimum leverage ratio of Tier 1 capital to total
adjusted assets of 4.0%, and (ii) minimum ratios of Tier 1 and total capital to
risk-weighted assets of 4.0% and 8.0%, respectively.
At September 30, 1997, total Tier l capital (defined as tangible stockholders'
equity for common stock and certain perpetual preferred stock) amounted to $28.4
million or 5.82 percent of total assets. Tier I capital excludes the effect of
SFAS No. 115, which amounted to $613,000 of net unrealized gain, after tax, on
securities available-for-sale (included as a component of stockholders' equity)
and goodwill of approximately $3.5 million as of September 30, 1997.
At September 30, 1997, the Corporation's estimated Tier I risk-based 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 September 30, 1997.
Under its prompt corrective action regulations, bank regulators are required to
take certain supervisory actions (and may take additional discretionary actions)
with respect to an undercapitalized institution. Such actions could have a
direct material effect on the institution's financial statements. The
regulations establish a framework for the classification of financial
institutions into five categories: well capitalized, adequately capitalized,
undercapitalized, significantly undercapitalized, and critically
undercapitalized. Generally, an institution is considered well capitalized if it
has a leverage (Tier 1) capital ratio of at least 5.0%; a Tier 1 risk-based
capital ratio of at least 6.0%; and a total risk-based capital ratio of at least
10.0%.
The foregoing capital ratios are based in part on specific quantitative measures
of assets, liabilities and certain off-balance sheet items as calculated under
regulatory accounting practices. Capital amounts and classifications are also
subject to qualitative judgments by the bank regulators about capital
components, risk weightings and other factors.
As of September 30, 1997, management believes that the Bank meets all capital
adequacy requirements to which it is subject.
18
<PAGE>
II. OTHER INFORMATION
Item 1 Legal proceedings
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.
Item 6 Exhibits and Reports on Form 8-K
A) Exhibits: Exhibit 1 - Financial Data Schedule
B) Reports on Form 8-K
There were no reports on Form 8-K filed during the three months
ended September 30, 1997.
19
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf, by the
undersigned, thereunto duly authorized.
CENTER BANCORP, INC.
DATE: /s/ ANTHONY C. WEAGLEY
---------------- ----------------------------------------
Anthony C. Weagley, Treasurer
(Chief Financial Officer)
20
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> SEP-30-1997
<CASH> 15,813
<INT-BEARING-DEPOSITS> 358,493
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 92,156
<INVESTMENTS-CARRYING> 228,062
<INVESTMENTS-MARKET> 238,900
<LOANS> 126,861
<ALLOWANCE> (1,269)
<TOTAL-ASSETS> 480,846
<DEPOSITS> 429,179
<SHORT-TERM> 16,000
<LIABILITIES-OTHER> 3,231
<LONG-TERM> 0
0
0
<COMMON> 4,677
<OTHER-SE> 27,759
<TOTAL-LIABILITIES-AND-EQUITY> 480,846
<INTEREST-LOAN> 7,345
<INTEREST-INVEST> 15,342
<INTEREST-OTHER> 310
<INTEREST-TOTAL> 22,997
<INTEREST-DEPOSIT> 10,408
<INTEREST-EXPENSE> 10,897
<INTEREST-INCOME-NET> 12,100
<LOAN-LOSSES> 0
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 8,059
<INCOME-PRETAX> 4,579
<INCOME-PRE-EXTRAORDINARY> 3,102
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,102
<EPS-PRIMARY> 1.32
<EPS-DILUTED> 1.32
<YIELD-ACTUAL> 6.97
<LOANS-NON> 27
<LOANS-PAST> 98
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1,293
<CHARGE-OFFS> 30
<RECOVERIES> 6
<ALLOWANCE-CLOSE> 1,269
<ALLOWANCE-DOMESTIC> 801
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 468
</TABLE>
